SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB
         (Mark one)
 X       Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
---      of 1934

         For the fiscal year ended:  DECEMBER 31, 2004

___      Transition Report Under Section 13 or 15(d) of the Securities Exchange
         Act of 1934

         For the transition period from _________ to ___________

                         Commission file number: 0-28260

                               EP MEDSYSTEMS, INC.
                 (Name of small business issuer in its charter)

NEW JERSEY                                             22-3212190
(State or Other Jurisdiction                (I.R.S. Employer Identification No.)
of Incorporation or Organization)

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 Exchange Act:         NONE

Securities  registered  under  Section 12(g) of the Exchange Act:  Common Stock,
without par value,  $.001 stated value per share

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
             X    Yes               No
         --------          --------

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

The issuer's revenues for the fiscal year ended December 31, 2004 were
$16,368,609.

The aggregate market value of the common stock held by non-affiliates of the
registrant, based on the closing price of the issuer's common stock on March 28,
2005 as reported on the Nasdaq SmallCap Market, was approximately was
approximately $67,026,418. (Reference is made to pages 57-60 herein for a
statement of assumptions upon which the calculation is based.) This
determination status is not necessarily conclusive for determination for other
purposes.

As of March 28, 2005, there were outstanding 25,814,176 shares of the issuer's
common stock, no par value, stated value $.001 per share.

Transitional Small Business Disclosure Format (check one):
         [    ]  Yes       [  X  ] No


<PAGE>


            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

          In addition to historical information, this Annual Report on Form
10-KSB for EP MedSystems, Inc. ("EP Med", "we", "us") contains forward-looking
statements relating to such matters as anticipated financial and operational
performance, business prospects, technological developments, results of clinical
trials, new products, research and development activities and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. We emphasize to you that a variety of factors could
cause EP Med's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the EP Med's
forward-looking statements. When we use the words or phrases "believe,"
"anticipate," "expect," "intend," "will likely result," "estimate," "project" or
similar expressions in this Annual Report on Form 10-KSB, we intend to identify
such forward-looking statements, but they are not the exclusive means by which
such statements are made. The forward-looking statements are only expectations
and/or predictions which are subject to risks and uncertainties, including the
significant factors discussed herein under "Risk Factors" and general economic,
market or business conditions, opportunities or lack of opportunities that may
be presented to EP Med, competitive actions, changes in laws and regulations and
other matters discussed herein in the sections entitled "Item 1 - Description of
Business," and "Item 6 - Management's Discussion and Analysis or Plan of
Operation" and elsewhere.

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


<PAGE>


                                   FORM 10-KSB
                          YEAR ENDED DECEMBER 31, 2004
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>             <C>                                                                                     <C>

Item
Number                                                                                                 Page

                                     Part I.

1.       Description of Business ........................................................................1
2.       Description of Property........................................................................15
3.       Legal Proceedings..............................................................................16
4.       Submission of Matters to a Vote of Security Holders............................................16

                                    Part II.

5.       Market for Common Equity and Related Stockholder Matters.......................................18
6.       Management's Discussion and Analysis or Plan of Operation......................................20
7.       Financial Statements...........................................................................45
8.       Changes in and Disagreements With Accountants
         on Accounting and Financial Disclosure.........................................................45
8A.      Controls and Procedures........................................................................45
8B.      Other Information..............................................................................45

                                    Part III.

9.       Directors, Executive Officers, Promoters and Control Persons; Compliance
         with Section 16(a) of the Exchange Act.........................................................46
10.      Executive Compensation.........................................................................50
11.      Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters................................................................57
12.      Certain Relationships and Related Transactions.................................................61
13.      Exhibits.......................................................................................61
14.      Principal Accountant Fees and Services.........................................................61

</TABLE>

<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL

          We were incorporated in New Jersey in January 1993 and operate in a
single industry segment. We develop, manufacture and market a broad-based line
of products for the cardiac rhythm management, or electrophysiology (EP), market
which are used to diagnose, monitor, visualize and treat irregular heartbeats
known as arrhythmias. Since our inception, we have acquired technology,
developed new products and begun to market various electrophysiology products,
including the EP-WorkMate(R) electrophysiology work station integrated with
RPM(TM) RealTime Position Management(TM) navigation technology, the EP-3(TM)
Stimulator, EP-4(TM) Computerized Cardiac Stimulator, diagnostic
electrophysiology catheters (including our unique one-piece catheter), the
ALERT(R) System (including the ALERT(R) Companion II and ALERT(R) family of
internal cardioversion catheters), the ViewMate(R) intracardiac ultrasound
catheter system and related disposable supplies.

          Cardiac electrophysiology evaluates the electrical system of the heart
and is mainly concerned with studying the cause and treatment of abnormalities
in the heart's rhythm. Cardiac arrhythmias are caused by disturbances in the
electrical activation of the heart muscle that ultimately cause the heart to
pump less efficiently. Cardiac rhythm disorders result in more than 1.2 million
hospitalizations and 400,000 deaths each year in the United States, and account
for about 20% of all chronic heart conditions. These conditions are diagnosed
and treated by electrophysiologists and cardiologists who specialize in the
diagnosis and treatment of cardiac arrhythmias.

          We have identified the diagnosis and treatment of atrial fibrillation,
a particular type of arrhythmia, as an area of interest for our ongoing
development, clinical and sales efforts. Atrial fibrillation is a condition
where waves of energy collect within the atria, the upper chambers of the heart,
causing erratic electrical signals that prevent the atria from providing
appropriate blood flow output. Atrial fibrillation is the most prevalent type of
abnormal heart rhythm and is estimated to afflict over 5,000,000 people
worldwide (of whom approximately 2,000,000 live in the United States) with an
estimated 300,000 to 400,000 new cases diagnosed each year. Although not
immediately life-threatening, patients with atrial fibrillation may exhibit
symptoms which include palpitations, fatigue and dizziness. Atrial fibrillation
is linked to a significantly increased risk of stroke and to a diminished
lifestyle due to decreased cardiac output. We have developed three product
platforms to address this and other markets.

          Our core product is the EP-WorkMate(R), a computerized
electrophysiology workstation that monitors displays and stores cardiac
electrical activity and arrhythmia data. The EP-WorkMate(R) offers, among other
features, display and storage of up to 192 intracardiac signals, real-time
diagnosis, analysis and integration with our own proprietary systems, such as
our EP-3(TM) Stimulator and the new EP-4(TM) Stimulator, as well as with those
of market leaders, such as Boston Scientific Corporation's RPM(TM) RealTime
Position Management(TM) navigation system, and with other technologies and
systems. Late in the third quarter of 2003, we received U.S. Food and Drug
Administration (the "FDA") market clearance to sell the EP-WorkMate(R)

                                       1
<PAGE>


integrated with Boston Scientific Corporation's RPM(TM) RealTime Position
Management(TM) System. This approval was the culmination of a strategic joint
development project between the two companies. It is the only EP recording
system on the market to integrate advanced recording and stimulation with
anatomic modeling, advanced mapping and 3-D navigation features, allowing
electrophysiology studies to be more efficient and user friendly. In March of
2004, we received FDA market clearance to sell the EP-4(TM) Computerized Cardiac
Stimulator. The EP-4(TM) improves performance over the previous generation
EP-3(TM) by adding two additional channels and is a platform for expanded
capabilities. The EP-3(TM) and EP-4(TM) Stimulators are computerized signal
generators and processors which, when integrated with the EP-WorkMate(R), are
used to stimulate the heart with electrical impulses in order to locate
arrhythmias. We believe that the EP-WorkMate(R), when integrated with the
EP-4(TM) Stimulator, offers the most advanced computer system available to the
electrophysiology market.

          We have also developed the ViewMate(R) intracardiac ultrasound
catheter system consisting of ViewMate(R) ultrasound imaging console and
Viewflex(TM) intracardiac imaging catheters. These products offer
high-resolution, real-time ultrasound capability designed to improve a
physician's or clinician's ability to visualize the inside of the chambers of
the heart. We believe that the ViewMate(R) ultrasound system may play an
important diagnostic role for a broad range of potential applications in
electrophysiology and cardiology. In April 2003 we received CE approval to
market the ViewMate(R) in Europe and in October 2003, we received FDA market
clearance to sell the ViewMate(R) System in the United States.

          We have also developed a product for the treatment of atrial
fibrillation known as the ALERT(R) System, which uses a patented electrode
catheter to deliver measured, variable, low-energy, bi-phasic electrical
impulses directly to the inside of the heart to convert atrial fibrillation to a
normal heart rhythm. We have obtained Class III Design Examination Certification
from a European Notified Body allowing us to label the ALERT(R) System with a CE
Mark, an international symbol of adherence to quality assurance standards,
design reviews and hazard analysis, which permits us to sell the ALERT(R) System
in the European Community. In November 2002, we received supplemental pre-market
approval from the FDA to sell the ALERT(R) System in the United States. In
September, 2003, we received pre-market approval from the FDA to sell the
ALERT(R) Companion II in the United States.

COMPANY STRATEGY

          The mission of EP MedSystems, Inc. is to develop, manufacture and
market the most technologically advanced diagnostic, therapeutic and
visualization solutions to the cardiac rhythm management marketplace. Our
strategy is to position our products as the platform of choice for
electrophysiologists and cardiologists by making the systems user friendly and
technologically advanced, and by integrating the products with the latest
technology. We believe that we have developed a reputation for innovation,
quality and service in the area of electrophysiology.

          USE CORE PRODUCTS AS A PLATFORM FOR GROWTH. We believe the
EP-WorkMate(R) is the platform for all future EP technology. This diagnostic
workstation is at the center of today's EP lab, and we have over 800
WorkMates(R) installed worldwide. Our objective is to leverage this installed
base, with our new products as well as with upgrades of innovative technologies
in a cost-effective manner, to hospitals around the globe.

                                       2
<PAGE>

          INTEGRATE WITH MARKET LEADERS. Our base platforms allow for
integration with the products of other market leaders in electrophysiology. In
September of 2002, we signed a joint development agreement with Boston
Scientific Corporation. The result of that project was the only EP recording
system on the market to integrate advanced recording and stimulation with
anatomic modeling, advanced mapping and 3D navigation features, allowing
electrophysiology studies to be more efficient and user friendly.

          EXPAND CLINICAL APPLICATIONS OF NEW PRODUCTS. We believe there are
numerous potential applications for our new products. Potential applications for
the ViewMate(R) intracardiac ultrasound catheter system include the following:
minimally invasive repair or replacement of heart valves; removal of pacemaker
leads; minimally invasive (catheter) repairs of atrial septal defects; catheter
closure of patent foramen ovale; minimally invasive procedures to close off the
left atrial appendage; and assistance in the optimal placement of left
ventricular pacemaker leads in treating congestive heart failure. Potential
applications for the ALERT(R) System include: replacement of external
cardioversion in electrophysiology procedures with the approval and launch of
the ALERT(R) CS/RA catheter system in the U.S.; and use of internal
cardioversion in post-op and intensive care markets.

          EXECUTE AN EFFICIENT SALES CHANNEL STRATEGY USING STRATEGIC ALLIANCES.
We believe entering into strategic alliances with market leaders creates an
efficient and effective sales channel for our core products and our new products
in areas outside of electrophysiology, such as interventional cardiology and
critical care. In December of 2003, we signed an agreement with Philips Medical
Systems Nederland B.V., a subsidiary of Koninklijke Philips Electronics N.V., to
combine their cardiovascular x-ray technology with our EP recording and data
management systems.

PRODUCTS

          In 2003, we added two new product platforms in the U.S. and expanded
our core platform with the RPM(TM) RealTime Position Management(TM) System. In
2004, we initiated the launch of these products. Our products can be separated
by technology into the categories described below for the diagnosis, treatment
and visualization of cardiac arrhythmias.

ELECTROPHYSIOLOGY  COMPUTER  WORKSTATIONS,  STIMULATORS  AND 3D NAVIGATION  AND
MAPPING  TECHNOLOGY  (EP-WORKMATE(R), EP-4(TM) COMPUTERIZED CARDIAC STIMULATOR,
RPM(TM)  REALTIME POSITION MANAGEMENT(TM) SYSTEM)

          The EP-WorkMate(R) is a computerized electrophysiology workstation
that monitors, displays and stores cardiac electrical activity and arrhythmia
data. Electrophysiology workstations are dedicated data management systems
designed specifically for use in electrophysiology procedures to view and record
procedural data, facilitate data analysis and generate customized reports. The
EP-WorkMate(R) offers, among other features, display and storage of up to 192
intracardiac signals, real-time analysis, including graphical and quantitative
display of such data, superior ease of use and a single keyboard for all
operations, as well as integration capacity with our own proprietary products,
such as the EP-4(TM) Stimulator and other technologies and systems. The


                                       3
<PAGE>


EP-WorkMate(R) consists of a Dual Pentium(R) III processor with integral
proprietary software, a proprietary signal-conditioning unit, two or three
21-inch high-resolution color monitors, an optical disk drive for data storage,
a custom keyboard, catheter and catheter interface module and a laser printer.
In addition, each EP-WorkMate(R) has an internal modem to provide a direct link
between the purchaser and EP Med, facilitating field software support. The
EP-WorkMate(R) is differentiated from competing products by (i) its seamless
integration with the EP-4(TM) Stimulator, (ii) its storage capacity of up to 192
intracardiac signals, (iii) its ability to process and simultaneously display
both real-time and historical electrophysiology activity and (iv) its simple,
user friendly software based on a menu driven, point and click interface.

          Our EP-4(TM) Stimulator is a computerized electrical pulse signal
generator and processor which, when integrated with the EP-WorkMate(R), is used
to stimulate the heart with electrical impulses in order to locate electrical
disturbances or arrhythmias. We believe the EP-4(TM) Stimulator is currently the
only integrated computerized EP clinical stimulator being sold in the United
States. It features automatic synchronization and rate controls as well as the
same user interface as the EP-WorkMate(R). The EP-4(TM) Stimulator can be sold
as a stand-alone electrophysiology stimulator or it can be integrated with the
EP-WorkMate(R). We believe that the EP-WorkMate(R), when integrated with the
EP-4(TM) Stimulator, offers the most advanced computer system available to the
electrophysiology market.

          In September of 2002, we signed a joint development agreement with
Boston Scientific Corporation to integrate our EP-WorkMate with their RPM(TM)
RealTime Position Management(TM) system. It is the only EP recording system on
the market to integrate advanced recording and stimulation, with anatomic
modeling, advanced mapping and 3D navigation features, allowing
electrophysiology studies to be more efficient and user friendly. We believe
this gives us significant advantages in price and space utilization over
competitors that sell two systems separately.

ULTRASOUND PRODUCTS

          We have identified intracardiac ultrasound imaging as a necessary
adjunct to the advanced treatment of cardiac arrhythmias, especially for the
treatment of atrial fibrillation and ventricular tachycardias. We also believe
that ultrasound imaging may assist in the permanent implantation of pacemaker
electrodes in the left side of the heart. Fluoroscopy imaging, the primary
visual image used in electrophysiology today, is unable to identify anatomic
structures of the heart (such as the ostium of the coronary sinus, the superior
and inferior vena cava, pulmonary veins, valves, infarcts, and the fossa ovalis,
among others) and is unable to assess lesions created by the physician. In
addition, fluoroscopy imaging is not adept at assessing catheter placement in
relation to certain anatomy. We believe that intracardiac ultrasound imaging may
overcome these deficiencies, and that this is important in light of the
increased complexity of newer electrophysiology procedures. Ultrasound imaging
may well address many of the concerns about complications of using radio
frequency energies to treat atrial fibrillation because of the proximity of the
atria to the great vessels of the heart.

                                       4
<PAGE>

         We have developed an intracardiac ultrasound product line, which
includes the ViewMate(R) ultrasound imaging console and Viewflex(TM)
intracardiac imaging catheters. These products offer high resolution, real-time
ultrasound capability designed to improve a physician's or clinician's ability
to view the inside of the chambers and anatomic structure of the heart safely
and accurately without the need to expose patients, physicians or clinicians to
repeated x-ray radiation. The increased visualization is a result of having the
catheter inside the heart itself, thereby having cardiac features in the near
field or its area of highest image resolution and detail. By manipulating the
catheter tip and its phased array ultrasound crystal, the physician or clinician
will not only be able to visualize the entire heart but will also be able to
direct the wedge-shaped ultrasound beam at specific areas of interest.
Additionally, our color capability will allow verification of heart valve
patency and blood flow direction and amount. We believe the ViewMate(R)
Ultrasound System may play an important diagnostic role for a broad range of
potential applications in electrophysiology and cardiology. In April 2003 we
received CE approval to market the ViewMate(R) in Europe and in October 2003, we
received FDA market clearance to sell the ViewMate(R) System in the United
States.

THE ALERT(R) SYSTEM

          On November 27, 2002, we received pre-market approval from the FDA to
sell the ALERT(R) System in the United States. We are the first to market with
an FDA-approved catheter-based product for internal cardioversion. In October
2003, we received pre-market approval notification from the FDA on our
supplement application for the ALERT(R) Companion II, a bi-phasic defibrillator
to be used as a part of the catheter based ALERT(R) Internal Cardioversion
System to treat atrial fibrillation.

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

          The ALERT(R) System represents a new approach to electrical
cardioversion known as low-energy internal cardioversion, which uses a patented
electrode catheter to deliver measured, variable, low-energy bi-phasic
electrical impulses, programmable electrical energy, from one to 15 joules,
directly to the inside of the heart to convert atrial fibrillation to normal
heart rhythm. The ALERT(R) System is comprised of a single-use proprietary
electrode catheter with two separate electrode arrays (the "ALERT(R) PA
Catheter") and an external energy source (the "ALERT(R) Companion"). We are in
the process of upgrading, repackaging and changing the manufacturer of the
ALERT(R) Companion. The repackaged ALERT(R) Companion will have a similar
"look and feel" as our stimulator.


                                       5
<PAGE>


          The ALERT(R) CS/RA Catheter System replaces existing electrophysiology
catheters, allowing the EP physician to perform not only routine diagnostic
procedures with the patented CS/RA, but also to cardiovert atrial fibrillation
to normal heart rhythm during the procedure. The ALERT(R) CS/RA Catheter System
consists to two catheters, each placed within the heart, to be used together
during an electrophysiology procedure to treat certain arrhythmias, including
atrial fibrillation. The catheters are placed in the coronary sinus vessel and
the right atrium to allow the physician to pace, record and cardiovert the
heart. The ALERT(R) CS/RA Catheters are used in conjunction with the ALERT(R)
Companion. In the second quarter of 2003, we received approval from the European
Notified Body to sell the ALERT(R) CS/RA Catheters in Europe. We expect to file
the pre-market approval supplement with the FDA in 2005, however, there can be
no assurances that the pre-market approval supplement will be accepted or
approved.

          The ALERT(R) TD Catheter, which incorporates thermodilution capability
to the ALERT(R) pulmonary artery catheter, received CE Mark authorization.
Thermodilution is a technique used to determine a patient's cardiac output by
injecting a cold solution through the catheter into the blood stream and
measuring blood temperature change over time with a thermistor mounted at the
end of the catheter. This feature is expected to broaden the ALERT(R)
applications to include the critical care and heart surgery markets by
incorporating cardiac output measurement capability into the catheter. A
separate, industry-standard 14k ohm thermistor connector facilitates catheter
connection to existing cardiac output computers distributed by numerous
manufacturers. This product is outside of our physician sales call point, and we
believe there is an opportunity to license this technology to others who sell
this product to physicians who would use this product.

DIAGNOSTIC CATHETER PRODUCTS

          We presently market a line of diagnostic electrophysiology catheters
for stimulation and sensing of electrical signals during electrophysiology
studies. Our diagnostic catheters are similar to others sold within the
industry, with the exception of our one-piece catheter design which offers the
physician unique recording capabilities. We offer numerous electrode/curve
configurations of catheters. In April 2004, the Company received market
clearance from the FDA for our line of deflectable diagnostic catheters. A
deflectable catheter allows the physician to deflect its tip to steer the
catheter into certain vessels and areas of the heart, which would be difficult
with a fixed curve catheter.

CERTAIN PATENTS, TRADEMARKS AND LICENSES

          Our success and ability to compete depend, in part, upon our ability
to protect our proprietary positions. Our policy is to protect our proprietary
position by, among other methods, filing United States and select foreign patent
applications to protect the technology that is important to the development of
our business. Patents in force on June 8, 1995 are entitled to a patent term of
the longer of 17 years from issuance or 20 years from the earliest filing date
of the patent, while patents issuing thereafter are entitled to a term of 20
years from the earliest filing date. We currently hold (title to or rights under
license or similar agreements to) 33 U.S. patents and patent applications filed
with the Patent and Trademark Office. The last to expire of our patents will
remain in effect until December 2024. We have also obtained certain patents in
our principal overseas markets. The expiration dates on our patents range from
2013 to 2024.

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<PAGE>


          We will continue to seek patents as we deem advisable to protect our
research and development efforts and to market our products. There can be no
assurance that any of our patent applications or applications as to which we
have acquired licenses will issue as patents, or that if patents are issued that
they will be of sufficient scope and strength to provide us with meaningful
protection of our technology or any commercial advantage, or that such patents
will not be challenged, invalidated or circumvented in the future. Moreover,
there can be no assurance that our competitors, many of which have substantial
resources and have made substantial investments in competing technologies, do
not presently have or will not seek patents that will prevent, limit or
interfere with our ability to make, use or sell our products either in the U.S.
or in other countries. In addition, there can be no assurance that current and
potential competitors have not filed or in the future will not file applications
or apply for patents or additional proprietary rights relating to devices,
apparatus, materials or processes used or proposed to be used by us.

LICENSES AND OTHER TECHNOLOGY AGREEMENTS

          We are also a party to certain license agreements which provide us
with rights under selected patents of third parties with regard to technology we
consider important to our business. Such license agreements are summarized
below.

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

-       Pursuant  to an  agreement,  dated as of March 9, 1998,  we  purchased
        from Allan Willis an issued U.S. patent and related know-how and
        technology, relating to conductive adhesive bands for catheter
        electrodes used in our SilverFlex(R) catheters. The agreement provides
        that the purchase price for the technology is comprised of an initial
        payment of $20,000 and subsequent payments in the form of quarterly
        royalties equal to 1% of net revenues (as defined under the agreement)
        derived by us in respect of the sale or lease of the products covered by
        the technology and 50% of the net revenues received from our licensees
        or sublicensees in respect of product sales or leases, up to total
        aggregate royalty payments of $1 million. The agreement further provides
        that, as of January 1, 2002 through the date of expiration or
        declaration of invalidity of the patent, we shall either pay a minimum
        quarterly royalty of $3,000 or grant to Mr. Willis a non-exclusive,
        royalty-free license to the patent, including the right to sublicense
        to third parties. The agreement may be terminated by either party in the
        event of breach of a material obligation by the other party, which
        breach remains uncured for a period of 30 days after written notice
        thereof to the breaching party.

                                       7
<PAGE>

-       Pursuant to an  agreement,  dated  September  5, 2002,  with Boston
        Scientific Corporation ("BSC"), we received a license from BSC to
        integrate their RPM(TM) Technology with our EP-WorkMate(R) to make,
        use, sell and distribute the integrated recording system. This agreement
        provides that, under certain conditions, the license becomes exclusive.

        The agreement also provides for a royalty payable to BSC based on the
        type of product sold in accordance with the agreement. The agreement
        terminates on the date the patent rights (a) expire, (b) are disclaimed,
        (c) are cancelled, or (d) are held invalid by a court of competent
        jurisdiction. Otherwise, the agreement may be terminated by either party
        in the event of a material breach, subject to notification and cure
        period, and in the event of a change in control.

-       In December 2003, we entered into a marketing  agreement with Philips
        Medical  Systems  Nederland B.V., a subsidiary of Koninklijke Philips
        Electronics N.V., ("Philips") to sell our EP-WorkMate(R) system
        in combination with Philips' x-ray fluoroscopy product. Pursuant to the
        agreement, Philips will purchase certain products and parts from us, and
        will then resell these products and parts to their customers. In
        connection with the agreement, we granted Philips a personal,
        revocable, worldwide, non-exclusive right to sublicense our software and
        related products to customer end-users in the territory (as defined in
        the agreement). The purchase by Philips of our products will also confer
        on Philips, its affiliates, distributors, agents and customers an
        irrevocable, royalty-free, non-exclusive, non-transferable license in
        the territory under our patent applications, patents, copyrights, trade
        secrets, trademarks or other intellectual property rights we own or
        control, solely to market, sell, distribute or otherwise dispose of
        such products and service parts in accordance with the terms of the
        agreement. We have also granted Philips the right to use our trademarks,
        trade names and service marks during the term of the agreement. The
        agreement expires in December 2005, subject to certain renewal options,
        and can be terminated by Philips, subject to certain notice and cure
        periods, for certain reasons, including, among others,
        non-competitiveness, change of control and cause.

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

                                       8
<PAGE>


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

       REGISTERED TRADEMARKS:  EP-WorkMate(R),  ALERT(R) System,  SilverFlex(R),
       ProCath(R), V-LERT(R), ALERT VT(R), ViewMate(R)

       UNREGISTERED TRADEMARKS:  EP-3(TM) Stimulator, EP-4(TM) Computerized
       Cardiac Stimulator and Viewflex(TM)

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

RESEARCH AND DEVELOPMENT

         The electrophysiology market is characterized by rapid technological
change, new product introductions and evolving industry standards. To compete
effectively in this environment, we engage in the continuous development of
products by (i) conducting internal research and development or contracting with
third parties for specific research and development projects, (ii) licensing new
technology, and (iii) acquiring products incorporating technology that could not
otherwise be developed as quickly using internal resources.

          Our expenditures for research and development (which include
expenditures for regulatory affairs and engineering) totaled approximately
$2,470,000 and $2,566,000 for the years ending December 31, 2004 and 2003,
respectively. During 2003, our principal research and development costs involved
the ALERT(R) System and the ALERT(R) CS/RA catheter system clinical trials and
regulatory approval process, efforts to develop and obtain regulatory approval
of our line of the ViewMate(R) intracardiac ultrasound system, hiring of
additional in-house engineering and technical support personnel and increased
development work on existing products, including the EP-WorkMate(R) and
electrophysiology catheters. Expenditures for these projects decreased as
products were approved in late 2002 and throughout 2003 and 2004. Expenditures
in 2004, consisted primarily of upgrades to existing product lines.
Additionally, other research and development efforts are ongoing to develop new
products, enhance existing products and lower production costs.

                                       9
<PAGE>

SALES, MARKETING AND DISTRIBUTION METHODS

DOMESTIC

          We primarily utilize our own direct sales and marketing force to sell
and promote our products in the U.S. market. Within each hospital, the sales and
marketing effort is directed at those physicians, primarily
electrophysiologists, most likely to use our products. In September of 2002, we
announced a purchasing agreement with Premier, Inc., a large group purchasing
organization (GPO), for our EP-WorkMate(R) and catheter product lines. In
December 2003, we signed a similar agreement with the GPO, Broadlane, Inc.

         We expect to expend considerable resources and effort to support the
roll out of our new products, including the EP-WorkMate(R) integrated with
RPM(TM), ViewMate(R) Intracardiac ultrasound system, ALERT(R) System and the
ALERT(R) CS/RA, if and when the ALERT(R) CS/RA is approved in the U.S. by the
FDA. Examples of the types of expenditures are physician/clinician training and
education, promotional materials, sample products, demo and service equipment
and increased direct sales and marketing expenses, among others.

STRATEGIC ALLIANCES

         We believe entering into strategic alliances with market leaders
creates an efficient and effective sales channel for our core products and our
new products in areas outside of electrophysiology, such as interventional
cardiology and critical care. To facilitate this, we have entered into alliance
agreements with Boston Scientific Corporation and Philips Medical.

INTERNATIONAL

          We utilize our own direct sales and marketing force, as well as sales
agents, to sell and promote our products in France. Outside of the French
market, we utilize a network of independent distributors to sell our products
internationally. The distributor agreements specify territory, terms, products
and minimum sales and can be terminated by both sides as agreed in the contract.
While we do not consider any other distributor arrangement to be material to our
business, we might not be able to replace existing distributors on a timely
basis if present relationships are terminated. Further, we might not be able to
make arrangements with new distributors to access new international markets and
both current and future distributors might not be successful in actively and
effectively marketing our products. We have branch offices in the United Kingdom
and France and have set up a call center in Oss, Netherlands. We feel this
favorably impacts distributor relationships and European service needs in a
shorter response time and assists in additional promotion of our products in
Europe. Our European offices are staffed with sales managers and an office
manager. We expect to expend considerable resources and effort to support the
sale of the EP-WorkMate(R) integrated with RPM(TM), ViewMate(R) and ALERT(R)
CS/RA Systems in Europe. Examples of the types of expenditures are
physician/clinician/distributor training and education, promotional materials,
sample products and increased direct sales and marketing expenses, among others.

                                       10
<PAGE>

         No assurance can be given that either we or our distributors can
successfully sell the EP-WorkMate(R) integrated with RPM(TM), ViewMate(R) or
ALERT(R) CS/RA Systems or other products in Europe or elsewhere on terms
acceptable to us, or at all. Foreign sales are subject to certain significant
risks, including exchange rate fluctuations, local medical reimbursement issues,
duties, tariffs and taxes, import restrictions, United States export control
licensing requirements and related restrictions, laws and regulations, and other
regulations, each of which could have a material adverse impact on our business,
financial condition and results of operations.

CUSTOMERS

          Our products are sold to medical institutions and physicians in the
United States and France which then bill various third-party payers, such as
government programs and private insurance plans. See the Section entitled
"Third-Party Reimbursement." Outside of the United States and Frances we sell to
a network of distributors.

MANUFACTURING AND SOURCES OF SUPPLY

          We assemble our products at our West Berlin, New Jersey facility. Our
engineers generally design our products and their functionality; however,
certain critical components of our products are and will be obtained from
outside sources. Examples of these components are computers, high-resolution
monitors and laser printers that are typically available from more than one
vendor. We also rely on third-party sources to manufacture critical components
for the EP-4(TM) Stimulators, ViewMate(R) and its VewFlex(TM) catheter, ALERT(R)
Companion, EP-WorkMate(R) and RPM(TM) Navigation System. Any interruption by
these third-party sources in the supply of such products or components, as a
result of any failure to obtain necessary regulatory approvals or other events
relating to the performance of any third party source, would have a material
adverse effect on our ability to deliver those products or the products in which
such components are used, and could materially adversely impact our sales and
gross margins. If any interruption were to occur, we may not be able to reach an
acceptable arrangement with an alternative source of supply on a timely basis.
Our failure to find alternative manufacturing sources could have a material
adverse effect on our business, results of operations and financial condition.
Vendors of raw materials are required to submit certificates of compliance to
our specifications. The parts are inspected and tested upon receipt and when the
components are assembled into a complete system prior to shipment.

         Our catheters are assembled and tested by us at our West Berlin, New
Jersey facility prior to contract sterilization. The West Berlin, New Jersey
facility is certified to the ISO-13485 Quality System Stardard that is
recognized by the regulatory bodies in the EU, Canada and other countries. We
have outsourced a portion of our diagnostic catheter manufacturing offshore in
order to reduce our overall costs.

         Our West Berlin, New Jersey facility has no experience in large-scale
manufacturing, and there can be no assurance that we will be successful in
manufacturing products in significant volume. We believe that we have sufficient
capacity to satisfy our current manufacturing needs. While we have signed a
contract with a reputable company to manufacture our catheters offshore, there
can be no assurances that this company can meet regulatory, capacity,
scalability and cost concerns for us.

                                       11
<PAGE>

GOVERNMENT REGULATION

UNITED STATES

          Our West Berlin, New Jersey facility and the quality assurance
procedures in effect at that facility are subject to good manufacturing
practices ("GMP") regulations and quality system regulations promulgated by the
FDA.

          We have pre-market approval from the FDA for the marketing and sale of
the EP-WorkMate(R) and the EP-4 (TM) Stimulator in the United States.

          In 2002, we received pre-market approval from the FDA to sell the
ALERT(R) System in the United States. In October of 2003, we received
supplemental pre-market approval for the ALERT(R) Companion II.

          In the second quarter of 2003, the ALERT(R) CS/RA was approved for
sale in Europe. We expect to file a pre-market approval supplement with the FDA
to allow us to sell this product in the United States in 2005. While we expect
the supplemental pre-market approval application to be approved, there are no
assurances that we will be able to obtain this approval.

          In the third quarter of 2003, we filed a 510(k) for clearance to sell
the EP-WorkMate(R) integrated with Boston Scientific's RPM(TM) RealTime Position
Management(TM) system, and we received market clearance from the FDA in the same
quarter.

          In the second quarter of 2003, we filed a 510(k) for approval to sell
the ViewMate(R) intracardiac ultrasound system in the United States. We received
that approval in the third quarter of 2003. We had already received approval to
sell the product line in Europe in the second quarter of 2003.

          In March 2004, we received market clearance from the FDA to sell the
EP-4(TM) Computerized Cardiac Stimulator in the United States, and we also
received approval to sell the EP-4(TM) Computerized Cardiac Stimulator in
Europe. In addition, we received market clearance from the FDA for our line of
steerable diagnostic catheters.

          The process of obtaining and maintaining required regulatory approvals
can be expensive, uncertain and lengthy, and there can be no assurance that we
will ever obtain the approvals we seek. If such approvals are obtained, there
can be no assurance that we will be able to maintain them. Delays in receipt of,
or failure to receive, such approvals, the loss of previously received
approvals, or failure to comply with existing or future regulatory requirements
would have a material adverse effect on our business, financial condition and
results of operations. Changes in existing requirements or adoption of new
requirements also could have a material adverse effect on our business,
financial condition, and results of operations.

          In addition, there can be no assurance that the FDA will not impose
strict labeling requirements, onerous operator training requirements or other
requirements as a condition of its pre-market approval, any of which could limit
our ability to market our products.

                                       12
<PAGE>

INTERNATIONAL

          In order to market products in Europe and certain other foreign
jurisdictions, we must obtain required regulatory approvals and clearances and
otherwise comply with extensive regulations regarding safety and manufacturing
processes and quality. These regulations, including the requirements for
approvals or clearance to market and the time required for regulatory review,
vary from country to country. The time required to obtain approval by a foreign
country may be longer or shorter than that required for FDA approval and the
requirements may differ. Foreign countries also often have extensive regulations
regarding safety, manufacturing processes and quality that differ from those in
the United States and must be met in order to continue sale of a product within
the country. The European Economic Community has instituted the requirement that
all medical products sold into the European Union comply with the Medical Device
Directive which requires that all such products be labeled with the CE Mark. The
CE Mark designation allows us to market that product in countries that are
members of the European Union and the European Free Trade Association. There can
be no assurance that we will be successful in maintaining the CE Mark
certifications that we currently have or that we will be able to obtain the CE
Mark certification on newly developed products.

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

OTHER

          We are also subject to numerous Federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. We have not incurred significant costs to date
in order to comply with such laws. There can be no assurance that we will not be
required to incur significant costs to comply with such laws and regulations in
the future or that such laws and regulations will not have a materially adverse
effect upon our ability to do business.

THIRD-PARTY REIMBURSEMENT

          In the U.S., our products are marketed to medical institutions and
physicians that then bill various third-party payers, such as government
programs (principally Medicare and Medicaid) and private insurance plans, for
the healthcare services provided to their patients using our products.
Third-party payers are increasingly challenging the prices charged for medical
products and services, and substantial uncertainty exists as to third-party
reimbursement for newly approved products. Government agencies, private insurers
and other payers generally reimburse medical institutions for medical treatment
at a fixed rate per patient or based on the procedures performed. The fixed rate
reimbursement is unrelated to the specific devices used in treatment. If a
procedure is not covered, payers may deny reimbursement. In addition, some
payers may deny reimbursement if they determine that the device used in the
treatment was unnecessary, inappropriate or not cost-effective, or if it was

                                       13
<PAGE>

experimental or was used for a non-approved indication, even if it has approval
from the FDA. Because the amount of the reimbursement is fixed, to the extent a
physician uses more expensive devices, the amount of potential profit relating
to the procedure is reduced. Accordingly, medical institutions must determine
that the clinical benefits of more expensive equipment justify the additional
cost.

          Procedures in which the ALERT(R) System has been used in clinical
trials have been deemed eligible for Medicare reimbursement. We believe that the
medical institutions at which clinical trials were performed have submitted
their claims for reimbursement. We are not involved in the collection of
reimbursement monies and have no knowledge as to the status of payments on
reimbursement claims relating to the clinical trials. As reimbursement is made
directly to the medical institutions or physicians using our products, we do not
monitor reimbursement success. We are not aware of material reimbursement
difficulties experienced by medical institutions or physicians to date.

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

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

COMPETITION

          The medical device market, particularly in the area of cardiac
electrophysiology, is highly competitive, as the market is characterized by
rapid product development and technological change. Our present or future
products could be rendered obsolete or uneconomic by technological advances by
one or more of our present or future competitors or by other therapies. Our
future success will depend upon our ability to remain competitive with other
developers of such medical devices and therapies. We believe that our existing
products compete primarily on the basis of features, effectiveness, quality,
ease and convenience of use, customer service and cost effectiveness.

                                       14
<PAGE>

          Our primary competitors in the production of catheters and disposable
accessories are C.R. Bard Inc., EP Technologies, Inc. (a subsidiary of
Boston Scientific Corporation), Medtronic, Inc., Biosense Webster, Inc. (a
subsidiary of Johnson & Johnson, Inc.) and Daig Corporation (a subsidiary of St.
Jude Medical, Inc.). In the computerized electrophysiology workstation and
electrophysiology stimulator market, our main competitors are Marquette-Prucka
(a division of General Electric) and C.R. Bard Inc. For intracardiac ultrasound,
we compete with Acuson, a division of Siemens Medical Solutions. For our
navigation system, licensed from Boston Scientific Corporation, we compete with
Biosense Webster, Inc. and Endocardial Solutions, Inc. (recently acquired by St.
Jude Medical, Inc.).

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

PRODUCT LIABILITY AND INSURANCE

          The manufacture and sale of our products involves the risk of product
liability claims. Our products are highly complex and some are, or will be, used
in relatively new medical procedures and in situations where there is a
potential risk of serious injury, adverse side effects or death. Misuse or reuse
of catheters may increase the risk of product liability claims. Currently, we
maintain product liability insurance with coverage limits of $5,000,000 per
occurrence and $5,000,000 in the aggregate per year; however, there can be no
assurance that this coverage will be adequate. Such insurance is expensive and
may not be available in the future on acceptable terms, if at all. A successful
claim against or settlement by EP Med in excess of our insurance coverage, or
our inability to maintain insurance in the future, could have a material adverse
effect on our business and financial condition.

EMPLOYEES

          At December 31, 2004, EP Med had 85 full-time employees and one
part-time employee, of whom 25 were dedicated to manufacturing and logistics, 13
represented executive management and administration, 31 were engaged in sales
and marketing clinical applications and customer service, and 17 were engaged in
research and development, regulatory affairs, and quality assurance. We believe
our employee relations are satisfactory.

ITEM 2.  DESCRIPTION OF PROPERTY.

          We own and operate a facility comprising approximately 15,000 square
feet in West Berlin, New Jersey. The operations of this facility are
predominantly manufacturing and assembly of hardware and catheter products. This
facility also houses administration, engineering, catheter research and
development and warehousing. We also lease an additional 2,500 square feet of
space adjacent to our West Berlin, New Jersey facility for customer service and
warehousing at approximately $1,560 per month. In March of 2005, we signed a
lease at approximately $1,650 per month, for an additional 2,500 square feet
adjacent to this facility. This space will also be used for customer service and
warehousing. At December 31, 2004, the facility owned by us in West Berlin was
encumbered by a mortgage securing a convertible note issued by us in a financing
transaction. A previous mortgage was fully converted to equity in April and June
of 2003.

                                       15
<PAGE>

          EP MedSystems UK Ltd. has an office in Kent, England under a lease for
approximately 400 square feet effective through June 2005. The lease provides
for monthly rental payments of U.S. $1,029 and is currently on a month-to-month
basis. In addition, EP MedSystems France S.A.R.L. entered into a month-to-month
lease in May 1999, for 300 square feet of office and storage space in Aix en
Provence, France. The lease provides for monthly rental payments of U.S. $1,012.
Lastly, we lease office space in Oss, in the Netherlands at approximately U.S.
$1,197 per month.

          We evaluate our facilities in regular time intervals to insure they
are sufficient to meet our expected needs for at least the next twelve months.
We believe that our facilities are adequately covered by insurance.

ITEM 3.  LEGAL PROCEEDINGS.

         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          We held our 2004 Annual Meeting of Shareholders on December 22, 2004.
The following were the matters voted upon at the meeting:

          1. Election of Directors.

          David Jenkins and Abhijeet Lele were elected to serve as directors at
the 2004 Annual Meeting. The number of votes cast for and withheld from each
director are as follows:
<TABLE>
<CAPTION>
<S>                                                                     <C>

                                                                  Number of Votes
                               ---------------------------------------------------------------------------------------
                                       For            Against          Withheld         Abstentions         Broker
                                                                                                         Non-Votes
                               ------------------ --------------- ------------------ ----------------- ---------------
David Jenkins                     18,755,211            --            2,014,172             --               --
Abhijeet Lele                     20,569,743            --              199,640             --               --

</TABLE>

          Paul L. Ray, Reinhard Schmidt and Richard C. Williams continued as
directors after the meeting.

          2. Approval of a proposal to amend our 2002 Stock Option Plan to
increase the number of shares which may be issued upon exercise of options
granted under the Plan from 600,000 to 1,000,000 shares.

                                       16
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                       <C>

                                                                    Number of Votes
                                   -----------------------------------------------------------------------------------
                                         For           Against         Withheld        Abstentions        Broker
                                                                                                         Non-Votes
                                   ---------------- -------------- ----------------- ---------------- ----------------
Amendment to 2002 Stock Option       11,491,556       1,030,386           --             37,300          8,210,141
Plan
                                   ---------------- -------------- ----------------- ---------------- ----------------
</TABLE>


          3. Approval of a proposal to amend our Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Common Stock by 10,000,000, from 30,000,000 to 40,000,000 shares. The amendment
was approved by the following vote of the common stock:
<TABLE>
<CAPTION>
<S>                                                                     <C>

                                                                    Number of Votes
                                   -----------------------------------------------------------------------------------
                                         For         Against         Withheld          Abstentions        Broker
                                                                                                         Non-Votes
                                   ---------------- ----------- -------------------- ---------------- ----------------
Amendment to Amended and             20,273,533      470,650            --               25,200             --
Restated Certificate of
Incorporation
</TABLE>

                                       17

<PAGE>



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

          Until March 28, 2003, our common stock was listed and traded on the
Nasdaq National Market under the trading symbol "EPMD". Since March 28, 2003,
our common stock has been listed and traded on the Nasdaq SmallCap Market.

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

<TABLE>
<CAPTION>
<S>             <C>                                     <C>                             <C>

            PERIOD                                     HIGH                           LOW
            ----------------------------------         -----------------------        ------------------
            2003
            First Quarter                              $2.61                          $1.18
            Second Quarter                             $2.75                          $1.60
            Third Quarter                              $4.15                          $2.02
            Fourth Quarter                             $4.50                          $2.73
            2004
            First Quarter                              $3.45                          $2.95
            Second Quarter                             $3.50                          $2,87
            Third Quarter                              $3.32                          $2.15
            Fourth Quarter                             $3.92                          $2.51
</TABLE>

HOLDERS

          As of March 28, 2005, there were approximately 95 registered holders
of record of our common stock. This number excludes individual shareholders
holding stock under nominee security position listings because many of such
shares are held by brokers and other institutions on behalf of shareholders. As
a result, we are unable to estimate the total number of shareholders represented
by these record holders, but we believe that the amount is in excess of 400.

DIVIDEND POLICY

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

                                       18
<PAGE>


EQUITY COMPENSATION PLAN INFORMATION

          The following table sets forth, as of December 31, 2004, information
about outstanding options and rights to purchase our common stock granted to
participants in our equity compensation plans and the number of shares of our
common stock remaining available for issuance under such equity compensation
plans:
<TABLE>
<CAPTION>
<S>                                               <C>                      <C>                        <C>
                                                                                              NUMBER OF SECURITIES
                                                                                             REMAINING AVAILABLE FOR
                                          NUMBER OF SECURITIES                                FUTURE ISSUANCE UNDER
                                           TO BE ISSUED UPON     WEIGHTED-AVERAGE EXERCISE     EQUITY COMPENSATION
                                              EXERCISE OF          PRICE OF OUTSTANDING         PLANS (EXCLUDING
                                          OUTSTANDING OPTIONS,     OPTIONS, WARRANTS AND     SECURITIES REFLECTED IN
PLAN CATEGORY                             WARRANTS AND RIGHTS             RIGHTS                   COLUMN (A))
-------------                            --------------------    -------------------------   ------------------------
                                                  (A)                      (B)                        (C)
Equity  compensation  plans approved by
security holders (1)................          1,711,458                  $2.64                       658,605


Equity  compensation plans not approved
by security holders (2).............
                                                207,000                  $2.27                            -
                                                -------                  -----                            -

Total...............................          1,918,458                  $2.60                       658,605
                                              =========                  =====                       =======
<FN>

(1) This consists of EP Med's (i) 1995 Long Term Incentive Plan, (ii) 1995
Director Option Plan, and (iii) 2002 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 incentivize such persons in connection with EP
Med's business.

For a description of the 1995 Long Term Incentive Plan, 1995 Director Option
Plan, and 2002 Stock Option Plan, see "Item 10. - Executive Compensation -
Compensation Plans and Other Arrangements."
</FN>
</TABLE>


SALES OF UNREGISTERED SECURITIES

           On October 4, 2004, we engaged Dr. John Hummel, a physician, as a
consultant to manage a clinical study. In connection with that engagement, we
granted Dr. Hummel a warrant to purchase 10,000 shares of our common stock,
which vested immediately. The exercise price of the warrants is $2.51 per share,
the fair market value of our common stock on the date of the grant. The
transaction was accounted for in accordance with Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The fair value was measured using the Black-Scholes option pricing
model under Statement of Financial Accounting Standard No. 123 using the
following assumptions: risk free rate of 3.36%, 10 year life, and a volatility
percentage of 77.25%. The warrant was granted in a private transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended.


                                       19
<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

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

OVERVIEW

          EP MedSystems was incorporated in January 1993 and operates in a
single industry segment. We develop, manufacture, market and sell a line of
products for the cardiac rhythm management, or electrophysiology (EP), market
used to diagnose, monitor, visualize and treat irregular heartbeats known as
arrhythmias. Since our inception, we have acquired technology and marketing
rights, have developed new products and have begun marketing various
electrophysiology products, including our EP-WorkMate(R) computerized
electrophysiology workstation, the RPM(TM) RealTime Position Management(TM)
navigation technology, our EP-3(TM) Stimulator, our EP-4(TM) Computerized
Cardiac Stimulator, diagnostic electrophysiology catheters (including our unique
one-piece catheter) and our ALERT(R) System (including the ALERT(R) Companion II
and ALERT(R) family of internal cardioversion catheters), ViewMate(R)
intracardiac ultrasound catheter system and related disposable supplies.

          In 2003, we received the following product approvals or market
clearances:
<TABLE>
<CAPTION>
<S>             <C>                                                             <C>

              PRODUCT                                                       REGULATORY BODY

ViewMate(R)                                                                FDA and European Notified Body

ALERT (R) Companion II energy source                                       FDA

ALERT (R) CS/RA catheter set                                               European Notified Body

ALERT (R) Deflectable CS catheter                                          European Notified Body

Integration of the EP-WorkMate(R) with Boston Scientific's                 FDA
RPM(TM) RealTime Position Management(TM) System
</TABLE>

          In 2004, we initiated the launches of the approved products listed
above.

          In 2004, we received market clearance from the FDA for our line of
deflectable diagnostic catheters. A deflectable catheter allows the physician to
deflect its tip to steer the catheter into certain vessels and areas of the
heart, which would be difficult with a fixed curve catheter. In addition, we
received FDA market clearance for our new EP-4(TM) Computerized Cardiac
Stimulator. The EP-4(TM) is an improvement over our existing EP-3(TM) technology
allowing for constant current, elimination of a battery and two or four channel
stimulation. In September 2004, we received market clearance from the FDA for
constant voltage as well as constant current stimulation. The EP-4(TM)
Stimulator can now be used for EP diagnostic studies and pacemaker implantation
where measuring voltage thresholds is fundamental.

                                       20
<PAGE>


          Our core diagnostic product is the EP-WorkMate(R), a computerized
electrophysiology workstation that monitors displays and stores cardiac
electrical activity and arrhythmia data. The EP-WorkMate(R) offers, among other
features, display and storage of up to 192 intracardiac signals, real-time
diagnosis, analysis and integration with our own proprietary systems, such as
our EP-4(TM) Stimulator, as well as with those of market leaders, such as the
RPM(TM) RealTime Position Management(TM) navigation system and with other
technologies and systems. Late in the third quarter of 2003, we received FDA
market clearance to sell the EP-WorkMate(R) integrated with RPM(TM) RealTime
Position Management(TM) System. This approval was the culmination of a strategic
joint development project between Boston Scientific Corporation and EP Med. It
is the only EP recording system on the market to integrate advanced recording
and stimulation with anatomic modeling, advanced mapping and 3-D navigation
features, allowing electrophysiology studies to be more efficient and user
friendly. The EP-4(TM) Stimulator is a computerized signal generator and
processor which, when integrated with the EP-WorkMate(R), is used to stimulate
the heart with electrical impulses in order to locate arrhythmia. During 2004,
the EP-WorkMate(R), the RPM(TM) RealTime Position Management(TM) System and the
EP-4(TM) Stimulator accounted for approximately 89% of our total sales. We also
market a line of diagnostic electrophysiology catheters for stimulation and
sensing of electrical signals during electrophysiology studies, which
represented approximately 3% of our total sales revenues in 2004.

         We have also developed the ViewMate(R) intracardiac ultrasound catheter
system including the ViewMate(R) ultrasound imaging console and ViewFlexTM
intracardiac imaging catheters. These products offer high-resolution, real-time
ultrasound capability designed to improve a physician's or clinician's ability
to visualize inside the chambers of the heart. We believe the ViewMate(R)
Ultrasound System may play an important role for a broad range of potential
applications in electrophysiology and cardiology. In April of 2003, we received
CE approval to market the ViewMate(R) in Europe. In October 2003, we received
FDA market clearance to sell the ViewMate(R) System in the United States. Sales
of the ViewMate(R) system and related ViewFlex(TM) catheters accounted for
approximately 5% of our total sales revenues in 2004.

          We have also developed a product for the treatment of atrial
fibrillation known as the ALERT(R) System, which uses a patented electrode
catheter to deliver measured, variable, low-energy electrical impulses directly
to the inside of the heart to convert atrial fibrillation to a normal heart
rhythm. We have obtained Class III Design Examination Certification from a
European Notified Body allowing us to label the ALERT(R) System with a CE Mark,
an international symbol of adherence to quality assurance standards, design
reviews and hazard analysis, which permits us to sell the ALERT(R) System in the
European Community. In November 2002, we received pre-market approval from the
FDA to sell the ALERT(R) System in the United States. In September 2003, we
received pre-market approval to sell the ALERT(R) Companion II in the United
States. Sales of the ALERT(R) System and related catheters accounted for
approximately 3% of our total sales revenues in 2004.

                                       21
<PAGE>


CRITICAL ACCOUNTING POLICIES

          Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The SEC indicated that a critical accounting policy is one
which is important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Note 2 of our Notes to the Consolidated
Financial Statements includes a summary of the significant accounting policies
and methods used in the preparation of our Consolidated Financial Statements. In
addition, Financial Reporting Release No. 61 requires all companies to include a
discussion to address, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments. The
information provided below describing our debt and future commitments is
provided to facilitate a review of our liquidity and capital resources. The
following is a brief discussion of the more significant accounting policies and
methods used by us.

GENERAL

          The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. The primary estimates used by
management are in the determination of the allowance for doubtful accounts,
inventory obsolescence reserve and warranty reserve. Although these estimates
are based upon management's knowledge of current events, the estimates may
ultimately differ from actual results.

REVENUE RECOGNITION

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

          We have three sales channels: Direct sales to customers, sales to
independent distributors, and sales to alliance partners. Our products do not
require "installation" in the traditional sense, but the EP-WorkMate(R) does
require a set up. For sales to alliance partners and distributor sales, a
channel partner or distributor is responsible for all set-up of all electronic
hardware products, and we have no obligation after shipment of products to the
distributors. For direct sales, the customer can perform the set-up on its own,
however, EP Med personnel generally will assist customers in this process. The
set-up process, which takes approximately 1-2 hours to complete, is usually
performed within the week of shipment and primarily consists of assembling the
workstation cart and plugging in the monitors, printer, isolation transformer,
and the EP-4(TM) Stimulator to the main computer. This process does not impact
our standard payment terms. For sales to distributors, payment terms are defined
in the distributor agreements as 100% of the purchase price being due 30-60 days
after shipment. For direct sales, payment terms are agreed in advance of the
sale and generally require a 50% deposit prior to shipment, with the balance due
30-60 days after shipment.

                                       22
<PAGE>

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

          We also sell various types of warranty contracts to our customers.
These contracts range in term from one to five years. Revenue is recognized on
these contracts on a straight-line basis over the life of the contract.

VALUATION OF ACCOUNTS RECEIVABLE

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

VALUATION OF INVENTORY

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

VALUATION OF GOODWILL, INTANGIBLE ASSETS, AND OTHER LONG-LIVED ASSETS

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

        -       significant underperformance relative to expected historical or
                projected future operating results;
        -       significant  changes in the  manner of our use of the  acquired
                assets or the  strategy  for our  overall business;
        -       significant negative industry or economic trends;
        -       significant decline in our stock price for a sustained period;
                and
        -       our market capitalization relative to net book value.

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

                                       23
<PAGE>

INCOME TAXES

          We account for our income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.

ACCOUNTING FOR STOCK-BASED COMPENSATION.

          We have elected to measure our stock-based compensation expense
relating to grants to employees under our stock option plans using the intrinsic
value method. Under this method, we record no compensation expense when we grant
stock options to employees if the exercise price for a fixed stock option award
to an employee is equal to the fair value of the underlying common stock at the
date we grant the stock option.

          A different method for accounting for employee stock option grants is
the fair value method. Under the fair value method, a company is required to
determine the fair value of options granted to employees based on an option
pricing model which incorporates such factors as the current stock price,
exercise prices of the options, expected volatility of future movements in the
price of the underlying stock, risk-free interest rates, the term of the options
and any dividends expected to be paid. The fair value determined under this
method is then amortized over the vesting period of the related options. Had we
chosen to account for employee stock options using the fair value method, we
would have recorded additional stock based compensation expense of approximately
$560,000 and $424,000 for the years ended December 31, 2004 and 2003,
respectively.

         On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation. This new standard eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires
such transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in our financial statements. This new standard is
effective for awards that are granted, modified or settled in cash in interim
and annual periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We will
adopt this new standard effective for the third quarter of 2005, and have not
yet determined what impact this standard will have on our financial position or
results of operations, but it is likely that the adoption of this standard will
have a material impact on our results of operations.



RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO
THE FISCAL YEAR ENDED DECEMBER 31, 2003.

                                       24
<PAGE>

          The Company had net sales of $16,369,000 for the year ended December
31, 2004 as compared to $10,003,000 for the year ended December 31, 2003. This
$6,366,000 (or 64%) increase was primarily due to a $5,870,000 increase in sales
of our EP-WorkMate(R), EP-WorkMate(R) integrated with RPM(TM) navigation
technology, EP-4(TM) Stimulator and RPM(TM) sales into our install base.
ViewMate(R) and ViewFlex(TM) sales in 2004 also increased $591,000 over 2003.

          Gross profit on sales for the year ended December 31, 2004 was
$9,706,000 as compared with $5,240,000 for the same period in 2003. This
increase in gross profit as a percentage of sales from 52% to 59% was primarily
the result of an increase in sales of products within the United States, where
overall margins are higher, and higher sales covering fixed manufacturing costs.

          Sales and marketing expenses increased $2,783,000 (or 50%) to
$8,346,000 for the year ended December 31, 2004 as compared to the same period
in 2003. This increase was a result of higher commissions, salaries, benefits,
recruiter fees and consulting fees of $1,276,000 as a result of an increase in
headcount, higher overall sales, and the initiation of a clinical affairs
department in 2004. Additional product launch costs included spending for travel
and conventions of $724,000 and an additional $102,000 in marketing, advertising
and catheter sample expenses. Higher sales also resulted in an increase in
freight and royalty costs of $403,000. We anticipate continuing to invest in
sales and marketing in 2005, and this increased investment will include a full
year of costs associated with our new clinical affairs department. We anticipate
this new department will assist in the marketing of our new and existing
products, expand the overall claims of our new products, and provide additional
strategic direction from the physician's perspective.

          General and administrative expenses increased $469,000 (or 18%) to
$3,035,000 for the year ended December 31, 2004 as compared to the same period
in 2003. This increase in general and administrative expenses was primarily due
to an increase in noncash expenses for the amortization of deferred financing
fees of $178,000, and fluctuations in foreign currency of $103,000. In addition,
expenses in connection with being a public company increased significantly in
2004. Business insurance expenses increased by $52,000. Director's fees
increased by $33,000 and investor relations expenses were higher by $79,000. We
expect to incur additional costs in connection with compliance with
Sarbanes-Oxley legislation in 2005.

          Research and development expenses decreased $96,000 (or 4%) to
$2,470,000 for the year ended December 31, 2004 as compared to the same period
in 2003. The decrease was primarily due to a reduction in headcount, causing a
decrease in salaries and benefits totaling $157,000 which was offset by a
$127,000 increase in spending on research and development projects and costs
related to the outsourcing of certain product lines. Legal costs for certain
patents decreased by $67,000 as most legal work in 2004 was related to patent
filings. Costs for research and development can fluctuate on a
quarter-by-quarter basis depending on the status of projects and intellectual
property strategies.

          Interest expense increased $241,000 to $725,000 for the year ended
December 31, 2004 as compared to the same period in 2003. This was the result of
the interest expense related to the convertible note issued to Laurus including
accretion of note discount of $316,000 and an increase in the amortization of
beneficial conversion of $204,000, offset by a reduction in expense from payoff
of the note payable to Medtronic. For the year ended December 31, 2003, we
recorded a non-cash interest expense, debt conversion in connection with the
conversion of the $1,000,000 convertible promissory bridge notes issued to EGS,
which converted into common stock of the Company on January 31, 2003.

                                       25
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

          Since our incorporation in January 1993, our expenses have exceeded
sales, resulting in an accumulated deficit of approximately $42.6 million at
December 31, 2004 and approximately $38.2 million at December 31, 2003.

          On November 15, 2000, we completed a $3.2 million debt financing with
Medtronic Asset Management, Inc., an affiliate of Medtronic, Inc., one of our
shareholders. Approximately $2.3 million of that amount was used to repay
outstanding amounts on our then-existing revolving credit facility. The
principal and all accrued interest on the Medtronic note was to be repaid on
November 15, 2003 and the note was secured by a pledge by David Jenkins, the
Chairman of our Board of Directors, of shares of common stock of a
privately-held corporation. On March 12, 2003, the due date of the note was
extended to April 1, 2004. In connection with the extension, we paid $1 million
of the note upon receipt of certain equity proceeds and increased the interest
rate to the prime rate plus 3% from the prime rate plus 2%. The prime rate was
4% at December 31, 2003. We had accrued approximately $728,000 of interest
expense as of December 31, 2003. In February 2004, the principal amount of this
note, along with all accrued interest, was repaid.

          During the year ended December 31, 2001, we consummated the private
sale and issuance of our Series A convertible preferred stock to Medtronic, Inc.
("Medtronic"). In 2002, Medtronic converted a portion of its preferred stock
into shares of our common stock. At September 30, 2004 and December 31, 2003,
Medtronic held 373,779 of our Series A Preferred Shares which were convertible
into 387,946 shares of our common stock at the option of Medtronic or us in
accordance with the terms of the agreement with Medtronic. Subsequent to
December 31, 2004, Medtronic converted its preferred shares into 387,946 shares
of our common stock.

          On September 5, 2002, we entered into a stock purchase agreement and
license agreement with Boston Scientific Corporation ("BSC") in connection with
a strategic joint development project. The development project was completed in
the third quarter of 2003. As a result, we have marketing rights to the
developed technology and will pay royalties to BSC based on the market value of
the technology at the time of our sale of the integrated product. The stock
purchase agreement with BSC allowed for the sale of up to $3,000,000 of common
stock based on the achievement by us of milestones in the development of certain
cardiac electrophysiology technology. We achieved each of the milestones, and
the common stock was sold at the lesser of the ten-day trailing average trading
price per share prior to the closing of each installment purchase, and $5.00 per
share. Upon signing of the agreement, we received $500,000 for 210,084 shares of
our common stock issued at the ten-day trailing average trading price of $2.38
per share. On February 4, 2003, we issued 311,915 shares of common stock in
exchange for $500,000. These shares were registered for resale on Form S-3 on
April 2, 2003. On April 21, 2003, we issued 357,398 shares of common stock in
exchange for another payment of $500,000. During the third quarter of 2003, we
issued 601,631 shares of common stock in exchange for the final payments
totaling $1,500,000.

                                       26
<PAGE>

          On November 21, 2002, we issued $750,000 of notes secured by a
mortgage on our facility in West Berlin, New Jersey. Interest was payable
quarterly at 8% and the notes were collateralized by the building. The notes
were convertible into our common stock at escalating amounts over its three year
term as follows:

        -       November 21, 2002 through December 31, 2003 convertible at $2.14
                per share
        -       January 1, 2004 through December 31, 2004 convertible at $2.50
                per share
        -       January 1, 2005 through December 31, 2005 convertible at $3.00
                per share

          On April 2, 2003, the holders of the mortgage notes converted an
aggregate of $375,000 of the mortgage notes into 300,000 shares of our common
stock. In connection with the conversion, we reduced the conversion price from
$2.14 per share to $1.25 per share, which resulted in the recording of a
non-cash mortgage conversion charge of $222,084. On June 30, 2003, the holders
of the mortgage notes converted the final portion of the mortgage notes into
175,234 shares of common stock at a conversion price of $2.14 as stated in the
agreement.

          On December 30, 2002, we issued convertible promissory bridge notes,
in an aggregate amount of $1,000,000, to EGS Private Healthcare Partnership L.P.
and EGS Private Healthcare Counterpart L.P. (the "EGS Entities"). The maturity
date of those promissory notes was June 30, 2003, and interest accrued at 10%
per annum, payable upon maturity. In connection with that financing, we issued
warrants to the EGS Entities to purchase an aggregate of 50,000 shares of our
common stock at 105% of the closing trading price of its common stock on
December 30, 2002. On January 31, 2003, we issued common stock in a related
private placement. In connection with this issuance, the entire principal amount
of the promissory notes issued to the EGS Entities and all accrued and unpaid
interest thereon were converted into 819,783 shares of common stock and warrants
to purchase 327,913 shares of our common stock in and on the same terms as the
private placement. A managing member of the EGS Entities is also a member of our
Board of Directors.

          On January 31, 2003, we completed a $2,470,000 private placement of
our common stock to various accredited investors. We issued 2,007,475 shares of
our common stock for a purchase price of $1.23 per share and warrants to
purchase 802,990 shares of common stock at an exercise price per share of 110%
of the closing trading price on the date of closing of that transaction, which
was $1.6943. In the private placement, we received approximately $1,570,000 in
cash, net of offering costs. The balance of the private placement included the
conversion of the entire principal amount of, and accrued interest on, the
promissory notes from the EGS Entities into shares of our common stock, and the
securities issued in that private placement were issued on the same terms and
conditions as those of other investors. In connection with that conversion, the
50,000 warrants issued to the EGS Entities on December 30, 2002 were cancelled
in 2003 and we recorded a $1,000,000 non-cash charge in connection with the
conversion in 2003. The charge is for interest conversion expense associated
with certain beneficial conversion features and the intrinsic value of embedded
conversion options within the promissory notes. We had the right, with prior
notice to the holders of the warrants, to repurchase the warrants issued in
connection with the private placement at $.01 per warrant at any time after the
average closing price of our common stock, for any twenty consecutive trading
days, equaled or exceeded $2.54. In July of 2003, the closing price requirement
for repurchase of the warrants was met, we gave notice to repurchase the
warrants to the warrant holders, and 794,790 shares of common stock were issued
upon exercise of these warrants. In April 2003, we completed an additional
$210,000 private placement of 120,000 shares of our common stock to various
accredited investors.

                                       27
<PAGE>

          On August 28, 2003, we issued a Secured Convertible Note (the "Laurus
Convertible Note") to Laurus Master Fund, Ltd. ("Laurus") and entered into a
related Security Agreement with Laurus, pursuant to which Laurus provided us
with a $4,000,000 revolving asset-based credit facility in the form of a
three-year Laurus Convertible Note secured by our accounts receivable,
inventory, real property and other assets, other than intellectual property.

          At the closing of the transaction, we issued the Laurus Convertible
Note to Laurus having a principal amount of $4,000,000 and received net proceeds
of $2,661,600. An additional $1,000,000 of the Laurus Convertible Note was
previously restricted. Those restrictions were released during the third quarter
of 2004 and that amount became available to us. The balance of the proceeds was
used to pay fees incurred in connection with this transaction. Deferred
financing fees are being amortized over the life of the Laurus Convertible Note
using the effective interest method. In addition, we paid a portion of the fees
payable to an intermediary, Biscayne Capital Markets, Inc. ("Biscayne"), in
40,000 shares of our common stock having a market value on the date of closing
of this transaction equal to $100,000. The net proceeds of the Laurus
Convertible Note have been, and will be, used for working capital purposes and
payment of outstanding debt.

          The portion of the Laurus Convertible Note against which Laurus
advances funds based on our accounts receivable bears interest at the prime
rate, with a floor of 4%, which is an effective interest rate of approximately
17% (including accretion of discount and amortization of beneficial conversion
feature), and the balance (the "Advance Amounts") bears interest at the prime
rate plus 2%. One half of Advance Amounts outstanding on February 28, 2005 was
required to be repaid on or before that date. However, there were no "Advance
Amounts" outstanding on that date, as the net collateral exceeded the principal
amount outstanding on the Laurus Convertible Note. The remaining balance of the
Advance Amounts outstanding on the date of the closing is required to be repaid
on or before August 28, 2006. Subject to certain rights of cancellation, we may
extend the Laurus credit facility, on a year-by-year basis, commencing August
28, 2006. We may repay in cash, without penalty, up to $500,000 of the Laurus
Convertible Note in any one calendar year, plus all Advance Amounts.

          Subject to certain volume limitations and other conditions, all or a
portion of the Laurus Convertible Note was convertible into our common stock at
our option if the market price of our common stock reached a level, for 11
consecutive trading days, which was more than 120% of the "Fixed Conversion
Price". Through December 14, 2004, the Fixed Conversion Price was $2.55, which
was a price that was greater than the market price of our common stock on the
date of closing. Subject to certain volume limitations and other conditions,
Laurus has the option to convert all or a portion of the Laurus Convertible Note
into shares of our common stock at the Fixed Conversion Price.

          Following the conversion into our common stock by us and/or Laurus of
an aggregate of $2,000,000 of the principal amount of the Laurus Convertible
Note (a "Conversion Event"), the Fixed Conversion Price will be adjusted upward
to a price which is 115% of the average of the closing price of our common stock
for the three trading days prior to the Conversion Event. On December 15, 2004,
the balance of the first $2,000,000 of the principal amount was converted into
shares of our common stock and the Fixed Conversion Price on the remaining
$2,000,000 principal balance was adjusted upward from $2.55 to $4.20. Subject to
certain limitations, including the repayment obligations with respect to Advance

                                       28
<PAGE>

Amounts described above, the dollar amounts of the Laurus Convertible Note
converted may be re-borrowed. The Fixed Conversion Price is subject to
adjustment, with customary exceptions and on a weighted-average basis, in
connection with sales of our securities below the Fixed Conversion Price then in
effect, and is also subject to adjustment for stock splits, combinations, stock
dividends and similar events.

          As part of the credit facility transaction, Laurus and the
intermediary also received warrants to purchase an aggregate of 240,750 shares
of our common stock (the "Warrants"), with exercise prices set as follows: $2.93
per share for the purchase of up to the first 133,750 shares, $3.19 per share
for the purchase of up to the next 80,250 shares, and $3.70 per share for the
purchase of up to the final 26,750 shares. The expiration date of the Warrants
is August 28, 2010. The exercise price of the Warrants and the number of shares
underlying the Warrants are subject to adjustments for stock splits,
combinations, stock dividends and similar events.

          In October 2003, we registered, under the Securities Act of 1933, as
amended, 1,500,000 shares of our common stock which may be received by Laurus
upon conversion of the Laurus Convertible Note and exercise of the Warrant, and
the remaining 293,628 of such shares were registered in November 2004. In
accordance with the provisions of Emerging Issues Task Force (EITF) Issue 00-27,
"Application of EITF Issue No. 98-5 `Accounting for Convertible Securities with
Beneficial Conversion Features of Contingently Adjustable Conversion Ratios', to
Certain Convertible Securities", the allocated value of the Laurus Convertible
Note contained a beneficial conversion feature calculated based on the
difference between the effective conversion price of the proceeds allocated to
the Laurus Convertible Note and the Warrants at the date of issuance. The amount
arising from the beneficial conversion feature aggregated approximately $486,000
and is being amortized as interest expense from the date of the issuance of the
Laurus Convertible Note to the mandatory redemption date of August 28, 2006. We
valued the Laurus Convertible Note and the Warrants at issuance. The fair value
of the Warrants at the time of issue was $407,500. In accordance with EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," we marked the Warrants to market
at September 30, 2003 incurring a non-cash charge of $264,000. The registration
rights agreement associated with the Laurus Convertible Note was amended on
November 25, 2003 and, as a result, the amount associated with the warrants was
transferred to equity. We marked the Warrants to market at the date of the
amendment which reduced the overall expense to $210,750 for the year ended
December 31, 2003. The net carrying value of the Laurus Convertible Note, after
allocation of the fair value of the Warrants, is being accreted to interest
expense over the life of the agreement using the effective interest method.

          On December 26, 2003, we completed an $8,200,000 private placement of
our common stock to various accredited investors whereby we issued 3,200,000
shares of our common stock at a purchase price of $2.56 per share.

          In May of 2004, we engaged a physician as a consultant to head our
clinical affairs department. In connection with that agreement, we issued 10,000
shares of the Company's common stock to the physician and granted the physician
an option to purchase 10,000 shares of the common stock which vests twelve
months from the date of grant. Also in connection with the agreement, we granted
the physician an option to purchase 40,000 shares of our common stock which
vests in equal installments over five years. The exercise price of each of the
options was the fair market value of our common stock on the date of the grant.

                                       29
<PAGE>

The transactions were accounted for in accordance with Emerging Issues Task
Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The fair value was measured using the Black-Scholes option pricing
model under Statement of Financial Accounting Standard No. 123 using the
following assumptions for each grant as follows: risk free rate: 3.07%, 10 year
life, and a volatility percentage of 83.86%.

          In October 2004, we engaged a physician as a consultant to manage a
clinical study. In connection with that agreement, we granted the physician a
warrant to purchase 10,000 shares of our common stock, which vested immediately.
The exercise price of the warrants was the fair market value of our common stock
on the date of the grant. The transaction was accounted for in accordance with
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." The fair value was measured using the Black-Scholes
option pricing model under Statement of Financial Accounting Standard No. 123
using the following assumptions: risk free rate of 3.36%, 10 year life, and a
volatility percentage of 77.25%.

          On December 15, 2004, we completed a $4,500,000 private placement of
our common stock to two accredited investors in which we issued 1,500,000 shares
of our common stock at a purchase price of $3.00 per share.

          Net cash used in operating activities for the year ended December 31,
2004 decreased by $302,000 to $4,425,000 as compared to the same period in 2003.
The decrease in our net use of cash in operations during 2004 was primarily due
to the decrease in our net loss, and was offset by an increase in inventory and
accounts receivable. Inventory on hand increased as a result of the number of
new product lines approved in the second half of 2003 and accounts receivable
increased as a result of higher sales in 2004. Capital expenditures were
$308,000 for the year ended December 31, 2004 as compared to $154,000 in 2003.
We expect to purchase capital equipment in 2005 as we grow. We lease office
space and certain office equipment under operating leases.

          Assets decreased by $1,658,000 from $21,661,000 at December 31, 2003
to $20,003,000 at December 31, 2004. The change in assets was due to a number of
factors. Cash and cash equivalents, including restricted cash, decreased by
$2,904,000 from $12,249,000 at December 31, 2003 to $9,345,000 at December 31,
2004, primarily due to the repayment of the Medtronic debt and accrued interest
of approximately $2,920,000 and our net loss, offset by our December 2004
financing. Prepaid expenses and other assets, both short and long term,
decreased approximately $690,000. The decrease in these balance sheet items was
primarily a result of the reduction of both the deferred offering costs and the
beneficial conversion feature in connection with the convertible note.

          Liabilities decreased approximately $3,383,000 from $10,035,000 at
December 31, 2003 to $6,652,000 at December 31, 2004. This decrease was
primarily due to the repayment of approximately $2,920,000 in principal and
interest to Medtronic in February 2004.

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

                                       30
<PAGE>

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

         The following table summarizes our contractual cash obligations at
December 31, 2004, and the effects such obligations are expected to have on
liquidity and cash flow in future periods. We do not have any other commercial
commitments.

                             PAYMENTS DUE BY PERIOD
<TABLE>
<CAPTION>
<S>     <C>                             <C>                 <C>              <C>             <C>          <C>
                                                                                                        After 5
    Contractual Obligations            Total        Less than 1 year     1-3 years       4-5 years       years
--------------------------------- ----------------- ------------------ --------------- -------------- -------------
Long-Term Debt (1)                              $                   $      $2,000,000             $0            $0
--------------------------------- ----------------- ------------------ --------------- -------------- -------------
Operating Lease Obligations                     $             $46,000         $25,000             $0            $0
--------------------------------- ----------------- ------------------ --------------- -------------- -------------
Other Long Term Obligations(2)(3)               $0           $250,000              $0             $0            $0
--------------------------------- ----------------- ------------------ --------------- -------------- -------------
Total Contractual Cash
Obligations                                     $            $296,000      $2,025,000             $0            $0
--------------------------------- ----------------- ------------------ --------------- -------------- -------------
<FN>

(1)     We are also contractually obligated to pay variable interest on the Long-Term Debt.
(2)     Related to employment contract with the Company's CEO.
(3)     The Company also has contractual obligations for certain licensing contracts. We have signed a license
        agreement with Boston Scientific that provides for a royalty payment on sales of RPM(TM) units. This
        royalty is payable upon collection of sales. We also have other license agreements which the Company may
        terminate unilaterally in the event that the technology is no longer deemed relevant.
</FN>
</TABLE>


                                  RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE DECIDING TO
INVEST IN OUR COMMON STOCK. AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH
DEGREE OF RISK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY
ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR
THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. IN ASSESSING THESE RISKS, YOU
SHOULD ALSO REFER TO THE OTHER INFORMATION INCLUDED OR INCORPORATED BY REFERENCE
IN THIS 10-KSB, INCLUDING OUR FINANCIAL STATEMENTS AND THE NOTES THERETO.

                                       31
<PAGE>

I. RISK FACTORS RELATING TO EP MEDSYSTEMS, INC. AND THE INDUSTRY IN WHICH WE
OPERATE.

WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT FUTURE LOSSES.

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

                             1996                        $1,571,000
                             1997                        $4,864,000
                             1998                        $4,511,000
                             1999                        $2,997,000
                             2000                        $4,634,000
                             2001                        $4,089,000
                             2002                        $5,048,000
                             2003                        $6,949,000
                             2004                        $4,410,000

          At December 31, 2004, we had an accumulated deficit of approximately
$42.6 million. Our net sales revenue of $16.4 million, less cost of sales, did
not cover our operating expenses of approximately $13.9 million for the year
ended December 31, 2004. At December 31, 2003, we had an accumulated deficit of
approximately $38.2 million. Our net sales revenue of $10 million, less cost of
sales, did not cover our operating expenses of approximately $10.9 million for
the year ended December 31, 2003. We expect that our operating expenses will
continue to exceed our revenues, and as such, we will likely continue to incur
operating losses until revenue from new products covers our costs.

WE MAY NEED ADDITIONAL FUNDS TO SUPPORT OPERATIONS AND MAY NEED TO REDUCE
OPERATIONS, SELL STOCK OR ASSETS, OR MERGE WITH ANOTHER ENTITY TO CONTINUE
OPERATIONS.

          Our operations to date have consumed substantial capital resources,
and we will continue to expend substantial and increasing amounts of capital for
research, product development and testing to establish commercial-scale
manufacturing capabilities, and to market potential and approved products. Our
future capital requirements will depend on many factors, including:

        -      continued scientific progress in our research and development
               programs,

        -      the size and complexity of our research and development programs,

        -      the scope and results of testing and trials of our products,

        -      the time and costs involved in applying for regulatory
               approvals,

        -      the costs involved in preparing, filing, prosecuting,
               maintaining and enforcing patent claims,

        -      competing technological and market developments,

                                       32
<PAGE>

        -      our ability to establish and maintain collaborative research and
               development arrangements,

        -      the cost of manufacturing scale-up and product commercialization,

        -      our ability to create an effective sales channel for our
               products, and

        -      the costs of being a public company.

          We may need to raise additional funds. If we are not able to do so, we
may not be able to fund our operations. We expect that our existing capital
resources, including the capital previously raised through the sale of common
stock and the issuance of convertible notes under our existing revolving credit
facility, will be sufficient to fund our activities as currently planned for a
period in excess of twelve months. However, in the event sales do not reach
budgeted levels, the amounts expended by us for various purposes vary
significantly from our estimates and/or we are unable to convert outstanding
notes into shares of our common stock and borrow additional funds under our
existing revolving credit facility, it is likely that our cash requirements will
exceed current projections and that we will therefore need additional financing
sooner than currently expected. In the future, it is possible that we will not
have adequate resources to support our business activities.

          We may seek additional funding, including public and private
financings. Our choice of financing alternatives may vary from time to time
depending upon various factors, including the market price of our securities,
conditions in the financial markets, and the interest of other entities in
strategic transactions with us. There can be no guarantee that additional
financing will be available on acceptable terms, whether through collaborative
arrangement, issuance of securities, or otherwise. If adequate funds are not
available, we may be required to delay, scale back or eliminate one or more of
our research and development programs or other initiatives. We may also need to
obtain funds through arrangements with collaborative partners or others that
require us to relinquish rights to certain technologies or potential products.
Any such delay, scale back, partnership or similar arrangement could have a
negative impact on our ability to develop products, or to achieve profitability
if our products are brought to market. If we obtain additional funding through
sales of securities, your investment in us will be diluted.

WE MAY NEED TO ESTABLISH COLLABORATIVE AGREEMENTS, AND THIS COULD HAVE A
NEGATIVE EFFECT ON OUR FREEDOM TO OPERATE OUR BUSINESS OR PROFIT FULLY FROM
SALES OF OUR PRODUCTS.

          We may seek to collaborate with other medical device companies to gain
access to their research and development, manufacturing, marketing, distribution
and financial resources. However, we may not be able to negotiate arrangements
with any collaborative partners on acceptable terms. Any collaborative
relationships that we enter into may include restrictions on our freedom to
operate our business or to profit fully from the sales of our products.

          Once a collaborative arrangement is established, the collaborative
partner may discontinue funding any particular program or may, either alone or
with others, pursue alternative technologies for the diseases we are targeting.
Competing products, developed by a collaborative partner or to which a
collaborative partner has rights, may result in the collaborative partner
withdrawing support as to all or a portion of our technology.

                                       33
<PAGE>

          Without collaborative arrangements, we must fund our own research and
development activities, accelerating the depletion of our capital and requiring
us to develop our own marketing capabilities. Therefore, if we are unable to
establish and maintain collaborative arrangements, we could experience a
material adverse effect on our ability to develop products and, once developed,
to market them successfully.

OUR SUCCESS WILL DEPEND ON CONTINUED MARKET ACCEPTANCE OF THE EP-WORKMATE(R) AND
MARKET ACCEPTANCE OF OUR EP-WORKMATE(R) INTEGRATED WITH RPM(TM), THE ALERT(R)
SYSTEM AND VIEWMATE(R) PRODUCT OFFERINGS.

          Our ability to increase revenues over the next several years will
depend on the continued market acceptance by electrophysiologists of one of our
products, the EP-WorkMate(R) computerized monitoring and analysis workstation
integrated with RPM(TM), and market acceptance of our ALERT(R) System and
ViewMate(R) product offerings. Sales of our EP-WorkMate(R), its integrated
stimulator, EP-4(TM) and EP-3(TM), and Boston Scientific Corporation's RPM(TM)
RealTime Position Management(TM) system accounted for 89% and 86% of our sales
in the year ended December 31, 2004 and 2003, respectively. Because the
EP-WorkMate(R) has a list price of approximately $150,000 with an integrated
EP-4(TM) Stimulator, each sale of an EP-WorkMate(R) represents a relatively
large percentage of our net sales. Decreased or flat sales or low market
acceptance of our EP-WorkMate(R) products or low market acceptance of our
recently approved products could have a material adverse effect on our business,
results of operations and financial condition.

WE ARE REQUIRED TO OBTAIN REGULATORY APPROVALS IN ORDER TO MANUFACTURE AND
MARKET OUR PRODUCTS, AND OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO OBTAIN
THOSE APPROVALS.

          We plan to file with the FDA to sell the ALERT(R) CS/RA catheter
product line in the United States in 2005. We will also be seeking FDA approval
and approval by a European Notified Body for various other products. Approval of
these products by the FDA and European Notified Body is based upon, among other
things, the results of clinical trials that demonstrate the safety and efficacy
of such products. Our failure to obtain regulatory approval or the delay in the
approval of these products from either regulatory body would have a material
adverse effect on our sales, margins, business and financial condition.

ACCEPTANCE OF OUR PRODUCTS BY PHYSICIANS AND OTHER CLINICIANS IS CRITICAL TO OUR
SUCCESS.

          Acceptance and use of our products by physicians and other clinicians
is critical to our success. Physician and clinician acceptance will depend upon,
among other things, substantial favorable clinical experience, advantages over
alternative treatments, cost effectiveness and favorable reimbursement policies
of third-party payors, such as insurance companies, Medicare and other
governmental programs. Our failure to obtain physician and other clinician
acceptance of our products would have a material adverse effect on our business,
results of operations and financial condition.

                                       34
<PAGE>

WE ARE PRIMARILY ENGAGED IN THE SALE OF CAPITAL EQUIPMENT.

          We are primarily engaged in the sale of capital goods and are subject
to the budgetary cycles of our customers. This can cause fluctuations in our
quarterly revenue as customers manage their capital budgets based on available
cash to pay for equipment.

OUR PROFITABILITY WILL DEPEND ON OUR ABILITY TO MANUFACTURE OUR PRODUCTS
EFFICIENTLY AND ECONOMICALLY.

          Our profitability will depend on our ability to manufacture our
products efficiently and economically. Our failure to obtain efficiency in our
manufacturing processes will affect our profitability and could have a material
adverse effect on our business, results of operations and financial condition.

WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MANUFACTURING CAPACITY, WHICH MAY
AFFECT OUR ABILITY TO PRODUCE COMMERCIALLY VIABLE PRODUCTS IN SUFFICIENT
QUANTITIES.

          We have limited experience in manufacturing our catheter products
generally, and specifically, we have limited experience manufacturing all of our
products in volumes necessary for us to achieve commercial profitability. We may
not be able to establish or maintain reliable, high-volume, cost-effective
manufacturing capacity, which is critical to our future profitability. We have
entered into agreements to outsource a significant portion of the manufacturing
of our catheter products for sale in the United States and other countries.
Increasing or changing of our manufacturing capacity or sources through these
and other outsourcing arrangements may make it more difficult for us to:

        -       maintain quality control and assurance,

        -       maintain adequate component supplies,

        -       comply with FDA regulations, and

        -       seek additional regulatory approval on new manufacturing
                processes.

          We cannot assure you that we will be able to successfully manufacture
our products in volumes sufficient for us to be profitable or that we can
successfully increase our manufacturing capacity.

WE DEPEND ON THIRD-PARTY SOURCES TO MANUFACTURE CERTAIN OF OUR PRODUCTS AND
CRITICAL COMPONENTS FOR OUR PRODUCTS.

          We rely on third-party sources to manufacture critical components for
the EP-4(TM) Stimulators, ViewMate(R) and its VewFlex(TM) catheter, ALERT(R)
Companion, EP-WorkMate(R) and RPM(TM) Navigation System. In connection with our
migration from the EP-3(TM) Stimulator platform to the EP-4(TM) Computerized
Cardiac Stimulator platform, we changed our third-party manufacturing source and
have begun to manufacture certain catheter products offshore. In addition, we
have changed the manufacturer of our ALERT(R) Companion to give it a similar
"look and feel" as our stimulator. Any interruption by these third-party sources
in the supply of such products or components, as a result of any failure to
obtain necessary regulatory approvals or other events

                                       35
<PAGE>

relating to the performance of any third party source, would have a material
adverse effect on our ability to deliver those products or the products in which
such components are used and could materially adversely impact our sales and
gross margins. If any interruption were to occur, we may not be able to reach an
acceptable arrangement with an alternative source of supply on a timely basis.
Our failure to find alternative manufacturing sources could have a material
adverse effect on our business, results of operations and financial condition.

OUR SUCCESS DEPENDS IN PART ON OUR ABILITY TO KEEP PACE WITH TECHNOLOGICAL
DEVELOPMENTS AND MARKETPLACE CHANGES.

          The electrophysiology market is characterized by rapidly changing
technology, new products and industry standards. Accordingly, our ability to
compete depends on our ability to develop new products and improve existing ones
to keep pace with technological and marketplace changes. The research and
development necessary for new products and for product refinements can take
longer and require greater expenditures than we expect, and our efforts may not
be successful. Moreover, any new products or refinements to existing products
may not be accepted by physicians or patients. If we are unable to successfully
respond to technological developments or changes in the marketplace in which we
compete, our business, financial condition and prospects may be materially
adversely affected.

OUR PATENTS AND PROPRIETARY RIGHTS MIGHT NOT PROVIDE SUFFICIENT PROTECTION.

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

          In addition to patents, we rely on a combination of trade secrets,
copyrights and trademarks to protect our intellectual property rights. For
example, our software (which is an integrated component in the EP-WorkMate(R),
EP-3(TM) Stimulator and EP-4(TM) Stimulator) is copyrighted, however, existing
copyright laws offer only limited practical protection from misappropriation.
Our competitors may independently develop substantially equivalent proprietary
technology.

INTELLECTUAL PROPERTY LITIGATION COULD HARM OUR BUSINESS.

          We have not received any notices alleging any infringement by us of
any other party's patents or intellectual property. However, from time to time
we have received communications from third parties relating to rights to
technology that may be related to technology included in products offered by us.
In the future, we may receive similar or other communications from third parties
asserting that a product offered by us, or an aspect of our business, infringes
a patent held by the third party. With respect to those third party
communications previously received by us, we believe, after having consulted

                                       36
<PAGE>

with counsel, that either (i) our rights to such technology are established,
(ii) we have meritorious defenses, (iii) based on license terms previously
offered to us or typically available in the industry, we can obtain any
necessary licenses on commercially reasonable terms, or (iv) we can modify our
products to avoid such rights, but if this not the case, we may be sued and
assessed damages for past infringement. Those licenses may not be available on
commercially reasonable terms, or at all. In addition, there can be no assurance
that current and potential competitors have not filed, or in the future will not
file, applications or apply for patents or additional proprietary rights
relating to devices, apparatus, products, materials or processes used or
proposed to be used by us.

          Litigation over infringement claims is frequent in the medical device
industry. We may have to defend against third party intellectual property claims
or litigate against third parties that are infringing on our patents or other
intellectual property rights. Any intellectual property litigation, with or
without merit, would be time consuming and costly. The result of such litigation
could cause us to cancel or delay shipments of any products found to be
employing another party's intellectual property rights, require us to develop
alternative technology or require us to enter into costly royalty or licensing
agreements. Further, if necessary licenses are not available to us on
satisfactory terms, we may not be able to redesign our products or processes to
avoid any alleged infringement of a third party's intellectual property rights.
Accordingly, we could be prevented from manufacturing and selling some of our
products.

          Litigation to defend against third party patents and other
intellectual property claims and litigation initiated by us to protect our
patents and other intellectual property rights may be costly for us and time
consuming to our management. Such costs may be prohibitive and may affect our
ability to defend against or initiate patent and other intellectual property
claims. In addition, any litigation of this type might require our management to
focus on matters outside of the day-to-day operations of our business. Our
inability to defend against any type of intellectual property claim or protect
our own intellectual property may have a material adverse effect on our
business, results of operations and financial condition.

IF WE ARE UNABLE TO PAY ROYALTIES, WE MAY LOSE OUR RIGHTS TO USE CERTAIN
IMPORTANT TECHNOLOGY.

          We have entered into several technology agreements which require us to
pay royalties, including, in some cases, minimum annual royalties. If we do not
pay these royalties, we may be in breach of our technology agreements and could
lose the rights granted to us under these agreements. The loss of these rights
would affect our ability to make, market and sell the ALERT(R) product line and
the RPM(TM) product line, which could have a material adverse affect on our
business, results of operations, financial condition and prospects.

WE FACE SIGNIFICANT COMPETITION, AND MANY OF OUR COMPETITORS HAVE GREATER
FINANCIAL, MARKETING AND OTHER RESOURCES THAN WE DO, WHICH MAY AFFECT OUR FUTURE
SUCCESS.

          The medical device market, particularly in the area of
electrophysiology products, is highly competitive and is characterized by rapid
product development and technological change. Many of our competitors have
access to significantly greater financial, marketing and other resources than we

                                       37
<PAGE>

do. The greater resources of our competitors could enable them to develop
competing products more quickly so as to make it difficult for us to develop a
share of the market for these products. By having greater resources, our
competitors may also be able to respond more quickly to technology changes in
the marketplace and may be able to obtain regulatory approval for products more
quickly than we can. Our future success will depend on our ability to remain
competitive with other developers of medical devices and therapies.

          Our primary competitors in the production of catheters and disposable
accessories are C.R. Bard Inc., EP Technologies, Inc. (a subsidiary of
Boston Scientific Corporation), Medtronic, Inc., Biosense Webster, Inc. (a
subsidiary of Johnson & Johnson, Inc.) and Daig Corporation (a subsidiary of St.
Jude Medical, Inc.). In the computerized electrophysiology workstation and
electrophysiology stimulator market, our main competitors are Marquette-Prucka
(a division of General Electric) and C.R. Bard Inc. For the RPM(TM) Navigation
technology, our main competitors are Endocardial Solutions and Johnson &
Johnson, Inc. For intracardiac ultrasound we compete with Acuson, a division of
Siemens Medical Solutions.

THIRD-PARTY REIMBURSEMENT MIGHT BE DENIED, MIGHT ULTIMATELY BE AT LEVELS WHICH
EFFECTIVELY REDUCE OUR PRICES, OR MIGHT BE UNAVAILABLE FOR SOME OF OUR PRODUCTS,
AND WE MAY NOT EARN AS MUCH INCOME FROM THE SALE OF OUR PRODUCTS AS WE CURRENTLY
ANTICIPATE.

          Our products are generally purchased by physicians or medical
institutions. In the United States, third-party payors, such as Medicare,
Medicaid and private insurers, are billed for the healthcare services provided
to patients using those products. Similar reimbursement arrangements exist in
several European countries. Third-party payors are increasingly challenging the
prices charged for medical products and services and are putting pressure on
medical equipment suppliers to reduce prices. Certain procedures involving the
EP-WorkMate(R), our EP-3(TM) Stimulator, our EP-4(TM) Stimulator, our integrated
RPM(TM) Navigation technology, our ALERT(R) System product line and our
ViewFlex(TM) catheters currently are eligible for reimbursement at varying
levels, some of which will need to increase for us to continue to increase
revenues. Maintaining and increasing levels of third-party payor reimbursement
will likely be tied to economic benefits realized through use of our products
and patient outcomes and resulting market acceptance of those products. We
cannot assure you that significant economic benefits from the use of our
products can or will be realized or that patient outcomes from the use of our
products will be significantly improved. In addition, changes in FDA regulations
or in third-party payor policies could limit or reduce reimbursement or make
reimbursement unavailable for procedures using our products. In any of those
events, or if third-party reimbursement does not become available for products
we may develop in the future, our business, results of operations and financial
condition could be materially adversely affected.

THE SUCCESS OF OUR BUSINESS IS DEPENDENT ON OUR KEY PERSONNEL AND THE LOSS OF
ANY OF THESE PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

          The success of our business is dependent, to a significant extent,
upon the abilities and continued efforts of our senior management team,
including Reinhard Schmidt, our President, Chief Executive Officer and a member
of our board of directors. Our success also depends upon certain of our research
and development and other scientific personnel. We have an employment contract

                                       38
<PAGE>


with Mr. Schmidt, but none of our other executive officers or key scientific
personnel currently has an employment agreement with us. We currently maintain
key-man life insurance on our President and Chief Executive Officer and Vice
President of Engineering, but there can be no assurance that this policy will be
maintained or renewed. The loss of any of these persons and the inability to
quickly attract replacements for these key personnel could have a material
adverse effect on our business, results of operations and financial condition.

WE MIGHT NOT BE ABLE TO ATTRACT, MANAGE AND RETAIN OUR SALES FORCE AND
THIRD-PARTY DISTRIBUTORS, WHICH MAY AFFECT OUR ABILITY TO PROMOTE AND SELL OUR
PRODUCTS.

          We utilize our own direct sales and marketing force to sell and
promote our products in the United States and France. We might not be able to
continue to attract, manage and retain a qualified sales and marketing force who
can successfully promote our products, which could materially adversely affect
our business, results of operations and financial condition.

          We generate sales throughout the rest of the world through a
distribution network. While we do not consider any one distributor to be
material to our business, we might not be able to replace existing distributors
on a timely basis, or do so on terms which are not economically disadvantageous
to us, if present relationships are terminated. Further, we might not be able to
make arrangements with new distributors to access new international markets. If
our current or future distributors are not successful in actively and
effectively marketing our products, it could have a material adverse effect on
our business and prospects.

OUR BUSINESS COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS, WHICH, IF SUCCESSFUL,
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION.

          We face an inherent business risk of exposure to product liability and
other claims and lawsuits in the event that our technologies or products are
alleged to have resulted in adverse effects. We may not be able to avoid
significant liability exposure as our products are highly complex and some are
or will be used in relatively new medical procedures and in situations where
there is a potential risk of serious injury, adverse side effects or death. In
addition, misuse of these products, including the misuse or reuse of our
catheters, may increase the risk of a patient experiencing adverse effects and,
as a result, the risk of product liability claims.

          We may not have sufficient insurance coverage, and we may not be able
to obtain sufficient coverage at a reasonable cost. We currently maintain
product liability insurance with coverage limits of $5,000,000 per occurrence
and $5,000,000 in the aggregate per year. This insurance is expensive and may
not be available to us in the future. An inability to obtain or maintain product
liability insurance at acceptable costs or to otherwise protect against
potential product liability claims could prevent or inhibit the
commercialization of some or all of our products. A successful claim against us
or settlement by us in excess of our insurance coverage or our inability to
maintain insurance, could have a material adverse effect on our business,
results of operations and financial condition.

                                       39
<PAGE>

WE ARE SUBJECT TO RISKS ASSOCIATED WITH SALES IN MULTIPLE COUNTRIES.

          We derive a significant portion of our revenues from sources outside
the United States. In 2004 and 2003, approximately 22% and 41%, respectively, of
our net sales were derived from sales outside the United STATES. We expect
international sales will continue to represent a significant percentage of our
total sales. We sell our products in the countries of the European Union and in
Japan, Turkey, Saudi Arabia and China, among others. While we attempt to
mitigate risks associated with international sales, as a result of the
significant portion of our revenues derived from such international sales, we
are subject to associated risks, including:

        -       U.S. export license requirements and unauthorized re-export of
                our products to non-U.S. approved jurisdictions, non-compliance
                with which, or the occurrence of which, can result in fines,
                injunctions, civil penalties, recall or seizure of products,
                total or partial suspension of foreign sales and criminal
                prosecution, among other things;

        -       currency devaluations and fluctuations in currency exchange
                rates, particularly in Europe in connection with the euro and
                pounds sterling;

        -       imposition of, or increases in, customs duties and other
                tariffs;

        -       inability to definitively determine or satisfy legal
                requirements;

        -       inability to effectively enforce contract or legal rights;

        -       inability to obtain complete financial, end-user and other
                information under local legal, judicial, regulatory, disclosure
                and other systems or from foreign distributors;

        -       unexpected changes in regulatory requirements;

        -       nationalization and other risks, which could result from a
                change in government or other political, social or economic
                instability;

        -       extended collection periods for accounts receivable;

        -       potentially inadequate protections of intellectual property
                rights;

        -       restrictions on repatriation of earnings; and

        -       the effects of terrorism, wars or other geopolitical events
                which, directly or indirectly, impact the demands for products
                manufactured or sold by United States' companies or the global
                economy generally.

         These risks could have a material adverse effect on our ability to
maintain and expand foreign sales. Our failure to maintain and expand foreign
sales would have a material adverse effect on our business, results of
operations and financial condition.

OUR BUSINESS AND FINANCIAL CONDITION ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES ARISING FROM DOMESTIC AND INTERNATIONAL LAWS AND REGULATIONS.

          UNITED STATES. In the United States, the development, testing,
manufacture, labeling, marketing, promotion and sale of medical devices is
regulated principally by the FDA under the Federal Food, Drug and Cosmetic Act.
The FDA has broad discretion in enforcing compliance with that statute and its
regulations. Our ability to continue to sell our products commercially is
subject to continuing FDA oversight of the on-going design, manufacturing,
packaging, labeling, storage and quality of our medical devices. While we
believe we are currently in full compliance with the FDA, we are subject to
additional inspections by the FDA and cannot assure you that we will be in full
compliance during any future FDA inspections, particularly with respect to

                                       40
<PAGE>

facilities maintained by any third party with which we have an agreement to
manufacture our catheters or components of our other products. Noncompliance can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure to grant pre-market clearance
or pre-market approval for devices, withdrawal of marketing approvals and
criminal prosecution, any of which could have a material adverse effect on our
business, results of operations and financial condition.

          INTERNATIONAL. In order for us to market our products in Europe and
certain other foreign jurisdictions, we must obtain required regulatory
approvals and clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to market and the time
required for regulatory review, vary from country to country. Foreign countries
also often have extensive regulations regarding safety, manufacturing processes
and quality that differ from those in the United States and must be met in order
to continue sale of a product within that country. We may not be able to obtain
regulatory approvals in such countries or we may be required to incur
significant costs in obtaining or maintaining our foreign regulatory approvals.
Failure to obtain approvals or delays in the receipt of approvals to market our
products and/or failure to maintain the approvals we currently have and those
which we may receive in the future would have a material adverse effect on our
business, results of operations, financial condition and prospects. Presently,
we are permitted to sell some of our products in countries that are members of
the European Union. We cannot be sure that we will be successful in maintaining
that permission.

WE ARE SUBJECT TO NEW CORPORATE GOVERNANCE REQUIREMENTS, AND OUR COSTS RELATED
TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY WITH, EXISTING AND FUTURE
REQUIREMENTS COULD ADVERSELY AFFECT OUR BUSINESS.

         We face new corporate governance requirements under the Sarbanes-Oxley
Act of 2002, as well as new rules and regulations subsequently adopted by the
SEC, the Public Company Accounting Oversight Board and NASDAQ. These laws, rules
and regulations continue to evolve and may become increasingly stringent in the
future. In particular, we may be required to include the management and auditor
reports on internal control as part of our annual report for the year ended
December 31, 2005, pursuant to Section 404 of the Sarbanes-Oxley Act. We are in
the process of evaluating and implementing our disclosure controls structure to
provide reasonable assurance that our public disclosure would be accurate and
complete and to help ensure that we will be able to comply with Section 404 of
the Sarbanes-Oxley Act. However, due to the inherent limitations of control
systems, we cannot assure you that we will be able to fully comply with these
laws, rules and regulations. Our failure to comply with these laws, rules and
regulations may materially adversely affect our reputation, our financial
condition and the value of our securities.

         In addition, we expect that these laws, rules and regulations will
increase our legal and financial compliance costs and make certain corporate
governance activities more difficult, time-consuming and costly. We also expect
that these new requirements may make it more difficult and expensive for us to
obtain director and officer liability insurance.

                                       41
<PAGE>

II.      RISK FACTORS RELATED SPECIFICALLY TO OUR EQUITY SECURITIES AND
         SIGNIFICANT SHAREHOLDERS

OUR PRINCIPAL SHAREHOLDERS HAVE THE ABILITY TO CONTROL US AND THEIR INTERESTS
MAY, AT TIMES, CONFLICT WITH THE INTERESTS OF OUR OTHER SHAREHOLDERS.

          As a result of our prior private placement financings, we have
shareholders who hold a large percentage of our outstanding shares of common
stock. David Jenkins, our Chairman of the Board, beneficially owns, either
directly or indirectly through entities in which he has ownership, approximately
3,357,400 shares of our common stock, or 13.1% of the outstanding shares of our
common stock, assuming currently exercisable warrants held directly or
indirectly by him are fully exercised. Abhijeet Lele, one of our directors,
beneficially owns, either directly or indirectly through limited partnerships of
which he has management control, approximately 2,297,696 shares of our common
stock, or 8.9% of the outstanding shares of our common stock, assuming currently
exercisable warrants held directly or indirectly by him are fully exercised. To
the extent that these shareholders exercise their voting rights in concert, they
may have the ability to appoint new management and to control the outcome of
matters submitted to a vote of the holders of our common stock. In addition,
because our certificate of incorporation does not provide for cumulative voting
with respect to election of directors, these shareholders and their affiliates
may be able to control the election of members of our board. The interests of
these equity holders may at times conflict with the interests of our other
shareholders.

OUR COMMON STOCK PRICE IS VOLATILE AND MAY DECLINE EVEN IF OUR BUSINESS IS DOING
WELL.

          The market price of our common stock has been, and is likely to
continue to be, highly volatile. Market prices for securities of medical device
companies, including ours, have historically been highly volatile, and the
market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. The following factors can have a significant effect on the market
price of our common stock:

        -       announcements of technological innovations or new products by us
                or others,

        -       clinical trial results,

        -       developments concerning agreements with collaborators,

        -       government regulation,

        -       developments in patent or other proprietary rights,

        -       public concern as to the safety of electrophysiology products d
                eveloped by us or others,

        -       future sales of substantial amounts of our common stock by
                existing shareholders, and

        -       comments by securities analysts and general market conditions.

          The realization of any of the risks described in these "Risk Factors"
could have a negative affect on the market price of our common stock.

                                       42
<PAGE>

OUR COMMON STOCK TRADES ON THE NASDAQ SMALLCAP MARKET QUOTATION SYSTEM. IN THE
FUTURE, OUR COMMON STOCK MAY BE REMOVED FROM LISTING ON THE NASDAQ SMALLCAP
MARKET QUOTATION SYSTEM AND MAY NOT QUALIFY FOR LISTING ON ANY STOCK EXCHANGE,
IN WHICH CASE IT MAY BE DIFFICULT TO FIND A MARKET IN OUR COMMON STOCK.

          Our securities trade on The Nasdaq SmallCap Market. Nasdaq has several
requirements for companies to meet for continued listing, including minimum
stockholders' equity. If we fail to demonstrate compliance with all requirements
for continued listing on The Nasdaq SmallCap Market, our common stock could be
delisted from The Nasdaq SmallCap Market. There can be no assurance that we will
satisfy the requirements for continued listing on The Nasdaq SmallCap Market.

          If our common stock is no longer traded on The Nasdaq SmallCap Market,
it may be more difficult for you to sell shares that you own, and the price of
our common stock may be negatively affected. As a result, there is a risk that
holders of our common stock may not be able to obtain accurate price quotes or
be able to correctly assess the market price of our common stock. Increases in
volatility could also make it more difficult to pledge shares of our common
stock as collateral, if holders sought to do so, because a lender might be
unable to accurately value our common stock.

          If we fail to maintain our listing on The Nasdaq SmallCap Market for
any reason, our common stock will be traded on the Nasdaq's Over the Counter
Bulletin Board ("OTCBB") or may be considered a penny stock under regulations of
the SEC and trade on the "pink sheets", each of which would impose additional
sales practice requirements on broker-dealers who buy and sell our securities.
The additional burdens imposed upon broker-dealers by these requirements could
discourage broker-dealers from effecting transactions in our common stock, which
could severely limit the market liquidity of our common stock and your ability
to sell our securities in the secondary market. This also could limit our
ability to raise additional financing.

FUTURE SALES OF OUR COMMON STOCK BY EXISTING SHAREHOLDERS COULD NEGATIVELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND MAKE IT MORE DIFFICULT FOR US TO
SELL SHARES OF OUR COMMON STOCK IN THE FUTURE.

          Sales of our common stock in the public market, or the perception that
such sales could occur, could result in a drop in the market price of our
securities and make it more difficult for us to complete future equity
financings. We have outstanding the following shares of common stock:

        -       Approximately 25,814,176 shares of common stock are either
                freely tradeable in the public markets or are eligible for sale
                in the public markets.

        -       As of March 28, 2005, there are an aggregate of approximately
                2,060,000 shares of common stock that may be issued on the
                exercise of outstanding stock options granted under our 1995
                Long Term Incentive  Plan, our 1995 Director Option Plan, our
                2002 Stock Option Plan, and other agreements pursuant to which
                nonqualified options were granted at a weighted average
                exercise price of $2.60 per share.

                                       43
<PAGE>


        -       As of March 28, 2005,  there are an aggregate of  approximately
                1,240,050 shares of common stock that may be issued on the
                exercise of outstanding warrants.

        -       We have in effect a registration statement under the Securities
                Act registering approximately 476,000 shares of common stock
                which may be issued upon conversion of a secured convertible
                note pursuant to our existing revolving credit facility.

          We cannot estimate the number of shares of common stock that may
actually be resold in the public market since this will depend upon the market
price for the common stock, the individual circumstances of the sellers and
other factors. We also have a number of shareholders that own significant blocks
of our common stock. Such concentration of ownership could affect the liquidity
of our common stock and have an adverse effect on the price of our common stock.
If these shareholders sell large portions of their holdings in a relatively
short time, for liquidity or other reasons, the market price of our common stock
could drop significantly.

POTENTIAL ISSUANCE OF PREFERRED STOCK MAY DELAY, DEFER OR PREVENT CORPORATE
TAKEOVER.

          The board of directors has the authority to issue up to 5,000,000
shares of undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the shareholders. The board of directors, without shareholder approval, can
issue preferred stock with voting and conversion rights, which could adversely
affect the voting power of the holders of our common stock. We have no present
intention to issue shares of preferred stock. The potential future issuance of
preferred stock under certain circumstances may have the effect of delaying,
deferring or preventing a change in control of us or otherwise adversely
affecting the rights of the holders of common stock.

OUR CERTIFICATE OF INCORPORATION DOES NOT PROVIDE FOR CUMULATIVE VOTING, BUT
DOES PROVIDE FOR A STAGGERED BOARD, WHICH COULD DELAY OR PREVENT A CHANGE OF
CONTROL.

          Our Certificate of Incorporation does not provide for cumulative
voting with respect to the election of directors, but does provide for staggered
elections of our board of directors. As a result, shareholders who have large
holdings of our common stock may be able to control the election of members of
our board, which may have the effect of delaying or preventing a change in
control of us, including transactions in which our shareholders might otherwise
receive a premium for their shares over current market prices. The staggered
board provision makes it more difficult for shareholders to change the majority
of directors even when the only reason for the change may be the performance of
the present directors. Such provisions are applicable to all elections of
directors, not only elections occurring after a change in control.

CERTAIN PROVISIONS OF OUR BY-LAWS, OTHER AGREEMENTS, AND APPLICABLE STATE LAWS
MAY HAVE ANTI-TAKEOVER EFFECTS.

          Our By-laws provide that only our Board of Directors, the Chairman of
our Board or our President may call a special meeting of the shareholders and
that shareholders may not take action by written consent without a meeting.
These provisions limit the ability of a potential acquirer or shareholders
favoring a change of control to act quickly by special meeting or without a
meeting.

                                       44
<PAGE>

          The vesting of all options granted pursuant to our 1995 Long Term
Incentive Plan, 1995 Director Option Plan, 2002 Stock Option Plan and other
agreements, accelerate in the event of (an immediately prior to) a change in
control of the Company. Currently, approximately 800,000 shares are issuable
upon the exercise of vested options and approximately 1,100,000 shares are
issuable upon the exercise of unvested options granted pursuant to these plans
and agreements.

          Section 14A:10A of the New Jersey Business Corporation Act (also known
as the "New Jersey Shareholders' Protection Act") provides that, with certain
exceptions, an "interested stockholder" is prohibited from engaging in a
"business combination" with the company for five years following the date the
stockholder first became "interested" unless the company's board approved the
particular business combination before the acquirer became an interested
stockholder. After five years have elapsed, the interested stockholder may
engage in a business combination if certain conditions are met.

ITEM 7.  FINANCIAL STATEMENTS.

          The information in response to this item is set forth in the
Consolidated Financial Statements beginning on page F-1 of this Annual Report on
Form 10-KSB.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

          Not applicable.

ITEM 8A.  CONTROLS AND PROCEDURES.

          As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the
Exchange Act). Based on this evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.

          There was no change in our internal control over financial reporting
during our most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal controls over
financial reporting.

ITEM 8B.  OTHER INFORMATION.

          Not applicable.

                                       45

<PAGE>

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

          The following table sets forth certain information regarding our
directors and executive officers as of March 26, 2005:
<TABLE>
<CAPTION>
<S>     <C>                                           <C>                             <C>

           Name                                       Age                       Description

     David A. Jenkins (1)                             47         Chairman of the Board; Class III Director
     Reinhard Schmidt (1)                             51         President and Chief Executive Officer;
                                                                 Class II Director
     Matthew C. Hill                                  36         Chief Financial Officer and Secretary
     C. Bryan Byrd                                    44         Vice President, Engineering and
                                                                 Manufacturing
     John Huley                                       48         Vice President, Sales
     Thomas Maguire                                   42         Vice President, Regulatory and Quality
                                                                 Assurance
     Richard C. Williams (2) (3)                      61         Class I Director
     Paul Ray (2) (3)                                 58         Class II Director
     Abhijeet Lele (2) (3)                            39         Class III Director
--------------------------
<FN>

(1) Member of the Plan Committee

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

(3) Member of the Compensation Committee of the Board of Directors.
</FN>
</TABLE>


          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 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 Class I directors expires at the 2005 Annual
Meeting. The term for Class II directors expires at the 2006 Annual Meeting. The
term for the Class III directors expires at the 2007 Annual Meeting. The
successors to each class of directors whose terms expire at succeeding annual
meetings, will be elected to hold office for a term expiring at the Annual
Meeting of Shareholders held in the third year following the year of their
election. Officers of EP Med are elected annually and hold offices until their
successors are elected and qualified or until their earlier removal, death or
resignation.

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

                                       46
<PAGE>

          DAVID A. JENKINS is a founder and currently the Chairman of the Board
of Directors of EP MedSystems. He is a Class III director whose term expires in
2007. Mr. Jenkins served as the Chief Executive Officer of EP MedSystems from
its inception in 1993 until August 2002, and has been the Chairman since 1995.
Mr. Jenkins also served as President of EP MedSystems from its inception in 1993
until August 2001. He also currently serves as President and a director of
Transneuronix, Inc., a privately-held company engaged in the development of
neuro-muscular stimulation devices.

          REINHARD SCHMIDT has served as President, Chief Operating Officer and
a director of EP MedSystems since August 2001. In August 2002, he also took on
the additional duties of Chief Executive Officer. He is a Class II director
whose term expires in 2006. From 1998 through 2001, Mr. Schmidt was President of
Surgical Navigation Specialist, Inc. From 1995 to 1998, Mr. Schmidt was Vice
President and General Manager of Siemens Healthcare Services, a Siemens company.
From 1990 to 1995, Mr. Schmidt worked with General Electric Medical Systems as
Manager of National Accounts and Managed Health Care Services. Prior to that,
Mr. Schmidt had over 12 years experience with Unysis Corp., culminating in the
position of Director of Finance.

          MATTHEW C. HILL served as the Controller of EP MedSystems from August
2002 to March 2003. In March 2003, Mr. Hill was appointed as EP MedSystems'
Chief Financial Officer. From 1994 through 2002, Mr. Hill held various
positions, up to the level of senior manager, with the international accounting
and auditing firm of Grant Thornton. He has over 12 years of experience in
finance and accounting.

          C. BRYAN BYRD is the Vice President, Engineering and Manufacturing of
EP MedSystems . Mr. Byrd joined EP MedSystems in April 1993 to oversee software
development for new products. Prior to joining EP MedSystems, 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, has served as the Vice President of Sales of EP MedSystems
since May 2004. From 2000 to 2004, Mr. Huley held the position of Northeast
Region Manager with Abbott Vascular Devices, where he managed the Northeastern
U.S. 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, has served as our Vice President, Regulatory and
Quality Assurance since October 2004. From 2000 to 2004, Mr. Maguire served as
Regulatory Compliance Manager, then Group Manger at Synthes (USA). In those
roles he was primarily responsible for developing regulatory strategy to support
the firm's osteobiologics divison. Prior to his employment at Synthes, Mr.
Maguire 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.

                                       47
<PAGE>

          ABHIJEET LELE has served as a director of EP MedSystems 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., 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 EP MedSystems. 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), Stereotaxis, Inc.
(NASDQ: STXS), Optiscan Biomedical Corporation and Ekos Corporation.

          PAUL L. RAY has served as a director of EP MedSystems since July 2002.
He is a Class II director whose term expires in 2006. Mr. Ray is co-founder of
MedCap Ltd. and Konrad Capital, LLC. He formerly served as the President, CEO
and Chairman of Image Guided Technologies, Inc. ("IGT") in Boulder, CO. Mr. Ray
orchestrated IGT's venture funding, its public offering and NASDAQ listing and
finally the sale of IGT to Stryker Corporation in August of 2000. Mr. Ray has
served as Commissioner and Chairman for The Colorado Advanced Technology
Institute. Mr. Ray currently serves as a Director for the Colorado Technology
Incubator and the Colorado Biotechnology Association. In addition, he was
appointed in 1999 to the position of Co-Vice Chairman of the Governor's
Commission on Science and Technology for the State of Colorado. In January 2003,
Mr. Ray became a partner in the New York-based investment banking firm of McKim
and Company, LLC, where he serves as the lifesciences partner. Mr. Ray currently
holds the position of President and Chief Executive Officer of Nervonix, Inc.,
which has developed imaging technology for pain management. Mr. Ray has over 32
years of experience in the medical industry, with an emphasis on medical
devices, and has held senior management positions with Dow Corning Corporation,
V. Mueller Allegiance, a division of Cardinal Medical, Collagen Corporation and
TMJ Implants.

          RICHARD C. WILLIAMS was elected to the Board of Directors in August of
2002. He is a Class I director whose term expires in 2005. 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 and was recently appointed to the position of
non-executive Chairman of the Board of Cellegy Pharmaceuticals, Inc., a Nasdaq
specialty pharmaceutical company. From 2000 to April 2001, he also served as
Vice Chairman - Strategic Planning and a director of King Pharmaceuticals Inc.,
a NYSE specialty pharmaceutical company. 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 NYSE cardiovascular pharmaceutical development
company. From 1997 to 1999, he was Co-Chairman and a director of Vysis, a Nasdaq
genetic biopharmaceutical company. 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 also Chairman and a
director of ISTA Pharmaceuticals, Inc., a Nasdaq ophthalmology company, and is a
former member of the Listed Company Advisory Committee of New York Stock
Exchange.

                                       48
<PAGE>

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

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 Securities and Exchange 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, 2004, our executive officers, directors and greater than 10%
beneficial owners complied on a timely basis with all such filing requirements.

          During the 2004 fiscal year, each of Thomas Maguire, our Vice
President - Regulatory Affairs and Qualify Assurance and John Huley, our Vice
President - Sales, failed to file their respective Form 3 (Initial Statement of
Beneficial Ownership of Securities) in a timely fashion. Each of the above
referenced persons subsequently filed a Form 3 on March 30, 2005. In addition,
the following individuals failed to file Form 4s (Statement of Changes in
Beneficial Ownership) in a timely fashion:

        o             Matthew C. Hill, the Company's Chief Financial Officer,
                      who subsequently filed a Form 4 on March 29, 2005 which
                      included three transactions not reported on a timely
                      basis.

        o             Charles B. Byrd, the Company's Vice President -
                      Engineering and Manufacturing, who subsequently filed a
                      Form 4 on March 29, 2005 which included two transactions
                      not reported on a timely basis.

        o             Fred Greenberg, who is a beneficial owner of more than 10%
                      of our common stock, who subsequently filed a Form 4 on
                      January 10, 2005 which included two transactions not
                      reported on a timely basis.

AUDIT COMMITTEE

          We have an Audit Committee of our Board of Directors established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934.
Currently, Abhijeet Lele, Richard Williams and Paul Ray are members of the Audit
Committee. Mr. Lele is the financial expert serving on the Audit Committee.
Pursuant to the rules of the National Association of Securities Dealers, Inc.,
our Board of Directors is not yet required to determine whether Mr. Lele is
independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Securities Exchange Act of 1934, as amended.

                                       49
<PAGE>

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 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 EP MedSystems' confidential
compliance line. A copy of our Code of Business Conduct and Ethics is available
on our website at http://www.epmedsystems.com. We will also provide a copy of
our code of 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: Matthew C. Hill, Chief Financial Officer.

ITEM 10.  EXECUTIVE COMPENSATION.

          The following summary compensation table sets forth certain
information concerning compensation paid or accrued to the Chief Executive
Officer and each of EP Med's four most highly paid executive officers whose
salary and bonus for all of their services in all capacities in 2004 exceed
$100,000.

                                                 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S>                                           <C>                                     <C>                       <C>
                                                                                     LONG TERM COMPENSATION
                                                                     --------------------------------------------------------
                                     ANNUAL COMPENSATION                            AWARDS                   PAYOUTS
                          ------------------------------------------ --------------------------------------------------------
NAME                                                           OTHER         RESTRICTED    SECURITIES                     ALL
AND                                                            ANNUAL          STOCK       UNDERLYING      LTIP          OTHER
PRINCIPAL                             SALARY    BONUS       COMPENSATION      AWARD(S)      OPTIONS/      PAYOUTS     COMPENSATION
POSITION                    YEAR       ($)        ($)           ($)              $          SARS (#)        ($)            $
                            ----       ---        ---           ---              -          --------        ---            -

Reinhard Schmidt            2004      $257,200   $37,500                                          -
President and Chief
Executive Officer from      2003      $257,720   $37,500                   -                      -
August 2002                 2002      $215,533   $60,000        45,000 (1)                  175,000 (2)

Matthew C. Hill             2004      $125,333         -                                     30,000 (3)
Chief Financial             2003      $108,224   $16,875                                    103,750 (4)
Officer

C. Bryan Byrd               2004      $172,500                  17,000 (5)                    6,000 (6)
Vice President,             2003      $172,500                                               73,000 (7)
Engineering and             2002      $156,563                                               50,000 (8)
    Manufacturing

                                       50
<PAGE>

Mark Adams                  2004      $153,353         -        51,500 (10)                                              20,000 (11)
Vice President, Sales &     2003      $149,019   $15,000                                    100,000 (12)                 10,750 (11)
   Marketing (9)

John Huley                  2004      $114,135   $22,500                                    150,000 (13)                 $8,985 (11)
Vice President, Sales

------------------------------------
<FN>

(1)      In connection with the rescission of an interest free nonrecourse loan
         extended in connection with a stock purchase transaction at the time of
         Mr. Schmidt's employment, EP Med recorded $45,000 in compensation
         expense as of December 31, 2003.

(2)      In consideration for the rescission of the stock purchase transaction
         described in footnote (1) above, Mr. Schmidt was granted an incentive
         stock option to purchase 75,000 shares of common stock pursuant to the
         2002 Stock Option Plan (subject to shareholder approval of such plan at
         the 2002 annual meeting of shareholders) at an exercise price equal to
         $2.20 per share (the original purchase price established in connection
         with Mr. Schmidt's stock purchase rights and greater than the fair
         market value of the common stock on the date of grant of the stock
         option). This stock option vests over four years from the date of
         grant. EP Med recognized a de minimus compensation charge related to
         this stock option as the market price on August 29, 2002 (the date of
         the 2002 annual meeting of shareholders when the 2002 Stock Option Plan
         was approved) was greater than $2.20. The compensation charge is
         amortized over the vesting period of 4 years. Mr. Schmidt was also
         granted an option in September 2001 under the 1995 Director Option Plan
         to purchase 60,000 shares of common stock at an exercise price of $1.85
         per share (the price of the stock on the date of grant); the option
         vested 1,000 shares per month. Because Mr. Schmidt was not entitled to
         participate in the 1995 Director Option Plan, this option was cancelled
         in July 2002 in consideration for the grant to Mr. Schmidt of an
         incentive stock option to purchase 60,000 shares of common stock
         pursuant to the 2002 Stock Option Plan (subject to shareholder approval
         of such plan at the 2002 annual meeting of shareholders) at an exercise
         price equal to $2.10 per share (the fair market value of the common
         stock on the date of grant). EP Med recognized a de minimus
         compensation charge related to this stock option as the market price on
         August 29, 2002 (the date of the 2002 annual meeting of shareholders
         when the 2002 Stock Option Plan was approved) was greater than $2.10.
         The compensation charge is amortized over the vesting period of 4
         years. Lastly, on August 29, 2002, Mr. Schmidt was granted an option to
         purchase 40,000 shares of common stock of the Company at an exercise
         price of $2.40 per share with 20% vesting on each anniversary date.
         Those options have a term of a 10 years.

(3)      On March 4, 2004, EP Med granted Mr. Hill an incentive stock option to
         purchase 5,000 shares of common stock pursuant to the 1995 Long Term
         Incentive Plan at an exercise price of $3.20 per share. On July 22,
         2004, EP Med granted Mr. Hill an incentive stock option to purchase
         25,000 shares of common stock pursuant to the 1995 Long Term Incentive
         Plan at an exercise price of $3.15 per share. The options vest over 5
         years and the term of the options is 10 years.

(4)      On March 5, 2003, EP Med granted Mr. Hill an incentive stock option to
         purchase 50,000 shares of common stock pursuant to the 2002 Stock
         Option Plan at an exercise price of $1.32 per share. On August 15,
         2003, EP Med granted Mr. Hill an incentive stock option to purchase
         3,750 shares of common stock pursuant to the 1995 Long Term Incentive
         Plan at an exercise price of $2.55 per share. On August 26, 2003, EP
         Med granted Mr. Hill an incentive stock option to purchase 50,000
         shares of common stock pursuant to the 1995 Long Term Incentive Plan at
         an exercise price of $2.25 per share. The options vest over 5 years and
         the term of the options is 10 years.

(5)      On May 26, 2004, Mr. Byrd exercised an option to purchase 10,000 shares
         of EP Med common stock at an exercise price of $1.33 per share. The
         price of EP Med's common stock on May 26, 2004 was $3.03 per share.

                                       51
<PAGE>

(6)      On July 22,  2004,  EP Med granted Mr. Byrd an incentive  stock option
         to purchase  6,000 shares of common stock  pursuant  to the 1995  Long
         Term  Incentive  Plan at an  exercise  price of $3.15  per  share.  The
         options vest over 5 years and the term of the options is 10 years.

(7)      On May 7, 2003, EP Med granted Mr. Byrd an incentive stock option to
         purchase 50,000 shares of common stock pursuant to the 2002 Stock
         Option Plan at an exercise price of $2.14 per share. On July 22, 2003,
         EP Med granted Mr. Byrd an incentive stock option to purchase 18,000
         shares of common stock pursuant to the 1995 Long Term Incentive Plan at
         an exercise price of $2.91 per share. On November 19, 2003, EP Med
         granted Mr. Byrd an incentive stock option to purchase 5,000 shares of
         common stock pursuant to the 1995 Long Term Incentive Plan at an
         exercise price of $3.75 per share. The options vest over 5 years and
         the term of the options is 10 years.

(8)      On August 29, 2002, EP Med granted Mr. Byrd an incentive stock option
         to purchase 50,000 shares of common stock pursuant to the 2002 Stock
         Option Plan at an exercise price of $2.40 per share. Options vest
         10,000 per year and the term of the option is ten years.

(9)      In May of 2004, Mr. Adams separated from the Company.

(10)     On June 30, 2004, Mr. Adams exercised an option to purchase 30,000
         shares of EP Med common stock at an exercise price of $1.79 per share.
         The price of EP Med's common stock on June 30, 2004 was $2.98. On
         August 16, 2004, Mr. Adams exercised an option to purchase 10,000
         shares of EP Med common stock at an exercise price of $ 1.32 per share.
         The price of EP Med's common stock on August 16, 2004, was $2.90. In
         connection with a separation agreement between EP Med and Mr. Adams,
         the vesting of a portion of the options described in Note (12) below
         were accelerated. In connection with that accelerated vesting, EP Med
         recorded a compensation charge of approximately $11,000. The remainder
         of the options granted to Mr. Adams and described in Note (12) were
         cancelled pursuant to the separation agreement.

(11)     Reimbursement of relocation expenses.

(12)     On January 20, 2003, EP Med granted Mr. Adams an incentive stock option
         to purchase 50,000 shares of common stock pursuant to the 1995 Long
         Term Incentive Plan at an exercise price of $1.79 per share. On March
         5, 2003, EP Med granted Mr. Adams an incentive stock option to purchase
         50,000 shares of common stock pursuant to the 2002 Stock Option Plan at
         an exercise price of $1.32 per share. The options vest over 5 years and
         the term of the options is 10 years. See Note (10) above. Pursuant to
         the separation agreement described in Note (12) above, the vesting of a
         portion of these options was accelerated upon the separation of Mr.
         Adams, and the remainder of those options were cancelled.

(13)     On May 10, 2004, in connection with his employment, EP Med granted Mr.
         Huley an incentive stock option to purchase 150,000 shares of common
         stock pursuant to the 2002 Stock Option Plan at an exercise price of
         $3.18 per share. The options vest over 5 years and the term of the
         options is 10 years.
</FN>
</TABLE>

STOCK OPTIONS

         The following table sets forth certain information concerning grants of
stock options to each of the executive officers identified in the Summary
Compensation Table during the fiscal year ended December 31, 2004.

                                       52
<PAGE>

                        OPTION GRANTS IN FISCAL YEAR 2004
<TABLE>
<CAPTION>
<S>                                     <C>                        <C>                  <C>             <C>

                                    NUMBER OF SHARES        PERCENT OF TOTAL        EXERCISE
                                   UNDERLYING OPTIONS      OPTIONS GRANTED TO      PRICE PER
                                         GRANTED            EMPLOYEES IN 2004        SHARE         EXPIRATION DATE
                                  ---------------------- ------------------------ ------------- ----------------------
                                                      -                        -             -                      -
Reinhard Schmidt
President and Chief Executive
Officer

Matthew C. Hill (1)                               5,000                       1%         $3.20          March 9, 2014
Chief Financial Officer                          25,000                       4%         $3.15          July 22, 2014

C. Bryan Byrd (1) Vice President, Engineering
and Manufacturing                                 6,000                       1%         $3.15          July 22, 2014

Mark Adams
Vice President,
Sales and Marketing                                   -                        -             -                      -

John Huley  (1)
Vice President, Sales                           150,000                      26%         $3.18           May 10, 2014
<FN>
         (1) See applicable footnotes to above Summary Compensation Table.
</FN>
</TABLE>

          The exercise prices of the options granted during the fiscal year
ended December 31, 2004 were equal to or greater than the fair market value of
our common stock on the date of each grant.

OPTION EXERCISES AND HOLDINGS

          The following table provides certain information with respect to each
of the executive officers identified in the Summary Compensation Table
concerning the exercise of stock options during the fiscal year ended December
31, 2004 and the value of unexercised stock options held as of such date.

                                       53
<PAGE>

<TABLE>
                          AGGREGATED OPTION EXERCISES IN 2004 AND YEAR-END OPTION VALUES

<CAPTION>
<S>                                                                  <C>                            <C>
                                                                                              VALUE OF UNEXERCISED
                                                          NUMBER OF SHARES UNDERLYING         IN-THE-MONEY OPTIONS AT
                                                          OPTIONS AT DECEMBER 31, 2004        DECEMBER 31, 2004 (1)
                                                          ----------------------------        -----------------------
                                 SHARES
                                ACQUIRED       VALUE
NAME                           ON EXERCISE   REALIZED    EXERCISABLE     UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
----                           -----------   --------    -----------     -------------     -----------     -------------
Reinhard Schmidt (2)
President and Chief
Executive Officer                     -            -         147,000           128,000         250,550          202,700

Matthew C. Hill (2)
Chief Financial Officer               -            -          26,750           122,000          50,700          194,300

C. Bryan Byrd (2)
Vice President,
Engineering and
Manufacturing                    10,000      $17,000          34,600           143,400          46,124          101,846

Mark Adams (2)
Vice President,
Sales and Marketing              40,000      $51,500               -                 -               -                -

John Huley
Vice President, Sales                 -            -               -           150,000               -           85,500
--------------------------
<FN>

(1)       Amounts calculated by subtracting the exercise price of the options
          from the market value of the underlying common stock using the closing
          sale price on the Nasdaq Small Capital Market of $3.75 per share on
          December 31, 2004.

(2)       See footnotes to above summary compensation table.
</FN>
</TABLE>

          During the fiscal year ended December 31, 2004, 85,137 options were
exercised.


             LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
<S>     <C>                        <C>                    <C>                            <C>
                                                                          ESTIMATED FUTURE PAYOUTS UNDER NON- STOCK
                                                                          PRICED-BASED PLANS
                                                                          -----------------------------------------
          (A)                     (B)                     (C)                  (D)            (E)             (F)
                           NUMBER OF SHARES,      PERFORMANCE OR OTHER
                             UNITS OR OTHER     PERIOD UNTIL MATURATION   THRESHOLD          TARGET        MAXIMUM
          NAME                 RIGHTS (#)              OR PAYOUT            ($ OR #)         ($ OR #)      ($ OR #)
          ----            -----------------     -----------------------   ---------        -----------     --------
Reinhard Schmidt
President and Chief                -                       -                    -              -               -
Executive Officer

Matthew C. Hill
Chief Financial Officer          30,000             5 years vesting             -              -               -

C. Bryan Byrd
Vice President,
Engineering and                  6,000              5 years vesting             -              -               -
Operations

Mark Adams
Vice President,                    -                       -                    -              -               -
Sales and Marketing

John Huley
Vice President, Sales           150,000             5 years vesting             -              -               -
</TABLE>

                                       54
<PAGE>


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 are
1,000,000 of shares of our common stock reserved for issuance under the 1995
Incentive Plan. At December 31, 2004, options to purchase 826,458 shares 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 will terminate
on November 30, 2005, unless earlier terminated by the Board of Directors.

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

1995 DIRECTOR OPTION PLAN

          EP Med's 1995 Director Option Plan was adopted by our Board of
Directors and our shareholders in November 1995. A total of 540,000 shares of
our common stock are reserved for issuance under the 1995 Director Option Plan,
and options to purchase 240,000 shares were outstanding as of December 31, 2004
at exercise prices ranging from $2.00 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

                                       55
<PAGE>

rate of 1,000 shares per month, commencing with the first month following the
date of grant for so long as the optionee remains a director or advisor, as the
case may be. The 1995 Director Option Plan is administered by the Plan Committee
of EP Med, which determines the optionees and the terms of the options granted,
including the exercise price and the number of shares subject to the options.
The 1995 Director Option Plan will terminate on November 30, 2005, unless
earlier terminated by the Board of Directors.

2002 STOCK OPTION PLAN

          EP MedSystems' 2002 Stock Option Plan (the "2002 Plan") was approved
by 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, 2004, options to purchase 645,000 shares were outstanding
at exercise prices ranging from $1.32 to $2.40. The 2002 Plan provides for
grants of incentive stock options to our employees and officers and for grants
of non-statutory stock options to employees, officers, advisors and consultants
of EP MedSystems. 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.

COMPENSATION OF DIRECTORS

          Non-employee directors received amounts ranging from $18,000 to
$19,000 for their service for the year ended December 31, 2004. Directors will
be compensated for the year ended December 31, 2005 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.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

          We entered into an employment agreement, dated as of July 20, 2001
(and effective on commencement, August 20, 2001) with Reinhard Schmidt. Under
the agreement, Mr. Schmidt served as President and Chief Operating Officer of EP
Med for an initial term of 2 years at an annual salary of $200,000. The Board of
Directors has discretion to approve salary increases and bonuses. On August 29,
2002, Mr. Schmidt added the duties of Chief Executive Officer, and the
Compensation Committee of the Board increased Mr. Schmidt's compensation to
$250,000. The agreement provides that unless terminated by either party
providing the other with written notice of its intention not to renew at least
30 days prior to the scheduled expiration date, the agreement shall be renewed
automatically after the initial two-year term for successive one-year terms. The
agreement further provides that if the agreement is terminated by EP Med without
cause or by Mr. Schmidt for good reason (including the occurrence of certain
events within one year of change in control), Mr. Schmidt shall be entitled to
severance payments equal to Mr. Schmidt's then-current base salary for a period
of twelve months. On August 20, 2004, Mr. Schmidt's employment agreement
automatically renewed through August 2005.

                                       56
<PAGE>

          On May 5, 2004, we entered into a separation agreement and release
with Mark Adams, our former Vice President of Sales and Marketing. Pursuant to
the agreement, we accepted Mr. Adams' resignation as an employee and officer of
EP MedSystems effective May 11, 2004. As consideration for the release Mr. Adams
gave us, we agreed to a continuation of his salary for six months at a rate of
$150,000 per annum, payable bi-weekly, a continuation of his health insurance
for nine months and a lump sum relocation payment of $20,000. In addition, Mr.
Adams agreed to relinquish all rights to previously granted stock options in
exchange for the grant of an option to purchase 30,000 shares of our common
stock at an exercise price of $1.79 per share and an option to purchase 10,000
shares of our comment stock at an exercise price of $1.32 per share, each of
which vested immediately upon the effectiveness of the separation.

ITEM 11.  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 28, 2005, 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.
<TABLE>
<CAPTION>
<S>               <C>                                                   <C>                                 <C>

                                                         SHARES OF COMMON STOCK BENEFICIALLY
         NAME AND ADDRESS OF BENEFICIAL OWNER                         OWNED (1)                       PERCENT OF CLASS
------------------------------------------------------   -----------------------------------          ----------------
Group comprised of Cardiac Capital, LLC, Rollins                      3,357,400(2)                           13.1%
Investment Fund, R. Randall Rollins, Gary W. Rollins
and David A. Jenkins

         Cardiac Capital, LLC                                         2,250,000                               8.7%
         2170 Piedmont Road, N.E.
         Atlanta, Georgia 30324 (3)

         Rollins Investment Fund                                      2,250,000                               8.7%
         R. Randall Rollins
         Gary W. Rollins
         2170 Piedmont Road, N.E.
         Atlanta, Georgia 30324 (4)

         David A. Jenkins                                             3,357,400                              13.1%
         Chairman of the Board
         c/o EP MedSystems, Inc.
         575 Route 73 N, Building D
         West Berlin, New Jersey 08091 (5)

                                       57
<PAGE>
                                                         SHARES OF COMMON STOCK BENEFICIALLY
         NAME AND ADDRESS OF BENEFICIAL OWNER                         OWNED (1)                       PERCENT OF CLASS
------------------------------------------------------   -----------------------------------          ----------------
Group comprised of Greenberg Healthcare Management,                   2,568,378                             9.9%
LLC, EGS Partners, LLC, The Pharmaceutical/Medical
Technology Fund, L.P., Strategic Healthcare
Investment Fund, EGS Private Healthcare Associates,
LLC, EGS Private Healthcare Partnership, L.P.,
Frederic Greenberg, and Abhijeet Lele
350 Park Avenue, 11th Floor
New York, New York 10022 (6)

Michael Roth and Brian Stark                                          1,750,000                             6.8%
3600 South Lake Drive
St. Francis, WI 53235 (7)

Group comprised of S.A.C. Capital Advisors, LLC,                      1,731,567                             6.7%
S.A.C Capital Associates, LLC, S.A.C. Capital
Management, LLC and Steven A. Cohen.
172 Cummings Point Road
Stamford, CT  06902 (8)

Boston Scientific Corporation                                         1,481,028                             5.7%
One Boston Scientific Place
Natick, MA 07160 (9)

Reinhard Schmidt                                                        284,000                             1.1%
President, Chief Executive Officer and Director
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey  08091 (10)

Matthew C. Hill                                                          36,000                                *
Chief Financial Officer
c/o EP MedSystems, Inc.
575 Route 73, N, Building D
West Berlin, NJ  08091 (11)

C. Bryan Byrd                                                           116,600                                *
Vice President, Engineering and Manufacturing
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey  08091 (12)

                                       58
<PAGE>

                                                         SHARES OF COMMON STOCK BENEFICIALLY
         NAME AND ADDRESS OF BENEFICIAL OWNER                         OWNED (1)                       PERCENT OF CLASS
------------------------------------------------------   -----------------------------------          ----------------
John Huley                                                               30,000                                *
Vice President, Sales
c/o EP MedSystems, Inc.
575 Route 73 N, Building D
West Berlin, New Jersey  08091 (13)

All executive officers and directors as a group                       6,219,696                             24.1%
(9 persons) (14)

* Represents beneficial ownership of less than 1% of the common stock.
--------------------
<FN>

(1)  Applicable percentage ownership as of March 28, 2005 is based on 25,814,176
     shares of Common Stock outstanding. Beneficial ownership is determined in
     accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as
     amended. Under Rule 13d-3, shares issuable within 60 days upon exercise of
     outstanding options, warrants, rights or conversion privileges are deemed
     outstanding for the purpose of calculating the number and percentage owned
     by the holder of those rights, but not deemed outstanding for the purpose
     of calculating the percentage owned by any other person. "Beneficial
     ownership" under Rule 13d-3 includes all shares over which a person has
     sole or shared dispositive or voting power.

(2)  The information set forth with respect to the Cardiac Capital Group is
     based on information contained in a Statement on Schedule 13D filed with
     the SEC on April 5, 2001 (the "Cardiac Capital Schedule 13D"). The shares
     reflected in the table represent (i) 2,250,000 shares beneficially owned by
     Cardiac Capital, LLC; (ii) 2,250,000 shares beneficially owned by Rollins
     Investment Fund, indirectly as a 50% owner of Cardiac Capital, LLC, with
     shared voting and investment power with David A. Jenkins (see footnotes
     (3), (4) and (5)); (iii) 2,250,000 shares beneficially owned by each of R.
     Randall Rollins and Gary W. Rollins, indirectly as equal owners of Rollins
     Investment Fund, with shared voting and investment power with David A.
     Jenkins (see footnotes (3), (4) and (5)); and (iv) 3,357,400 shares
     beneficially owned by David A. Jenkins, 2,250,000 of which shares are owned
     with shared voting and investment power with Rollins Investment Fund, R.
     Randall Rollins and Gary W. Rollins (see footnotes (3) and (5)).

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

(4)  Includes 750,000 shares issuable upon the exercise of outstanding warrants
     exercisable by Cardiac Capital. Rollins Investment Fund disclaims
     beneficial ownership of 1,125,000 shares (i.e., 50%) of Common Stock and
     warrant shares and each of Messrs. R. Randall Rollins and Gary W. Rollins
     disclaims beneficial ownership of one-half of such shares (see footnotes
     (2), (3) and (5)). In the Cardiac Capital Schedule 13D, Rollins Investment
     Fund has reported that it is a Georgia general partnership, the ownership
     of which is divided equally between R. Randall Rollins and Gary W. Rollins.
     Rollins Investment Fund owns 50% of Cardiac Capital, LLC, the record owner
     of the shares of Common Stock and warrant shares reflected in the table,
     and, as such, the Rollins Investment Fund's ownership is indirect and it
     shares voting and investment power with David Jenkins, the other 50% owner

                                       59
<PAGE>

     of Cardiac Capital. Rollins Investment Fund and David Jenkins, together
     with EP MedSystems, have entered into a letter agreement, dated March,
     2002, pursuant to which David Jenkins has agreed that he shall forbear from
     selling any shares of Common Stock of EP MedSystems owned by him, and shall
     cause his spouse, his lineal descendants and any trust for the benefit of
     any of them to similarly forbear from selling any shares of Common Stock of
     EP MedSystems owned by any of them during the first year following the
     closing without the prior written consent of Rollins Investment Fund. Under
     the letter agreement, Mr. Jenkins has further agreed that, notwithstanding
     any provision to the contrary in the operating agreement of Cardiac
     Capital, the decision of Cardiac Capital to exercise its registration
     rights after the first anniversary of the closing may be made by Rollins
     Investment Fund in its sole judgment and without the consent of Mr.
     Jenkins.

(5)  Includes 166,000 shares issuable upon exercise of fully vested options.
     Also includes 160,000 shares held by Mr. Jenkins as trustee for the Dalin
     Class Trust, 42,500 shares held by Mr. Jenkins' wife and 20,000 shares held
     by Mr. Jenkins' wife as custodian for his children. Also includes 2,250,000
     shares beneficially owned by Cardiac Capital, LLC, the ownership of which
     is divided equally between Mr. Jenkins and Rollins Investment Fund and, as
     such, Mr. Jenkins' ownership is indirect and he shares voting and
     investment power with Rollins Investment Fund; 750,000 of such shares are
     issuable upon the exercise of outstanding warrants exercisable by Cardiac
     Capital, LLC (see footnotes (2), (3) and (4)). Mr. Jenkins disclaims
     beneficial ownership of (i) 42,500 shares held by his wife, (ii) 20,000
     shares held by his wife as custodian for his children, and (iii) 1,125,000
     shares (i.e., 50%) of Common Stock and warrant shares held of record by
     Cardiac Capital, LLC.

(6)  The information set forth with respect to the EGS Group is based on
     information contained in a Statement on Schedule 13D filed with the SEC on
     March 18, 2003 and other information known to the Company. The shares
     reflected in the table represent (i) 2,687,946 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 2,280,481 and EGS Private
     Healthcare Counterpart, L.P. ("EGS Counterpart"), which is the record owner
     of 287,212; (ii) 259,380 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) 2,939,326 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) 2,687,946 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) 35,000 shares issuable upon
     exercise of fully vested options beneficially held by Abhijeet Lele.

(7)  The information set forth with respect to Michael Roth and Brian Stark is
     based on information contained in a statement on Schedule 13G filed with
     the SEC on December 17, 2004.

(8)  The information set forth with respect to the S.A.C. Capital group is based
     on information contained in a statement on Schedule 13G/A filed with the
     SEC on February 14, 2005.

(9)  The information set forth with respect to Boston Scientific Corporation is
     based on information contained in a statement on Schedule 13G/A filed with
     the SEC on February 17, 2004.

(10) Includes 159,000 shares issuable upon exercise of fully vested options and
     100,000 shares issuable upon the exercise of outstanding warrants. See the
     Section entitled "Employment Agreements."

(11)     Includes 36,000 shares issuable upon exercise of fully vested options.

(12)     Includes 84,600 shares issuable upon exercise of fully vested options.

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

(14)     Includes 1,423,600 shares issuable upon exercise of fully vested options and warrants.
</FN>
</TABLE>

                                       60
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

PROMISSORY  NOTE  TRANSACTION  AND  PRIVATE  PLACEMENT  FINANCING  TRANSACTION
INVOLVING  EGS  PRIVATE  HEALTHCARE PARTNERSHIP, L.P. AND EGS PRIVATE HEALTHCARE
COUNTERPART, L.P.

         On December 30, 2002, we issued notes, in an aggregate amount of $1
million, to EGS Private Healthcare Partners L.P. and EGS Private Healthcare
Counterpart L.P. A Managing Member of the EGS Entities, Abhijeet Lele, is also a
member of our Board of Directors. On January 31, 2003, the notes were converted
into equity in connection with a related private placement.

FINANCING TRANSACTION WITH MEDTRONIC, INC./PLEDGE OF SECURITY BY
DAVID A. JENKINS.

         The $3.2 million note issued by us to Medtronic, Inc., a shareholder in
EP Med, was secured by a pledge of certain shares of stock in a privately held
company owned by David Jenkins, the Chairman of our Board of Directors. The note
was repaid in-full in February 2004.

LOAN TO C. BRYAN BYRD.

         In May 2000, we loaned $100,000 to one of our officers, Mr. Byrd, to
finance his exercise of fully vested options. This recourse loan bore interest
at the Federal Funds rate and was collateralized by 50,000 shares of our common
stock. Principal and any accrued interest was due and payable on May 23, 2003.
On April 4, 2003, the principal amount of, and all accrued and unpaid interest
on, the note receivable were repaid by Mr. Byrd through return to treasury of
the 50,000 shares of common stock, which collateralized that loan. The market
price of our common stock on the date of such return was $2.08. The shares were
recorded on the balance sheet under the caption "Treasury Stock."

ITEM 13.  EXHIBITS

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


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, 2004 and 2003, the review of the financial statements
included in our Forms 10-QSB and consents issued in connection with our filings
on Form S-3 and Form S-8 for 2004 and 2003 totaled $192,724 and $45,506,
respectively.

                                       61
<PAGE>

          The aggregate fees billed by PricewaterhouseCoopers LLP for
professional services rendered for the review of the financial statements
included in our Forms 10-QSB and consents issued in connection with our filings
on Form S-3, Form S-8 and Form 10-KSB for 2004 and 2003 totaled $5,500 and
$144,450, respectively.

AUDIT-RELATED FEES.

          No fees were billed by PricewaterhouseCoopers LLP for assurance and
related services that are reasonably related to the performance of the audit or
review of our financial statements, for the years ended December 31, 2004 and
2003, and are not disclosed in the paragraph captions "Audit Fees" above.

          No fees were billed by Grant Thornton LLP for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements, for the years ended December 31, 2004 and 2003, and
are not disclosed in the paragraph captions "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, 2004 and
2003 were $19,905 and $0, 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, 2004 and 2003.

          The aggregate fees billed by PricewaterhouseCoopers LLP for
professional services rendered for tax compliance, for the years ended December
31, 2004 and 2003, were $0 and $34,500, respectively. The aggregate fees billed
by PricewaterhouseCoopers LLP for professional services rendered for tax advice
and tax planning, for the years ended December 31, 2004 and 2003, were $0 and
$13,655, respectively.

ALL OTHER FEES.

          No fees were billed by Grant Thornton LLP for products and services,
other than the services described in the paragraphs captions "Audit Fees",
"Audit-Related Fees", and "Tax Fees" above for the years ended December 31, 2004
and 2003.

          No fees were billed by PricewaterhouseCoopers LLP for products and
services, other than the services described in the paragraphs captions "Audit
Fees", "Audit-Related Fees", and "Tax Fees" above for the years ended December
31, 2004 and 2003.

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 PricewaterhouseCoopers LLP and Grant Thornton LLP in 2004.
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

                                       62
<PAGE>

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 PricewaterhouseCoopers LLP and Grant Thornton LLP.

                                       63

<PAGE>



                                   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/ REINHARD SCHMIDT
                                             --------------------
                                             Reinhard Schmidt,
                                             President and
                                             Chief Executive Officer

                                         Date:  March 30, 2005

          KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Reinhard Schmidt 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-KSB, 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.

<TABLE>
<CAPTION>
<S>             <C>                                     <C>                                     <C>

              SIGNATURE(S)                           TITLE(S)                                DATE

         /s/ REINHARD SCHMIDT                President, Chief Executive                 March 30, 2005
         -----------------------------       Officer and Director (Principal
         Reinhard Schmidt                    Executive Officer)


         /s/ MATTHEW C. HILL                 Chief Financial Officer                    March 30, 2005
         -----------------------------       (Principal Financial and
         Matthew C. Hill                     Accounting Officer)

         /s/ DAVID A. JENKINS                Chairman of the Board                      March 30, 2005
         -----------------------------
         David A. Jenkins

         /s/ PAUL L. RAY                     Director                                   March 30, 2005
         -----------------------------
         Paul L. Ray

                                       64
<PAGE>

         /S/ RICHARD C. WILLIAMS             Director                                   March 30, 2005
         -----------------------------
         Richard C. Williams

         /S/ ABHIJEET LELE                   Director                                   March 30, 2005
         -----------------------------
         Abhijeet Lele
</TABLE>


                                       65
<PAGE>



                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S>     <C>                     <C>

Exhibit Number             Description
--------------             -----------
         3.1               Amended and Restated Certificate of Incorporation of EP MedSystems, Inc. filed with
                           the Secretary of the State of New Jersey on April 8, 1996 (1)

         3.2               Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
                           EP MedSystems, Inc. filed with the State of New Jersey on November 6, 1998 (16)

         3.3               Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
                           EP MedSystems, Inc., filed with the Secretary of the State of New Jersey on October
                           21, 2001 (14)

         3.4               Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
                           EP MedSystems, Inc., filed with the Secretary of the State of New Jersey on December
                           22, 2003 (17)

         3.5               Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
                           EP MedSystems, Inc., filed with the Secretary of the State of New Jersey on January
                           12, 2005 (25)

         3.6               Bylaws, as amended (1)

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

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

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

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

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

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

                                      E-1
<PAGE>

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

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

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

         4.10              Common Stock and Warrant Purchase Agreement, dated as of January 31, 2003, by and
                           between EP MedSystems, Inc. and each of the several purchasers named in Exhibit A
                           thereto. (9)

         4.11              Registration Rights Agreement, dated as of January 31, 2003, by and between EP
                           MedSystems, Inc. and the Initial Investors referred to therein. (9)

         4.12              Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to Michael R. Hamblett. (9)

         4.13              Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to Heimdall Investments
                           Ltd. (9)

         4.14              Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to EGS Private
                           Healthcare Partnership, L.P. (9)

         4.15              Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to EGS Private
                           Healthcare Counterpart, L.P. (9)

         4.16              Amended and Restated Secured Promissory Note issued to Medtronic International Limited
                           on March 13, 2003, together with First Amendment to Note Purchase Agreement, dated
                           March 13, 2003, between Medtronic International Limited and EP MedSystems, Inc. (9)

         4.17              Stock Purchase Agreement, dated as of September 5, 2002, between EP MedSystems, Inc.
                           and Boston Scientific Corporation. (15)

         4.18              Registration Rights Agreement, dated as of September 5, 2002, between EP MedSystems,
                           Inc. and Boston Scientific Corporation (15).

         4.19              Mortgage Note, dated November 21, 2002, issued to William Winstrom, in the principal
                           amount of $375,000, together with related Mortgage and Security Agreement. (21)

         4.20              Mortgage Note, dated November 21, 2002, issued to Anthony Varrichio, in the principal
                           amount of $375,000, together with related Mortgage and Security Agreement. (21)

                                      E-2
<PAGE>

         4.21              Agreement between Anthony Varrichio and EP MedSystems, Inc., dated April 2, 2003,
                           effecting conversion of the Mortgage Note into 150,000 shares of EP MedSystems common
                           stock. (19)

         4.22              Agreement between William Winstrom and EP MedSystems, Inc., dated April 2, 2003,
                           effecting conversion of the Mortgage Note into 150,000 shares of EP MedSystems common
                           stock. (19)

         4.23              Common Stock Purchase Agreement between EP MedSystems, Inc. and the several purchasers
                           named therein, dated as of April 11, 2003. (18)

         4.24              Amendment No. 1, dated April 11, 2003, to Registration Rights Agreement, dated as of
                           January 31, 2003, by and between EP MedSystems, Inc. and the Initial Investors
                           referred to therein. (18)

         4.25              Agreement made as of June 27, 2003, by and between EP MedSystems, Inc. and Anthony
                           Varrichio. (16)

         4.26              Agreement made as of June 27, 2003, by and between EP MedSystems, Inc. and William
                           Winstrom. (16)

         4.27              Notice of EP MedSystems' Right to Repurchase Warrants, dated July 23, 2003. (16)

         4.28              Secured Convertible Note, dated August 28, 2003, with Laurus Master Fund, Ltd. in the
                           principal amount of $4,000,000, together with related Registration Rights Agreement,
                           Guaranty, and Security Agreement. (20)

         4.29              Amendment, dated November 25, 2003 to Registration Rights Agreement dated August 28,
                           2003 with Laurus Master Fund, Ltd. (23)

         4.30              Warrant, dated August 28, 2003, issued by EP MedSystems, Inc. to Laurus Masterfund,
                           Ltd. (11)

         4.31              Warrant, dated August 28, 2003, issued by EP MedSystems, Inc. to Biscayne Capital
                           Markets, Inc. (13)

         4.32              Form of Common Stock Purchase Agreement dated December 26, 2003 (identical agreements,
                           except for number of shares of Common Stock acquired, were executed by each of the
                           selling shareholders) (17)

         4.33              Form of Registration Rights Agreement dated December 26, 2003 (identified agreements
                           were executed by each of the selling shareholders) (17)

         4.34              Common Stock Purchase Agreement, dated as of December 14, 2004, by and between EP
                           MedSystems, Inc. and the Purchasers listed on Exhibit A thereto. (24)

                                      E-3
<PAGE>

         4.35              Registration Rights agreement, dated as of December 14, 2004, by and between EP
                           MedSystems, Inc. and the Investors listed on Exhibit A thereto (24)

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

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

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

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

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

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

         10.7*             Amendment to EP MedSystems, Inc. 1995 Director Option Plan (22)

         10.8*             EP MedSystems, Inc. 2002 Stock Option Plan as Amended by First Amendment (26)

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

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

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

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

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

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

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

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

                                      E-4
<PAGE>

         10.17             Promissory Note dated December 30, 2002 between EP MedSystems, Inc. and EGS Healthcare
                           Limited Partnership (21)

         21.1              Subsidiaries of the Registrant (23)

         23.1**            Consent of Grant Thornton LLP

         24.1**            Powers of Attorney (included on signature page).

         31.1**            Certification Pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange
                           Act of 1934, as amended.

         31.2**            Certification Pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange
                           Act of 1934, as amended.

         32.1**            Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
                           of the Sarbanes-Oxley Act of 2002.

         32.2**            Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
                           of the Sarbanes-Oxley Act of 2002.

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

<FN>

         * Denotes management contract or compensatory plan or arrangement.

         **Filed herewith.

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

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

3.       Incorporated by reference from EP Med's Proxy Statement for the Annual
         Meeting of Shareholders held on July 18, 2000, previously filed with
         the Commission.

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

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

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

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

                                      E-5
<PAGE>

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

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

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

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

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

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

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

15.      Incorporated by reference form EP Med's Quarterly Report on Form 10-QSB
         for the quarter ended September 30, 2002.

16.      Incorporated by reference from EP MedSystems, Inc.'s Quarterly Report
         on Form 10-QSB for the quarter ended June 30, 2003 previously filed
         with the commission.

17.      Incorporated by reference form EP MedSystems, Inc.'s Registration
         Statement on Form S-3 previously filed with the commission on January
         22, 2004.

18.      Incorporated by reference to EP MedSystems, Inc.'s Registration
         Statement on Form S-3 previously filed with the commission on April 18,
         2003.

19.      Incorporated by reference to EP MedSystems, Inc.'s Registration
         Statement on Form S-3 previously filed with the commission on October
         28, 2003.

20.      Incorporated by reference to EP MedSystems, Inc.'s current report on
         Form 8-K previously filed with the commission on September 12, 2003.

21.      Incorporated by reference to EP MedSystems, Inc.'s Annual Report on
         Form 10-KSB for the year ended December 31, 2002.

22.      Incorporated by reference from EP MedSystems, Inc.'s Proxy Statement
         for the Annual Meeting of Shareholders held on August 29, 2002,
         previously filed with the commission on July 30, 2002.

                                      E-6
<PAGE>

23.      Incorporated by reference from EP MedSystems, Inc.'s Annual Report on
         Form 10-KSB for the year ended December 31, 2003.

24.      Incorporated by reference from EP MedSystems, Inc.'s Current Report on
         Form 8-K previously filed with the commission on December 21, 2004.

25.      Incorporated by reference from EP MedSystems, Inc.'s Registration
         Statement on Form S-3 previously filed with the commission on January
         14, 2005.

26.      Incorporated by reference from EP MedSystems, Inc.'s Definitive Proxy
         Statement for the Annual Meeting of Shareholders held on December 22,
         2004, previously filed with the commission on November 24, 2004.
</FN>
</TABLE>

                                      E-7
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

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


<TABLE>
<CAPTION>
<S>                 <C>                                                                              <C>

             FINANCIAL STATEMENTS                                                                  PAGE
                                                                                                ------------

           Report of Independent Registered Public Accounting Firm                                  F-2

           Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003                F-3

           Consolidated Statements of Operations for the years ended                                F-4
           December 31, 2004 and 2003

           Consolidated Statements of Changes in Shareholders' Equity                               F-5
           for the years ended December 31, 2004 and 2003

           Consolidated Statements of Cash Flows for the years ended                                F-7
           December 31, 2004 and 2003

           Notes to Consolidated Financial Statements                                               F-8

</TABLE>


                                      F-1

<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and
Shareholders of EP MedSystems, Inc.

We have audited the accompanying consolidated balance sheets of EP MedSystems,
Inc. (a New Jersey corporation) as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EP MedSystems,
Inc. as of December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the years then ended in conformity
with accounting principles generally accepted in the United States of America.


/s/ Grant Thornton LLP

Philadelphia, PA
March 4, 2005

                                      F-2
<PAGE>


<TABLE>
<CAPTION>
<S>                             <C>                                                    <C>                  <C>

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                                                                               DECEMBER 31,
                               ASSETS                                                   2004                   2003
                                                                             --------------------    ------------------
Current assets:
  Cash and cash equivalents                                               $            9,345,000  $         11,248,983
  Restricted cash                                                                              -             1,000,000
  Accounts receivable, net of allowance for doubtful accounts
     of $139,000, and $98,600 as of December 31, 2004 and
     2003, respectively                                                                4,335,075             3,035,426
  Inventories, net of reserves                                                         2,947,853             2,330,830
  Prepaid expenses and other current assets                                              472,654               846,132
  Deferred tax asset, net of valuation allowance                                               -               397,720
                                                                             --------------------    ------------------
       Total current assets                                                           17,100,582            18,859,091

Property, plant and equipment, net                                                     2,223,421             1,951,640
Goodwill                                                                                 341,730               341,730
Other intangible assets, net                                                             158,162                13,033
Other assets                                                                             179,046               495,530
                                                                             --------------------    ------------------
       Total assets                                                       $           20,002,941  $         21,661,024
                                                                             ====================    ==================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of notes payable                                        $                    -   $         2,200,000
  Accounts payable                                                                     2,107,463             1,962,556
  Accrued expenses                                                                     1,776,816             1,645,842
  Deferred revenue                                                                       460,393               507,824
                                                                             --------------------    -----------------
       Total current liabilities                                                       4,344,672             6,316,222

Deferred warranty revenue- non-current                                                   348,184               271,629
Secured convertible note, non-current                                                  1,958,611             3,446,865
                                                                             --------------------    ------------------
       Total liabilities                                                  $            6,651,467   $        10,034,716
                                                                             --------------------    ------------------
Commitments and contingencies
Shareholders' equity:
  Preferred stock, no par value, 5,000,000 shares authorized,
     373,779 shares issued and outstanding at December 31,
     2004 and 2003, respectively                                                         618,161               618,161
  Common stock, $.001 stated value, 40,000,000 shares authorized,
     25,387,630 issued at December 31, 2004 and 23,098,179 shares
     issued at December 31, 2003, respectively
                                                                                          25,388                23,098
  Additional paid-in capital                                                          55,650,822            49,414,829
  Accumulated other comprehensive loss                                                  (280,582)             (177,728)
  Treasury stock, 50,000 shares at cost                                                 (100,000)             (100,000)
  Accumulated deficit                                                                (42,562,315)          (38,152,052)
                                                                             --------------------    ------------------
       Total shareholders' equity                                                     13,351,474            11,626,308
                                                                             --------------------    ------------------
       Total liabilities and shareholders' equity                         $           20,002,941   $        21,661,024
                                                                             ====================    ==================
                         The accompanying notes are an integral part of these statements.
</TABLE>

                                      F-3
<PAGE>



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


<TABLE>
<CAPTION>
<S>                                                                     <C>                     <C>

                                                                          2004                  2003

                                                                  ------------------     ----------------
Net sales                                                      $         16,368,609   $       10,002,828
Cost of products sold                                                     6,663,055            4,762,429
                                                                   ------------------     ----------------
       Gross profit                                                       9,705,554            5,240,399

Operating costs and expenses:
   Sales and marketing expenses                                           8,346,138            5,563,359
   Research and development expenses                                      2,470,258            2,566,477
   General and administrative expenses                                    3,034,501            2,565,788
   Mortgage conversion expense                                                    -              222,084
                                                                  ------------------     ----------------
       Total operating expenses                                          13,850,897           10,917,708
                                                                  ------------------     ----------------

       Loss from operations                                              (4,145,343)          (5,677,309)

Interest expense, net                                                      (143,700)            (484,830)
Interest expense, debt conversion                                          (581,698)          (1,000,000)
Interest expense, change in valuation of warrants
                                                                                  -             (210,750)
Other income                                                                      -               26,095
                                                                  ------------------     ----------------
Loss before income tax benefit                                 $         (4,870,741)   $      (7,346,794)

Income tax benefit                                                          460,478              397,720
                                                                  ------------------     ----------------

Net loss                                                       $         (4,410,263)   $      (6,949,074)
                                                                  ==================     ================

Basic and diluted net loss per share                           $              (0.19)   $           (0.38)
                                                                  ==================     ================

Weighted average shares outstanding used to
compute basic and diluted loss per share
                                                                         23,514,846           18,378,450
                                                                  ==================     ================


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

                                      F-4

<PAGE>




                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
                                    (Part 1)
<TABLE>
<CAPTION>
<S>     <C>                     <C>         <C>                <C>       <C>


                               Common     Common  Preferred Preferred Additional
                               Stock      Stock    Stock      Stock    Paid-in
                               Shares     Amount   Shares     Amount   Capital
                             ----------- -------- --------- --------- ------------

BALANCE, DECEMBER 31,
2002                         15,098,736  $15,099   373,779  $618,161  $32,372,087
                             =========== ======== ========= ========= ============

Issuance of common
stock in connection
with joint development
contract, net of
offering costs                1,270,944    1,271         -         -    2,461,194

Issuance of common
stock in private
placement including
conversion of
promissory note, net of
offering costs                2,007,475    2,007         -         -    2,071,155

Conversion of
convertible promissory
bridge notes,
beneficial conversion
feature                              -          -        -         -    1,000,000

Foreign currency
translation                           -        -         -         -            -

Issuance of common
stock in private
placement, net of
offering costs                3,320,000    3,320         -         -    7,781,700

Issuance of common
stock in connection
with conversion
of mortgage to equity
including non-cash
mortgage conversion
costs of $222,084               476,234      476         -         -      971,609

Issuance of common
stock in connection
with Secured
Convertible Note                 40,000       40         -         -       99,960

Beneficial conversion
feature in connection
with Secured
Convertible Note                      -        -         -         -      486,147

Issuance of common
stock in connection
with exercise of
warrants                        794,790      795         -         -    1,323,317

Warrants issued in
connection with
promissory note                       -        -         -         -      618,250

Issuance of common
stock in connection
with conversion of
secured convertible note         90,000       90         -         -      229,410

Net Loss                              -        -         -         -            -
                             ----------- -------- --------- --------- ------------
BALANCE, DECEMBER 31,        23,098,179  $23,098   373,779  $618,161  $49,414,829
2003
                             =========== ======== ========= ========= ============
                        The accompanying notes are an integral part of these statements.
</TABLE>

                                       F-5

<PAGE>


<TABLE>
                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                            CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
                                    (Part 2)
<CAPTION>
<S>     <C>                     <C>         <C>           <C>            <C>

                             Accumulated
                             Other        Receivable
                             Comp-        from
                             rehensive    Officer/
                             Income       Treasury      Accumulated
                             (Loss)       Stock           Deficit        Total
                             ------------ ----------- ---------------- -----------

BALANCE, DECEMBER 31,
2002                                $613  $(100,000)   $(31,202,978)   $1,702,982
                             ============ =========== =============== ===========

Issuance of common
stock in connection
with joint development
contract, net of
offering costs                         -           -                -   2,462,465

Issuance of common
stock in private
placement including
conversion of
promissory note, net of
offering costs                         -           -                -   2,073,162

Conversion of
convertible promissory
bridge notes,
beneficial conversion
feature                                -           -                -   1,000,000

Foreign currency
translation                    (178,341)           -                -    (178,341)

Issuance of common
stock in private
placement, net of                                                       7,785,020
offering costs                         -           -               -

Issuance of common
stock in connection
with conversion of
mortgage to equity
including non-cash
mortgage conversion                                                       972,085
costs of $222,084                      -           -               -

Issuance of common
stock in connection
with Secured                                                              100,000
Convertible Note                       -           -               -

Beneficial conversion
feature in connection
with Secured
Convertible Note                       -           -               -      486,147

Issuance of common
stock in connection
with exercise of                                                       1,324, 112
warrants                               -           -               -

Warrants issued in
connection with
promissory note                        -           -               -      618,250

Issuance of common
stock in connection
with conversion of
secured convertible note               -           -               -      229,500

Net Loss                               -           -     (6,949,074)   (6,949,074)
                             ------------ ----------- --------------- -------------
BALANCE, DECEMBER 31,         $(177,728)  $(100,000)   $(38,152,052)  $11,626,308
2003
                             ============ =========== =============== =============
                         The accompanying notes are an integral part of these statements.
</TABLE>

                                      F-5
<PAGE>



                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
                                    (Part 1)
<TABLE>
<CAPTION>
<S>                             <C>      <C>         <C>       <C>          <C>

                            Common      Common     Preferred  Preferred  Additional
                            Stock       Stock      Stock      Stock        Paid-in
                            Shares      Amount     Shares     Amount      Capital
                           ----------- ---------- ---------- ---------- ------------

BALANCE, DECEMBER 31,
2003                       23,098,179    $23,098    373,779   $618,161  $49,414,829
                           ----------- ---------- ---------- ---------- ------------

Issuance of stock in
connection with joint
conversion of secured
convertible note              694,314        695          -          -    1,744,742

Issuance of stock in
connection with exercise
of options                     85,137         85          -          -      173,641

Issuance of stock,
options and warrants in
connection with clinical
affairs consulting
contracts                      10,000         10          -          -      152,799

Issuance of common stock
in private placement,
net of offering costs       1,500,000      1,500          -          -    4,154,031

Acceleration of option
vesting in connection
with separation
agreement                           -          -          -          -       10,780

Foreign currency
translation                         -          -          -          -            -

Net loss                            -          -          -          -            -
                           ----------- ---------- ---------- ---------- ------------
BALANCE,   DECEMBER   30,  25,387,630    $25,388    373,779   $618,161  $55,650,822
2004
                           =========== ========== ========== ========== ============

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

                                      F-6


<PAGE>



                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONTINUED
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
                                    (Part 2)

<TABLE>
<CAPTION>
<S>     <C>                    <C>           <C>         <C>           <C>             <C>

                                         Accumulated
                           Additional       Other
                             Paid-in    Comprehensive  Treasury     Accumulated
                             Capital        Loss         Stock        Deficit        Total
                           ------------ -------------- ----------- -------------- ------------

BALANCE, DECEMBER 31,
2003                       $49,414,829     $(177,728)  $(100,000)  $(38,152,052)  $11,626,308
                           ------------ -------------- ----------- -------------- ------------

Issuance of stock in
connection with joint
conversion of secured
convertible note             1,744,742              -           -              -    1,745,437

Issuance of stock in
connection with exercise
of options                     173,641              -           -              -      173,726

Issuance of stock,
options and warrants in
connection with clinical
affairs consulting
contracts                      152,799              -           -              -      152,809

Issuance of common stock
in private placement,
net of offering costs        4,154,031              -           -              -    4,155,531

Acceleration of option
vesting in connection
with separation
agreement                       10,780              -           -              -       10,780

Foreign currency
translation                          -      (102,854)           -              -     (102,854)

Net loss                             -                          -    (4,410,263)   (4,410,263)
                           ------------ -------------- ----------- -------------- ------------
BALANCE,   DECEMBER   30,  $55,650,822     $(280,582)  $(100,000)  $(42,562,315)  $13,351,474
2004
                           ============ ============== =========== ============== ============

                         The accompanying notes are an integral part of these statements.
</TABLE>
                                      F-6

<PAGE>



                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
<S>     <C>                                                                            <C>                   <C>


                                                                                      2004                  2003
                                                                                -----------------     -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                                    $        (4,410,263)   $       (6,949,074)
 Adjustments to reconcile net loss to net cash
    used in operating activities:
      Depreciation and amortization                                                      784,901               685,690
      Bad debt expense                                                                   113,354                62,878
      Interest expense, debt conversion                                                        -             1,000,000
      Mortgage conversion expense                                                              -               222,084
      Change in value of warrants and amortization of beneficial
        conversion feature                                                               299,451               315,204
      Accretion of note discount                                                         282,244                92,059
      Deferred income taxes                                                              397,720                40,852
      Non cash expenses in connection with issuance of common stock and
       options for consulting agreements                                                163,589
 Changes in assets and liabilities:
    (Increase) decrease in accounts receivable                                        (1,413,003)              340,676
    Increase in inventories                                                           (1,338,868)             (135,419)
    Decrease (increase) in prepaid expenses and other assets                             390,511              (507,333)
    Increase (decrease) in accounts payable                                              144,907              (623,494)
    Increase in accrued expenses, deferred revenue, customer deposits and
      accrued interest                                                                   160,101               728,184
                                                                                -----------------     -----------------
      NET CASH USED IN OPERATING ACTIVITIES                                  $        (4,425,356)   $      ( 4,727,693)
                                                                                -----------------     -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures                                                                (308,103)             (154,196)
    Patent costs                                                                        (171,863)              (15,191)
                                                                                -----------------     -----------------
      NET CASH USED IN INVESTING ACTIVITIES                                  $          (479,966)  $          (169,387)
                                                                                -----------------     -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments under term notes payable                                                   (2,200,000)           (1,000,000)
  Proceeds from issuance of secured convertible debt                                           -             3,661,600
  Decrease (increase) in restricted cash                                               1,000,000            (1,000,000)
  Net proceeds from issuance of common stock, net of offering costs                    4,304,193            12,649,995
                                                                                -----------------     -----------------

Effect of exchange rate changes                                                         (102,854)             (178,341)

Net (decrease) increase in cash and cash equivalents                                  (1,903,983)            9,236,174
Cash and cash equivalents, beginning of period                                        11,248,983             2,012,809
                                                                                -----------------     -----------------
Cash and cash equivalents, end of period                                     $         9,345,000    $       11,248,983
                                                                                =================     =================
Supplemental cash flow information:
  Cash paid for interest                                                     $           933,057   $            93,690
  Non-cash reclassification of assets from inventory to fixed assets         $           722,845   $           414,499

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

                                      F-7
<PAGE>



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


1.       BASIS OF PRESENTATION

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

         The Company faces a number of risks, including developing and
sustaining a profitable, cash positive business, which is largely dependent upon
market acceptance of recently developed products.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

CASH AND CASH EQUIVALENTS

          EP MedSystems considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The carrying amount of
cash and cash equivalents approximates fair value.

CONCENTRATIONS OF CREDIT RISK

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

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

          The Company has subsidiaries in the United Kingdom, France and the
Netherlands and thus is exposed to risks that arise from foreign currency
exchange rate fluctuations. Such exposures arise from transactions denominated
in foreign currencies, primarily from translation of results of operations
outside the United States, inter-company advances and inter-company purchases of
inventory. The Company does not engage in hedging of foreign currencies through
the purchase of option contracts or forward exchange contracts.

                                      F-8
<PAGE>

         Credit is extended based on evaluation of the customers' financial
condition. Accounts receivable payment terms vary and are stated in the
financial statements at amounts due from customers net of an allowance for
doubtful accounts. Accounts outstanding longer than the payment terms are
considered past due. The allowance is determined by considering a number of
factors, including the length of time trade accounts receivable are past due,
previous loss history, customers' current ability to pay their obligations, and
the condition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts.

INVENTORIES

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

PROPERTY AND EQUIPMENT

          Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets as follows:

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

Leasehold improvements are amortized on a straight-line basis over the shorter
of their estimated useful lives or the term of the lease. Expenditures for
repairs and maintenance are expensed as incurred.

GOODWILL AND INTANGIBLE ASSETS

          Registration and legal fees associated with patent filings are
capitalized and amortized over three years. Management reviews these assets for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of the assets might not be recoverable. EP MedSystems has
determined that, as of December 31, 2004 and 2003, no such assets have been
impaired.

          Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Currently, the Company operates as a
single reporting unit. Goodwill and other "indefinite-lived" assets are not
amortized and are subject to the impairment rules of Statement of Financial
Accounting Standards No. 142 ("SFAS 142") which the Company adopted effective as
of January 1, 2002. Goodwill is tested for impairment on an annual basis or upon
the occurrence of certain circumstances or events. The Company determines the
fair market value of its reporting unit using quoted market rates and cash flow
techniques. The fair market value of the reporting unit is compared to the
carrying value of the reporting unit to determine if an impairment loss should
be calculated. If the book value of the reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the fair value of the goodwill to the book value of the goodwill. If
the book value of the goodwill exceeds the fair value of goodwill, an impairment
loss is recorded. Fair value of goodwill is determined by subtracting the fair
value of the identifiable assets of a reporting unit from the fair value of the
reporting unit. There were no impairment losses recorded in 2004 or 2003.

                                      F-9
<PAGE>

REVENUE RECOGNITION

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

          EP MedSystems provides a one-year warranty on all of its electronic
products and, in accordance with Statement of Financial Accounting Standard No.
5 "Accounting for Contingencies," accrues for the estimated cost of providing
this warranty at the time of sale. Further, the Company incurs discretionary
costs to service its products in connection with product performance issues. The
estimates of the future warranty costs are based on historical experience.
<TABLE>
<CAPTION>
<S>     <C>                                                                        <C>                <C>

                                                                                  2004               2003
                                                                             ---------------     --------------
Beginning balance                                                        $       126,000     $        71,000
Warranties                                                                       649,000             291,000
Warranty payments                                                               (444,000)           (236,000)
                                                                             ---------------     --------------

Ending balance                                                           $      $331,000     $      $126,000
                                                                             ===============     ==============
</TABLE>

          In addition to the standard one-year warranty provided on all
products, EP MedSystems offers separately priced extended warranties. EP
MedSystems recognizes revenue from these warranty contracts on a straight-line
basis over the contract period in accordance with FASB Technical Bulletin 90-1
"Accounting for Separately Priced Product Warranties and Product Maintenance
Contracts."

SHIPPING AND HANDLING COSTS

         In accordance with EITF 00-10: Accounting for Shipping and Handling
Fees and Costs, the Company reflects freight costs associated with shipping its
products to customers as a component of sales and marketing expenses. Total
direct shipping costs incurred in 2004 were approximately $416,000.


RESEARCH AND DEVELOPMENT

          Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect material costs related to
specific projects, as well as clinical and regulatory costs.

                                      F-10
<PAGE>


STOCK BASED COMPENSATION

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

         On December 16, 2004 the FASB issued SFAS No. 123(R), "Share-Based
Payment", which is an amendment to SFAS No. 123, "Accounting for Stock-Based
Compensation." This new standard eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and generally
requires such transactions to be accounted for using a fair-value-based method
and the resulting cost recognized in our financial statements. This new standard
is effective for awards that are granted, modified or settled in cash in interim
and annual periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We will
adopt this new standard effective for the third quarter of 2005, and have not
yet determined what impact this standard will have on our financial position or
results of operations, but it is likely the adoption of this standard will have
a material impact on our results of operations.

          EP MedSystems records the fair value of stock issuances to
non-employees based on the market price on the date issued. The amount is
expensed, capitalized or recorded as a reduction of paid-in capital, depending
on the purpose for which the stock is issued. It is EP MedSystems' policy to
account for stock options granted to non-employees in accordance with Emerging
Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," and the fair value is measured using the Black-Scholes
option pricing model under Statement of Financial Accounting Standard No.
123.See Shareholders' Equity footnote for stock options issued to non-employees.

          Had compensation costs for EP MedSystems' stock option plans been
determined consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation", EP MedSystems' proforma net loss and loss per share for 2004 and
2003 would have been as follows:

<TABLE>
<CAPTION>
<S>     <C>                                                         <C>                    <C>

                                                                     2004                   2003
                                                                     ----                   ----

       Net loss, as reported                                      $(4,410,263)           $(6,949,074)

       Deduct:  Total stock-based employee compensation
       expense determined under fair value based method
       for all awards granted since January, 1995, net of
       related tax effects                                          $(559,575)              (423,730)
                                                             ------------------     ------------------

       Pro forma net loss                                         $(4,969,838)           $(7,372,804)
                                                             ==================     ==================

       Loss per share:
           Basic and diluted - as reported                             $(0.19)                $(0.38)
                                                             ------------------     ------------------
           Basic and diluted - pro forma                               $(0.21)                $(0.40)
                                                             ------------------     ------------------
</TABLE>

                                      F-11
<PAGE>

NET LOSS PER SHARE

         Basic net loss per share is computed using the weighted-average number
of shares of common stock outstanding. Diluted net loss per share does not
differ from basic net loss per share since potential shares of common stock from
the exercise of stock options and warrants are anti-dilutive for all periods
presented. Accordingly, potential common shares of approximately 4,386,000 and
4,917,000 for the years ended December 31, 2004 and 2003, respectively, have
been excluded from the diluted per share calculation.

INCOME TAXES

         Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets,
unless it is more likely than not that such assets will be realized.

COMPREHENSIVE INCOME / LOSS

          For the years ended December 31, 2004 and 2003, components of
comprehensive loss consisted of net loss and foreign currency translation
adjustments. Comprehensive loss for the years ended December 31, 2004 and 2003
was $4,513,000 and $7,127,000, respectively.

FOREIGN CURRENCY TRANSLATION

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

         Also in accordance with SFAS No. 52, transaction gains and/or losses
are incurred as a result of the changes between functional currency and the
transaction denominated currency. These gains and/or losses are marked to the
current exchange rate on a quarterly basis and included in expenses in the
Statement of Operations. For the year ended December 31, 2004 and 2003, the
transaction gains recorded were approximately $132,000 and $235,000,
respectively.

USE OF ESTIMATES

          The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in

                                      F-12
<PAGE>

the financial statements and accompanying notes. The primary estimates used by
management are in the determination of the allowance for doubtful accounts,
inventory obsolescence reserve and warranty reserve. Although these estimates
are based on management's knowledge of current events and actions it may
undertake in the future, the estimates may ultimately differ from actual
results.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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



3.       INVENTORIES
<TABLE>
<CAPTION>
<S>     <C>                                                          <C>                     <C>

Inventories consist of the following:
                                                                            DECEMBER 31,
                                                                     2004                   2003
                                                                ---------------        ---------------
                    Raw materials                           $        1,201,449      $       1,202,711
                    Work in progress                                   516,893                561,008
                    Finished goods                                   1,399,511                725,111
                    Reserve for obsolescence                          (170,000)              (158,000)
                                                                ---------------        ---------------
                                                            $        2,947,853     $        2,330,830
                                                                ===============        ===============
</TABLE>

                                      F-13


<PAGE>



4.       PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
<S>                     <C>                                           <C>                    <C>

Property and equipment consist of the following:
                                                                            DECEMBER 31,
                                                                     2004                   2003
                                                                ----------------        --------------
                    Land                                    $            69,738      $       69,738
                    Buildings and improvements                        1,037,674           1,029,341
                    Leasehold improvements                              132,298             128,102
                    Machinery and equipment                           4,514,870           3,496,164
                    Furniture and fixtures                              232,441             233,729
                                                                ----------------        --------------
                                                             $        5,987,021      $    4,957,074
                    Less: accumulated depreciation                   (3,763,600)         (3,005,434)
                                                                ----------------        --------------
                                                            $         2,223,421     $4    1,951,640
                                                                ================        ==============
</TABLE>



5.       INTANGIBLE ASSETS
<TABLE>
<CAPTION>
<S>     <C>                                                          <C>                     <C>

Intangible assets consist of the following:
                                                                            DECEMBER 31,
                                                                     2004                   2003
                                                                ---------------        ---------------
                    Goodwill                                $       774,099         $       774,099
                    Less: accumulated amortization                 (432,369)               (432,369)
                                                                ---------------        ---------------
                                                            $       341,730         $       341,730
                                                                ===============        ===============



                                                                            DECEMBER 31,
                                                                     2004                   2003
                                                                ---------------        ---------------
                    Other intangible assets                 $       368,650         $       196,787
                    Less: accumulated amortization                 (210,488)               (183,754)
                                                                ---------------        ---------------
                                                            $       158,162         $        13,033
                                                                ===============        ===============
                                                                ===============        ===============
</TABLE>



At December 31, 2004 and 2003 other intangible assets consist primarily of
patent costs. At December 31, 2004, the net intangible asset was $158,162 and it
is expected to be fully amortized as follows:

                              2005          $61,384
                              2006          $56,743
                              2007          $40,035

6.       COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

         EP MedSystems leases office space in the United Kingdom, France and the
Netherlands to support European and Asian sales and service. The Company has its
executive offices with its manufacturing facility in West Berlin, New Jersey.
The total rent expense associated with office leases was approximately $67,000
and $53,000 in 2004 and 2003, respectively. Additionally, EP MedSystems also
leases certain office equipment for periods extending through 2006.

                                      F-14

<PAGE>


          The aggregate future commitment for minimum rentals as of December 31,
2004 is as follows:

                              2005               $27,000
                              2006                $5,000


EMPLOYEE LIFE INSURANCE

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

SUPPLIERS

         The Company outsources the manufacture of some components to its
products. Some of these arrangements are sourced from one supplier.

7.       NOTES PAYABLE

         On November 15, 2000, EP MedSystems, Inc. completed a debt financing
for $3.2 million with Medtronic Asset Management, Inc., an affiliate of
Medtronic, Inc., and one of EP MedSystems' shareholders. Approximately $2.3
million was utilized to repay outstanding amounts on EP MedSystems' revolving
credit facility. The principal and all accrued interest on the note was to be
repaid on November 15, 2003 and the note was secured by a pledge by David
Jenkins, EP MedSystems' Chairman, of shares of common stock of a privately-held
corporation. On March 12, 2003, the due date of the note was extended to April
1, 2004. In connection with the extension, the Company paid $1 million of the
note upon receipt of certain equity proceeds and increased the interest rate to
the prime rate plus 3%. The prime rate was 4% at December 31, 2003. EP
MedSystems had accrued approximately $728,000 of interest expense as of December
31, 2003. In February 2004, the principal amount of this note along with all
accrued interest was repaid in full.

         On November 21, 2002, the Company signed a $750,000 mortgage note on
its facility in West Berlin, New Jersey. Interest was payable quarterly at 8%
and the note was collateralized by the building. The note was convertible into
common stock of the Company at escalating amounts over its three year term as
follows:

        -  November 21, 2002 through December 31, 2003 convertible at $2.14 per
           share
        -  January 1, 2004 through December 31, 2004 convertible at $2.50 per
           share
        -  January 1, 2005 through December 31, 2005 convertible at $3.00 per
           share

         On April 2, 2003, the holders of the mortgage notes, which were secured
by the $750,000 mortgage on EP MedSystems' facility in West Berlin, converted an
aggregate of $375,000 of the mortgage notes into 300,000 shares of common stock
of EP MedSystems. In connection with the conversion, the Company reduced the
conversion price from $2.14 per share to $1.25 per share, which resulted in the
recording of a non-cash mortgage conversion charge of $222,084. On June 30,
2003, the holders of the mortgage notes converted the final portion of the
mortgage notes into 175,234 shares of common stock at a conversion price of
$2.14 as stated in the agreement.

                                      F-15
<PAGE>

         On December 30, 2002, the Company issued convertible promissory bridge
notes, in an aggregate amount of $1,000,000, to EGS Private Healthcare
Partnership L.P. and EGS Private Healthcare Counterpart L.P. (the "EGS
Entities"). The maturity date of those promissory notes was June 30, 2003, and
interest accrued at 10% per annum, payable upon maturity. In connection with
that financing, the Company issued warrants to the EGS Entities to purchase an
aggregate of 50,000 shares of the common stock of the Company at 105% of the
closing trading price of its common stock on December 30, 2002. On January 31,
2003, the Company issued common stock in a private placement. The entire
principal amount of the promissory notes issued to the EGS Entities and all
accrued and unpaid interest thereon were converted into 819,783 shares of common
stock and warrants to purchase 327,913 shares of the common stock of the Company
in and on the same terms as the private placement. In connection with the
conversion, the warrants to purchase 50,000 shares of common stock issued to the
EGS Entities on December 30, 2002 were cancelled. The Company recorded a
$1,000,000 non-cash charge in connection with the conversion. The charge is for
interest expense in connection with the conversion of the convertible promissory
bridge notes as a result of certain beneficial conversion features and the
intrinsic value of embedded conversion options within the promissory notes. A
managing member of the EGS Entities is also a member of the Board of Directors
of the Company.

         On August 28, 2003, the Company issued a Secured Convertible Note (the
"Convertible Note") to Laurus Master Fund, Ltd. ("Laurus") and entered into a
related Security Agreement with Laurus, pursuant to which Laurus provided the
Company with a $4,000,000 revolving asset-based credit facility in the form of a
three-year Convertible Note secured by the accounts receivable, inventory, real
property and other assets of the Company, other than intellectual property.

         At the closing of the transaction, the Company issued the Convertible
Note to Laurus having a principal amount of $4,000,000 and received net proceeds
of $2,661,600. An additional $1,000,000 of the Convertible Note was previously
restricted and those restrictions were released during the third quarter of
2004. The balance of the proceeds was used to pay fees incurred in connection
with this transaction. Deferred financing fees are being amortized over the life
of the Convertible Note using the effective interest method. In addition, the
Company paid a portion of the fees payable to an intermediary, Biscayne Capital
Markets, Inc. ("Biscayne"), in 40,000 shares of the Company's Common Stock
having a market value on the date of closing of this transaction equal to
$100,000. The net proceeds of the Convertible Note will be used by the Company
for working capital purposes and payment of outstanding debt.

         The portion of the Convertible Note against which Laurus advances funds
based on the Company's accounts receivable bears interest at the prime rate,
with a floor of 4%, and the balance (the "Advance Amounts") bears interest at
the prime rate plus 2%, effective interest rate of 16.86%, including accretion
of debt discount and amortization of the beneficial conversion feature. One half
of Advance Amounts outstanding on February 28, 2005 was required to be repaid on

                                      F-16
<PAGE>

or before that date. However, there were no "Advance Amounts on that date, as
the net collateral exceeded the principal amount outstanding on the Convertible
Note. The remaining balance of the Advance Amounts outstanding on the date of
the closing is required to be repaid on or before August 28, 2006. The Company,
subject to certain rights of cancellation, may extend the credit facility by
Laurus, on a year-by-year basis, commencing August 28, 2006. The Company may
repay in cash, without penalty, up to $500,000 of the Convertible Note in any
one calendar year, plus all Advance Amounts.

         Subject to certain volume limitations and other conditions, all or a
portion of the Convertible Note was convertible into the Common Stock of the
Company at the Company's option if the market price of the Company's Common
Stock reached a level, for 11 consecutive trading days, which is above 120% of
$2.55 (the "Fixed Conversion Price"), which through December 14, 2004 was $2.55
and which was a price in excess of the market price of the Company's Common
Stock on the date of closing. Subject to certain volume limitations and other
conditions, Laurus has the option to convert all or a portion of the Convertible
Note into shares of the Company's Common Stock at the Fixed Conversion Price.

         Following the conversion into the Company's Common Stock by the Company
and/or Laurus of an aggregate of $2,000,000 of the principal amount of the
Convertible Note (a "Conversion Event"), the Fixed Conversion Price will be
adjusted upward to a price which is 115% of the average of the closing price of
the Company's Common Stock for the three trading days prior to the Conversion
Event. On December 15, 2004, the balance of the first $2,000,000 of the
principal amount was converted into shares of the Company's common stock. The
fixed conversion price was adjusted upwards from $2.55 to $4.20, on the
remaining $2,000,000 principal balance. Subject to certain limitations,
including the repayment obligations with respect to Advance Amounts described
above, the dollar amounts of the Convertible Note converted may be re-borrowed.

         The Fixed Conversion Price is subject to adjustment, with customary
exceptions and on a weighted-average basis, in connection with sales of the
Company's securities below the Fixed Conversion Price then in effect, and is
also subject to adjustment for stock splits, combinations, stock dividends and
similar events. As part of the credit facility transaction, Laurus and the
intermediary also received warrants to purchase an aggregate of 240,750 shares
of the Company's Common Stock (the "Warrants"), with exercise prices set as
follows: $2.93 per share for the purchase of up to the first 133,750 shares,
$3.19 per share for the purchase of up to the next 80,250 shares, and $3.70 per
share for the purchase of up to the final 26,750 shares. The expiration date of
the warrant is August 28, 2010. The exercise price of the warrants and the
number of shares underlying the warrants are subject to adjustments for stock
splits, combinations, stock dividends and similar events.

         In October 2003, the Company registered, under the Securities Act of
1933, as amended, 1,500,000 shares of its Common Stock which may be received by
Laurus upon conversion of the Convertible Note and exercise of the Warrant and
the remaining 293,628of such shares were registered in November of 2004.

         In accordance with the provisions of Emerging Issues Task Force (EITF)
Issue 00-27, "Application of EITF Issue No. 98-5 'Accounting for Convertible
Securities with Beneficial Conversion Features of Contingently Adjustable
Conversion Ratios', to Certain Convertible Securities", the allocated value of
the Convertible Note contained a beneficial conversion feature calculated based
on the difference between the effective conversion price of the proceeds

                                      F-17
<PAGE>

allocated to the Convertible Notes and the Warrants at the date of issuance. The
amount arising from the beneficial conversion feature aggregated approximately
$486,000 and is being amortized as interest expense from the date of the
issuance of the Convertible Note to the mandatory redemption date of August 28,
2006. The Company valued the Convertible Note and the Warrants at issuance. The
fair value of the Warrants at the time of issue was $407,500. In accordance with
EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," the Company marked the Warrants
to market at September 30, 2003 incurring a non-cash charge of $264,000. The
registration rights agreement associated with the Convertible Note was amended
on November 25, 2003 and, as a result, the amount associated with the Warrants
was transferred to equity. The Company marked the Warrants to market at the date
of the amendment which reduced the overall expense to $210,750 for the year
ended December 31, 2003. The net carrying value of the Convertible Note, after
allocation of the fair value of the Warrants is being accreted to interest
expense over the term of the Convertible Note using the effective interest
method.

         The maturities on long-term debt consists of the following at December
31, 2004:

                              2005         $                 -
                              2006         $         1,958,611
                                              ----------------
                                                   $ 1,958,611
                                              ================

         The maturities above are net of $41,329 in discount of the Convertible
Note at December 31, 2004.

8.       SHAREHOLDERS' EQUITY

PREFERRED STOCK

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

          During the year ended December 31, 2001, EP MedSystems consummated the
private sale and issuance of Series A convertible preferred stock to Medtronic,
Inc. ("Medtronic"). In 2002, Medtronic converted a portion of its preferred
stock into shares of common stock of the Company. At December 31, 2004 and 2003,
Medtronic held 373,779 of the Company's Series A Preferred Shares which were
convertible into 387,946 shares of common stock of the Company at the option of
Medtronic or the Company in accordance with the terms of the agreement with
Medtronic, Inc. The Series A Preferred Shares have a liquidation preference of
$2.048 per share. Subsequent to December 31, 2004, Medtronic converted their
preferred shares into 387,946 shares of common stock of the Company.

                                      F-18
<PAGE>

COMMON STOCK

          EP MedSystems is authorized to issue 40,000,000 shares of common
stock, no par value, $.001 stated value per share, of which a total of
25,387,630 and 23,098,179 shares were issued and 50,000 shares were held in
Treasury Stock at December 31, 2004 and 2003, respectively.

         On September 5, 2002, EP MedSystems entered into a stock purchase
agreement and license agreement with Boston Scientific Corporation ("BSC") in
connection with a strategic joint development project. Following the completion
of the development, which occurred in the third quarter 2003, EP MedSystems has
marketing rights to the technology and will pay royalties to BSC based on the
market value of the technology at the time of sale of the product. The stock
purchase agreement with BSC allowed for the sale of up to $3,000,000 of common
stock based on the achievement by the Company of milestones in the development
of certain cardiac electrophysiology technology. The common stock was sold at
the lesser of the ten-day trailing average trading price per share prior to the
closing of each installment purchase, and $5.00 per share. Upon signing of the
agreement, EP MedSystems received $500,000 for 210,084 shares issued at the
ten-day trailing average trading price of $2.38 per share. On February 4, 2003,
the Company issued 311,915 shares of common stock in exchange for $500,000.
These shares were registered for resale on Form S-3 on April 2, 2003. On April
21, 2003, the Company issued 357,398 shares of common stock in exchange for
another payment of $500,000. During the third quarter of 2003, the Company
issued 601,631 shares of common stock in exchange for the final payments
totaling $1,500,000.

         On January 31, 2003, the Company completed a $2,470,000 private
placement of its common stock to various accredited investors. The Company
issued 2,007,475 shares of its common stock for a purchase price of $1.23 per
share and warrants to purchase 802,990 shares of common stock at an exercise
price per share of 110% of the closing trading price on the date of closing of
that transaction, which was $1.6943. In the private placement, the Company
received approximately $1,570,000 in cash, net of offering costs. The balance of
the private placement included the conversion of the entire principal amount of,
and accrued interest on, the promissory notes from the EGS Entities into common
stock of the Company and the securities issued in that private placement were
issued on the same terms and conditions as those of the other investors. In
connection with that conversion, the 50,000 warrants issued to the EGS Entities
on December 30, 2002 were cancelled in 2003 and the Company recorded a
$1,000,000 non-cash charge in connection with the conversion. The charge is for
interest conversion expense associated with certain beneficial conversion
features and the intrinsic value of embedded conversion options within the
promissory notes. The Company had the right, with prior notice to the holders of
the warrants, to repurchase the warrants issued in connection with the private
placement at $.01 per warrant at any time after the average closing price of the
Company's common stock, for any twenty consecutive trading days, has equaled or
exceeded $2.54. In July of 2003, the closing price requirement for repurchase of
the warrants was met, notice to repurchase the warrants was given to the warrant
holders by the Company, and 794,790 shares of common stock were issued upon
exercise of these warrants. In April 2003, the Company completed an additional
$210,000 private placement of 120,000 shares of its common stock to various
accredited investors.

                                      F-19
<PAGE>


         On April 4, 2003, the principal amount of, and all accrued and unpaid
interest on, the note receivable from a Company officer were repaid by that
officer through return to treasury of the 50,000 shares of common stock to the
Company, which collateralized that loan. The market price of the Company's
common stock on the date of such return was $2.08. The shares are recorded on
the balance sheet under the caption "Treasury stock."

         On December 23, 2003, the Company completed an $8,200,000 private
placement of its common stock to various accredited investors. The Company
issued 3,200,000 shares of its common stock at a purchase price of $2.56 per
share.

         In May of 2004, the Company engaged a physician as a consultant to head
its clinical affairs department. In connection with that agreement, the Company
issued 10,000 shares of the Company's common stock to the physician and granted
the physician an option to purchase 10,000 shares of the Company's common stock
which vests twelve months from the date of grant. Also in connection with the
agreement, the Company granted the physician an option to purchase 40,000 shares
of the Company's common stock which vests in equal installments over five years.
The exercise price of each of the options was the fair market value of the
Company's common stock on the date of the grant. The transactions were accounted
for in accordance with Emerging Issues Task Force Issue No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services." The fair value was measured
using the Black-Scholes option pricing model under Statement of Financial
Accounting Standard No. 123 using the following assumptions for each grant as
follows: risk free rate: 3.07%, 10 year life, and a volatility percentage of
83.86%.

         In October 2004, the Company engaged a physician as a consultant to
manage a clinical study. In connection with that agreement, the Company granted
the physician a warrant to purchase 10,000 shares of the Company's common stock
which vested immediately. The exercise price of the warrants was the fair market
value of the Company's common stock on the date of the grant. The transaction
was accounted for in accordance with Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." The fair value
was measured using the Black-Scholes option pricing model under Statement of
Financial Accounting Standard No. 123 using the following assumptions: risk free
rate of 3.36%, 10 year life, and a volatility percentage of 77.25%.

         On December 15, 2004, the Company completed a $4,500,000 private
placement of its common stock to two accredited investors. The Company issued
1,500,000 shares of its common stock at a purchase price of $3.00 per share.

9.       STOCK OPTION PLANS

1995 LONG TERM INCENTIVE PLAN

          EP MedSystems' 1995 Long Term Incentive Plan (the "1995 Incentive
Plan") was adopted by the Board of Directors and shareholders in November 1995.
On November 5, 1999, the Shareholders approved an amendment increasing the
number of shares available under the Plan from 700,000 to 1,000,000. The 1995
Incentive Plan provides for grants of "incentive" and "non-qualified" stock
options to employees of EP MedSystems. The 1995 Incentive Plan is administered
by the Compensation Committee, which determines the optionees and the terms of
the options granted, including the exercise price, number of shares subject to
the options and the exercisability thereof. The 1995 Incentive Plan will
terminate on November 30, 2005, unless terminated earlier by the Board of
Directors.

                                      F-20
<PAGE>

1995 DIRECTOR OPTION PLAN

          EP MedSystems' 1995 Director Option Plan (the "1995 Director Plan")
was adopted by the Board of Directors and the shareholders in November 1995. A
total of 360,000 shares of common stock of EP MedSystems are available for
issuance under the 1995 Director Plan. The 1995 Director Plan provides for
grants of director options to eligible directors of EP MedSystems and for grants
of advisor options to eligible members of the Scientific Advisory Board of EP
MedSystems. Each of the director options and the advisor options are exercisable
at the rate of 1,000 shares per month, commencing with the first month following
the date of grant. The terms of these options are five years. The 1995 Director
Plan will terminate on November 30, 2005, unless terminated earlier by the Board
of Directors.

2002 OPTION PLAN

          EP MedSystems' 2002 Stock Option Plan (the "2002 Plan") was approved
by the Shareholders in August 2002 and amended in December 2004. A total of
1,000,000 shares of the common stock of the Company are reserved for issuance
under this Plan. The 2002 Plan provides for grants of incentive stock options to
employees of EP MedSystems. The 2002 Plan is administered by the Compensation
Committee. The 2002 Plan will terminate on August 29, 2012, unless terminated
earlier by the Board of Directors.

          During the second quarter of 2004, in connection with a separation
agreement with one of the Company's employees, there was an acceleration of the
vesting of certain options. In connection with the accelerated vesting, the
Company recorded an expense in accordance with FIN44, "Accounting for Certain
Transactions Involving Stock Compensation."

          For the year ended December 31, 2004 and 2003 no non-employee holders
of non-plan stock options exercised their options.

          At December 31, 2004 and 2003, EP MedSystems had 2,577,063 and
1,935,200 shares, respectively, of common stock reserved for stock options under
all plans. All stock options granted by EP MedSystems, were granted at exercise
prices not less than the current fair market value of EP MedSystems' common
stock on the date of grant, as determined by the Board of Directors or the fair
market value on the date of grant.

                                      F-21

<PAGE>



          Information relating to stock options is as follows:
<TABLE>
<CAPTION>
<S>     <C>                                             <C>                     <C>                     <C>


                                                                              OPTION                 WEIGHTED
                                                      NUMBER OF                PRICE                  AVERAGE
                                                       OPTIONS                 RANGE              EXERCISE PRICE
                                                   -----------------    --------------------    --------------------
Outstanding at December 31, 2002                       1,431,379              $1.91 - $4.19                   $2.46
Granted                                                  470,550              $1.32 - $3.90                   $2.31
Exercised                                                      -                          -                       -
Forfeited/Expired                                       (314,519)             $1.34 - $4.13                   $2.75
                                                   -----------------    --------------------    --------------------
Outstanding at December 31, 2003                       1,587,410              $1.32 - $4.13                   $2.35
                                                   =================    ====================    ====================

    Granted                                              576,500              $2.48 - $3.56                   $2.61
    Exercised                                            (85,137)             $1.32 - $2.88                   $2.09
    Forfeited/expired                                   (160,315)             $1.32 - $3.75                   $2.44
                                                   -----------------    --------------------    --------------------
Outstanding at December 31, 2004                       1,918,458              $1.32 - $4.13                   $2.60
                                                   =================    ====================    ====================
Exercisable at December 31, 2004                         674,950              $1.32 - $3.25                   $2.14
                                                   =================    ====================    ====================
</TABLE>


          Under Statement of Financial Accounting Standards No. 123, the fair
value of each stock option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions in 2004 and 2003, respectively:
<TABLE>
<CAPTION>
<S>                     <C>                                        <C>              <C>

                                                                  2004             2003
                                                              -------------    -------------
                  Risk free interest rate                        3.56%            3.27%
                  Expected life                                 5 years          5 years
                   Volatility                                    80.07%           81.95%
                  Weighted average fair value of options
                  granted during the year
                                                                 $3.15            $2.31
                  Expected dividends                               -                -
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 2004:
<TABLE>
<CAPTION>
<S>                     <C>             <C>                                             <C>

                      Options         Outstanding                                Options Exercisable

    Range of           Number      Weighted average        Weighted             Number         Weighted
 exercise prices   outstanding at  contractual life    average exercise     Exercisable at      average
                    December 31,                             price           December 31,   exercise price
                        2004                                                     2004
----------------   --------------  ----------------    -----------------    --------------  ---------------
$1.32-$1.91
                        208,750            7.1                $1.68           122,500           $1.78
$2.00-$3.00
                      1,083,250            6.6                $2.30           529,560           $2.18
$3.03-$4.25
                        626,458            8.3                $3.42            22,890           $3.16
               -----------------                                     -----------------
                      1,918,458                                               674,950
               =================                                     =================
</TABLE>

                                      F-22
<PAGE>


10.      INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

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

          The following table sets forth product sales by geographic segment as
of December 31,
<TABLE>
<CAPTION>
<S>              <C>                                    <C>                     <C>

                                                       2004                  2003
                                                 ------------------     ----------------
              United States                            $12,751,000           $5,922,000
              Europe/Middle East                         2,607,000            2,604,000
              Asia and Pacific Rim                       1,011,000            1,477,000
                                                 ------------------     ----------------
                                                       $16,369,000          $10,003,000
                                                 ==================     ================
</TABLE>

          Sales of EP MedSystems' cardiac electrophysiology devices and related
catheters aggregated $14,962,000 and $1,407,000 in 2004 and $8,780,000 and
$1,223,000 in 2003, respectively. EP MedSystems' long-lived assets are primarily
located in the U.S. No one foreign country was material to the Company's sales
in 2004.

                                      F-23
<PAGE>



          Net sales for the year  ended  December  31,  2004 were  billed in two
currencies: $15,714,000 in U.S. dollars and $655,000 in Euros. Management
has determined that the impact of foreign currency risk on sales is minimal
since a majority of sales are billed in U.S. dollars. EP MedSystems does incur
translation gains and losses, which are recorded in Shareholders' Equity.

11.      EMPLOYEE BENEFIT PLAN

          During 1997, EP MedSystems established an employee 401(k)-salary
deferral plan that allows contributions by all eligible full time employees.
Eligible employees may contribute up to 15% of their respective compensation,
subject to statutory limitations, and EP MedSystems may match a percentage of
employee contributions at the discretion of the Board of Directors. During the
years ended December 31, 2004 and 2003, no matching contributions were made to
the plan.

12.      INCOME TAXES

          EP MedSystems accounts for income taxes in accordance with the
provisions of Statement of Financial Account Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires EP MedSystems to recognize
income tax benefits for the loss carryforwards, which have not previously been
recorded. At December 31, 2004 and 2003, a valuation allowance has been
recognized to offset all but a portion of deferred tax assets related to these
carryforwards. The tax effects of temporary differences and carryforwards that
give rise to significant portions of deferred tax assets and liabilities consist
of the following:

<TABLE>
<CAPTION>
<S>             <C>                                                      <C>                    <C>

                                                                               DECEMBER 31,
                                                                         2004                 2003
                                                                   -----------------     ----------------
           Allowance for doubtful accounts                      $            55,716   $           39,444
           Inventory reserves                                                68,392               63,304
           Intangible asset amortization                                  (216,554)            (155,221)
           Depreciation                                                      53,905              130,748
           Accrued liabilities                                              224,849               86,408
           Net operating loss carryforwards                              13,435,067           11,953,308
           Research and development credit                                  548,183              548,183
           Write-down of EchoCath investment                                560,000              560,000
           Write-off of note receivable                                      43,000               43,000
           Deferred warranty income                                         338,592              256,712
           Other                                                            103,265               90,285
                                                                   -----------------    -----------------
                                                                         15,214,415           13,616,171
           Less: Valuation allowance                                    (15,214,415)         (13,218,451)
                                                                   -----------------    -----------------
                                                                $               --   $          397,720
                                                                   -----------------    -----------------
</TABLE>

                                      F-24
<PAGE>



Income Tax Benefit consists of the following:


                                                     YEAR ENDED DECEMBER 31,
                                                   2004                 2003
                                          -----------------     ----------------
           Current                     $         (858,198)   $        (438,000)
           Deferred                               397,720               40,280
                                         -----------------    -----------------
               Total                    $        (460,478)   $        (397,720)
                                         -----------------    -----------------


          At December 31, 2004 and 2003, EP MedSystems had approximately
$37,794,000 and $34,057,000, respectively, of federal net operating loss
carryforwards available to offset future income. The federal carryforwards
expire between 2009 and 2025. Due to ownership changes that occurred, as defined
by Section 382 of the Internal Revenue Code, EP MedSystems may be limited in the
use of net operating losses generated prior to the changes in ownership in each
year following the change in ownership. Additionally, EP MedSystems may have
experienced subsequent changes in ownership, as defined by Section 382,
resulting in additional limitations in EP MedSystems' ability to utilize certain
net operating losses.

          During the years ended December 31, 2004 and 2003, the Company
received approval to sell a portion of its unused cumulative New Jersey Net
Operating Loss ("NOLs") carryforwards under the State of New Jersey's Technology
Business Tax Certificate Transfer Program (the "Program"). The Program allows
qualified technology and biotechnology businesses in New Jersey to sell unused
amounts of NOL carryforwards and defined research and development credits for
cash. The Company received approval to sell NOLs of EP MedSystems and ProCath
statutory entities in November 2004 and 2003, respectively. The Company entered
into contracts to sell those NOL's for approximately $460,000 and $398,000 in
December 2004 and 2003, respectively. Accordingly, the Company has adjusted its
valuation allowance to reflect net deferred tax asset of $398,000 as of December
31, 2003. In 2004, the Company had received the proceeds from the sale of the
NOL carryforwards prior to year end and therefore no net deferred tax asset
balance is reflected on the balance sheet.

          A reconciliation of EP MedSystems' effective tax rate is as follows:
<TABLE>
<CAPTION>
<S>     <C>                                                          <C>                   <C>

                                                                            DECEMBER 31,
                                                                     2004                  2003
                                                                 --------------        --------------

    Federal statutory rate                                          (34.0%)               (34.0%)
    Increase (reduction) in income taxes resulting from:
       Benefit from sale of state net operating loss                 (9.5%)                (5.4%)
       Change in valuation allowance                                 30.0%                 32.6%
       Other                                                          4.0%                  1.4%
                                                                 --------------        --------------
    Effective Tax Rate                                               (9.5%)                (5.4%)
                                                                 ==============        ==============
</TABLE>

13.      RECENTLY ISSUED ACCOUNTING STANDARDS

         In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities -- an Interpretation of Accounting Research Bulletin (ARB) No.
51." FIN 46 requires the primary beneficiary to consolidate a variable interest
entity (VIE) if it has a variable interest that will absorb a majority of the
entity's expected losses if they occur, receive a majority of the entity's

                                      F-25
<PAGE>

expected residual returns if they occur, or both. FIN 46 applies immediately to
VIEs created after January 31, 2003, and to VIEs in which the entity obtains an
interest after that date. For VIEs acquired before February 1, 2003, the
effective date for EP MedSystems is July 1, 2003. In December 2003, the FASB
published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of
the interpretation and defer to the effective date of implementation for certain
entities. Under the guidance of FIN 46R, entities that do not have interests in
structures that are commonly referred to at special purpose entities are
required to apply the provisions of the interpretation in financials statements
for periods ending after March 14, 2004. The adoption of this Statement did not
have a material impact on our results of operations, financial position, or cash
flows.

         In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." This standard amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This standard is effective for contracts entered into or modified
after June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003. In addition, except as stated below, all
provisions of this Statement should be applied prospectively. SFAS No. 149 could
have a future impact depending on transactions entered into, however, at this
time the adoption of SFAS No. 149 had no impact on the Company's results of
operations, financial position or cash flows.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." This
standard requires an issuer to classify certain financial instruments as
liabilities. It also changes the classification of certain common financial
instruments from either equity or presentation to liabilities and requires an
issuer of those financial statements to recognize changes in fair value or
redemption amount, as applicable, in earnings. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and with one
exception, is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS 150 could have a future impact depending on
transactions entered into, however, at this time the adoption SFAS 150 had no
impact on the Company's results of operations, financial position or cash flows.

         In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that " . . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges . . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
At this time, management does not believe the adoption of this Statement will
have any immediate material impact on the Company's results of operation,
financial position or cash flow.

                                      F-26
<PAGE>

         On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation. This new standard eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires
such transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in our financial statements. This new standard is
effective for awards that are granted, modified or settled in cash in interim
and annual periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We will
adopt this new standard effective for the third quarter of 2005, and have not
yet determined what impact this standard will have on our financial position or
results of operations, but it is likely the adoption of this standard will have
a material impact on our results of operations.

         In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary
Assets. This Statement addresses the measurement of exchanges of nonmonetary
assets. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in that Opinion, however, included certain exceptions to that principle. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetrary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. This
Statement is effective for financial statements for fiscal years beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges
incurred during fiscal years beginning after the date of this statement is
issued. Management believes the adoption of this Statement will have no impact
on the financial statements of the company.

         In December 2004, the FASB issued two FASB Staff Positions (FSP)
regarding the accounting implications of the American Jobs Creation Act of 2004.
The Company is assessing the impact, if any, that FAS No. 109-1, "Application of
FASB Statement No. 109 'Accounting for Income Taxes' to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004" and FSP No. 109-2 "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs Creation Act of 2004"
will have on the Company's effective tax rate in 2005.

         At its September 29-30, 2004, meeting, the FASB reached a conclusion on
Emerging Issues Task Force (EITF) Issue No. 04-8, "The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share", that contingently convertible
debt instruments will be subject to the if-converted method under FASB Statement
No. 128 (SFAS No. 128), EARNINGS PER SHARE, regardless of the contingent
features included in the instrument. Under current practice, issuers of
contingently convertible debt instruments exclude potential common shares
underlying the debt instruments from the calculation of diluted earnings per
share until the market price or other contingency is met. Due to the losses
incurred for the quarter, diluted net loss per share does not differ from basic
net loss per share, since potential shares of common stock issuable upon the
conversion of the convertible debt are anti-dilutive for all periods presented.
EITF 04-8 could have a future impact on the Company's results of operations in
the event that the potential shares of common stock issuable upon conversion of
the convertible debt were included in the diluted earnings per share
calculation. The effective date for Issue 04-8 is for reporting periods ending
after December 15, 2004

                                      F-27
<PAGE>

14.      RELATED PARTY TRANSACTIONS

          On December 30, 2002, the Company issued notes, in an aggregate amount
of $1 million to EGS Private Healthcare Partners L.P. and EGS Private Healthcare
Counterpart L.P. (the EGS Entities). A Managing Member of the EGS Entities is
also on the Board of Directors of EP MedSystems. On January 31, 2003, the notes
were converted to equity in connection with a private placement.

          The Company's $3.2 million note with Medtronic, Inc., a shareholder in
EP MedSystems, was secured by a pledge of certain shares of stock in a privately
held company owned by David Jenkins, EP MedSystems' Chairman of the Board. In
February 2004, the principal amount of this note, together with all accrued
interest, was repaid in full.

          In May 2000, EP MedSystems loaned $100,000 to one of its officers to
finance his exercise of fully vested options. This recourse loan bore interest
at the Federal Fund rate and was collateralized by 50,000 shares of EP
MedSystems' common stock. Principal and any accrued interest was due and payable
on May 23, 2003. On April 4, 2003, the principal amount of, and all accrued and
unpaid interest on, the note receivable from a Company officer were repaid by
that officer through return to treasury of the 50,000 shares of common stock to
the Company, which collateralized that loan. The market price of the Company's
common stock on the date of such return was $2.08. The shares are recorded on
the balance sheet under the caption "Treasury stock."


                                      F-28