##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K





(Mark one)

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

For the fiscal year ended: December 31, 2007

or



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

For the transition period from  to

Commission file number: 0-28260





EP MedSystems, Inc.

(Exact Name of
Registrant as Specified in its Charter)







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

(856) 753-8533

(Issuers Telephone Number, Including Area Code)





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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ̈  Yes    x  No

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.     ̈  Yes    x  No

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

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

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

Large accelerated filer    ̈    Accelerated Filer   ̈    Non-accelerated filer   ̈    Smaller Reporting Company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      ̈  Yes    x  No

The aggregate market value of the common stock held by
non-affiliates of the registrant, based on the closing price of the registrants common stock on June 29, 2007 as reported on the NASDAQ Capital Market, was approximately $45,420,000. In determining the market value of the
registrants common stock held by non-affiliates, shares of common stock beneficially owned by directors, officers and holders of more than 10% of the registrants common stock have been excluded. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.

As of March 28, 2008, there were outstanding 30,405,236 shares of the
registrants common stock, no par value, stated value $.001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the
end of our 2007 fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.









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TABLE OF CONTENTS



|         |  |                                                                                                |  |     
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                |  | Page
|PART 1   |  |                                                                                                |  | 4   
|         |  |                                                                                               
|Item 1.  |  | Business                                                                                       |  | 4   
|         |  |                                                                                               
|Item 1A. |  | Risk Factors                                                                                   |  | 14  
|         |  |                                                                                               
|Item 1B. |  | Unresolved Staff Comments                                                                      |  | 23  
|         |  |                                                                                               
|Item 2.  |  | Description of Properties                                                                      |  | 23  
|         |  |                                                                                               
|Item 3.  |  | Legal Proceedings                                                                              |  | 23  
|         |  |                                                                                               
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 24  
|         |  |                                                                                               
|PART II  |  |                                                                                                |  | 25  
|         |  |                                                                                               
|Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                       |  | 25  
|         |  |                                                                                               
|Item 6.  |  | Selected Financial Data                                                                        |  | 28  
|         |  |                                                                                               
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 29  
|         |  |                                                                                               
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 38  
|         |  |                                                                                               
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 38  
|         |  |                                                                                               
|Item 9.  |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure           |  | 38  
|         |  |                                                                                               
|Item 9A. |  | Controls and Procedures                                                                        |  | 38  
|         |  |                                                                                               
|Item 9B. |  | Other Information                                                                              |  | 39  
|         |  |                                                                                               
|PART III |  |                                                                                                |  | 39  
|         |  |                                                                                               
|Item 10. |  | Directors, Executive Officers, and Corporate Governance                                        |  | 39  
|         |  |                                                                                               
|Item 11. |  | Executive Compensation                                                                         |  | 39  
|         |  |                                                                                               
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 39  
|         |  |                                                                                               
|Item 13. |  | Certain Relationships and Related Transactions and Director Independence                       |  | 39  
|         |  |                                                                                               
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 39  
|         |  |                                                                                               
|PART IV  |  |                                                                                                |  | 39  
|         |  |                                                                                               
|Item 15. |  | Exhibits and Financial Statement Schedules                                                     |  | 39  



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Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in or incorporated by reference into this annual report are forward-looking statements and are made to comply
with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Matters discussed in or incorporated by reference into this annual report that relate to events or developments that are expected to occur in the
future, including managements expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements. Forward-looking statements are
based on managements beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to management. These statements may be identified by the use of words like
plans, expects, believes, projects, anticipates, intends, estimates, will,  should, could and other similar expressions that
indicate future events and trends. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us
will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations. These forward-looking statements involve significant risks and uncertainties
(some of which are beyond our control) and assumptions. They are subject to change based upon various factors, including but not limited to the risks and uncertainties summarized below. Should one or more of these risks or uncertainties materialize,
or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements after the
date they are made, whether as a result of new information, future events or otherwise.



| |  |  | We have a history of operating losses and expect future losses;
| | - |  | ---------------------------------------------------------------



| |  |  | 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 indebtedness and debt service could adversely affect our financial condition;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | We may need to establish collaborative agreements;
| | - |  | --------------------------------------------------



| |  |  | Our success will depend on market acceptance of our existing and new products, particularly our intracardiac echo
(ultrasound or ICE) ultrasound catheter system, including the ViewFlexTMintracardiac imaging catheters and ViewMate® II ultrasound imaging console;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are required to obtain regulatory approvals in order to manufacture and market our products;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | We may face fluctuations in future quarterly operating results;
| | - |  | ---------------------------------------------------------------



| |  |  | We are primarily engaged in the sale of capital equipment and are subject to the budgetary cycles of our customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Our profitability will depend on our ability to manufacture our products efficiently and economically;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | We depend on third-party sources to manufacture certain of our products and critical components of our products;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Our success depends on our ability to keep pace with technological developments and marketplace changes;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Our patents and proprietary rights may not provide sufficient protection for our intellectual property;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Intellectual property litigation could harm our business;
| | - |  | ---------------------------------------------------------



| |  |  | We face significant competition and many of our competitors have greater financial, marketing and other resources than we do.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | Third-party reimbursement might be reduced or denied, which may reduce our revenues;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | We may lose key personnel, sales force and/or distributors;
| | - |  | -----------------------------------------------------------



| |  |  | We are subject to product liability claims;
| | - |  | -------------------------------------------



| |  |  | We are subject to risks associated with sales in multiple countries;
| | - |  | --------------------------------------------------------------------



| |  |  | Our export controls may not be adequate to ensure compliance with United States export laws;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | We have sold our products into countries under embargo by the United States and have incurred significant legal, consulting and accounting fees in connection with
investigations by the Department of Commerce and Department of Treasury. We have also paid approximately $280,000 to settle these matters;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We may be the subject of an ongoing investigation by the Securities and Exchange Commission regarding our public disclosure related to our sale of goods into Iran
and may face costs, fines and penalties as a result; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other factors detailed in the section entitled Risk Factors in Item 1A below.
| | - |  | -------------------------------------------------------------------------------

Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any
updates or revisions to any forward-looking statement, or to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.



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PART I



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

General

We were incorporated in New Jersey in January 1993 and operate in a single industry segment. We
develop, manufacture and market a line of products for use in the cardiac rhythm management or electrophysiology (EP) market which are used for visualization, diagnosis and treatment of cardiac rhythm disorders. Our EP product line
includes the EP-WorkMate® computerized electrophysiology workstation and the EP-4 Computerized Cardiac Stimulator, with options to incorporate the MapMate® Navigation Interface, the NurseMate Remote Review Charting Station, and products linking our systems to hospital IT networks. In addition, our intracardiac echo (ICE) ultrasound catheter system, including our
ViewFlex® intracardiac imaging catheters and ViewMate® II ultrasound imaging system, is used for live visualization of devices
and anatomy during catheter based procedures in EP and interventional cardiology.

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 the most prevalent type of abnormal heart
rhythm and is estimated to afflict over 5,000,000 people worldwide (of whom approximately 3,000,000 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.

Our core diagnostic product is the EP-WorkMate® computerized electrophysiology workstation and the integrated EP-4 Computerized Cardiac Stimulator, with options to incorporate the MapMate®
Navigation Interface, the NurseMate Remote Review Charting Station, and products linking our systems to hospital IT networks. The EP-WorkMate® system is a computerized
electrophysiology workstation that monitors displays and stores cardiac electrical activity and arrhythmia data. It 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 Stimulator, as well as with the systems of other market leaders and with other technologies and systems. In the fourth quarter of 2006, we received market clearance from the United States Food
and Drug Administration (FDA) to sell the MapMate® interface in the United States. The MapMate® integrates
Johnson & Johnsons (J&J) Biosense Webster Divisions CARTO Mapping navigation system, allowing EP studies to be more efficient and user friendly. The EP-4 Stimulator is a computerized signal generator and
processor which, when integrated with the EP-WorkMate® system, is used to stimulate the heart with electrical impulses in order to locate arrhythmia. The NurseMate Remote Review
Charting Station is an integrated monitoring and review station that allows a separate EP WorkMate® user to review and edit patient study data. We believe that the EP-WorkMate® system, when integrated with the EP-4 Stimulator, offers the most advanced diagnostic computer system available to the electrophysiology market. The EP-WorkMate® platform accounted for approximately 85%, 86% and 85% of our total sales for the years ended December 31, 2007, 2006 and 2005, respectively.

We have also developed an intracardiac echo (ultrasound or ICE) ultrasound catheter system,
comprised of our ViewFlex® intracardiac imaging catheters and ViewMate® II ultrasound imaging console. These products offer
high-resolution, real-time ultrasound imaging capability designed to improve a physicians or clinicians ability to visualize anatomy and devices inside the chambers of the heart. We believe the ViewFlex® catheters and ViewMate® II Ultrasound systems will play an important role for a broad range of potential applications in electrophysiology and
interventional cardiology. Sales of the ViewFlex® catheters and related ViewMate® II systems accounted for approximately 11%, 8%
and 9% of our total sales for the years ended December 31, 2007, 2006 and 2005, respectively. In January, 2007, we announced our collaboration with Philips to jointly develop and market an ultrasound system designed for use with our
ViewFlex® catheter. In April, 2007, we launched for sale the new ViewMate® II ultrasound system based on Philips Medical
Systems HDII XE platform. Philips acts as an original equipment manufacturer for the product to be sold under our proprietary name ViewMate® II. As part of the joint development and
distribution agreement, we have exclusive rights to sell this platform in hospital electrophysiology (EP) and cardiac catheterization labs, and Philips may offer the ICE option to its customers in cardiac ultrasound and other hospital
departments on the HDII XE ultrasound system, providing additional platforms capable of using our ViewFlex® catheters.

We also market a product for the treatment of atrial fibrillation known as the ALERT® System, which uses a patented electrode catheter to deliver measured, variable, low-energy electrical impulses directly to the inside of the heart to convert



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atrial fibrillation to a normal heart rhythm. Sales of the ALERT® System and related catheters
accounted for approximately 3%, 4% and 4% of our total sales for the years ended December 31, 2007, 2006 and 2005, respectively. We obtained Class III Design Examination Certification from a European Notified Body allowing us to label the
ALERT® System with a CE Mark, which permits us to sell the ALERT® System in the European Community. During the fourth quarter of
2007, we began a process to identify strategic alternatives for our ALERT® Catheter product line. We are working to identify a buyer and to complete a divestiture of the product line.

During the fourth quarter of 2007, we discontinued our line of diagnostic electrophysiology catheters used for stimulation and sensing of
electrical signals during electrophysiology studies, which have historically represented approximately 2% of total sales.

We have three
sales channels: Direct sales to customers, sales to independent distributors, and sales to alliance partners. We invest substantial resources and management effort in our sales organizations and sales and marketing expenses represent our largest
cost center.

We manage our product groups and distribution channels on a centralized basis. Accordingly, we report our financial results
under a single operating segment  the development, manufacturing and distribution of medical devices.

The table below shows net
sales and percentage of total net sales contributed by each of our core products for the fiscal years 2007, 2006 and 2005:



|                                                        |  |                                          |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------- |  | ---------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                        |  | For The Twelve Months Ended December 31, |           
|                                                        |  | 2007                                     |            |   | 2006 |   |            | 2005 | 
|Net Sales                                               |  |                                          |            |   |      |   |            |      |  |   |            |  
|EP-WorkMate® platform                                   |  | $                                        | 16,062,000 |   |      | $ | 13,383,000 |      |  | $ | 14,161,000 |  
|ViewFlexTMcatheters and ViewMate® II ultrasound systems |  |                                          | 1,974,000  |   |      |   | 1,244,000  |      |  |   | 1,543,000  |  
|ALERT® System, EP catheters and other                   |  |                                          | 816,000    |   |      |   | 931,000    |      |  |   | 965,000    |  
|                                                        |  |                                          |            |   |      |   |            |      |  |   |            |  
|Total revenue                                           |  | $                                        | 18,852,000 |   |      | $ | 15,558,000 |      |  | $ | 16,669,000 |  
|                                                        | 
|                                                        |  | For The Twelve Months Ended December 31, |           
|                                                        |  | 2007                                     |            |   | 2006 |   |            | 2005 | 
|Percentage of Net Sales                                 |  |                                          |            |   |      |   |            |      |  |   |            |  
|EP-WorkMate® platform                                   |  |                                          | 85         | % |      |   | 86         | %    |  |   | 85         | %
|ViewFlex® catheters and ViewMate® II ultrasound systems |  |                                          | 11         | % |      |   | 8          | %    |  |   | 9          | %
|ALERT® System, EP catheters and other                   |  |                                          | 4          | % |      |   | 6          | %    |  |   | 6          | %
|                                                        |  |                                          |            |   |      |   |            |      |  |   |            |  
|                                                        |  |                                          | 100        | % |      |   | 100        | %    |  |   | 100        | %

Company Strategy

The mission of EP MedSystems, Inc. is to develop, manufacture and market the most clinically 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® system is a central platform for future EP technology. This diagnostic workstation is at the center
of todays EP lab, and we have over 800 WorkMates 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.

Integrate with market leaders. Our base platforms allow for
integration with the products of other market leaders in electrophysiology. Through our MapMate® product, we have integrated our EP-WorkMate® system with J&Js Biosense Divisions CARTO Mapping navigation system, allowing electrophysiology studies to be more efficient and user friendly. In April 2005, we announced a joint development
agreement with Philips Medical Systems Nederland B.V. (Philips) to integrate its Allura X-ray system with our EP-WorkMate® system resulting in the next generation of an
integrated electrophysiology lab. In the past we have also integrated our products with products from Boston Scientific Corporation, Witt and others.



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Expand clinical applications of new
products. We believe there are numerous potential applications for our products. Potential applications for the ViewMate® II intracardiac ultrasound catheter system include the
following: advanced EP ablation procedures; 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; evaluation of thrombus in the heart and assistance in the optimal placement of left ventricular pacemaker leads in treating congestive heart failure.

Execute an efficient sales channel strategy using strategic alliances. We believe entering into strategic alliances with other 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. For example, we have a strategic alliance with Philips Medical Systems which
combines their cardiovascular x-ray technology with our EP recording and data management systems which enables us to market the integrated electrophysiology lab and our related products through that state-of-the-art platform.

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, 3D Navigation and Mapping Technology

EP-WorkMate system.
The EP-WorkMate® system 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® system 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 Stimulator and other technologies and systems. The EP-WorkMate® system is
differentiated from competing products by (i) it signal quality, (ii) its seamless integration with the EP-4 Stimulator, (iii) its storage capacity of up to 192 intracardiac signals, (iv) its ability to process and
simultaneously display both real-time and historical electrophysiology activity, (v) its simple, user friendly software based on a menu driven, point-and-click interface, and (vi) its integration with other products in the EP lab.

EP-4 Computerized Cardiac Stimulator. Our EP-4 Stimulator is a
computerized electrical pulse signal generator and processor which, when integrated with the EP-WorkMate® system, is used to stimulate the heart with electrical impulses in order to locate
electrical disturbances or arrhythmias. We believe the EP-4 Stimulator is currently the only fully 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® system. The EP-4 Stimulator can be sold as a stand-alone electrophysiology stimulator or it can be integrated with the EP-WorkMate® system.

MapMate.The
MapMate® interface enables our EP-WorkMate® system to share information, log data and generate a common report with the CARTO
Mapping navigation system sold by J&Js Biosense Division. The combination offers more comprehensive clinical management, enhanced efficiency and simplified records.

NurseMate.The NurseMate Remote Review Charting Station is an integrated monitoring
and review station that allows a separate EP WorkMate® user to chart, review and edit patient study data.

We have also integrated our EP-WorkMate® system with Philips Medical Systems Allura x-ray system. It is the only EP recording system on the market to integrate advanced recording, stimulation, mapping, navigation and x-ray allowing electrophysiology
studies to be more efficient and user friendly.

In 2007, we derived approximately 85% of our revenues from electrophysiology computer
workstations, stimulators, 3D navigation and mapping technologies.

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. Fluoroscopy imaging, the primary visualization modality 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, and the fossa ovalis, among others) and is not adept at assessing catheter placement in relation to certain anatomy. We believe that intracardiac ultrasound imaging may overcome these deficiencies.



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We offer an intracardiac echo (ICE) ultrasound
catheter system, including our ViewFlex® intracardiac imaging catheters and ViewMate® II ultrasound imaging system. These
products offer high resolution, real-time ultrasound visualization of devices and anatomy during catheter based procedures in EP and interventional cardiology. 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 Doppler mode allows identification of blood flow direction and velocity. We believe the ViewMate® II Ultrasound System may play an important diagnostic role for a broad range of potential applications in electrophysiology and cardiology. In 2007, we derived approximately 11% of our revenues
from our ultrasound products.

Our ViewMate® II ultrasound system, launched in April, 2007, is based on Philips Medical Systems HDII XE platform. As part of the joint development and distribution agreement, Philips may offer the ICE option to its
customers on the HDII XE ultrasound system, providing an additional customer base for our ViewFlex® catheters.

Other Product lines

The ALERT System.
The ALERT® System employs an 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 directly to the inside of the heart to convert atrial fibrillation to normal heart rhythm. The ALERT® System is comprised of a single-use
proprietary electrode catheter with two separate electrode arrays (the ALERT® Catheter) and an external energy source (the ALERT® Companion).

During the fourth quarter of
2007, we began a process to identify strategic alternatives for our ALERT® Catheter product line. We are working to identify a buyer for the ALERT® System and to complete a divestiture of the product line. In 2007, we derived approximately 3% of our revenues from our ALERT® System products.

Business Realignment Charges

In the fourth
quarter of 2007, we recorded a business realignment charge of $1.3 million, or $.04 per share, $940,000 of which were non-cash items, in connection with a realignment of our business and products. We undertook this realignment to focus on our key
growth and value opportunities and to re-deploy our financial and human resources to capitalize on them while eliminating several low growth, low value products. Among the actions that we took were:



| |  |  | We discontinued our diagnostic EP catheter product line  which has historically represented about 2% of total revenue.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | We gave notice of termination to our three Europe based employees and are in the process of closing our French sales office and UK distributor support office. We
intend to support our international distribution activities from our New Jersey headquarters.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We took an accounting reserve on older versions of our ICE catheter inventory, including WIP of our current
ViewFlex® model, in anticipation of the launch of our new ViewFlex® Plus catheterwhich may be available for sale in Q2 of
2008  this new product launch is conditional on achieving the necessary regulatory approvals.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We realized the final cost of wrapping our ICE CHIP Study including site costs and write-off of clinical study supplies and equipment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We received notice that Boston Scientific was terminating our Supply Agreement for the sale of the RPM equipped
WorkMate® system. Sales of the RPM system peaked for EP MedSystems during 2004 and had subsided towards zero as Boston Scientific had reduced sales and technical support of the product.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We began a process to identify strategic alternatives for our ALERT® Catheter product line. The ALERT® System, which is not approved for sale in the United States, has historically contributed approximately 4% of total
revenue. We believe that the ALERT System represents a desirable product line for a strategic buyer and we are working toward a divestiture.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The charges included (a) $610,000 related to write downs of inventory related to discontinued products; (b) $219,000 related to inventory impairments for products deemed slow moving due to new product
launches; (c) $339,000 related to staff adjustments, lease termination and other costs related to closing down of our international offices; and (d) $114,000 related to completion of a clinical study, including write-off of clinical study
supplies and equipment.

The charges are reflected on the income statement as follows: (a) $829,000 charged to cost of sales;
(b) $315,000 charged to sales and marketing expenses; and (c) $138,000 charged to general and administrative expenses.



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Patents, Trademarks and Licenses

Patents. 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. We currently hold title to 36 United States patents and patent applications filed with the United States Patent and
Trademark Office. We have also obtained certain patents in our principal overseas markets. The expiration dates on our patents range from 2013 to 2024.

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. These license agreements are summarized below.



| |  |  | In December 2003, we entered into a marketing agreement with Philips Medical Systems Nederland B.V.
(Philips) to sell our EP-WorkMate® system in combination with Philips x-ray fluoroscopy product. Pursuant to the agreement, Philips purchases certain products and parts
from us, and resells 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 has a provision for automatic annual renewals and can be terminated by Philips,
subject to certain notice and cure periods, for certain reasons, including, non-competitiveness, change of control and cause. The agreement was renewed for a one year period in December, 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2005, we entered into a software development, license and distribution agreement with Biosense Webster, Inc. (Biosense) pursuant to which we
received a license to interface certain aspects of their CARTO XP Mapping System and the right to distribute the interface kit worldwide, subject to certain restrictions. Under the agreement, Biosense has the right to sell the interface hardware
component of the interface kit in post sales service calls. Under the agreement, we will pay a formula-based royalty to Biosense. The agreement has a term lasting through December, 2008, representing two years from our first distribution of an
interface kit, unless otherwise terminated. The agreement is renewable upon the mutual agreement of Biosense and us. In the event of termination of the agreement, we may ship all backlog orders and honor all quotes up to six months following the
original quote date.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In January 2007, we entered into a joint development and distribution agreement with Philips Medical Systems
(Philips) pursuant to which we agreed to form an integrated product between the HD11 XE and ViewFlex® catheter and grant each other a free nonexclusive license, without right to
grant sublicenses, for certain ultrasound base technologies as defined in the agreement. The distribution agreement provides for our purchase of the Philips HD11 XE ultrasound system under our proprietary name ViewMate® II and sales of those units into territories in the United States as defined in the agreement. The distribution agreement also allows for the sale by Philips of certain of our products into territories in the United
States as defined in the agreement. The purchase of Philips products confers on us the use of trade names, trademarks subject to defined limitations. The contract has a term of three years, subject to renewal options, and can be terminated with
notice 180 days from the end of the term. The contract includes indemnifications and provisions in the normal course of business for an OEM contract.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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

Registered Trademarks: EP-WorkMate® System, ALERT® System, MapMate® Interface, ViewMate® and ViewFlex®.



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Unregistered Trademarks: EP-3 Stimulator, EP-4 Computerized Cardiac Stimulator,
NurseMate Remote Review and Charting WorkStation and LinkMate.

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 United States 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.

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.

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 from the owners of such intellectual property 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 and diversion of effort and resources.

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 (ii) contracting with third parties for specific research and development projects and (iii) licensing new technology.

Our expenditures for research and development (which include expenditures for regulatory affairs
and engineering) totaled approximately $3,131,000 (17% of net sales), $2,738,000 (18% of net sales) and $2,374,000 (14% of net sales) for the years ending December 31, 2007, 2006 and 2005, respectively. Expenditures in 2007 consisted primarily
of design efforts for future product releases in our ICE product line, ongoing enhancements to our existing EP WorkMate® platform offerings, efforts to improve overall product quality and
lower production costs, costs to integrate our products with hospital information systems and other products commonly used in the industry and to obtain and maintain regulatory approvals.

Sales, Marketing and Distribution Methods

Domestic. We primarily utilize our own direct sales and marketing force to sell and promote
our products in the United States market. Within each hospital, the sales and marketing effort is directed at those physicians, primarily electrophysiologists, most likely to use our products. We entered into a group purchasing organization (GPO)
contracts with Premier, Inc. This GPO is an alliance of various hospital networks and the contract allows us access to their hospitals to market to their physicians. We expect to concentrate our marketing efforts on the roll out of our new products,
including the EP-WorkMate® system integrated with various market leaders, and intracardiac ultrasound system. To support these sales, we intend to employ physician/clinician training and
education, promotional materials, sample products, demo and service equipment and increased direct sales and marketing efforts, 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 build these sales channels, we have entered into alliance agreements with Philips and Biosense. There can be no assurances that those relationships will continue indefinitely or that strategies for
these companies will not change, possibly impacting our business.

International. 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



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contract. While we do not consider any single 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. During 2007, we began a process to close both our French sales office and the United Kingdom international distributor support office which were staffed by a sales manager, operations manager and clerical staff.
We intend to manage our distributor network from our New Jersey headquarters.

No assurance can be given that either we or our distributors
can successfully sell our products in Europe or elsewhere on terms acceptable to us, or at all.

International Operations

Foreign sales are subject to certain significant risks, including exchange rate fluctuations, local medical reimbursement issues, longer accounts
receivable collection cycles, duties, tariffs and taxes, quotas, 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. Such risks are further described in Item 1A, Risk Factors of this Form 10-K

Currency exchange rate fluctuations relative to the U.S. Dollar can affect reported consolidated revenues and net earnings. However, 96% of our net sales are denominated in US dollars and we are in the process of
closing our two existing international offices. We do not hedge this exposure in order to reduce the effect of foreign currency rate fluctuations on net earnings.

Customers

We sell our products directly to medical institutions in the United States which then bill various third-party
payers, such as government programs and private insurance plans. See the Section entitled Third-Party Reimbursement. In 2006, one customer, the US and international subsidiaries of Philips Medical Systems Nederland B.V. accounted for 10%
of our net sales.

Outside of the United States, we sell to a network of distributors. Our distributors are located in Europe, the Middle
East and Asia. We derived approximately $4,506,000 (or 24% of net sales), $4,354,000 (or 28% of net sales) and $3,752,000 (or 23% of net sales) in 2007, 2006 and 2005, respectively, from customers located in countries other than the United States.

Seasonality

Our quarterly net sales
are influenced by many factors, including the timing of hospital capital equipment budgeting process, new product introductions, regulatory approvals and other factors. Net sales in the first quarter are typically lower than other quarters of the
year and sales in the fourth quarter are typically higher than other quarters of the year. We believe that this is a result of the timing of our hospital customers capital budgeting and purchasing process.

Manufacturing and Sources of Supply

We assemble and test our products at our West Berlin, New Jersey facility, which is certified to
the ISO-13485 Quality System Standard that is recognized by the regulatory bodies in the European Union, Canada and other countries. Although we believe that we have sufficient capacity to satisfy our current manufacturing needs, we have no
experience in large-scale manufacturing and there can be no assurance that we would be successful in manufacturing products in significant volume. Certain critical components of our products are obtained from outside sources, such as 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 Stimulators, ViewMate® II, ViewFlex® catheter, and EP-WorkMate® system. Any interruption in the supply of such products
or components could 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, which could have a material adverse effect on our business, results of operations and financial condition

Government Regulation

United States

Our West Berlin, New Jersey facility and the activities conducted at that facility are subject to good manufacturing practices (GMP)
regulations and quality system regulations promulgated by the FDA.



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We have market approval from the FDA for the
marketing and sale of the EP-WorkMate® system, EP-4 Stimulator, ViewMate®, ViewMate® II, ViewFlex® Catheter, MapMate®, NurseMate products, as well as other products in the
United States.

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.

We initiated a field action recall for our EP-4 stimulator product in March 2006. This field action consisted of an upgrade of the
installed base in a phased process and required us to bring the units in-house to make certain modifications. During 2006, we accrued approximately $256,000 in costs associated with this field action to cover the cost of shipping and modifying the
product. Through December 31, 2006, we incurred approximately $184,000 in costs associated with this process. During 2007, we spent an additional $43,000 in connection with the recall. The field action recall was completed for all domestic
units during 2007 and the $29,000 balance of the original accrual was reversed.

As a result of the recall, the FDA performed an inspection
of our facility and subsequently issued us a report containing several observations identified during the course of the audit. In September 2006, the FDA issued a Warning Letter to us that identified certain issues with respect to the
Companys conformity with the FDAs quality system regulations and certain reporting requirements. The FDA requested a written plan outlining the steps to address the issues identified in the letter. We undertook steps toward
addressing the observations from the FDAs audit of our facility and have responded to the FDAs request for a written plan. Failure to promptly address these issues may result in regulatory action including but not limited to
seizure, injunction and/or civil monetary penalties. We believe we have fully addressed the concerns raised by the FDA. In February, 2008, the FDA returned to our facility to perform its normal periodic inspection and to confirm our
actions with respect to the warning letter. At the conclusion of the inspection, no items related to the warning letter were observed, however several new Section 483 observations were issued to us. We have committed that we will address and
correct these new observations within the next two months.

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 Regulation

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.



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Third-Party Reimbursement

In the United States, our products are marketed to medical institutions that in turn 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 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. Additionally, even if a procedure is eligible for
reimbursement, the level of reimbursement may not be adequate.

Our ViewFlex® intracardiac ultrasound catheter may, depending on the procedure, add significant costs to that procedure. We may be required to economically justify the additional costs of using the
ViewFlex® by demonstrating the benefits to healthcare providers and payers in terms of such factors as patient procedural efficiencies, more desirable images, improved patient outcomes and
lower overall costs with respect to other methods of visualizing the internal anatomy of the heart.

Reimbursement systems in international
markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government managed health care systems that control reimbursement
to medical institutions and physicians for new products and procedures. In most markets, there are private insurance systems as well as government managed systems. Market acceptance of our products will depend on the availability and level of
reimbursement in targeted international markets. There can be no assurance that our products will obtain reimbursement in any country within a particular time, for a particular time, for a particular amount, or at all.

We believe less-invasive catheter-based procedures generally provide a more cost-effective overall treatment when compared to conventional drug,
surgical, and other treatments. Many hospital administrators and physicians justify the use of our products by the attendant cost saving and clinical benefits that they believe will be derived from the use of our products. However, we cannot provide
assurance that these cost-savings and clinical benefit assumptions will, in fact, be realized. Reimbursement for our products is not assured in some international markets under either government or private reimbursement system, and health care
providers may not advocate reimbursement for procedures using our products. Failure by hospitals in the United States or in international markets and other users of our products to obtain reimbursement from third-party payers, or changes in
government and private third-party payers policies toward reimbursement for procedures employing our products, would have a material adverse effect on our business, financial condition and results of operations. Moreover, we are unable to
predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on us.

Political, economic and regulatory influences are subjecting the health care industry in the United States to increased scrutiny. We anticipate that
Congress, state legislatures and the private sector will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include mandated basic health care benefits, controls on
health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, greater reliance on prospective payment systems, the creation of large insurance purchasing groups, price controls and
other fundamental changes to the health care delivery system. Legislative debate is expected to continue in the future, and market forces are expected to demand reduced costs. We cannot predict what impact the adoption of any federal or state health
care reform measures, future private sector reform or market forces may have on our business. 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.



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In the computerized electrophysiology workstation and electrophysiology stimulator market, our main
competitors are General Electric and C.R. Bard Inc. In intracardiac ultrasound, we compete with Siemens Medical Solutions and their co-marketing partner, Biosense-Webster, a division of Johnson & Johnson, but others may enter this market.

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 newer and more effective technologies than we do,
bring products to market before we do and 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 customers consider
many factors when choosing suppliers, including product reliability, clinical outcomes, product availability, price and product services provided by the manufacturer, and market share can shift as a result of technological innovation and other
business factors. Our business will depend upon our 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 us or a settlement 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, 2007, EP Med had 89 full-time employees, of whom 23 were dedicated to manufacturing and logistics, 9 represented executive management and administration, 40 were engaged in sales, 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.

Executive Officers of the Registrant

The following is a list of our
executive officers as of March 28, 2008.



|                 |  |     |  |                                                         
|---------------- |  | --- |  | --------------------------------------------------------
|Name             |  | Age |  | Description                                             
|David A. Jenkins |  | 50  |  | Chairman of the Board; Class III Director               
|David I. Bruce   |  | 48  |  | President and Chief Executive Officer; Class II Director
|James J. Caruso  |  | 47  |  | Chief Financial Officer and Secretary                   
|C. Bryan Byrd    |  | 47  |  | Vice President, Engineering and Manufacturing           
|John Huley       |  | 51  |  | Vice President, Channel Management                      
|Thomas Maguire   |  | 45  |  | Vice President, Regulatory and Quality Assurance        

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

David A. Jenkins is a founder and has served as our Chairman of the Board of Directors since
1995. He is a Class II Director whose term expires in 2009. From October, 2005 to August, 2006, Mr. Jenkins served as President, Chief Executive Officer and Chief Operating Officer of the Company. Mr. Jenkins also served as the Chief
Executive Officer of the Company from its inception in 1993 until August 2002. Mr. Jenkins served as President of the Company from its inception in 1993 until August 2001. He served as President and a director of Transneuronix, Inc., a
privately-held company engaged in the development of neuromuscular stimulation devices, until its sale to Medtronic in 2005. In addition, Mr. Jenkins is the Managing Member of SeaCap Management, LLC, the managing member of FatBoy Capital,
LP. Mr. Jenkins also serves on the Board of Directors of Geodigm, Inc., Inset Technologies, Inc., and Catheter Robotics, Inc., each of which is a privately held company.

David I. Bruce is the President and Chief Executive Officer of the Company. He is a Class II Director whose term expires in
2009. Mr. Bruce joined us in August, 2006, following nine years of increasing responsibility at Acuson Corporation and the Ultrasound Division of Siemens, including as General Manager of the intracardiac echo (ICE) catheter group with
responsibility for both commercial operations and research and development. He also served as Vice President,



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Marketing for EVL, a laser vision correction company. Mr. Bruce received an MBA from the Wharton School and BS in Mechanical Engineering from
the University of California, Berkeley.

James J. Carusohas served as our Chief Financial Officer since April 17, 2007. From
1999 through 2006, he served as Vice President of Finance of Hi-tronics Designs, Inc, an implantable medical device design and OEM manufacturer that was acquired by Advanced Neuromodulation Systems in 2001, and which was subsequently acquired by St.
Jude Medical, Inc. in 2005. He served as our Chief Financial Officer from 1995 to 1999. He is a certified public accountant and received a BS degree in accounting from Rutgers University and an MBA from Fordham University.

C. Bryan Byrd is the Vice President, Research and Development of the Company. Mr. Byrd joined us in April 1993 as Vice President, Research
and Development and has overseen development of all of our products. He received a BS in Physics from Emory University and an MA in Physics from the University of Texas Austin.

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

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

Availability of SEC Reports

We make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) as soon as reasonably practical after they are filed or furnished to the U.S. Securities and Exchange Commission (SEC). Such reports
are available on our website (http://www.epmedsystems.com) under Company Information section Investor Relations or can be obtained by contacting Investor Relations at 1.856.753.8533 or at EP MedSystems, Inc. Cooper Run Executive Park
575 Route 73 North, West Berlin, NJ 08091. Information included on our website is not deemed to be incorporated into this Form 10-K.



|Item 1A. | Risk Factors
|-------- | ------------

In addition to the other
information set forth in this annual report, you should carefully consider the following factors that could materially affect our business, financial condition or future results. The risks and uncertainties described below are not the only risks and
uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also impair our business, financial condition and results of operations.

Risks Related to Our Business

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

At December 31, 2007, we had
an accumulated deficit of approximately $60 million. In 2007, our net sales revenue of $18.9 million, less cost of sales of $7.4 million, did not cover our operating expenses of approximately $17.0 million for the year ended December 31, 2007.
We expect that our operating expenses will continue to exceed our revenues, and as such, we will likely continue to incur operating losses unless and until revenue from newer products increases to a level to cover our costs.

We will need additional funds to support our operations and we may need to reduce our operations, sell stock or assets, enter into collaborative marketing agreements,
or merge with another entity to continue our operations.

Our operations to date have consumed substantial capital resources, and we
will continue to expend substantial and increasing amounts of capital for product development, establishing commercial-scale manufacturing capabilities and sales



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efforts to market currently approved and future products. Our future capital requirements will depend on many factors, including:



| |  |  | our ability to increase sales of our products, particularly our ViewFlex® ultrasound catheter system;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | our ability to establish an effective sales channel for our products;
| | - |  | ---------------------------------------------------------------------



| |  |  | the size and complexity of our research and development programs;
| | - |  | -----------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------



| |  |  | our ability to establish and maintain collaborative research and development arrangements;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the cost of manufacturing scale-up and product commercialization; and
| | - |  | ---------------------------------------------------------------------



| |  |  | the costs of being a public company.
| | - |  | ------------------------------------

We may need to raise additional funds in order to satisfy these and other future capital requirements. If we are not able to do so, we may not be able to fund our future operations. We expect that our existing capital resources, including
the remaining availability under our Keltic asset based loan agreement (which is described in Item 7 of this Form 10K), will be sufficient to fund our activities as currently planned through the end of the fourth quarter of 2008. However, in
the event our sales do not meet budgeted amounts, our operating expenses increase, our capital expenditures increase over our estimates, and/or we are unable to continue to borrow funds under our existing credit facility, it is possible that we will
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 borrowings, 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 additional financing is not available to us on acceptable terms, or at all, it would have a material adverse effect on our business, financial condition,
prospects and results of operations.

Our success will depend on continued market acceptance of
the EP-WorkMate® system platform and market acceptance of our ViewFlex® intracardiac imaging catheters and ViewMate® II ultrasound system and other product offerings.

Our ability to increase revenues over the next several years will depend on the continued market acceptance by electrophysiologists of our EP-WorkMate®
system computerized monitoring and analysis workstation with integrated stimulator, 3D navigation and mapping technologies; and market acceptance of our intracardiac echo (ultrasound or ICE) ultrasound catheter system, comprised of our ViewFlex® intracardiac imaging catheters and ViewMate® II ultrasound imaging console. Sales of our EP-WorkMate® platform, accounted for 85%, 86%, and 85% of our sales in the year ended December 31, 2007, 2006, and 2005, respectively. Because a typical EP-WorkMate® system, including integrated options, has a list price of approximately $200,000, each sale of an EP-WorkMate® system represents a significant portion of
our net sales.

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. Decreased or flat sales or low market acceptance of our EP-WorkMate® system products
or low market acceptance of our intracardiac echo ultrasound catheter system could have a material adverse effect on our business, results of operations and financial condition.

We are primarily engaged in the sale of capital equipment, which is sensitive to fluctuations in our customers budgets.

Our primary source of revenue is the sale of capital goods and, as a result, we are subject to the budgetary cycles of our customers. These cycles can cause fluctuations in our quarterly revenue as our customers
manage their capital budgets based on available cash to pay for equipment.



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We have limited manufacturing experience and manufacturing capacity, which may affect our ability to produce
commercially viable products economically and in sufficient quantities.

Our
profitability will depend on our ability to manufacture our products efficiently and economically. We have limited manufacturing experience, particularly with respect to our ViewFlex®
intracardiac ultrasound catheter products. 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 experience in manufacturing any 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 may not be able to maintain or establish outsourcing arrangements on acceptable terms. We may not 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 may need to establish collaborative agreements, and this could have a negative effect on our freedom to operate our
business, fund new product development 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 capabilities 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, our partner may discontinue its funding of any particular program or may, either alone or with others,
pursue alternative technologies for the medical conditions our products are intended to treat. If a partner were to develop, or to establish an economic interest in, a competing product, such partner may withdraw financial or technological resources
from the development of our collaborative product or technology.

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 on acceptable terms, we could experience a
material adverse effect on our ability to develop products and, once developed, to market them successfully.

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 WorkMate®, EP-4 Stimulators, ViewFlex® intracardiac imaging catheters, ViewMate® II ultrasound imaging console and other products. Any interruption by these third-party sources in the supply of
such products or components 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 or on acceptable terms. 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 dynamic industry
standards. Accordingly, our ability to compete depends on our ability to develop new products and improve existing products 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 intellectual property protection for our products.

Our success and ability to compete effectively in the electrophysiology marketplace depends on our ability to protect our patents, proprietary technology
and other intellectual property. We have acquired, and will seek to acquire, patents in the United States and certain foreign countries. We also have entered into license agreements to obtain rights, including patent rights, of third parties that we
consider important to our business. We cannot assure you that patents will be issued on our patent applications and applications for which we have acquired licenses. Further, if pending or future patents are issued, they may not be sufficient to
provide us with meaningful protection or a commercial advantage. Additionally, patents we hold or may hold in the future may be challenged, invalidated or circumvented. Moreover, our competitors, many of whom have substantial resources and have made
substantial investments in competing technologies, may presently have or may seek



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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® system and EP-4 Stimulator) is copyrighted; however, existing
copyright laws offer only limited practical protection from misappropriation. As a result, our competitors may independently develop substantially equivalent proprietary technology.

Intellectual property litigation could harm our business.

We operate in an industry that is
susceptible to significant patent and intellectual property litigation and, in recent years, it has been common for companies in the medical device field to aggressively challenge the rights of other companies to prevent the marketing of new
devices. We may have to defend against third party intellectual property claims or initiate litigation against third parties that are infringing on our patents or other intellectual property rights. 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.

Any litigation, with or without merit, 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.

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 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 may be able to better
market their products 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.

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,
resulting in a reduction in revenue from the sale of our products.

Our products are generally purchased 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. Initiatives to limit the growth of healthcare costs, including price regulation, are
also underway in several countries in which we do business. Implementation of healthcare reforms in the United States and other countries may limit the price of, or the level at which, reimbursement is provided for our products and adversely affect
both our pricing flexibility and the demand for our products.

Certain procedures
involving our products, including ViewFlex® 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.



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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 David I. Bruce, President and Chief Executive Officer, David A. Jenkins, Chairman of our Board of Directors and C. Bryan Byrd, Vice President of
Engineering. Our success also depends upon certain of our research and development and other scientific personnel. We currently maintain key-man life insurance on Mr. Byrd, 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 believe our future success
will depend substantially upon our ability to attract and retain highly qualified technical and management personnel. We believe that there is and will continue to be intense competition for qualified personnel in this industry.

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. We may not be able to continue
to attract, manage and retain a qualified sales and marketing force that 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 network of independent third-party distributors. While we do not consider any single
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 commercially reasonable 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. We cannot assure you that this coverage is or will be adequate to
cover future claims. 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 a 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.

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 2007, 2006, and 2005, approximately 24%, 28%, and 23%,
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 Europe, 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:



| |  |  | United States export license requirements and unauthorized re-export of our products to non-United States 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;
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| |  |  | exchange rate fluctuations, particularly in Europe in connection with the euro and pounds sterling;
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| |  |  | imposition of, or increases in, customs duties and other tariffs;
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| |  |  | foreign tax laws and potential increased costs associated with overlapping tax structures;
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| |  |  | 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;
| | - |  | ----------------------------------------------



| |  |  | extended collection periods for accounts receivable;
| | - |  | ----------------------------------------------------



| |  |  | potentially inadequate protections of intellectual property rights; 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 export controls may not be adequate to ensure compliance with United States export laws, especially when we sell our products to distributors over which we have limited control.

The United States government has declared an embargo that restricts the export of products and services to a number of countries, including Iran, Syria,
Sudan and Cuba. We sell our products through distributors in Europe, Asia and the Middle East, and in such circumstances, the distributor is responsible for interacting with the end user of our products, including assistance in the set up of any
products purchased by such end user. In order to comply with United States export laws, and as a condition of our settlement agreement with the Department of Treasury and Department of Commerce, we have instituted export controls including training
for our personnel in export restrictions and requirements, appointing an export control officer to oversee our export procedures, executing agreements with our distributors that include defining their territory for sale and requirements pertaining
to United States export laws, obtaining end user information from our distributors and screening it to restricted party lists maintained by the United States government. While we believe that these procedures are adequate to prevent the export or
re-export of our products into countries under embargo by the United States government, we cannot assure you that our products will not be exported or re-exported by our distributors into such restricted countries. In particular, our control over
what our distributors do with our products is necessarily limited, and we cannot assure you that they will not sell our products to an end user in a country in violation of United States export laws. Any violation of United States export regulations
could result in substantial legal, consulting and accounting costs, and significant fines and/or criminal penalties. In the event that our products are exported to countries under a United States trade embargo in violation of applicable United
States export laws and regulations, such violations, costs and penalties or other actions that could be taken against us could adversely affect our reputation and/or have an adverse effect on our business, financial condition, prospects or results
of operations.

We have sold and may continue to sell, with a license, our products into countries that are under embargo by the United States and as a
result have incurred and may continue to incur significant legal, consulting and accounting fees and may place our reputation at risk.

United States export laws permit the sale of medical products to certain countries under embargo by the United States government if the seller of such products obtains a license to do so, which requirements are in place because the United
States has designated such countries as state sponsors of terrorism. Certain of our products have been sold in Syria under license through a distribution agreement with an independent distributor. In addition, certain of our products were
distributed in Iran without United States governmental authorization. The aggregate revenue generated by sales of our products into Syria and Iran have been immaterial to our business and results of operations.

We may continue to supply medical devices to Syria and other countries that are under embargo by the United States government upon obtaining all
necessary licenses. We do not believe, however, that our sales into such countries will be material to our business or results of operations. There are risks we face in selling to countries under United States embargo, including, but not limited to,
possible damage to our reputation for sales to countries that are deemed to support terrorism, and failure of our export controls to limit sales strictly to the terms of the relevant license, which failure may result in civil and criminal penalties.
In addition, we may incur significant legal, consulting and accounting costs in ensuring compliance with our export licenses to countries under embargo.

Any damage to our reputation from such sales, failure to comply with the terms of our export licenses or the additional costs we incur in making such sales could have a material adverse impact on our business,
financial condition, prospects or results of operations.

Sales of our products into Iran were investigated by the United States Department of Treasury
and the Department of Commerce. The timing and accuracy of our public disclosure of these matters may continue to be under investigation by the Securities and Exchange Commission (SEC), and we cannot assure you that such investigation
will not result



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in significant fines or penalties that could have a material adverse effect on the Companys business, financial condition, prospects, or results of
operations.

The United States Department of Treasury and Department of Commerce have concluded investigations into certain sales of
our products into Iran. In November 2006, we signed a settlement agreement with the Department of Commerce prior to the issuance of a formal charging letter. Under the settlement agreement, we paid $244,000 in civil penalties and were not subject to
any restrictions on commercial or export activities.

In February, 2007, we signed a settlement with the Department of Treasury which
required the payment of $33,000 in penalties. Additionally, we agreed to conduct certain compliance and internal audit procedures for three years.

In a letter dated August 16, 2005, we were informed by the Securities and Exchange Commission (the SEC) that it was conducting a confidential, informal inquiry to determine whether there have been violations of certain
provisions of the federal securities laws in connection with our financial and accounting reporting, including relating to disclosures we made in its Form 8-K filed with the Commission on August 12, 2005 regarding the then ongoing government
investigations of sales by us of our products to Iran. We believe that we fully cooperated with the SEC in connection with this matter.

We
cannot assure that the ongoing informal inquiry by the SEC will not result in other significant costs, fines or penalties that could, in the aggregate, have a material adverse effect on our business, financial condition, prospects or results of
operations. We have made no provision for any future costs associated with the investigations or any costs associated with our defense or negotiations with the SEC to resolve this final outstanding issue. We have not received any communication from
the SEC regarding this informal inquiry since February, 2006.

See Item 3. Legal Proceedings and Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations for more information regarding these investigations and their effects on us.

Our business and financial condition are subject to various risks and uncertainties arising from domestic and international laws and regulations which may require us to obtain regulatory approvals in order to
manufacture and market our products.

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, as amended. 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 ongoing 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 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 manufacturing or marketing approvals and criminal prosecution, any of which could have a material adverse effect on our business, results of operations and financial condition.

We expect to seek FDA approval and approval by a European Notified Body for various products as well as improvements to our current products. Approval
of these products and product improvements 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 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. However, there can be no assurances that we will be successful in maintaining that permission.



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We are subject to new corporate governance and public disclosure requirements, and our costs of compliance, 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 result in
continuing uncertainty regarding compliance matters and higher legal and financial compliance costs. We also expect that these new requirements may make it more difficult and expensive for us to obtain director and officer liability insurance. We
have completed our internal control assessment and have updated internal control structure to provide reasonable assurance that our public disclosures are accurate and complete and comply with Sections 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 financial condition and the value of our securities.

Our operations are subject to environmental, health and safety laws and regulations that could require us to incur material costs.

We are subject to various federal, state, and local environmental protection and health and safety laws and regulations, and we incur costs to comply with those laws. Environmental laws hold current or previous owners or operators of
businesses and real property potentially liable for contamination on that property, even if they did not know of and were not responsible for the contamination. Environmental laws may also impose liability on any person who disposes or arranges for
the disposal of hazardous substances for contamination at the disposal site, regardless of whether the disposal site is owned or operated by such person. Although we do not currently anticipate that the costs of complying with environmental laws,
including costs for remediation of contaminated properties, if any, will be material, we cannot ensure that we will not incur material costs or liabilities in the future due to the discovery of new facts or conditions, the occurrence of new releases
of hazardous materials or a change in environmental laws.

Risks Relating to Our Securities and Significant Shareholders

Our principal shareholders have the ability to control us and their interests may conflict with the interests of our other shareholders.

We have shareholders who hold a large percentage of our outstanding shares of common stock. David A. Jenkins, Chairman of our Board of Directors,
beneficially owns, either directly or indirectly through entities in which he has ownership, approximately 10% of the outstanding shares of our common stock, assuming currently exercisable options held 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 9% of the outstanding shares of our common stock, assuming currently exercisable options held by him
are fully exercised. To the extent that these two shareholders and members of our Board of Directors exercise their voting rights in concert, they may have the ability to appoint new management and/or influence 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 influence the
election of members of our Board of Directors. 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:



| |  |  | a public or private placement of our securities,
| | - |  | ------------------------------------------------



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



| |  |  | developments concerning agreements with collaborators,
| | - |  | ------------------------------------------------------



| |  |  | government regulation,
| | - |  | ----------------------



| |  |  | developments in patent or other proprietary rights,
| | - |  | ---------------------------------------------------



| |  |  | public concern as to the safety of electrophysiology products developed 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.
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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.

Our common stock trades on the NASDAQ Capital Market quotation system. In the future, our common stock
may be removed from listing on the NASDAQ Capital 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 common stock trades on the NASDAQ Capital 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 Capital Market, our common stock could be delisted from the NASDAQ Capital Market. There can be no assurance that we will
satisfy the requirements for continued listing on The NASDAQ Capital Market.

If our common stock is no longer traded on The NASDAQ Capital
Market, it may be more difficult for holders of our common stock to sell any shares that they 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 Capital Market for any reason, our
common stock will be traded on the NASDAQ Over the Counter Bulletin Board or may be considered a penny stock under regulations of the Commission 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 the ability of the holders of our common stock 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 30,405,000 shares of common stock are either freely tradable in the public markets or are eligible for sale in the public markets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of March 28, 2008, there is an aggregate of approximately 3,647,000 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, our 2006 Stock Option Plan, our 2006 Director Plan, and other agreements pursuant to which nonqualified options were granted at a weighted
average exercise price of $2.13 per share; and
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| |  |  | As of March 28, 2008, there is an aggregate of approximately 283,000 shares of common stock that may be issued on the exercise of outstanding warrants at a
weighted average exercise price of $2.00 per share.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We 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.

Our 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. Our 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 directors. As a result, shareholders who have large
holdings of our common stock



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may be able to control the election of members of our Board of Directors, 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 of Directors 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.

In the event of a change in control of our company, the vesting of all options granted pursuant to our 1995 Long Term Incentive
Plan, 1995 Director Option Plan, 2002 Stock Option Plan, 2006 Stock Option Plan, 2006 Director Plan and other agreements accelerate immediately prior to such change in control. At December 31, 2007, approximately 1,622,000 shares are issuable
upon the exercise of vested options and approximately 2,003,000 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 1B. | Unresolved Staff Comments.
|-------- | --------------------------

None.



|Item 2. | Properties.
|------- | -----------

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 5,000 square feet of space adjacent to this facility for customer service, research and development and warehousing at approximately $3,500 per month. The facility owned by us in
West Berlin is encumbered by a mortgage securing our outstanding debt.

We are in the process of closing both our French sales office and
UK distributor support office. We believe that we can effectively support all of our international activities from our New Jersey headquarters. As a result, we have established a reserve to cover the costs to terminate the leases and close the
offices.

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.
|------- | ------------------

During the second quarter of
2005, the Company received an Administrative Subpoena from the Bureau of Industry and Security of the United States Department of Commerce (the Department of Commerce) seeking production of records and documents relating to the sale
and/or export of the Companys products to Iran and Syria. In the third quarter of 2005, the Company was informed that the United States Attorneys Office for the District of New Jersey had commenced a criminal investigation into the same
matter. In March 2006, the United States Attorneys Office informed the Company that it will not prosecute the Company in connection with this matter.

In a letter dated August 16, 2005, the Company was informed by the Securities and Exchange Commission (the SEC) that it was conducting a confidential, informal inquiry to determine whether there have
been violations of certain provisions of the federal securities laws in connection with the Companys financial and accounting reporting, including relating to disclosures the Company made in its Form 8-K filed with the Commission on
August 12, 2005 regarding ongoing government investigations of sales by the Company of its products to Iran.

Based on the
Companys investigation of these matters, management believes that a limited number of the Companys heart monitor systems were distributed to medical facilities in Iran in prior periods without United States governmental authorization. We
believe the aggregate revenues generated by these transactions were not material to the Companys cumulative financial results during the period in which such transactions occurred, and the Company has taken steps to



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implement certain control procedures designed to prevent the Companys products or services from being provided to any foreign countries in violation of
applicable law.

The fact that certain of the Companys heart monitor systems were distributed to medical facilities in Iran without
United States government authorization was voluntarily disclosed by the Company in 2003 to the Department of Commerce and to the Office of Foreign Assets Control of the United States Treasury Department. The federal government investigated the
accuracy and completeness of those voluntary disclosures.

Separately, the Audit Committee of the Companys Board of Directors
conducted an independent investigation into these matters and retained outside counsel to assist it. In the third quarter of 2005, the Company incurred approximately $911,000 in legal, consulting and accounting expenses associated with the
governmental and Audit Committee investigations. Additional costs were incurred for the SECs inquiry, additional document review, additional interviews and the termination of Reinhard Schmidt, our former President, Chief Executive Officer and
Chief Operating Officer. In the fourth quarter of 2005, the Company incurred $474,000 in legal consulting and accounting expenses associated with the governmental and Audit Committee investigations and $45,000 associated with the Companys
defense and negotiations with the government.

On October 9, 2005, the Board of Directors of the Company terminated Reinhard
Schmidts employment as its President, Chief Executive Officer and Chief Operating Officer for cause. Mr. Schmidts termination resulted from his certification and authorization of statements to the Department of Commerce, some of
which the Audit Committee has determined in its independent investigation to have been inaccurate or incomplete. Mr. Schmidts termination was not a result of the discovery of any financial or accounting irregularity by the investigation.
Pursuant to Mr. Schmidts employment agreement, his position as a director of the Company ceased upon the termination of his employment.

In the fourth quarter of 2005, we terminated our agreements with our Armenian and German distributors. The German distributor contested the termination, which was settled with no cash payment to the ex-distributor.

For the year ended December 31, 2006, the Company incurred approximately $210,000 in connection with negotiations with various governmental
entities.

On July 20, 2006, the Company received a proposed charging letter stating that the Department of Commerce had reason to
believe that the Company violated export control regulations arising out of sales between October 1999 and January 2004 of cardiac equipment to end-users in Iran without the required U.S. Government authorization, and that the disclosures made by
the Company and certified by Reinhard Schmidt, then the Companys Chief Executive Officer, regarding these transactions in October and November 2003 were false and misleading. In November 2006, the Company signed an agreement to settle this
matter with the Department of Commerce prior to the issuance of a formal charging letter. Under the settlement agreement, the Company paid $244,000 to settle and was not subject to any restrictions on commercial or export activities thereafter.

In February, 2007, the Company signed an agreement to settle this matter with the Department of Treasury which required the payment of
$33,000. Additionally, the Company agreed to conduct certain compliance and internal audit procedures for three years.

We cannot assure
that the ongoing informal inquiry by the SEC will not result in other significant costs, fines or penalties that could, in the aggregate, have a material adverse effect on our business, financial condition, prospects or results of operations. The
Company has made no provision for any future costs associated with the investigations or any costs associated with the Companys defense or negotiations with the SEC to resolve this final outstanding issue. We have not received any
communication from the SEC regarding this informal inquiry since February, 2006.



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

There were no matters submitted to a vote of security holders during the fourth quarter of the 2007 fiscal year.



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PART II



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

Market Information

Our common stock is listed and traded on the NASDAQ Capital Market.

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



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|Period         |  | High |      | Low
|2007           |  |      |      |     |   |     
|First Quarter  |  | $    | 1.80 |     | $ | 1.32
|Second Quarter |  | $    | 2.16 |     | $ | 1.60
|Third Quarter  |  | $    | 1.90 |     | $ | 1.31
|Fourth Quarter |  | $    | 2.28 |     | $ | 1.72
|               |  |     
|2006           |  |      |      |     |   |     
|First Quarter  |  | $    | 2.87 |     | $ | 2.43
|Second Quarter |  | $    | 2.72 |     | $ | 1.72
|Third Quarter  |  | $    | 1.80 |     | $ | 1.29
|Fourth Quarter |  | $    | 1.66 |     | $ | 1.12
|               |  |     
|2005           |  |      |      |     |   |     
|First Quarter  |  | $    | 3.82 |     | $ | 2.99
|Second Quarter |  | $    | 3.30 |     | $ | 2.49
|Third Quarter  |  | $    | 3.62 |     | $ | 2.60
|Fourth Quarter |  | $    | 3.04 |     | $ | 2.28

Holders

As of March 28, 2008, there were approximately 57 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 1,000.

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.



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Stock Performance Graph

The following line graph and table compare, for the five most recently concluded fiscal years, the yearly percentage change in the cumulative total stockholder return, assuming reinvestment of dividends, on the
Companys common stock with the cumulative total return of companies on the NASDAQ Stock Market and an index comprised of certain companies in similar service industries (the Selected Peer Group Index).

LOGO

COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE

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



|                     |  |                    |  |            |  |            |  |            |  |            |  |           
|-------------------- |  | ------------------ |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | ----------
|                     |  | FISCAL YEAR ENDING
|COMPANY/INDEX/MARKET |  | 12/31/2002         |  | 12/31/2003 |  | 12/31/2004 |  | 12/30/2005 |  | 12/29/2006 |  | 12/31/2007
|EP MedSystems Inc    |  | 100.00             |  | 121.60     |  | 150.00     |  | 116.40     |  | 53.60      |  | 83.20     
|Russell 3000 Index   |  | 100.00             |  | 128.74     |  | 141.71     |  | 147.77     |  | 168.16     |  | 179.59    
|NASDAQ Market Index  |  | 100.00             |  | 150.36     |  | 163.00     |  | 166.58     |  | 183.68     |  | 201.91    



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Equity Compensation Plan Information

The following table sets forth, as of December 31, 2007, 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:



|                                                               |  |                                                                                           |  |                                                                           |      |                                                                                                                                       |          
|-------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                                  |  | Number of Securities to beIssued Upon Exercise ofOutstanding Options,Warrants, and
Rights |  | Weighted-AverageExercise Price
ofOutstanding Options,Warrants, and Rights |      | Number of SecuritiesRemaining Available forFuture Issuance
UnderEquity compensation Plans(Excluding SecuritiesReflected in column (a)
|                                                               |  | (a)                                                                                       |  | (b)                                                                       |      | (c)                                                                                                                                  
|Equity compensation plans approved by security holders (1)     |  | 2,611,658                                                                                 |  | $                                                                         | 2.28 |                                                                                                                                       | 1,547,000
|Equity compensation plans not approved by security holders (2) |  | 1,015,000                                                                                 |  | $                                                                         | 1.81 |                                                                                                                                       |         
|                                                               |  |                                                                                           |  |                                                                           |      |                                                                                                                                       |          
|Total                                                          |  | 3,624,658                                                                                 |  | $                                                                         | 2.15 |                                                                                                                                       | 1,547,000
|                                                               |  |                                                                                           |  |                                                                           |      |                                                                                                                                       |          



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

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

Sales of Unregistered Securities

On November 6, 2007, we granted C. Bryan Byrd, our Vice President, Engineering and Manufacturing, an incentive stock option to purchase 150,000
shares of common stock pursuant to the 2006 Stock Option Plan at an exercise price of $2.19 per share. The options vest over 5 years, subject to acceleration upon a change of control (as defined) of our company, and have a term of 10 years.

On September 13, 2007, in connection with his continued service to the Board of Directors, we granted Richard Williams an incentive
stock option to purchase 60,000 shares of common stock pursuant to the 2006 Director Plan at an exercise price of $1.54. The options vest monthly at a rate of 1,000 per month subject to acceleration upon change of control (as defined) of our
company and have a term of 10 years.

On July 17, 2007, in connection with his continued service on the Board of Directors, we granted
David Jenkins a Non-plan stock option to purchase 60,000 shares of common stock at an exercise price of $1.77. The options vest monthly at a rate of 1,000 per month subject to acceleration upon change of control (as defined) of our company and
have a term of 10 years.

On May 14, 2007, in connection with continued service on the Board of Directors, we granted Abhijeet Lele an
incentive stock option to purchase 60,000 shares of common stock pursuant to the 2006 Director Plan at an exercise price of $1.83. The options vest monthly at a rate of 1,000 per month subject to acceleration upon change of control (as defined)
of our company and have a term of 10 years.

On April 17, 2007, we granted James J. Caruso, our Chief Financial Officer, an incentive
stock option to purchase 100,000 shares of common stock pursuant to the 2006 Stock Option Plan at an exercise price of $2.07 per share. The options vest at a rate of 25% after 60 days from hiring and 25% per year on the anniversary date,
subject to acceleration upon a change of control (as defined) of our company, and have a term of 10 years.

Also on April 17, 2007, we
granted James J. Caruso, our Chief Financial Officer, an incentive stock option to purchase 50,000 shares of common stock pursuant to the 2006 Stock Option Plan at an exercise price of $2.07 per share. The options vest upon achievement of certain
2007 performance criteria as determined by the Chief Executive Officer and have a term of 10 years. On February 26, 2008, options to purchase 15,000 shares vested and 35,000 were cancelled.

On January 7, 2007, in connection with his appointment to the Board of Directors, we granted Gerard Michel an incentive stock option to purchase
60,000 shares of common stock pursuant to the 2006 Director Plan at an exercise price of $1.43. The options vest monthly at a rate of 1,000 per month subject to acceleration upon change of control (as defined) of our company and have a term of
10 years.

On August 16, 2006, upon the start of his employment as our President and CEO, we granted David I. Bruce the following
options:



|                  |  |                 |  |                   |  |               
|----------------- |  | --------------- |  | ----------------- |  | --------------
|Plan              |  | Date            |  | Number of Options |  | Exercise Price
|2002 Plan         |  | August 16, 2006 |  | 50,000            |  | $1.44         
|2006 Plan         |  | August 16, 2006 |  | 250,000           |  | $1.44         
|Nonqualified plan |  | August 16, 2006 |  | 500,000           |  | $1.44         

The options vest over 5 years, subject to acceleration upon a change of control (as defined) of our company, and
have a term of 10 years.

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

On March 27, 2006, we completed a $10,000,000 private placement of our common stock to a number of accredited investors. We issued 3.78 million
shares of our common stock at a purchase price of $2.25 per share. In addition, FatBoy Capital, LP purchased approximately 617,000 shares of common stock at a price of $2.43 per share in accordance with NASDAQ marketplace rules. David Jenkins, our
Chairman is a managing member of FatBoy Capitals general partner.



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All other information required by this Item 5 may be found under the sections captioned
Executive Compensation and Related Matters in our Proxy Statement for our Annual Meeting of Stockholders which is expected to be mailed to shareholders on or around April 30, 2008, which is incorporated herein by
reference.



|Item 6. | Selected Financial Data.
|------- | ------------------------

The information below was derived from
our Consolidated Financial Statements included in this report and in reports we have previously filed with the Commission. This information should be read together with those financial statements and the Notes to the Consolidated Financial
Statements. For more information regarding this financial data, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations section also included in this report.

Statement of Operations Data:



|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|--------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                              |  | Year ended December 31,                  |       
|                                              |  | 2007                                     |        |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003 |       
|                                              |  | (In thousands, except share information) |       
|Revenues:                                     |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net sales                                     |  | $                                        | 18,852 |   |      | $ | 15,558 |      |  | $ | 16,669 |   |  | $    | 16,368 |   |  | $ | 10,003 |  
|Cost of revenues:                             |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Cost of products sold                         |  |                                          | 7,421  |   |      |   | 6,125  |      |  |   | 6,420  |   |  |      | 6,663  |   |  |   | 4,763  |  
|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Gross Profit                                  |  |                                          | 11,431 |   |      |   | 9,433  |      |  |   | 10,249 |   |  |      | 9,705  |   |  |   | 5,240  |  
|Sales and marketing expenses                  |  |                                          | 10,179 |   |      |   | 9,683  |      |  |   | 8,485  |   |  |      | 8,346  |   |  |   | 5,563  |  
|Research and development expenses             |  |                                          | 3,131  |   |      |   | 2,738  |      |  |   | 2,374  |   |  |      | 2,470  |   |  |   | 2,566  |  
|General and administrative expenses           |  |                                          | 3,652  |   |      |   | 3,737  |      |  |   | 5,397  |   |  |      | 3,034  |   |  |   | 2,566  |  
|Mortgage conversion expense                   |  |                                          |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | 222    |  
|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loss from operations                          |  |                                          | (5,531 | ) |      |   | (6,725 | )    |  |   | (6,007 | ) |  |      | (4,145 | ) |  |   | (5,677 | )
|Interest expense                              |  |                                          | (256   | ) |      |   | (258   | )    |  |   | (256   | ) |  |      | (210   | ) |  |   | (485   | )
|Debt conversion interest expense              |  |                                          |       |   |      |   |       |      |  |   |       |   |  |      | (582   | ) |  |   | (1,000 | )
|Change in valuation of warrants               |  |                                          |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | (211   | )
|Interest and other income                     |  |                                          | 292    |   |      |   | 419    |      |  |   | 200    |   |  |      | 66     |   |  |   | 26     |  
|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Loss before income tax benefit                |  |                                          | (5,495 | ) |      |   | (6,564 | )    |  |   | (6,063 | ) |  |      | (4,871 | ) |  |   | (7,347 | )
|Income tax benefit                            |  |                                          |       |   |      |   | 87     |      |  |   | 290    |   |  |      | 461    |   |  |   | 398    |  
|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net loss                                      |  | $                                        | (5,495 | ) |      | $ | (6,477 | )    |  | $ | (5,773 | ) |  | $    | (4,410 | ) |  | $ | (6,949 | )
|Basic and diluted loss per share              |  | $                                        | (.18   | ) |      | $ | (.22   | )    |  | $ | (.22   | ) |  | $    | (.19   | ) |  | $ | (.38   | )
|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Weighted average number of shares outstanding |  |                                          | 30,390 |   |      |   | 29,330 |      |  |   | 25,802 |   |  |      | 23,515 |   |  |   | 18,378 |  
|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                              | 
|                                              |  | December 31,                             |       
|                                              |  | 2007                                     |        |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003 |       
|                                              |  | (In thousands)                           |       
|Balance Sheet Data (at end of period):        |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Working capital                               |  | $                                        | 6,057  |   |      | $ | 12,033 |      |  | $ | 7,758  |   |  | $    | 12,756 |   |  | $ | 12,543 |  
|Intangible assets, net                        |  | $                                        | 444    |   |      | $ | 529    |      |  | $ | 532    |   |  | $    | 500    |   |  | $ | 355    |  
|Total assets                                  |  | $                                        | 14,627 |   |      | $ | 18,311 |      |  | $ | 15,131 |   |  | $    | 20,003 |   |  | $ | 21,661 |  
|Long-term debt, including current maturities  |  | $                                        | 1,999  |   |      | $ | 1,990  |      |  | $ | 1,980  |   |  | $    | 1,959  |   |  | $ | 5,647  |  
|Stockholders equity                          |  | $                                        | 7,556  |   |      | $ | 12,189 |      |  | $ | 8,353  |   |  | $    | 13,351 |   |  | $ | 11,626 |  
|                                              |  |                                          |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  



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

Except for historical information, the following Managements Discussion and Analysis contains forward-looking statements based upon current
expectations that involve certain risks and uncertainties. Forward-looking statements include the words plans, expects, aims, believes, projects, anticipates,
intends, will, should, could and other expressions that indicate future events and trends. These forward-looking statements generally relate to plans and objectives for future operations and are based
upon managements estimates of future results or trends. Although we believe that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved. 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 of this annual report entitled Item 7. Risk
Factors. Please see the statements contained under the Section entitled Cautionary Statement Regarding Forward-Looking Statements above.

Summary

We were incorporated in January 1993 and operate in a single
industry segment. We develop, manufacture and market a line of products for use in the cardiac rhythm management or electrophysiology (EP) market which are used for visualization, diagnosis and treatment of cardiac rhythm disorders. The
Companys EP product line includes the EP-WorkMate® computerized electrophysiology workstation, with options to incorporate our EP-4 Computerized Cardiac Stimulator, our
NurseMate Remote Review Charting Station, and products linking our systems to hospital IT networks. We also sell products linking our EP WorkMate® system to products of market
leaders, such as our MapMate® Navigation Interface with Biosense Websters CARTO mapping navigation system, Philips Medical Systems Allura x-ray system and with other
technologies and systems.

The EP-WorkMate® system is a computerized electrophysiology workstation that monitors displays and stores cardiac electrical activity and arrhythmia data. It 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 Stimulator, as well as with the systems of other market leaders and with other technologies and systems. In the fourth quarter of 2006,
we received market clearance from the United States Food and Drug Administration (FDA) to sell the MapMate interface in the United States. The MapMate® integrates J & Js Biosense Webster Divisions CARTO Mapping navigation system, allowing EP studies to be more efficient and user friendly. The EP-4 Stimulator is a
computerized signal generator and processor which, when integrated with the EP-WorkMate® system, is used to stimulate the heart with electrical impulses in order to locate arrhythmia. The
NurseMate Remote Review Charting Station is an integrated monitoring and review station that allows a separate EP WorkMate® user to review and edit patient study data. We believe that
the EP-WorkMate® system, when integrated with the EP-4 Stimulator, offers the most advanced diagnostic computer system available to the electrophysiology market. The EP-WorkMate® platform accounted for approximately 85%, 86% and 85% of our total sales for the years ended December 31, 2007, 2006 and 2005, respectively.

We have developed an intracardiac echo (ultrasound or ICE) ultrasound catheter system, comprised
of our ViewFlex® intracardiac imaging catheters and ViewMate® II ultrasound imaging console. These products offer
high-resolution, real-time ultrasound imaging capability designed to improve a physicians or clinicians ability to visualize anatomy and devices inside the chambers of the heart. We believe the ViewFlex® catheters and ViewMate® II Ultrasound systems will play an important role for a broad range of potential applications in electrophysiology and
interventional cardiology. Sales of the ViewFlex® catheters and related ViewMate® II systems accounted for approximately 11%, 8%
and 9% of our total sales for the years ended December 31, 2007, 2006 and 2005, respectively. In April, 2007, we launched for sale the new ViewMate® II ultrasound system based on
Philips Medical Systems HDII XE platform. Philips acts as an original equipment manufacturer for the product to be sold under our proprietary name ViewMate® II. As part of the joint
development and distribution agreement, we have exclusive rights to sell this platform in hospital electrophysiology (EP) and cardiac catheterization labs, and Philips may offer the ICE option to its customers in cardiac ultrasound and
other hospital departments on the HDII XE ultrasound system, providing additional platforms capable of using our ViewFlex® catheters.

We also market a product for the treatment of atrial fibrillation known as the ALERT® 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. Sales of the ALERT® System and related catheters accounted for approximately 3%, 4% and 4% of our total sales for the years ended December 31, 2007, 2006 and 2005,
respectively.

We obtained Class III Design Examination Certification from a
European Notified Body allowing us to label the ALERT® System with a CE Mark, which permits us to sell the ALERT® System in the
European Community. During the fourth quarter of 2007, we began a process to identify strategic alternatives for our ALERT Catheter product line. We believe that the ALERT System represents a desirable product line for a strategic buyer and we are
working to identify such a buyer and to complete a divestiture of the product line.

Net sales in 2007 increased by 21% to $18.9 million compared to 2006 led by increased sales of our EP WorkMate® platform with new integrated NurseMate and MapMate® product features. Also, intracardiac ultrasound revenue grew by 59% to $2.0 million compared to fiscal 2006.

The Companys net loss was $5.5 million, or $.18 per share, for fiscal 2007 as compared to $6.5 million or $0.22 per share, for the full year in 2006.

In the fourth quarter of 2007, we recorded a business realignment charge of $1.3 million, or $.04 per share, $940,000 of which were non-cash items, in
connection with a realignment of our business and products. We undertook this realignment to focus on our key growth and value opportunities and to re-deploy our financial and human resources to capitalize on them



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while eliminating several low growth, low value products. The charges included (a) $610,000 or $0.02 per share related to write down of inventory
related to discontinued products; (b) $219,000 or $0.01 per share related to inventory impairments for products deemed slow moving due to new product launches; (c) $339,000 or $0.01 per share related to staff adjustments and closing down
of certain international offices and activities; and (d) $114,000 or $0.00 per share related to completion of clinical study and including write-off of clinical study supplies and equipment.

Our net cash used in operations during 2007 was $2.0 million, as compared to $6.6 million in 2006. This improvement was primarily due to higher sales,
improved working capital management, a lower net loss and a number of non-cash charges incurred in connection with our business realignment. At December 31, 2007, we had approximately $5.6 million of cash on hand.

On February 28, 2008, we closed on a $3 million loan facility as more fully described below. The facility is made up of a $1.5 million asset based
revolving credit line and a $1.5 million term loan, each with a three year term and each is secured by of our assets. We used the proceeds from the loan to pay off our $2.0 million convertible debt which matured on February 28, 2008.

Recently Issued Accounting Pronouncements

Information
regarding new accounting pronouncements is included in Note 13 to the Consolidated Financial Statements.

Critical Accounting Policies and Estimates

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 Commission 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 include 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 requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Judgments and assessments of uncertainties are required in applying the Companys accounting policies in the valuation of accounts
receivable, valuation of inventory, valuation of goodwill intangibles, and other long-term assets, income taxes and share-based compensation. The Company bases its judgments and estimates on historical experience and other assumptions that it
believes are reasonable. 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 us and 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® system does require a set up. For distributors, the 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, while the customer can perform the set-up on its own, our personnel generally will assist customers in this process. The set-up process, which takes approximately 1-2 hours to complete, is usually
performed shortly after shipment and primarily consists of assembling the workstation cart and plugging in the monitors, printer, isolation transformer, and the EP-4 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 to 60 days after shipment. For direct sales, payment terms are agreed in advance of the sale with the
balance due 30 to 60 days after shipment.



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We provide a standard one-year warranty on all of our products. At the time of sale, we accrue the
estimated cost of providing the warranty. The estimates of the future costs are based on historical data.

We also sell various types of
extended 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, changes in the financial condition of our customers, and any specific customer collection issues
that we have identified. In addition, due to the significant average selling price of our equipment, any single write-off of a customer balance could be substantial. We may request letters of credit from our customers when we believe that there is a
significant risk of credit loss. Our allowance for doubtful accounts was $107,000 and $308,000 at December 31, 2007 and 2006 respectively. During 2007, we recovered a previously written off accounts receivable of approximately $100,000 and
recorded a reduction in our bad debt expense. 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. Additional
reserves are sometimes established as a result of lack of marketability or changes in customer consumption patterns. Managements judgment is necessary in determining the realizable value of those products to arrive at the proper obsolescence
reserve. These reserves are estimates, which could change significantly, either favorably or unfavorably, depending on market and competitive conditions.

During 2007, we recorded a business realignment charge of $1.3 million, or $.04 per share, approximately $830,000 of which were non-cash inventory adjustments, in connection with a realignment of our business and
products. We undertook this realignment to focus on our key growth and value opportunities and to re-deploy our financial and human resources to capitalize on them while eliminating several low growth, low value products. The charges included
(a) $610,000 or $0.02 per share related to write down of inventory related to discontinued products and; (b) $219,000 or $0.01 per share related to inventory impairments for products deemed slow moving due to new product launches.

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

At December 31, 2007, we had net goodwill of $342,000 which 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. Goodwill is tested for impairment annually or more
frequently if changes in circumstance or the occurrence of events suggest impairment exists. There was no impairment loss recorded in 2007 or 2006.

At December 31, 2007, we had net unamortized patent costs of $102,000 which are amortized over a three year useful life. We assess the impairment of these assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable.

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. We have fully reserved our net deferred tax asset given our past history
of operating losses.

Accounting for Stock-Based Compensation.

In periods prior to 2006, we had 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.



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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 $754,000 for the year ended December 31, 2005.

On December 16, 2004 the Financial Accounting Standards Board (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 was effective beginning in the
first fiscal year beginning after June 15, 2005. We adopted this new standard effective for the first quarter of 2006.

We used the
modified prospective method and therefore did not restate prior period results. Under the modified prospective method, awards granted, modified, or settled after the date of adoption should be measured and accounted for in accordance
with SFAS No. 123R. Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123 except that amounts must be recognized in the consolidated statements of income.
We have not accelerated or modified the existing stock option plans to eliminate the recording of stock option expense as required by SFAS No. 123R.

The unrecognized compensation expense associated with unvested stock options was approximately $2,676,000 as of December 31, 2007, which will be amortized over an average period of approximately 5 years. Our 2007
fiscal results included approximately $915,000 of pre-tax compensation expense as a result of the adoption of SFAS No. 123R. It is anticipated that the 2008 compensation expense will be approximately $1 million.

Results of Operations.

Revenues and Gross Margin on Product
Revenues

Our revenues and gross margin on product revenues were as follows:



|                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                        |  | FOR THE 12 MONTH PERIOD |           
|                                                        |  | 2007                    |            |   | 2006 |   |            | 2005 | 
|EP-WorkMate® platform                                   |  | $                       | 16,062,000 |   |      | $ | 13,383,000 |      |  | $ | 14,161,000 |  
|ViewFlexTMcatheters and ViewMate® II ultrasound systems |  |                         | 1,974,000  |   |      |   | 1,244,000  |      |  |   | 1,543,000  |  
|ALERT® System, EP catheters and other                   |  |                         | 816,000    |   |      |   | 931,000    |      |  |   | 965,000    |  
|                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Total revenue                                           |  | $                       | 18,852,000 |   |      | $ | 15,558,000 |      |  | $ | 16,669,000 |  
|                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Cost of products sold                                   |  |                         | 7,421,000  |   |      |   | 6,125,000  |      |  |   | 6,420,000  |  
|Gross profit                                            |  | $                       | 11,431,000 |   |      | $ | 9,433,000  |      |  | $ | 10,249,000 |  
|                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|Gross profit as a percentage of total revenue           |  |                         | 61         | % |      |   | 61         | %    |  |   | 61         | %
|                                                        |  |                         |            |   |      |   |            |      |  |   |            |  

TWELVE MONTHS ENDED DECEMBER 31, 2007 AS COMPARED TO THE TWELVE MONTHS ENDED DECEMBER 31, 2006

Revenues and Gross Margin

The Company had net sales of $18,852,000 for the year ended December 31, 2007, as compared to
$15,558,000 for the year ended December 31, 2006. This $3,294,000 (or 21%) increase was primarily due to increased sales of our EP-WorkMate® platform and new integrated NurseMate
and MapMate® product features. We also had higher sales of EP-4 Stimulators and other EP-WorkMate® warranties, upgrades and
peripheral products as compared to the same period in 2006. Sales of ultrasound products increased by 59% to $1,974,000 for the year ended December 31, 2007 as compared to 2006 due to the introduction of the ViewMate® II ultrasound system based on Philips Medical Systems HDII XE platform in April, 2007. Total domestic sales increased by approximately 28% in 2007 versus 2006 largely as a result of increased



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sales activity of the EP-WorkMate® platform as well as increased sales of our ultrasound
products. Total international sales increased by 3% to $4,500,000 during the year ended December 31, 2007 but decreased as a percentage of total sales from 28% to 24%.

Gross profit on sales for year ended December 31, 2007 was $11,431,000, an increase of 21% as
compared with $9,433,000 in 2006. Gross profit as a percentage of sales remained flat year-to-year at 61%. Adversely affecting gross margin in 2007 was approximately $829,000 in costs charged to cost of sales associated with the business realignment
program. Offsetting this impact were increases in gross margins attributed to several factors including an increase in our average selling price for the EP WorkMate® and EP-4
Stimulator and the introduction of new product features which are integrated into our existing EP-WorkMate® platform. In addition, 2007 included a higher percentage of domestic sales, which
have a higher gross margin than international sales as international sales are typically made through an independent distributor.

Business Realignment
Expenses

During 2007, we recorded a business realignment charge of $1.3 million, or $.04 per share, $943,000 of which were non-cash
items, in connection with a realignment of our business and products. We undertook this realignment to focus on our key growth and value opportunities and to re-deploy our financial and human resources to capitalize on them while eliminating several
low growth, low value products.

The charges included (a) $610,000 related to write down of inventory related to discontinued
products; (b) $219,000 related to inventory impairments for products deemed slow moving due to new product launches; (c) $339,000 related to staff adjustments, lease termination and other costs of closing down of our international offices;
and (d) $114,000 related to completion of clinical study and including write-off of clinical study supplies and equipment.

The
charges are reflected on the income statement as follows: (a) $829,000 charged to cost of sales; (b) $315,000 charged to sales and marketing expenses; and (c) $138,000 charged to general and administrative expenses.

Operating Expenses

The following is a summary of other operating
expenses in dollars and as a percent of total revenue for the twelve months ending December 31,



|                           |  |      |            |         |      |   |     |      |            |  |     |     |  |         |            |  |    |  
|-------------------------- |  | ---- | ---------- | ------- | ---- | - | --- | ---- | ---------- |  | --- | --- |  | ------- | ---------- |  | -- | -
|                           |  | 2007 |            |         | 2006 |   |     | 2005 |           
|                           |  | ($)  |            | % ofRev |      |   | ($) |      | % ofRev    |  |     | ($) |  | % ofRev |           
|Sales and marketing        |  | $    | 10,179,000 |         | 54   | % |     | $    | 9,683,000  |  | 62  | %   |  | $       | 8,485,000  |  | 51 | %
|General and administrative |  |      | 3,652,000  |         | 19   | % |     |      | 3,737,000  |  | 24  | %   |  |         | 5,397,000  |  | 32 | %
|Research and development   |  |      | 3,131,000  |         | 17   | % |     |      | 2,738,000  |  | 18  | %   |  |         | 2,374,000  |  | 14 | %
|                           |  |      |            |         |      |   |     |      |            |  |     |     |  |         |            |  |    |  
|Total operating expenses   |  | $    | 16,962,000 |         | 90   | % |     | $    | 16,158,000 |  | 104 | %   |  | $       | 16,256,000 |  | 98 | %

Total operating expenses (consisting of selling, general and administrative expenses and research
and development costs) for the year ended December 31, 2007 were $16,962,000 or 90% of total sales as compared to $16,158,000 or 104% of total sales during 2006.

Sales and marketing expenses increased by $496,000, or 5%, to $10,179,000 for the year ended
December 31, 2007 as compared to 2006. During 2007, sales and marketing expenses were 54% of net sales as compared to 62% in 2006. The improvement in selling expenses as a percentage of net sales is the result of increased sales and reduced
expenses, particularly in our clinical affairs activities where costs decreased by $837,000 during 2007 as we completed activities related to our ICE CHIP study. We are not pursuing additional clinical studies at this time. Improved cash collections
coupled with a recovery of a previously written off accounts receivable of approximately $100,000 resulted in a reduction in our bad debt expense in 2007. These cost decreases were offset by increases of approximately $974,000 in compensation,
benefits and travel costs for additional headcount and other sales activities, including costs attributable to the staffing of our dedicated ICE sales force and increased commission paid on higher sales of our EP WorkMate® platform. As a part of our business realignment in 2007, we recorded sales and marketing expenses of approximately $201,000 to close down our French sales office and $114,000 of write-off of clinical study supplies
and equipment.

General and administrative expenses decreased by $84,000, or 2%, to $3,652,000 for 2007 as compared to 2006. During 2007,
G&A expenses were 19% of net sales as compared to 24% in 2006. The primary cause was the decrease in legal and other fees and expenses incurred in 2006 as a result of our investigations by the U.S. Department of Commerce and the U.S. Department
of the Treasury. The 2006 period also included $288,000 for fines and penalties related to the Commerce Department settlement. Additionally, 2006 included approximately $300,000 in expenses, including recruitment costs, related to hiring a new Chief
Executive Officer and stock option compensation expense for the prior interim CEO. As



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a part of our business realignment in 2007, we recorded general and administrative expenses of approximately $138,000 of employee termination and other costs
to close down of our UK distributor support office.

Research and development
expenses increased by $393,000, or 14% to $3,131,000 for the year ended December 31, 2007 as compared to 2006. During 2007, R&D expenses were 17% of net sales as compared to 18% in 2006. The primary cause of the increased spending was
ongoing investments in our intracardiac echo ultrasound catheter system. We also continue to invest in our EP Workmate® platform, including new and improved features. We expect the level of
future research and development spending to increase in total dollars, and to remain relatively stable as a percentage of net sales, as we continue to undertake projects to develop new products and make improvements to existing ones.

Non-Operating Income and Expenses

The following is a summary of
non-operating income and expenses:



|                          |  |                         |         |      |   |         |  |   |        
|------------------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|                          |  | FOR THE 12 MONTH PERIOD
|                          |  | 2007                    |         | 2006 |   | 2005   
|Interest and other income |  | $                       | 292,000 |      | $ | 420,000 |  | $ | 201,000
|Interest expense          |  | $                       | 255,000 |      | $ | 258,000 |  | $ | 256,000

Interest and other income decreased by $128,000 or 30% to $292,000 for the year ended
December 31, 2007 as compared to 2006. The Company completed a private placement in March, 2006 which led to higher interest income commencing in the second quarter of 2006. Interest income has declined as the Companys overall cash
balance has declined.

Interest expense decreased $3,000 or 1% to $255,000 for the year ended December 31, 2007, as compared to 2006.
The interest is primarily related to the Companys $2,000,000 secured convertible debt.

TWELVE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THE
TWELVE MONTHS ENDED DECEMBER 31, 2005

We had net sales of $15,558,000 for
the year ended December 31, 2006, as compared to $16,669,000 for the year ended December 31, 2006. This $1,111,000 (or 6.7%) decrease was primarily due to lower sales of our EP-WorkMate® system with Boston Scientific Corporations RPM Navigation system which has become less competitive due to a lack of support from Boston Scientific for this product line. We realized higher sales of our EP-WorkMate® system product line, but we are not closing higher priced combination systems as we did in 2005. Our sales of consumable products were up 9% over the same period last year. Sales of ALERT
catheters were flat as we are not actively recruiting new placements. However, sales of ViewFlex® ultrasound catheters increased 23% over the same period in 2005. Sales in the United States
were down 13% over the same period in 2005. Sales in Asia were essentially unchanged year over year. Sales in Europe increased 32% due to strong sales in the last 9 months of the year by our distributors in the region and our representative in
France.

Gross profit on sales for the year ended December 31, 2006 was $9,433,000 as compared with $10,249,000 for the same period in
2005. Gross profit as a percentage of sales was relatively flat at 61%. Gross profit for the year ended December 31, 2006 was impacted by certain write-downs of inventory of approximately $411,000 as the Company assessed the market valuation
and obsolescence of certain items in inventory.

Sales and marketing expenses
increased $1,198,000 (or 14%) to $9,683,000 for the year ended December 31, 2006 as compared to the same period in 2005. Of this increase, our clinical affairs department accounted for approximately $296,000 of the increase in symposia costs,
share-based compensation for our senior medical advisor and clinical fees associated with the Companys ICE CHIP study. We completed phase I of the ICE CHIP study in July of 2006 and after data analysis we will determine whether to begin
enrollment in phase II in the middle of 2007, depending on the results. We are also in the initial phase of a second clinical trial to support additional applications of our ViewMate® II
cardiac ultrasound catheter system. We incurred an additional $500,000 in compensation costs of which $344,000 was share-based compensation associated with the adoption of FAS 123R. The balance of the compensation costs was for additional head
count. In connection with the increased headcount, we had $50,000 in additional travel costs as well.

General and administrative expenses
decreased $1,660,000 (or 31%) to $3,737,000 for the year ended December 31, 2006 as compared to the same period in 2005. The decrease in general and administrative expenses was due to a number of factors. There was a decrease in our legal costs
of $1,696,000 as a result of what we anticipate is the completion of a significant portion of the legal work associated with our receipt of the Administrative Subpoena and the investigation by the Department of Commerce and other governmental
entitles described more fully in Note 16 of the Consolidated Financial Statements included in this Annual Report on Form 10-K. We incurred approximately $1,430,000 of legal, consulting and accounting expenses in the third and fourth quarters of 2005
associated with our response to these governmental investigations. These expenses were primarily attributable to our Audit Committee investigation, our negotiations with the government and the termination of Reinhard Schmidt, our former President
and Chief Executive Officer. Although we are



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unable to estimate the amount of additional legal expenses we may be required to incur to resolve these governmental investigations and inquiries, we have
incurred approximately $210,000 of legal and other fees and expenses in connection with these matters for the year ended December 31, 2006. We believe that additional legal and other costs and expenses through the remainder of 2007 may be
significant as we work to resolve these matters and continue to implement control procedures designed to prevent our products or services from being provided to customers in any foreign countries in violation of applicable law. With respect to this
matter, we have signed a settlement agreement with the Department of Commerce and recorded an expense of $244,000 associated with the expected fines and penalties with no restrictions on commercial or export activities. Notwithstanding the agreement
as to settlement terms with the Commerce Department, the investigations by the U.S. Treasury Department and the Securities and Exchange Commission have not been closed, and could result in findings that we violated applicable law resulting in
additional civil, administrative or criminal fines or penalties. In November 2006, the Treasury Department has orally indicated to the Company the maximum penalty the Department would be seeking is $44,000 with no restrictions on commercial or
export activities. We have received a settlement agreement from Treasury, in which the penalty was $33,000. The agreement also had certain other requirements. The Company has executed the agreement, paid the fine and forwarded it to the Treasury.
This issue is deemed to be closed. We cannot assure you that the ongoing investigations by the Commission or the U.S. Treasury Department will not result in other significant costs, fines or penalties that could, in the aggregate, have a material
adverse effect on our business, financial condition, prospects or results of operations. The Company has made no provision for any future costs associated with these investigations or any costs associated with the Companys defense or
negotiations with the various governmental entities to resolve these outstanding issues.

Notwithstanding the penalties accrued, we had a
decrease in non-cash expenses of $568,000 as a result of fluctuations in foreign currency and a decrease of consulting fees of $129,000 associated with our planned compliance with Section 404 of Sarbanes-Oxley. In addition, there were lower
deferred financing fees associated with lower conversions of the Laurus Convertible Note. We had higher compensation costs of $588,000 primarily associated with share-based compensation costs of $460,000. There was a decrease of $143,000 in other
costs associated with the above mentioned investigations.

Research and development
expenses increased $364,000 (or 15%) to $2,738,000 for the year ended December 31, 2006 as compared to the same period in 2005. The increase was due to an increase of $260,000 in salaries, benefits and recruiter fees associated with additional
headcount in the research and development and quality departments, including $102,000 related to share-based compensation. There was also an increase in destructive testing costs of $77,000 associated with the ViewFlex catheter product. We believe these testing costs will continue into the second quarter of 2007 as we manage changes to the catheter to improve the supply. These costs were offset by a reduction in project costs.
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 $2,000 to $258,000 for the year ended December 31, 2006, as compared to the same period in 2005. This increase in interest expense is a result of higher interest rates in 2006 offset by
a decrease in the beneficial conversion feature and decrease in the accretion of debt discount as a result of the conversion of debt to equity related to the convertible note issued to Laurus. Interest and other income increased $219,000 to $420,000
primarily due to higher cash balances and higher interest rates.

Liquidity and Capital Resources

Since our incorporation in January 1993, our expenses have exceeded sales, resulting in an accumulated deficit of $60 million at December 31, 2007.
Our cash and cash equivalents were approximately $5.6 million and $7.7 million as of December 31, 2007 and 2006, respectively. Based upon our current operating plans and projections, we believe that our existing capital resources,
comprised of cash on hand and the remaining borrowing availability under the Keltic loan, will be sufficient to meet our anticipated capital needs through the end of December 2008 although there can be no assurance of this as this estimate is based
upon a number of assumptions, which may not hold true. Furthermore, our liquidity could be adversely affected by the factors affecting future operating results that are discussed in Item 1A. Risk Factors.

The Company may seek to raise funds to meet our long term capital needs through equity or debt financings, collaborative or other arrangements with third
parties or through other sources of financing. There can be no assurance that such funds will be available on terms favorable to the Company, if at all. Also, there can be no assurance, assuming we successfully raise additional funds, that we will
achieve positive cash flow. If we are not able to secure additional funding, we may be required to scale back our sales and marketing efforts, research and development programs and general and administrative activities and possibly seek to sell or
license rights to our products to third parties.

Financing Activities

On February 28, 2008, the Company entered into a $3 million secured loan agreement (the Keltic Loan Agreement) with Keltic Financial Partners L.P. (Keltic), which included (i) a
$1,500,000 revolving loan (the Revolving Loan), and (ii) a $1,500,000 term loan (the Term Loan). The loans are secured by a first lien on all of our assets, including intellectual



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property. We used proceeds of the loan to repay our $2 million secured convertible note which matured on February 28, 2008.

The Revolving Loan bears interest at the greater of: (a) the prime rate plus 1.75% or (b) eight percent (8.00%). The Term Loan bears interest
at the greater of: (a) the prime rate plus 2.00% or (b) eight and one-quarter percent (8.25%). The maturity date of the Revolving Loan is February 28, 2011. The Term Loan requires principal payments of $25,000 per month for thirty-six
(36) months followed by a balloon payment of $600,000 on February 28, 2011, unless the Keltic Loan Agreement is extended, in which case we will continue to pay $25,000 per month through February 28, 2013. On and after the occurrence
of an Event of Default (as defined in the Keltic Loan Agreement), all principal, interest and all other amounts due under the Term and Revolving Loans may be accelerated at the sole option of Keltic and the interest rate on the loans may be
increased three and one-half percent (3.5%) per annum.

We issued Keltic a warrant to purchase 25,000 shares of our Common Stock at
$2.50 per share exercisable for a five year period.

During 2007, we received $52,800 in proceeds from the exercise of employee stock
options.

On August 28, 2003, we entered into a secured Convertible Note with Laurus which provided us with a $4 million revolving
asset-based credit facility secured by our accounts receivable, inventory, real property and other assets, excluding intellectual property. The Laurus Note had an initial term of three years which was subsequently extended through February 28,
2008. On December 15, 2004, pursuant to the terms of the loan agreement, $2,000,000 of the principal amount was converted into 694,314 shares of our common stock at the conversion price of $2.88, and the fixed conversion price on the remaining
$2 million principal balance was adjusted upward to $4.20.

As part of the Laurus convertible note transaction, Laurus and a broker to the
transaction 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 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 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 Note contained a beneficial conversion feature calculated based on the difference between the effective conversion price of the proceeds allocated to the Laurus Note and the Warrants at
the date of issuance. The amount arising from the beneficial conversion feature aggregated approximately $486,000 which was amortized as interest expense from the date of the issuance of the Laurus Note to the mandatory redemption date of
August 28, 2006. We valued the Laurus 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 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 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.

During 2005, three options to purchase shares of our common stock were issued to a senior medical advisor in the amounts of 40,000, 40,000 and 100,000
shares of common stock respectively, on which the exercise price of the options was the fair market value of our common stock on the date of the grant. With respect to the two 40,000 option issuances, they vest in equal installments over three years
and we expensed $171,000 representing the fair value of the options measured using the Black-Scholes option pricing model for each grant as follows: risk free rate of 3.77% and 4.33%; 10 year life, and volatility percentage of 77.98% and 81.1%. The
issuance of an option in the amount of 100,000 shares of our common stock did not meet the criteria for expensing in 2005. In the first quarter of 2006, the consultants performance obligation in connection with these options was fulfilled and
we recorded an expense of $196,480, valued using the Black-Scholes option pricing model for each grant as follows: risk free rate of 4.82%, 10 year life, and volatility percentage of 84.23%.

On March 27, 2006, we completed a $10,000,000 private placement of common stock to a number of accredited investors. We issued 3.78 million
shares of its common stock at a purchase price of $2.25 per share. In addition, FatBoy Capital, LP purchased approximately 617,000 shares of common stock at a price of $2.43 per share in accordance with NASDAQ marketplace rules. David Jenkins, our
Chairman is a managing member of FatBoy Capital, LPs general partner.



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Operating Activities

Net cash used in operating activities for the year ended December 31, 2007 decreased by $4,622,000 to $2,001,000 from $6,623,000 as compared to 2006. The decrease in our net cash used for operations during 2007
was partly due to the decrease in our net loss by $982,000 to $5,495,000 in 2007 from $6,477,000 in 2006. Additionally, several non-cash charges impacted net cash used in operating activities including share based compensation of $915,000 and
$923,000 in 2007 and 2006 respectively; non-cash business realignment charges of $943,000, comprised of write down of inventory related to discontinued products, inventory impairments for products deemed slow moving due to new product launches and
completion of a clinical study and including write-off of clinical study supplies and equipment in 2007; and $1,096,000 and $761,000 in depreciation and amortization recorded during 2007 and 2006 respectively.

Net cash used in operations was also favorably impacted by efforts to manage working capital. Accounts receivables decreased by $495,000 despite
increased sales as we improved our collection efforts. Accounts payable increased by $153,000 and accrued expenses increased by $303,000 due to increased sales compensation and expenses and other activities arising from increased business activity
in 2007. Total deferred revenue increased by $484,000 as we sold more extended warranty contracts.

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, expansion of sales efforts, especially as we attempt to increase our
market share of our ultrasound product line. The amount and timing of future losses will depend upon, among other things, volume of sales of our existing products, market acceptance of the 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 or that material cost. Based upon our current plans and projections, we believe that our existing capital resources will be sufficient to meet our anticipated capital needs
through the end of the fourth quarter of 2008.

Investing Activities

Capital expenditures totaled $241,000 and $194,000 for the years ended December 31, 2007 and 2006 respectively. We do not consider our business activities to be heavily capital intensive and as a result, we do
not expect capital expenditures to increase materially in 2008.

Off-Balance Sheet Arrangements

As of December 31, 2007, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Summary of Contractual Obligations

The following
table summarizes our contractual cash obligations at December 31, 2007, 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
|Contractual Obligations                |  | Total                  |           | Less than1 year |   | 1-3 years |  | 4-5years |        | After5 years
|Long-Term Debt (1)                     |  | $                      | 2,000,000 |                 | $ | 2,000,000 |  | $        | 0      |              | $ | 0 |  | $ | 0
|Operating Lease Obligations            |  | $                      | 155,000   |                 | $ | 112,000   |  | $        | 43,000 |              | $ | 0 |  | $ | 0
|Other Long Term Obligations (2)        |  | $                      | 0         |                 | $ | 0         |  | $        | 0      |              | $ | 0 |  | $ | 0
|                                       |  |                        |           |                 |   |           |  |          |        |              |   |   |  |   |  
|Total Contractual Cash Obligations (3) |  | $                      | 2,155,000 |                 | $ | 2,112,000 |  | $        | 43,000 |              | $ | 0 |  | $ | 0
|                                       |  |                        |           |                 |   |           |  |          |        |              |   |   |  |   |  



|(1) | We are contractually obligated to pay variable interest on the Long-Term Debt, the principal of which comes due on February 28, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(2) | We also have contractual obligations for certain licensing contracts. We have signed a license agreement with Biosense
Webster that provides for a license payment on sales of MapMate® units. This license is payable upon sales of the units. We also have other license agreements which we may terminate
unilaterally in the event that the technology is no longer deemed relevant.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | On February 28, 2008, we entered into a $3 million secured loan agreement with Keltic which included (i) a $1,500,000 revolving loan (the Revolving Loan), and
(ii) a $1,500,000 term loan (the Term Loan). The loans are secured by a first lien on all of our assets, including intellectual property. We used proceeds of the loan to repay its $2 million secured convertible note which matured on
February 28, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Revolving Loan bears interest at the greater of: (a) the prime rate plus 1.75% or (b) eight
percent (8.00%). The Term Loan bears interest at the greater of: (a) the prime rate plus 2.00% or (b) eight and one-quarter percent (8.25%). The maturity date of the Revolving Loan is February 28, 2011. The Term Loan requires
principal payments of $25,000 per month for thirty-six (36) months followed by a balloon payment of $600,000 on February 28, 2011, unless the Keltic Loan Agreement is extended, in which case we will continue to pay $25,000 per month
through February 28, 2013. On and after the occurrence of an Event of Default (as defined in the Keltic Loan Agreement), all principal, interest and all other amounts due under the Term and Revolving Loans may be accelerated at the sole option
of Keltic and the interest rate on the loans may be increased three and one-half percent (3.5%) per annum.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk.
|-------- | -----------------------------------------------------------

We are exposed to a variety of risks, including changes in interest rates affecting our outstanding debt balance and fixed rate investments of our cash and cash equivalents and foreign currency fluctuations. We do not have any market risk
with respect to such factors as commodity prices or equity prices. We do not invest in, or otherwise use, foreign currency or other derivative financial or derivative commodity instruments, and we do not engage in hedging transactions for
speculative or trading or any other purposes.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our Keltic loan agreement and our cash and cash equivalents.

Since interest on the Keltic loan is variable, changes in the base rate may lead to additional interest expense if interest rates increase. In addition,
the interest rate on the note may be increased by 3.5% upon the occurrence of a default. Because management does not believe that our exposure to interest rate market risk is material at this time, we have not developed or implemented a strategy to
manage this market risk through the use of derivative financial instruments or otherwise. We will assess the significance of interest rate market risk from time to time and will develop and implement strategies to manage that market risk as
appropriate.

Our primary investment objective with respect to our cash and cash equivalents is to preserve principal. We accept lower
interest rates rather than expose our assets to significant risk. We invest our excess cash in overnight money markets funds held at a commercial bank. As of December 31, 2007, 100% of our investment portfolio matures less than 90 days from the
date of purchase. Due to the short-term nature of these investments, we believe that we are not subject to any material market risk exposure, and as a result, the estimated fair value of our cash and cash equivalents approximates their principal
amounts. If market interest rates were to increase immediately and uniformly by 10% from levels at December 31, 2007, we estimate that the fair value of investment portfolio would decline by an immaterial amount.

Foreign Currency Risk

Our
international revenues were 24%, 28% and 23% of our total revenues for the year ended December 31, 2007, 2006 and 2005, respectively. Our international sales are made through international distributors, our direct sales force and sales to
alliance partners, with payments to us typically denominated in United States dollars and the Euro. Management believes that the aggregate impact of foreign currency risk is minimal since approximately 96% of our sales are billed in United States
dollars. Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors. We do not hedge our foreign currency exposure.



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

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



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

Not applicable.



|Item 9A. | 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 Securities Exchange Act of 1934, as amended (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



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submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs 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.

Managements annual report on our internal control over financial reporting is provided on Page
F-2 on this Form 10-K and incorporated herein by reference.

During the fiscal year ended December 31, 2007, there were no changes in
our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



|Item 9B. | Other Information.
|-------- | ------------------

Not applicable.

PART III



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

All information required by this Item 10 may be found under the sections entitled Item 1: Certain Information Concerning Nominees and Continuing Directors, Certain Information Concerning Board Meetings and
Committees, Executive Compensation and Related Matters in our Proxy Statement, which is expected to be mailed to shareholders on or around April 30, 2008, which is incorporated herein by reference.



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

All information required
by this Item 11 is may be found under, in the sections entitled Executive Compensation, Board Compensation, Related Matters,  Report of the Compensation Committee, and Miscellaneous in
our Proxy Statement for our Annual Meeting of Stockholders which is expected to be mailed to shareholders on or around April 30, 2008, which is incorporated herein by reference.



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

All information required by this Item 12 may be found under the sections entitled Executive Compensation, Security Ownership of
Management and Certain Beneficial Owners and Miscellaneous in our Proxy Statement for our Annual Meeting of Stockholders which is expected to be mailed to shareholders on or around April 30, 2008, which is incorporated herein
by reference.



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

All information required by this Item 13 may be found under the section entitled Certain Relationships and Related Transactions in our Proxy Statement for our Annual Meeting of Stockholders which is
expected to be mailed to shareholders on or around April 30, 2008, which is incorporated herein by reference.



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

All
information required by this Item 14 may be found under the section entitled Audit and Other Fees Paid to Independent Auditors and Audit Committee Polices and Procedures in our Proxy Statement for our Annual Meeting of
Stockholders which is expected to be mailed to shareholders on or around April 30, 2008, which is incorporated herein by reference.

PART IV



|Item 15. | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------



| | (a) | Financial Statements, Financial Statements, Financial Statement Schedules, and Exhibits:
| | --- | ----------------------------------------------------------------------------------------

(1) Financial Statements

The financial statements filed as part of this report are listed
on the index to Consolidated Financial Statements in Item 8.

(2) Financial Statement Schedules:

Schedule IIValuation and Qualifying Accounts, is filed as part of this Form 10-K.

All other financial statement schedules not listed above have been omitted because the required information is included in the
Consolidated Financial Statements or Notes thereto, or is not applicable.



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(3) Exhibits

Exhibits are listed in the Exhibit Index on page E-1 filed here with.

The Exhibits include management contracts, compensatory plans and arrangements required to filed as exhibits to the Form 10-K by item 601
or Regulation S-K.

(b) Exhibits

The Exhibits filed or incorporated by reference herewith are as specified in the exhibit Index.



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SIGNATURES

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



EP MEDSYSTEMS, INC.By:

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

March 28, 2008


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

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



|                                            |  |                                                                      |  |               
|------------------------------------------- |  | -------------------------------------------------------------------- |  | --------------
|Signature(s)                                |  | Title(s)                                                             |  | Date          
|/s/ David I. Bruce David I. Bruce           |  | President, Chief Executive Officer, Director                         |  | March 28, 2008
|                                            |  |                                                                     
|/s/ David A. Jenkins David A. Jenkins       |  | Chairman of the Board of Directors                                   |  | March 28, 2008
|                                            |  |                                                                     
|/s/ James J. Caruso James J. Caruso         |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 28, 2008
|                                            |  |                                                                     
|/s/ Abhijeet Lele Abhijeet Lele             |  | Director                                                             |  | March 28, 2008
|                                            |  |                                                                     
|/s/ Gerard Michel Gerard Michel             |  | Director                                                             |  | March 28, 2008
|                                            |  |                                                                     
|/s/ Richard C. Williams Richard C. Williams |  | Director                                                             |  | March 28, 2008



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INDEX TO FINANCIAL STATEMENTS

EP MEDSYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                |  |     
|--------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                |  | Page
|FINANCIAL STATEMENTS                                                                                            |  |     
|                                                                                                                | 
|Managements Report on Internal Control over Financial Reporting                                                |  | 43  
|                                                                                                                | 
|Report of Independent Registered Public Accounting Firm                                                         |  | 44  
|                                                                                                                | 
|Consolidated Balance Sheets as of December 31, 2007 and December 31, 2006                                       |  | 45  
|                                                                                                                | 
|Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005                      |  | 46  
|                                                                                                                | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2007, 2006 and 2005 |  | 47  
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005                      |  | 48  
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | 49  
|                                                                                                                | 
|Financial Statement Schedule                                                                                    |  | 64  



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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for
establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States and include those policies and procedures that:



| |  |  | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material
effect on the financial statements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of its inherent limitations, such as resource constraints, human error, lack
of knowledge or awareness and the possibility of intentional circumvention of these controls, internal control over financial reporting may not prevent or detect misstatements. Furthermore, the design of any control system is based, in part, upon
assumptions about the likelihood of future events, which assumptions may ultimately prove to be incorrect. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.

Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2007.
In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its assessment, management has concluded
that the Companys internal control over financial reporting was effective as of December 31, 2007.

This Annual Report on Form
10-K does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public
accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only managements report in this Annual Report on Form 10-K.



|                                      |  |                              
|------------------------------------- |  | -----------------------------
|/s/ David I. Bruce                    |  | /s/ James J. Caruso          
|President and Chief Executive Officer |  | Chief Financial Officer      
|(Principal Executive Officer)         |  | (Principal Financial Officer)



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##### Table of Contents

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, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2007. Our audits of the basic financial statements include the financial statement schedule in the accompanying index. These consolidated financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 audits 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 of the consolidated financial statements 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of EP MedSystems, Inc. as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,
2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial
statements, the Company has adopted Financial Accounting Standards Board Statement No. 123(R), Share Based Payments in 2006.



|                      
|----------------------
|/s/ Grant Thornton LLP
|                      
|Philadelphia, PA      
|                      
|March 28, 2008        



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##### Table of Contents

EP MEDSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                                      |  | December 31, |            
|                                                                                                                                                                                      |  | 2007         |             |   | 2006 |  
|ASSETS                                                                                                                                                                                |  |              |             |   |      |   |             |  
|Current assets:                                                                                                                                                                       |  |              |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                                             |  | $            | 5,553,637   |   |      | $ | 7,743,239   |  
|Accounts receivable, net of allowance for doubtful accounts of $107,000, and $308,000 as of December 31, 2007 and 2006,
respectively                                                  |  |              | 4,368,992   |   |      |   | 4,808,225   |  
|Inventories, net of reserves                                                                                                                                                          |  |              | 2,331,567   |   |      |   | 2,859,677   |  
|Prepaid expenses and other current assets                                                                                                                                             |  |              | 327,166     |   |      |   | 419,411     |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total current assets                                                                                                                                                                  |  |              | 12,581,362  |   |      |   | 15,830,552  |  
|Property, plant and equipment, net                                                                                                                                                    |  |              | 1,581,835   |   |      |   | 1,937,131   |  
|Goodwill                                                                                                                                                                              |  |              | 341,730     |   |      |   | 341,730     |  
|Other intangible assets, net                                                                                                                                                          |  |              | 102,293     |   |      |   | 187,081     |  
|Other assets                                                                                                                                                                          |  |              | 20,105      |   |      |   | 14,851      |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total assets                                                                                                                                                                          |  | $            | 14,627,325  |   |      | $ | 18,311,345  |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|                                                                                                                                                                                      |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                  |  |              |             |   |      |   |             |  
|Current liabilities:                                                                                                                                                                  |  |              |             |   |      |   |             |  
|Secured convertible note, current                                                                                                                                                     |  |              | 1,998,595   |   |      |   |             |  
|Accounts payable                                                                                                                                                                      |  |              | 1,684,733   |   |      |   | 1,531,799   |  
|Accrued expenses                                                                                                                                                                      |  |              | 2,026,010   |   |      |   | 1,722,944   |  
|Deferred revenue                                                                                                                                                                      |  |              | 814,979     |   |      |   | 542,351     |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total current liabilities                                                                                                                                                             |  |              | 6,524,317   |   |      |   | 3,797,094   |  
|Deferred warranty revenue non-current                                                                                                                                                |  |              | 547,034     |   |      |   | 335,658     |  
|Secured convertible note, non-current                                                                                                                                                 |  |              |            |   |      |   | 1,989,760   |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total liabilities                                                                                                                                                                     |  | $            | 7,071,351   |   |      | $ | 6,122,512   |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Commitments and contingencies                                                                                                                                                         |  |              |            |   |      |   |            |  
|Shareholders equity:                                                                                                                                                                 |  |              |             |   |      |   |             |  
|Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding                                                                                          |  |              |            |   |      |   |            |  
|Common stock, $.001 stated value, 50,000,000 shares authorized, 30,405,236 issued at December 31, 2007 and 40,000,000 share authorized,
30,365,236 shares issued at December 31, 2006 |  |              | 30,406      |   |      |   | 30,366      |  
|Additional paid-in capital                                                                                                                                                            |  |              | 68,391,581  |   |      |   | 67,423,769  |  
|Accumulated other comprehensive loss                                                                                                                                                  |  |              | (458,494    | ) |      |   | (352,628    | )
|Treasury stock, 50,000 shares at cost                                                                                                                                                 |  |              | (100,000    | ) |      |   | (100,000    | )
|Accumulated deficit                                                                                                                                                                   |  |              | (60,307,519 | ) |      |   | (54,812,674 | )
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total shareholders equity                                                                                                                                                            |  |              | 7,555,974   |   |      |   | 12,188,833  |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  
|Total liabilities and shareholders equity                                                                                                                                            |  | $            | 14,627,325  |   |      | $ | 18,311,345  |  
|                                                                                                                                                                                      |  |              |             |   |      |   |             |  

The accompanying notes are an integral part of these statements.



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EP MEDSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31,



|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                     |  | 2007 |            |   | 2006 |   |            | 2005 | 
|Net sales                                                                            |  | $    | 18,852,372 |   |      | $ | 15,558,085 |      |  | $ | 16,669,107 |  
|Cost of products sold                                                                |  |      | 7,421,568  |   |      |   | 6,125,088  |      |  |   | 6,420,125  |  
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Gross profit                                                                         |  |      | 11,430,804 |   |      |   | 9,432,997  |      |  |   | 10,248,982 |  
|Operating costs and expenses:                                                        |  |      |            |   |      |   |            |      |  |   |            |  
|Sales and marketing expenses                                                         |  |      | 10,179,219 |   |      |   | 9,683,576  |      |  |   | 8,485,193  |  
|Research and development                                                             |  |      | 3,130,652  |   |      |   | 2,737,914  |      |  |   | 2,373,914  |  
|General and administrative                                                           |  |      | 3,652,416  |   |      |   | 3,736,871  |      |  |   | 5,397,197  |  
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                                                             |  |      | 16,962,287 |   |      |   | 16,158,361 |      |  |   | 16,256,304 |  
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Loss from operations                                                                 |  |      | (5,531,483 | ) |      |   | (6,725,364 | )    |  |   | (6,007,322 | )
|Interest expense                                                                     |  |      | (255,417   | ) |      |   | (258,308   | )    |  |   | (256,458   | )
|Interest and other income                                                            |  |      | 292,055    |   |      |   | 419,514    |      |  |   | 200,578    |  
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Loss before income tax benefit                                                       |  | $    | (5,494,845 | ) |      | $ | (6,564,158 | )    |  | $ | (6,063,202 | )
|Income tax benefit                                                                   |  |      | 0          |   |      |   | 86,873     |      |  |   | 290,128    |  
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Net loss                                                                             |  | $    | (5,494,845 | ) |      | $ | (6,477,285 | )    |  | $ | (5,773,074 | )
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Basic and diluted net loss per share                                                 |  | $    | (0.18      | ) |      | $ | (0.22      | )    |  | $ | (0.22      | )
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  
|Weighted average shares outstanding used to compute basic and diluted loss per share |  |      | 30,390,332 |   |      |   | 29,330,452 |      |  |   | 25,801,729 |  
|                                                                                     |  |      |            |   |      |   |            |      |  |   |            |  

The accompanying notes are an integral part of these statements.



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EP MEDSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2005, 2006, 2007



|                                                                                     |  |                   |  |                   |        |                      |          |   |                      |   |          |                          |  |                                            |            |  |               |          |   |                    |   |          |       |  |   |             |   |  |   |            |  
|------------------------------------------------------------------------------------ |  | ----------------- |  | ----------------- | ------ | -------------------- | -------- | - | -------------------- | - | -------- | ------------------------ |  | ------------------------------------------ | ---------- |  | ------------- | -------- | - | ------------------ | - | -------- | ----- |  | - | ----------- | - |  | - | ---------- | -
|                                                                                     |  | CommonStockShares |  | CommonStockAmount |        | PreferredStockShares |          |   | PreferredStockAmount |   |          | AdditionalPaid-inCapital |  | AccumulatedOtherComprehensiveIncome (Loss) |            |  | TreasuryStock |          |   | AccumulatedDeficit |   |          | Total | 
|Balance, December 30, 2004                                                           |  | 25,387,630        |  | $                 | 25,388 |                      | 373,779  |   |                      | $ | 618,161  |                          |  | $                                          | 55,650,822 |  | $             | (280,582 | ) |                    | $ | (100,000 | )     |  | $ | (42,562,315 | ) |  | $ | 13,351,474 |  
|Issuance of common stock in connection with conversion of preferred stock            |  | 387,946           |  |                   | 388    |                      | (373,779 | ) |                      |   | (618,161 | )                        |  |                                            | 617,773    |  |               |         |   |                    |   |         |       |  |   |            |   |  |   |           |  
|Issuance of common stock in connection with exercise of options                      |  | 194,600           |  |                   | 195    |                      |         |   |                      |   |         |                          |  |                                            | 389,595    |  |               |         |   |                    |   |         |       |  |   |            |   |  |   | 389,790    |  
|Issuance of options in connection with clinical affairs consulting                   |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            | 171,000    |  |               |         |   |                    |   |         |       |  |   |            |   |  |   | 171,000    |  
|Foreign currency translation                                                         |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            |           |  |               | 213,434  |   |                    |   |         |       |  |   |            |   |  |   | 213,434    |  
|Net loss                                                                             |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            |           |  |               |         |   |                    |   |         |       |  |   | (5,773,074  | ) |  |   | (5,773,074 | )
|                                                                                     |  |                   |  |                   |        |                      |          |   |                      |   |          |                          |  |                                            |            |  |               |          |   |                    |   |          |       |  |   |             |   |  |   |            |  
|Balance, December 31, 2005                                                           |  | 25,970,176        |  | $                 | 25,971 |                      |         |   |                      |   |         |                          |  | $                                          | 56,829,190 |  | $             | (67,148  | ) |                    | $ | (100,000 | )     |  | $ | (48,335,389 | ) |  | $ | 8,352,624  |  
|Issuance of common stock in connection with private placement, net of offering costs |  | 4,395,060         |  |                   | 4,395  |                      |         |   |                      |   |         |                          |  |                                            | 9,474,754  |  |               |         |   |                    |   |         |       |  |   |            |   |  |   | 9,479,149  |  
|Share-based compensation                                                             |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            | 923,345    |  |               |         |   |                    |   |         |       |  |   |            |   |  |   | 923,345    |  
|Vesting of options in connection with options issued to consultant                   |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            | 196,480    |  |               |         |   |                    |   |         |       |  |   |            |   |  |   | 196,480    |  
|Foreign currency translation                                                         |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            |           |  |               | (285,480 | ) |                    |   |         |       |  |   |            |   |  |   | (285,480   | )
|Net loss                                                                             |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            |           |  |               |         |   |                    |   |         |       |  |   | (6,477,285  | ) |  |   | (6,477,285 | )
|                                                                                     |  |                   |  |                   |        |                      |          |   |                      |   |          |                          |  |                                            |            |  |               |          |   |                    |   |          |       |  |   |             |   |  |   |            |  
|Balance, December 31, 2006                                                           |  | 30,365,236        |  | $                 | 30,366 |                      |         |   |                      |   |         |                          |  | $                                          | 67,423,769 |  | $             | (352,628 | ) |                    | $ | (100,000 | )     |  | $ | (54,812,674 | ) |  | $ | 12,188,833 |  
|Share-based compensation                                                             |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            | 915,052    |  |               |         |   |                    |   |         |       |  |   |            |   |  |   | 915,052    |  
|Issuance of common stock upon exercise of employee stock options                     |  | 40,000            |  |                   | 40     |                      |         |   |                      |   |         |                          |  |                                            | 52,760     |  |               |         |   |                    |   |         |       |  |   |            |   |  |   | 52,800     |  
|Foreign currency translation                                                         |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            |           |  |               | (105,866 | ) |                    |   |         |       |  |   |            |   |  |   | (105,866   | )
|Net loss                                                                             |  |                  |  |                   |       |                      |         |   |                      |   |         |                          |  |                                            |           |  |               |         |   |                    |   |         |       |  |   | (5,494,845  | ) |  |   | (5,494,845 | )
|                                                                                     |  |                   |  |                   |        |                      |          |   |                      |   |          |                          |  |                                            |            |  |               |          |   |                    |   |          |       |  |   |             |   |  |   |            |  
|Balance, December 31, 2007                                                           |  | 30,405,236        |  | $                 | 30,406 |                      |         |   |                      |   |         |                          |  | $                                          | 68,391,581 |  | $             | (458,494 | ) |                    | $ | (100,000 | )     |  | $ | (60,307,519 | ) |  | $ | 7,555,974  |  
|                                                                                     |  |                   |  |                   |        |                      |          |   |                      |   |          |                          |  |                                            |            |  |               |          |   |                    |   |          |       |  |   |             |   |  |   |            |  

The accompanying notes are an integral part of these statements.



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EP MEDSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,



|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                    |  | 2007 |            |   | 2006 |   |            | 2005 | 
|Cash flows from operating activities:                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Net loss                                                                                            |  | $    | (5,494,845 | ) |      | $ | (6,477,285 | )    |  | $ | (5,773,074 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                         |  |      |            |   |      |   |            |      |  |   |            |  
|Foreign currency gain                                                                               |  |      | (146,421   | ) |      |   | (308,000   | )    |  |   |           |  
|Depreciation and amortization                                                                       |  |      | 1,095,986  |   |      |   | 761,019    |      |  |   | 784,012    |  
|Bad debt expense                                                                                    |  |      | (57,482    | ) |      |   | 93,000     |      |  |   | 76,000     |  
|Shared-based compensation                                                                           |  |      | 915,052    |   |      |   | 923,345    |      |  |   |           |  
|Inventory write-off                                                                                 |  |      | 828,506    |   |      |   |           |      |  |   |           |  
|Loss on obsolescence of equipment                                                                   |  |      | 114,107    |   |      |   |           |      |  |   |           |  
|Change in value of warrants and amortization of beneficial conversion feature                       |  |      | 18,473     |   |      |   |           |      |  |   | 45,222     |  
|Accretion of note discount                                                                          |  |      | 8,835      |   |      |   |           |      |  |   | 21,587     |  
|Deferred income taxes                                                                               |  |      |           |   |      |   | 9,249      |      |  |   |           |  
|Non cash expenses in connection with issuance of common stock and options for consulting agreements |  |      |           |   |      |   | 196,480    |      |  |   | 171,000    |  
|Changes in assets and liabilities:                                                                  |  |      |            |   |      |   |            |      |  |   |            |  
|Decrease (increase) in accounts receivable                                                          |  |      | 496,715    |   |      |   | (1,522,657 | )    |  |   | 886,649    |  
|(Increase) decrease in inventories                                                                  |  |      | (788,491   | ) |      |   | 272,934    |      |  |   | (843,866   | )
|Decrease in prepaid expenses and other assets                                                       |  |      | 68,518     |   |      |   | 40,207     |      |  |   | 72,706     |  
|Increase (decrease) in accounts payable                                                             |  |      | 152,934    |   |      |   | (665,949   | )    |  |   | 114,471    |  
|Increase (decrease) in accrued expenses, deferred revenue, customer deposits and accrued interest   |  |      | 787,073    |   |      |   | 54,791     |      |  |   | (8,778     | )
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in operating activities                                                               |  | $    | (2,001,040 | ) |      | $ | (6,622,866 | )    |  | $ | (4,454,071 | )
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from investing activities:                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Capital expenditures                                                                                |  |      | (241,491   | ) |      |   | (193,795   | )    |  |   | (200,891   | )
|Cash payments of patent costs                                                                       |  |      | (40,426    | ) |      |   | (107,137   | )    |  |   | (113,261   | )
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in operating activities                                                               |  | $    | (281,917   | ) |      | $ | (300,932   | )    |  | $ | (314,152   | )
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Cash flows from financing activities:                                                               |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from exercised stock options                                                               |  |      | 52,800     |   |      |   |           |      |  |   | 389,790    |  
|Proceeds from issuance of common stock, net of offering costs                                       |  |      |           |   |      |   | 9,479,149  |      |  |   |           |  
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by financing activities                                                           |  | $    | 52,800     |   |      | $ | 9,479,149  |      |  | $ | 389,790    |  
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Effect of exchange rate changes                                                                     |  |      | 40,555     |   |      |   | 7,887      |      |  |   | 213,434    |  
|Net (decrease) increase in cash and cash equivalents                                                |  |      | (2,189,602 | ) |      |   | 2,563,238  |      |  |   | (4,164,999 | )
|Cash and cash equivalents, beginning of period                                                      |  |      | 7,743,239  |   |      |   | 5,180,001  |      |  |   | 9,345,000  |  
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, end of period                                                            |  | $    | 5,553,637  |   |      | $ | 7,743,239  |      |  | $ | 5,180,001  |  
|                                                                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Supplemental cash flow information:                                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Cash paid for interest                                                                              |  | $    | 259,296    |   |      | $ | 232,408    |      |  | $ | 191,579    |  
|Net non-cash reclassification of assets from inventory to fixed assets                              |  | $    | 488,095    |   |      | $ | 22,000     |      |  | $ | 567,936    |  

The accompanying notes are an integral part of these statements.



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EP MEDSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Basis of Presentation
|-- | ---------------------

EP MedSystems, Inc. (the
Company or EP MedSystems) 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.

Since
inception, we have incurred an accumulated deficit of approximately $60 million. We have incurred substantial expenses, primarily for research and development activities, sales and marketing activities, obtaining regulatory approvals and
establishing manufacturing capabilities. For the fiscal years ended December 31, 2007 and 2006 we had a net loss of $5.5 million and $6.5 million, respectively.

Our cash and cash equivalents were approximately $5.6 million and $7.7 million as of December 31, 2007 and 2006, respectively. On
February 28, 2008, the Company completed funding on a $3 million secured loan facility with an asset-based lender. The loan arrangement includes a $1.5 million asset based revolving credit agreement and a $1.5 million term loan, each with a
three year term. The Company used proceeds from the facility to pay off its $2.0 million convertible debt which matured on February 28, 2008. Based upon its current operating plans and projections, the Company believes that its existing capital
resources, comprised of cash on hand and the remaining borrowing availability under the Keltic loan, will be sufficient to meet our anticipated capital needs through at least the end of December 2008.

The Company may seek to raise funds to meet our long term capital needs through equity or debt financings, collaborative or other arrangements with third
parties or through other sources of financing. There can be no assurance that such funds will be available on terms favorable to the Company, if at all. Also, there can be no assurance, assuming the Company successfully raises additional funds, that
it will achieve positive cash flow. If the Company is not able to secure additional funding, it may be required to scale back its sales and marketing efforts, research and development programs and general and administrative activities and possibly
seek to sell or license rights to its products to third parties.



|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 SARL, and ProCath Corporation. All material intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

EP MedSystems considers all short-term 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 and France 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.

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



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accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful
accounts.

Inventories

The Company
values its inventory at the lower of cost or market, with cost being determined on a first-in, first-out basis. The Company continually monitors its slow-moving items, and establishes reserve amounts on a specific identification basis, as necessary.
In addition, due to the fact that its business is dependent on the latest computer technology, the Company continually monitors its inventory and products for obsolescence. If the Company determines market value to be less than cost, it writes down
the cost to that value. Additional reserves are sometimes established as a result of lack of marketability or changes in customer consumption patterns. Managements judgment is necessary in determining the realizable value of those products to
arrive at the proper obsolescence reserve. These reserves are estimates, which could change significantly, either favorably or unfavorably, depending on market and competitive conditions.

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

At December 31, 2007, the Company had net goodwill of $342,000 which 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. Goodwill is tested for impairment annually or more frequently if changes in circumstance or the occurrence of events suggest impairment exists. There was no impairment loss recorded in 2007 or 2006.

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 was no impairment loss recorded in 2007 or 2006.

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 generally 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. A summary of warranty reserve activity follows:



|                  |  |      |          |   |      |   |          |      |  |   |          |  
|----------------- |  | ---- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                  |  | 2007 |          |   | 2006 |   |          | 2005 | 
|Beginning balance |  | $    | 272,000  |   |      | $ | 313,000  |      |  | $ | 331,000  |  
|Warranties        |  |      | 320,000  |   |      |   | 284,000  |      |  |   | 570,000  |  
|Warranty payments |  |      | (348,000 | ) |      |   | (325,000 | )    |  |   | (588,000 | )
|                  |  |      |          |   |      |   |          |      |  |   |          |  
|Ending balance    |  | $    | 244,000  |   |      | $ | 272,000  |      |  | $ | 313,000  |  
|                  |  |      |          |   |      |   |          |      |  |   |          |  



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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 2007, 2006 and 2005 were approximately $387,000, $293,000 and $299,000 respectively. The Company records freight billed to customers in net sales on the Statement of Operations.

Research and Development

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

Stock Based Compensation

Effective January 1, 2006, the Company follows Financial Accounting
Standards Board (FASB) Statement No. 123R, Share-Based Payment. Statement 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost is measured
based on the fair value of the equity or liability instruments issued. Statement 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights,
and employee share purchase plans. In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, Statement 123R includes an appendix that provides expanded guidance on measuring the fair
value of share-based payment awards. Statement 123R replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement
123, as originally issued in 1995, established a fair-value-based method of accounting for share-based payment transactions with employees. However, Statement 123 permitted entities the option of continuing to apply the guidance in Opinion 25, as
long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. The impact of Statement 123R, if it had been in effect, on the net loss and related per share amounts for
year ended December 31, 2005 was disclosed in Note 9 Stock Option Plans included in the Companys Form 10-K for the year ended December 31, 2005.

Since the Company adopted Statement 123R using the modified-prospective-transition-method, prior periods have not been restated. Under this method, the Company was required to record compensation expense for all
awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. The Company measured share-based compensation cost using the Black-Scholes
option pricing model.

The Company currently has five share-based employee compensation plans. Share-based compensation of $915,000, net of
a fully reserved tax benefit, or $(0.03) per share, was recognized for the year ended December 31, 2007. At this time the Company anticipates that share-based compensation for its employees will not exceed $1,000,000, net of tax benefits for
the year ended December 31, 2008. Reported net income, adjusting for share-based compensation that would have been recognized in the 2005 financial statements if Statement 123R had been followed is as follows:



|                                                                                             |  |                  |            |   |                  |   |            |                  |  |   |            |  
|-------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ---------------- | - | ---------- | ---------------- |  | - | ---------- | -
|                                                                                             |  | December 31,2007 |            |   | December 31,2006 |   |            | December 31,2005 | 
|Net loss, as reported                                                                        |  | $                | (5,495,000 | ) |                  | $ | (6,477,000 | )                |  | $ | (5,773,000 | )
|Less: stock-based compensation costs determined under fair value based method for all awards |  |                  |           |   |                  |   |           |                  |  |   | (754,000   | )
|                                                                                             |  |                  |            |   |                  |   |            |                  |  |   |            |  
|Adjusted net loss                                                                            |  | $                | (5,495,000 | ) |                  | $ | (6,477,000 | )                |  | $ | (6,527,000 | )
|                                                                                             |  |                  |            |   |                  |   |            |                  |  |   |            |  
|Loss per share of common stock:                                                              |  |                  |            |   |                  |   |            |                  |  |   |            |  
|As reported                                                                                  |  | $                | (.18       | ) |                  | $ | (.22       | )                |  | $ | (.22       | )
|                                                                                             |  |                  |            |   |                  |   |            |                  |  |   |            |  
|Share-based compensation costs                                                               |  |                  |           |   |                  |   |           |                  |  |   | (.03       | )
|                                                                                             |  |                  |            |   |                  |   |            |                  |  |   |            |  
|Adjusted net earnings                                                                        |  | $                | (.18       | ) |                  | $ | (.22       | )                |  | $ | (.25       | )
|                                                                                             |  |                  |            |   |                  |   |            |                  |  |   |            |  

The following table provides the weighted average fair value of stock options granted to employees
during fiscal years 2007, 2006, and 2005 and the related weighted average assumptions used in the Black-Scholes model:



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|                                                               |  |      |         |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                               |  | 2007 |         |   | 2006 |   |           | 2005 | 
|Fair value of options granted                                  |  | $    | 977,000 |   |      | $ | 1,557,000 |      |  | $ | 1,665,000 |  
|Assumptions used:                                              |  |      |         |   |      |   |           |      |  |   |           |  
|Expected life (years)                                          |  |      | 7 years |   |      |   | 7 years   |      |  |   | 7 years   |  
|Risk-free interest rate                                        |  |      | 4.46    | % |      |   | 4.69      | %    |  |   | 4.22      | %
|Volatility                                                     |  |      | 82      | % |      |   | 83        | %    |  |   | 80        | %
|Dividend yield                                                 |  |      | 0       | % |      |   | 0         | %    |  |   | 0         | %
|Weighted average fair value of options granted during the year |  | $    | 1.53    |   |      | $ | 1.13      |      |  | $ | 2.01      |  

Expected life: Management uses historical information to estimate expected forfeitures and uses the
simplified method to estimate the expected term of options within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. Compensation cost is recognized using a
straight-line method over the vesting or service period and is net of estimated forfeitures.

Risk-free interest rate: The risk-free interest rate
for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Volatility: Expected
volatility is based on the historical volatility of the price of shares of the Companys common stock over the past approximately 10 years.

Dividend yield: The Company does not anticipate paying any cash dividends in the foreseeable future and therefore a dividend yield of zero is assumed.

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 SFAS No. 123.

Business Realignment Expenses

During 2007, the
Company recorded a business realignment charge of $1.3 million, or $.04 per share, $943,000 of which were non-cash items, in connection with a realignment of its business and products. The charges included (a) $610,000 related to write down of
inventory related to discontinued products; (b) $219,000 related to inventory impairments for products deemed slow moving due to new product launches; (c) $339,000 related to staff adjustments, lease termination and other costs of closing
down of our international offices; and (d) $114,000 related to completion of clinical study and including write-off of clinical study supplies and equipment.

The charges are reflected on the income statement as follows: (a) $829,000 charged to cost of sales; (b) $315,000 charged to sales and marketing expenses; and (c) $138,000 charged to general and
administrative expenses.

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 4,358,000, 4,229,000 and 4,024,000 for the years ended December 31, 2007, 2006 and 2005, 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.



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Comprehensive Income / Loss

For the years ended December 31, 2007, 2006 and 2005, components of comprehensive loss consisted of net loss and foreign currency translation adjustments. Comprehensive loss for the years ended December 31,
2007, 2006 and 2005 was $5,601,000, $6,763,000 and $5,560,000, 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 loss.

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. The transaction gain (loss) recorded in expenses in the Statement of Operations was $146,000, $308,000 and ($261,000) for the years
ended December 31, 2007, 2006 and 2005, 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 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
values 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
|-- | -----------

Inventories consist of the following:



|                         |  |              |           |   |      |   |           |  
|------------------------ |  | ------------ | --------- | - | ---- | - | --------- | -
|                         |  | December 31, |          
|                         |  | 2007         |           |   | 2006 |  
|Raw materials            |  | $            | 1,136,000 |   |      | $ | 1,488,000 |  
|Work in progress         |  |              | 119,000   |   |      |   | 166,000   |  
|Finished goods           |  |              | 1,218,000 |   |      |   | 1,492,000 |  
|Reserve for obsolescence |  |              | (142,000  | ) |      |   | (286,000  | )
|                         |  |              |           |   |      |   |           |  
|                         |  | $            | 2,331,000 |   |      | $ | 2,860,000 |  
|                         |  |              |           |   |      |   |           |  

During 2007, the Company recorded a business realignment charge of $1.3 million, or $.04 per
share, $829,000 of which were non-cash inventory valuation adjustments, in connection with a realignment of its business and products. The charges included (a) $610,000 related to write down of inventory related to discontinued products; and
(b) $219,000 related to inventory impairments for products deemed slow moving due to new product launches.



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|4. | Property and Equipment
|-- | ----------------------

Property and equipment consist of the
following:



|                                                                 |  |              |            |   |      |   |            |  
|---------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                                                 |  | December 31, |           
|                                                                 |  | 2007         |            |   | 2006 |  
|Land                                                             |  | $            | 70,000     |   |      | $ | 70,000     |  
|Buildings and improvements                                       |  |              | 1,043,000  |   |      |   | 1,043,000  |  
|Leasehold improvements                                           |  |              | 144,000    |   |      |   | 144,000    |  
|Machinery and equipment                                          |  |              | 5,650,000  |   |      |   | 5,440,000  |  
|Furniture and fixtures                                           |  |              | 492,000    |   |      |   | 318,000    |  
|                                                                 |  |              |            |   |      |   |            |  
|                                                                 |  | $            | 7,399,000  |   |      | $ | 7,015,000  |  
|Less: accumulated depreciation                                   |  |              | (5,817,000 | ) |      |   | (5,078,000 | )
|                                                                 |  |              |            |   |      |   |            |  
|                                                                 |  | $            | 1,582,000  |   |      | $ | 1,937,000  |  
|                                                                 |  |              |            |   |      |   |            |  
|                                                                 |  |             
|5.      Intangible Assets                                        |  |              |            |   |      |   |            |  
|                                                                 |  |             
|Intangible assets, excluding goodwill, consist of the following: |  |              |            |   |      |   |            |  
|                                                                 | 
|                                                                 |  | December 31, |           
|                                                                 |  | 2007         |            |   | 2006 |  
|Other intangible assets                                          |  | $            | 629,000    |   |      | $ | 589,000    |  
|Less: accumulated amortization                                   |  |              | (527,000   | ) |      |   | (402,000   | )
|                                                                 |  |              |            |   |      |   |            |  
|                                                                 |  | $            | 102,000    |   |      | $ | 187,000    |  
|                                                                 |  |              |            |   |      |   |            |  

At December 31, 2007 other intangible assets consist of patent costs, which are expected to be amortized as
follows:



|     |  |   |       
|---- |  | - | ------
|2008 |  | $ | 62,000
|2009 |  |   | 37,000
|2010 |  |   | 3,000 



|6. | Commitments
|-- | -----------

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 owns its
executive offices and its manufacturing facility in West Berlin, New Jersey, and leases additional office and warehouse space nearby. The rent expense associated with office and warehouse leases was approximately $105,000, $147,000 and $104,000 in
2007, 2006, and 2005, respectively. Additionally, EP MedSystems also leases certain office equipment for periods extending through 2010.

The aggregate future commitment for minimum rentals as of December 31, 2007 is as follows:



|     |  |   |        
|---- |  | - | -------
|2008 |  | $ | 112,000
|2009 |  |   | 32,000 
|2010 |  |   | 11,000 

European Office Closedown Accrual

The Company has given notice of termination to its three Europe based employees and is in the process of closing its French sales office and UK
distributor support office. During 2007, the Company recorded approximately $300,000 for costs related to staff adjustments, lease termination and other costs associated with closing its international offices.

Employee Life Insurance

EP MedSystems has a key man
life insurance policy for $500,000 covering the Vice President of Engineering, for which it is the beneficiary.

Suppliers

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



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|7. | Notes payable
|-- | -------------

On February 28, 2008, the
Company entered into a $3 million secured Loan Agreement (the Keltic Loan Agreement) with Keltic Financial Partners L.P. (Keltic), which included (i) a $1,500,000 revolving loan (the Revolving Loan), and
(ii) a $1,500,000 term loan (the Term Loan). The loans are secured by a first lien on all assets of the Company, including intellectual property. The Company used proceeds of the loan to repay its $2 million secured convertible note
which matured on February 28, 2008.

The Revolving Loan bears interest at the greater of: (a) the prime rate plus 1.75% or
(b) eight percent (8.00%). The Term Loan bears interest at the greater of: (a) the prime rate plus 2.00% or (b) eight and one-quarter percent (8.25%). The maturity date of the Revolving Loan is February 28, 2011. The Term Loan
requires principal payments of $25,000 per month for thirty-six (36) months followed by a balloon payment of $600,000 on February 28, 2011, unless the Revolving Loan is extended, in which case the Company will continue to pay $25,000 per
month through February 28, 2013. On and after the occurrence of an Event of Default (as defined in the Keltic Loan Agreement), all principal, interest and all other amounts due under the Term and Revolving Loans may be accelerated at the sole
option of Keltic and the interest rate on the loans may be increased three and one-half percent (3.5%) per annum.

The Company issued
Keltic a warrant to purchase 25,000 shares of the Companys Common Stock at $2.50 per share exercisable for a five year period.

The
Company has classified its debt which was refinanced in February 2008 as short term debt since the Keltic loan contains a subjective acceleration clause.

On August 28, 2003, the Company entered into a secured Convertible Note with Laurus which provided us with a $4 million revolving asset-based credit facility secured by our accounts receivable, inventory, real
property and other assets, other than intellectual property. The Laurus Note had an initial term of three years which was subsequently extended through February 28, 2008. On December 15, 2004, pursuant to the terms of the Loan Agreement,
$2,000,000 of the principal amount was converted into 694,314 shares of our common stock at the conversion price of $2.88, and the Fixed Conversion Price on the remaining $2 million principal balance was adjusted upward to $4.20.

As part of the Laurus Convertible Note transaction, Laurus and a broker to the transaction 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 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 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 which was 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.

The maturities on debt consist of the following at December 31, 2007:



|     |  |   |          
|---- |  | - | ---------
|2008 |  | $ | 1,999,000
|     |  |   |          
|     |  | $ | 1,999,000
|     |  |   |          

The maturities above are net of $1,000 in discount of the Convertible Note at December 31,
2007.



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|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.

Common Stock

At the Companys Annual Meeting of Shareholders held on September 12, 2007, the shareholders approved an amendment to its Certificate of
Incorporation to increase the authorized number of shares of common stock from 40,000,000 shares to 50,000,000 shares. The Companys common stock has no par value, $.001 stated value per share, and a total of 30,405,236 and 30,365,236 shares
were issued and 50,000 shares were held in Treasury Stock at December 31, 2007 and December 31, 2006.

During 2005, three
separate options to purchase shares of the Companys common stock were issued to a physician consultant, engaged as the Companys senior medical advisor, in the amounts of 40,000, 40,000 and 100,000 shares of common stock respectively, on
which the exercise price of the options was equal to the fair market value of the Companys common stock on the date of the grant. With respect to the two 40,000 option issuances, they vest in equal installments over three years and the Company
expensed $171,000 representing the fair value of the options measured using the Black-Scholes option pricing model for each grant as follows: risk free rate of 3.77% and 4.33%; 10 year life, and volatility percentage of 77.98% and 81.1%. The
issuance of an option in the amount of 100,000 shares of the Companys common stock did not meet the criteria for expensing in 2005. In the first quarter of 2006, the consultants performance obligation in connection with these options was
fulfilled and the Company recorded an expense of $196,480, valued using the Black-Scholes option pricing model for each grant as follows: risk free interest rate of 4.82%, expected volatility percentage of 84.23% and an expected life of 10 years.

On March 27, 2006, the Company completed a $10,000,000 private placement of its common stock to a number of accredited investors. The
Company issued 3.78 million shares of its common stock at a purchase price of $2.25 per share. In addition, FatBoy Capital, LP purchased approximately 617,000 shares of common stock at a price of $2.43 per share in accordance with NASDAQ
marketplace rules. David Jenkins, the Companys Chairman is a managing member of FatBoy Capitals general partner. The company received net proceeds from the private placement of approximately $9,475,000 after offering costs. In connection
with this transaction, certain anti-dilution provisions of the Laurus Convertible Note resulted in a reduction of the conversion price of that note from $4.20 to $3.96



|9. | Stock Option Plans
|-- | ------------------

Effective January 1, 2006,
the company adopted SFAS No. 123R using the modified prospective transition method. SFAS No. 123(R) requires entities to recognize the cost of employee services in exchange for awards of equity instruments based on the grant-date fair
value of those awards (with limited exceptions). That cost, base on the estimated number of awards that are expected to vest, will be recognized over the period during which the employee is required to provide the service in exchange for the award.
No compensation cost is recognized for awards for which employees do not render the requisite service. Upon adoption, the grant-date fair value of employee share options and similar instruments was estimated using the Black-Scholes valuation model.

Compensation cost for the unvested portions of equity-classified awards granted prior to January 1, 2006, will be recognized in the
results of operations over the remaining vesting periods. Changes in fair vale of unvested liability instruments during the requisite service period will be recognized as compensation cost over that service period. Changes in the fair value of
vested liability instruments during the contractual term will be recognized as an adjustment to compensation cost in the period of the change in fair value. The Company expensed $915,000 and $923,000 in share-based compensation cost for the years
ended December 31, 2007 and 2006, respectively. Due to the modified prospective adoption of SFAS No. 123(R), results for prior periods have not been restated. EP MedSystems has five stock-based compensation plans under which directors,
officers and other eligible employees receive stock options. The Company has also granted options, approved by its Board of Directors, to certain employees, directors and outside consultants to provide incentive to such persons in connection with
its business.

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



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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 terminated on November 30, 2005. No further options may
be issued under the plan. At December 31, 2007, there are 566,658 options outstanding under the 1995 Incentive Plan.

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. 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 terminated on
November 30, 2005. At December 31, 2007, there are no options outstanding under the 1995 Directors Plan and no further options may be issued under this plan.

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. At December 31, 2007, there are 766,000 options
outstanding under the 2002 Plan.

2006 Stock Option Plan

EP MedSystems 2006 Stock Option Plan (the 2006 Plan) was approved by the shareholders in December 2005. On September 12, 2007, the shareholders approved an amendment increasing the number
of shares available under the Plan from 1,000,000 to 1,500,000. The 2006 Plan provides for grants of incentive stock options to employees of EP MedSystems. The 2006 Plan is administered by the Compensation Committee. The 2006 Plan will terminate on
October 21, 2015, unless terminated earlier by the Board of Directors. At December 31, 2007, there are 917,000 options outstanding under the 2006 Plan.

2006 Director Option Plan

EP MedSystems 2006 Director Option Plan (the 2006 Director Plan) was adopted by
the Board of Directors in October 2005 and the shareholders in December 2005. A total of 1,000,000 shares of common stock of EP MedSystems are available for issuance under the 2006 Director Plan. The 2006 Director Plan provides for grants of
60,000 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. On September 12, 2007, the shareholders approved an amendment the 2006 Director Plan to allow a Director to receive an additional grant of 60,000 director
options after his or her initial option grant has fully vested. The term of these options is ten years. The 2006 Director Plan will terminate on October 21, 2015, unless terminated earlier by the Board of Directors. At December 31, 2007,
there are 180,000 options outstanding under the 2006 Director Plan.

Non-Plan Options

The Company has granted a total of 1,015,000 Non-Plan Options, approved by its Board of Directors, to certain employees, directors and outside consultants
to provide incentive to such persons in connection with its business.

Stock Options

Stock options are granted with an exercise price equal to the closing market price of a share of common stock on the date of grant. Except for grants to
non-employee directors, which vest monthly over 5 years, awards generally vest in five years of continuous service and have ten-year contractual terms from the date of grant.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model. The Company uses historical data
regarding stock option exercise behaviors to estimate the expected term of options granted (based on the period of time that options granted are expected to be outstanding). Expected volatility is base on the historical volatility of the
Companys stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the Companys historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield
curve on the grant date for the expected term of the option.



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At December 31, 2007, 2006 and 2005, EP MedSystems had 5,112,000, 4,823,000 and 4,055,000 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. The Board of Directors of the Company has approved immediate vesting in the event of a change in control.

Information relating to stock options is as follows:



|                                 |  |                 |   |  |                   |               |                               |   |     
|-------------------------------- |  | --------------- | - |  | ----------------- | ------------- | ----------------------------- | - | ----
|                                 |  | Number ofOption |   |  | OptionsPriceRange |               | WeightedAverageExercise Price
|Outstanding at December 31, 2004 |  | 1,918,458       |   |  | $                 | 1.32 - $4.13  |                               | $ | 2.60
|                                 |  |                 |   |  |                   |               |                               |   |     
|Granted                          |  | 940,000         |   |  | $                 | 2.49 - $3.73  |                               | $ | 2.96
|Exercised                        |  | (194,750        | ) |  | $                 | 1.90 - $2.60  |                               | $ | 2.00
|Forfeited/Expired                |  | (367,000        | ) |  | $                 | 1.91 - $4.13  |                               | $ | 2.37
|                                 |  |                 |   |  |                   |               |                               |   |     
|Outstanding at December 31, 2005 |  | 2,296,708       |   |  | $                 | 1.32 - $4.25  |                               | $ | 2.83
|                                 |  |                 |   |  |                   |               |                               |   |     
|Exercisable at December 31, 2005 |  | 830,122         |   |  | $                 | 1.32 - $4.25  |                               | $ | 2.72
|                                 |  |                 |   |  |                   |               |                               |   |     
|Granted                          |  | 1,438,500       |   |  | $                 | 1.19 - $2.86  |                               | $ | 1.47
|Exercised                        |  |                |   |  |                   |              |                               |   |    
|Forfeited/Expired                |  | (349,000        | ) |  | $                 | 1.96 - $4.13  |                               | $ | 2.93
|                                 |  |                 |   |  |                   |               |                               |   |     
|Outstanding at December 31, 2006 |  | 3,386,208       |   |  | $                 | 1.19 - $4.25  |                               | $ | 2.25
|                                 |  |                 |   |  |                   |               |                               |   |     
|Exercisable at December 31, 2006 |  | 1,282,464       |   |  | $                 | 1.32 - $4.25  |                               | $ | 2.73
|                                 |  |                 |   |  |                   |               |                               |   |     
|Granted                          |  | 713,000         |   |  | $                 | 1.33   - 2.19 |                               | $ | 1.81
|Exercised                        |  | (40,000         | ) |  | $                 | 1.32          |                               | $ | 1.32
|Forfeited/Expired                |  | (434,550        | ) |  | $                 | 1.22 - $4.13  |                               | $ | 2.42
|                                 |  |                 |   |  |                   |               |                               |   |     
|Outstanding at December 31, 2007 |  | 3,624,658       |   |  | $                 | 1.19 - $4.25  |                               | $ | 2.15
|                                 |  |                 |   |  |                   |               |                               |   |     
|Exercisable at December 31, 2007 |  | 1,622,058       |   |  | $                 | 1.19 - $4.25  |                               | $ | 2.56
|                                 |  |                 |   |  |                   |               |                               |   |     

The aggregate intrinsic value of options outstanding and options exercisable is based on the
Companys closing stock price on the last trading day of the fiscal year for in-the-money options. The total intrinsic value of options outstanding and options exercisable was $1,063,000 and $183,000 at December 31, 2007.

The weighted average contractual term of options outstanding and exercisable options was 7.4 years and 5.9 years at December 31, 2007.



|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 for the years ended December 31,



|                     |  |      |            |      |   |            |  |   |           
|-------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                     |  | 2007 |            | 2006 |   | 2005      
|United States        |  | $    | 14,347,000 |      | $ | 11,204,000 |  | $ | 12,917,000
|Europe/Middle East   |  |      | 1,856,000  |      |   | 1,821,000  |  |   | 1,912,000 
|Asia and Pacific Rim |  |      | 2,649,000  |      |   | 2,533,000  |  |   | 1,840,000 
|                     |  |      |            |      |   |            |  |   |           
|                     |  | $    | 18,852,000 |      | $ | 15,558,000 |  | $ | 16,669,000
|                     |  |      |            |      |   |            |  |   |           

EP MedSystems long-lived assets are primarily located in the U.S. No one foreign country was
material to the Companys sales in 2007. One customer, Philips Electronics NV (through its US and international subsidiaries), accounted for 10% of the Companys sales for the year ended December 31, 2006.

Net sales were billed in two currencies: $18,107,000 and $14,710,000 in U.S. dollars and $745,000 and $848,000 in Euros for the years ended
December 31, 2007 and 2006, respectively. 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.



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|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, 2007, 2006 and 2005, 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 Accounting 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, 2007, 2006 and 2005, a valuation allowance has been recognized to offset all 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:



|                                              |  |                         |             |   |      |   |             |      |  |   |             |  
|--------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                              |  | December 31,            |            
|                                              |  | 2007                    |             |   | 2006 |   |             | 2005 | 
|Allowance for doubtful accounts               |  | $                       | 41,097      |   |      | $ | 121,600     |      |  | $ | 84,400      |  
|Inventory reserves                            |  |                         | 320,365     |   |      |   | 109,616     |      |  |   | 84,545      |  
|Intangible asset amortization                 |  |                         | (192,903    | ) |      |   | (234,808    | )    |  |   | (235,025    | )
|Depreciation                                  |  |                         | 13,036      |   |      |   | 108,778     |      |  |   | 166,124     |  
|Accrued liabilities                           |  |                         | 178,750     |   |      |   | 162,262     |      |  |   | 350,795     |  
|Net operating loss carryforwards              |  |                         | 18,242,845  |   |      |   | 17,499,479  |      |  |   | 14,983,125  |  
|Research and development credit               |  |                         | 764,544     |   |      |   | 548,183     |      |  |   | 548,183     |  
|Write-down of EchoCath investment             |  |                         | 560,000     |   |      |   | 560,000     |      |  |   | 560,000     |  
|Write-off of note receivable                  |  |                         | 43,800      |   |      |   | 43,800      |      |  |   | 43,000      |  
|Deferred warranty income                      |  |                         | 477,621     |   |      |   | 306,308     |      |  |   | 318,354     |  
|Other                                         |  |                         | 169,451     |   |      |   | 201,820     |      |  |   | 111,851     |  
|Inventory valuation adjustment                |  |                         | 173,182     |   |      |   | 164,400     |      |  |   |            |  
|                                              |  |                         |             |   |      |   |             |      |  |   |             |  
|                                              |  |                         | 20,791,788  |   |      |   | 19,591,438  |      |  |   | 17,015,352  |  
|Less: Valuation allowance                     |  |                         | (20,791,788 | ) |      |   | (19,591,438 | )    |  |   | (17,015,352 | )
|                                              |  |                         |             |   |      |   |             |      |  |   |             |  
|                                              |  | $                       |            |   |      | $ |            |      |  | $ |            |  
|                                              |  |                         |             |   |      |   |             |      |  |   |             |  
|                                              |  |                         |            
|Income Tax Benefit consists of the following: |  |                         |             |   |      |   |             |      |  |   |             |  
|                                              | 
|                                              |  | Year Ended December 31, |            
|                                              |  | 2007                    |             |   | 2006 |   |             | 2005 | 
|Current                                       |  | $                       |            |   |      | $ | (86,873     | )    |  | $ | (290,128    | )
|Deferred                                      |  |                         |            |   |      |   |            |      |  |   |            |  
|                                              |  |                         |             |   |      |   |             |      |  |   |             |  
|Total                                         |  | $                       | 0           |   |      | $ | (86,873     | )    |  | $ | (290,128    | )
|                                              |  |                         |             |   |      |   |             |      |  |   |             |  

At December 31, 2007, 2006 and 2005, EP MedSystems had approximately $53,533,000, $49,254,000
and $42,397,000, respectively, of federal net operating loss carryforwards available to offset future income. The federal carryforwards expire between 2009 and 2027. 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, 2006, and 2005, 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 2006 and 2005, respectively. The Company entered into contracts to sell those NOLs for approximately $-0-,
$87,000 and $290,000, in December 2007, 2006, and 2005, respectively.

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



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|                                                     |  |                         |    |  |       |    |  |       |   
|---------------------------------------------------- |  | ----------------------- | -- |  | ----- | -- |  | ----- | --
|                                                     |  | Year Ended December 31, |   
|                                                     |  | 2007                    |    |  | 2006  |    |  | 2005  |   
|Federal statutory rate                               |  | (34.0                   | )% |  | (34.0 | )% |  | (34.0 | )%
|Increase (reduction) in income taxes resulting from: |  |                         |    |  |       |    |  |       |   
|Benefit from sale of state net operating loss        |  | 0                       | %  |  | (1.3  | )% |  | (4.8  | )%
|Change in valuation allowance                        |  | 34.0                    | %  |  | 36.6  | %  |  | 29.7  | % 
|Other                                                |  | 0                       | %  |  | (2.6  | )% |  | 4.3   | % 
|                                                     |  |                         |    |  |       |    |  |       |   
|Effective Tax Rate                                   |  | 0                       | %  |  | (1.3  | )% |  | (4.8  | )%
|                                                     |  |                         |    |  |       |    |  |       |   

On July 13, 2006, the FASB issued Interpretation No. 48 (FIN No. 48)
Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken
on a tax return. This interpretation was effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Companys financial statement.



|13. | Recently Issued Accounting Standards
|--- | ------------------------------------

Effective
January 1, 2006, the company adopted SFAS No. 123R using the modified prospective transition method. See Note 2 for information regarding stock-based compensation.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a framework
for measuring fair value, clarifies the definition of fair value, and requires additional disclosures about fair-value measurements. SFAS No. 157 applies only to fair value measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments). SFAS No. 157, as issued, is effective for fiscal years beginning after November 15, 2007. The Company does not believe that the adoption of SFAS No. 157 will have a material
impact on its consolidated financial position or results of operations.

On February 15, 2007, the FASB issued FASB Statement
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (FAS159). The Fair value option established by Statement 159 permits, but does not require, all entities to choose to measure eligible
items at fair value at specified election dates. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Statement 159 is effective as of the
beginning of an entitys fiscal year that begins after November 15, 2007. The Company does not believe that the adoption of SFAS No. 159 will have a material impact on its consolidated financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141(R)), which
replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any controlling
interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after an entitys fiscal year that begins after December 15, 2008. The Company will assess the impact
of SFAS 141(R) if and when a future acquisition occurs.



|14. | Related Party Transactions
|--- | --------------------------

On February 26, 2008, the
Board of Directors approved Senior Management Incentive Agreements with each of two current senior officers (the 2008 Senior Management Incentive Agreements). Those senior officers are David I. Bruce, President and Chief Executive
Officer and James J. Caruso, Chief Financial Officer and Secretary. The agreements provide that if the senior officer is employed with EP MedSystems immediately prior to a change of control (as defined in the agreements) of EP
MedSystems, EP MedSystems will pay to each of the senior officers an amount equal to two times the senior officers annual base salary (which excludes any incentive pay, premium pay, commissions, overtime, bonuses and other forms of variable
compensation). The agreements also confirm the policy previously approved by the Companys Board of Directors that all options to purchase common stock of EP MedSystems granted to its employees (including all senior officers) will vest
immediately prior to a change of control. The incentive agreements also provide that if a senior officers benefits under the incentive agreement would result in an Internal Revenue Code Section 280C(b)(1) parachute payment,
such senior officer will receive an additional amount not to exceed 20% of the amount of the payments and benefits otherwise payable to the senior officer upon the occurrence of a change in control. All senior officers are employed



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by EP MedSystems on an at-will basis and none of the senior officers has an employment agreement with EP MedSystems. The terms of
Mr. Bruces Senior Management Incentive Agreement are consistent with his employment offer letter, previously disclosed by the Company on Form 8-K filed with the Securities Exchange Commission on August 17, 2006.

On May 12, 2005, the Board of Directors approved Senior Management Incentive Agreements with each of four current senior officers (the 2005 Senior
Management Incentive Agreements). Those senior officers are C. Bryan Byrd, Vice President, Engineering and Manufacturing, John Huley, Vice President, Sales, Thomas Maguire, Vice President, Regulatory and Quality Assurance and Richard Gibbons,
Director of Operations. The terms of the 2005 Senior Management Incentive Agreements are the same as the 2008 Senior Management Agreements.

In March of 2006, the Company completed a $10,000,000 private placement. As more fully described in Footnote 8, David Jenkins, the Companys Chairman, participated in the private placement.



|15. | Quarterly Financial Data (Unaudited)
|--- | ------------------------------------



|              |  |                                              |        |              |   |          |  |   |                                        |   |  |   |      |  
|------------- |  | -------------------------------------------- | ------ | ------------ | - | -------- |  | - | -------------------------------------- | - |  | - | ---- | -
|              |  | Fiscal Year Ended December 31, 2007          |       
|              |  | Net Sales                                    |        | Gross Profit |   | Net Loss |  |   | Net Earnings PerBasic Diluted Share(1) |  
|              |  | (in thousands, except per share information) |       
|1stQuarter    |  | $                                            | 3,544  |              | $ | 2,387    |  | $ | (1,509                                 | ) |  | $ | (.05 | )
|2nd Quarter   |  |                                              | 4,347  |              |   | 2,783    |  |   | (1,276                                 | ) |  |   | (.04 | )
|3rd Quarter   |  |                                              | 5,342  |              |   | 3,432    |  |   | (641                                   | ) |  |   | (.02 | )
|4thQuarter(2) |  |                                              | 5,619  |              |   | 2,829    |  |   | (2,069                                 | ) |  |   | (.07 | )
|              |  |                                              |        |              |   |          |  |   |                                        |   |  |   |      |  
|Total         |  | $                                            | 18,852 |              | $ | 11,431   |  | $ | (5,495                                 | ) |  | $ | (.18 | )
|              |  |                                              |        |              |   |          |  |   |                                        |   |  |   |      |  
|              | 
|              |  | Fiscal Year Ended December 31, 2006          |       
|              |  | Net Sales                                    |        | Gross Profit |   | Net Loss |  |   | Net Earnings PerBasic Diluted Share(1) |  
|              |  | (in thousands, except per share information) |       
|1stQuarter    |  | $                                            | 4,078  |              | $ | 2,490    |  | $ | (1,494                                 | ) |  | $ | (.06 | )
|2nd Quarter   |  |                                              | 3,311  |              |   | 2,068    |  |   | (2,213                                 | ) |  |   | (.07 | )
|3rd Quarter   |  |                                              | 3,799  |              |   | 2,247    |  |   | (1,692                                 | ) |  |   | (.06 | )
|4thQuarter    |  |                                              | 4,370  |              |   | 2,628    |  |   | (1,078                                 | ) |  |   | (.04 | )
|              |  |                                              |        |              |   |          |  |   |                                        |   |  |   |      |  
|Total         |  | $                                            | 15,558 |              | $ | 9,433    |  | $ | (6,477                                 | ) |  | $ | (.22 | )
|              |  |                                              |        |              |   |          |  |   |                                        |   |  |   |      |  
|              | 
|              |  | Fiscal Year Ended December 31, 2005          |       
|              |  | Net Sales                                    |        | Gross Profit |   | Net Loss |  |   | Net Earnings PerBasic Diluted Share(1) |  
|              |  | (in thousands, except per share information) |       
|1stQuarter    |  | $                                            | 3,476  |              | $ | 2,198    |  | $ | (1,408                                 | ) |  | $ | (.05 | )
|2nd Quarter   |  |                                              | 4,754  |              |   | 3,005    |  |   | (1,165                                 | ) |  |   | (.05 | )
|3rd Quarter   |  |                                              | 4,270  |              |   | 2,678    |  |   | (1,849                                 | ) |  |   | (.07 | )
|4thQuarter    |  |                                              | 4,169  |              |   | 2,368    |  |   | (1,351                                 | ) |  |   | (.05 | )
|              |  |                                              |        |              |   |          |  |   |                                        |   |  |   |      |  
|Total         |  | $                                            | 16,669 |              | $ | 10,249   |  | $ | (5,773                                 | ) |  | $ | (.22 | )
|              |  |                                              |        |              |   |          |  |   |                                        |   |  |   |      |  



|(1) | Total of quarterly amounts do not necessarily agree to the annual report amounts due to separate quarterly calculations
of weighted average shares outstanding.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes Business Realignment Expenses of $1.3 million or $(.04) per share as further described in Note 2.
|--- | ----------------------------------------------------------------------------------------------------------



|16. | Contingencies
|--- | -------------

Export Compliance

During the second quarter of 2005, the Company received an Administrative Subpoena from the Bureau of Industry and Security of the United States
Department of Commerce (the Department of Commerce) seeking production of records and documents relating to the sale and/or export of the Companys products to Iran and Syria. In the third quarter of 2005, the Company was informed
that the United States Attorneys Office for the District of New Jersey had commenced a criminal investigation into the same matter. In March 2006, the United States Attorneys Office informed the Company that it will not prosecute the
Company in connection with this matter.

In a letter dated August 16, 2005, the Company was informed by the Philadelphia District
Office of the Securities and Exchange Commission (the SEC District Office) that the Securities and Exchange Commission (the SEC) was



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conducting a confidential, informal inquiry to determine whether there have been violations of certain provisions of the federal securities laws in
connection with the Companys financial and accounting reporting, including relating to disclosures the Company made in its Form 8-K filed with the Commission on August 12, 2005 regarding ongoing government investigations of sales by the
Company of its products to Iran.

Based on the Companys investigation of these matters, management believes that a limited number of
the Companys heart monitor systems were distributed to medical facilities in Iran in prior periods without United States governmental authorization. The Company believes that the aggregate revenues generated by these transactions were not
material to the Companys cumulative financial results during the period in which such transactions occurred, and the Company has taken steps to implement certain control procedures designed to prevent the Companys products or services
from being provided to any foreign countries in violation of applicable law.

The fact that certain of the Companys heart monitor
systems were distributed to medical facilities in Iran without United States government authorization was voluntarily disclosed by the Company in 2003 to the Department of Commerce and to the Office of Foreign Assets Control of the United States
Treasury Department. The federal government investigated the accuracy and completeness of those voluntary disclosures.

Separately, the
Audit Committee of the Companys Board of Directors conducted an independent investigation into these matters and retained outside counsel to assist it. In the third quarter of 2005, the Company incurred approximately $911,000 in legal,
consulting and accounting expenses associated with the governmental and Audit Committee investigations. Additional costs were incurred for the SECs inquiry, additional document review, additional interviews and the termination of Reinhard
Schmidt, our former President, Chief Executive Officer and Chief Operating Officer. In the fourth quarter of 2005, the Company incurred $474,000 in legal consulting and accounting expenses associated with the governmental and Audit Committee
investigations and $45,000 associated with the Companys defense and negotiations with the government.

On October 9, 2005, the
Board of Directors of the Company terminated Reinhard Schmidts employment as its President, Chief Executive Officer and Chief Operating Officer for cause. Mr. Schmidts termination resulted from his certification and authorization of
statements to the Department of Commerce, some of which the Audit Committee has determined in its independent investigation to have been inaccurate or incomplete. Mr. Schmidts termination was not a result of the discovery of any financial
or accounting irregularity by the investigation. Pursuant to Mr. Schmidts employment agreement, his position as a director of the Company ceased upon the termination of his employment.

In the fourth quarter of 2005, we terminated our agreements with our Armenian and German distributors. The German distributor contested the termination,
which was settled with no cash payment to the ex-distributor.

For the year ended December 31, 2006, the Company incurred
approximately $210,000 in connection with negotiations with various governmental entities.

On July 20, 2006, the Company received a
proposed charging letter stating that the Department of Commerce had reason to believe that the Company violated export control regulations arising out of sales between October 1999 and January 2004 of cardiac equipment to end-users in Iran without
the required U.S. Government authorization, and that the disclosures made by the Company and certified by Reinhard Schmidt, then the Companys Chief Executive Officer, regarding these transactions in October and November 2003 were false and
misleading. In November 2006, the Company signed an agreement to settle this matter with the Department of Commerce prior to the issuance of a formal charging letter. Under the settlement agreement, the Company paid $244,000 in civil penalties and
was not subject to any restrictions on commercial or export activities.

In February, 2007, the Company agreed to a settlement with the
Department of Treasury which required the payment of $33,000 in penalties. Additionally, the Company agreed to conduct certain compliance and internal audit procedures for three years.

The Company cannot assure that the ongoing informal inquiry by the SEC will not result in other significant costs, fines or penalties that could, in the
aggregate, have a material adverse effect on the Companys business, financial condition, prospects or results of operations. The Company has made no provision for any future costs associated with the investigations or any costs associated with
the Companys defense or negotiations with the SEC to resolve this final outstanding issue. The Company has not received any communication from the SEC regarding this informal inquiry since February, 2006.

Product Field Action

The Company initiated a
field action recall for its EP-4 stimulator product in March 2006. This field action consisted of an upgrade of the installed base in a phased process and required us to bring the units in-house to make certain modifications. During 2006, the
Company accrued approximately $256,000 in costs associated with this field action to cover



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the cost of shipping and modifying the product. Through December 31, 2006, the Company incurred approximately $184,000 in costs associated with this
process. During 2007, the Company spent an additional $43,000 in connection with the recall. The field action recall was completed for all domestic units during 2007 and the $29,000 balance of the original accrual was reversed.

As a result of the recall, the FDA performed an inspection of the Companys facility and subsequently issued the Company a report containing several
observations identified during the course of the audit. In September 2006, the FDA issued a Warning Letter to the Company that identified certain issues with respect to the Companys conformity with the FDAs quality system
regulations and certain reporting requirements. The FDA requested a written plan outlining the steps to address the issues identified in the letter. The Company undertook steps toward addressing the observations from the FDAs audit
of the Companys facility and has responded to the FDAs request for a written plan. Failure to promptly address these issues may result in regulatory action including but not limited to seizure, injunction and/or civil monetary
penalties. The Company believes it has fully addressed the concerns of the FDA. In February, 2008, the FDA returned to the Companys facility to perform its normal periodic inspection and to confirm our actions with respect to the
warning letter. At the conclusion of the inspection, additional observations were issued to the Company. The Company has committed to address and correct these items in a timely manner.



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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS



|     |  |                                 |  |                |         |                   |   |            |  |   |             |   |  |                |          |   |  |   |        
|---- |  | ------------------------------- |  | -------------- | ------- | ----------------- | - | ---------- |  | - | ----------- | - |  | -------------- | -------- | - |  | - | -------
|Year |  | Description                     |  | OpeningBalance |         | Charged toexpense |   | Deductions |  |   | Adjustments |   |  | ClosingBalance
|2007 |  | Allowance for doubtful accounts |  | $              | 308,000 |                   | $ | 32,000     |  | $ | (58,000     | ) |  | $              | (175,000 | ) |  | $ | 107,000
|2006 |  | Allowance for doubtful accounts |  |                | 215,000 |                   |   | 248,000    |  |   | (195,000    | ) |  |                | 40,000   |   |  |   | 308,000
|2005 |  | Allowance for doubtful accounts |  |                | 139,000 |                   |   | 51,000     |  |   | (80,000     | ) |  |                | 105,000  |   |  |   | 215,000
|     |  |                                 |  |                |         |                  
|2007 |  | Inventory Reserve               |  | $              | 286,000 |                   | $ | 40,000     |  | $ | (184,000    | ) |  | $              |         |   |  | $ | 142,000
|2006 |  | Inventory Reserve               |  |                | 214,000 |                   |   | 235,000    |  |   | (163,000    | ) |  |                |         |   |  |   | 286,000
|2005 |  | Inventory Reserve               |  |                | 170,000 |                   |   | 143,000    |  |   | (99,000     | ) |  |                |         |   |  |   | 214,000



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Index to Exhibits



|               |  |                                                                                                                                                                                                                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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  Incorporated by reference to the
Companys Registration Statement on Form SB-2 and Pre-Effective Amendments No. 1 and 2 thereto filed April 18, 1996, May 28, 1996 and June 13, 1996, respectively.
|               | 
|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  Incorporated by reference
to the Companys Quarterly Report on Form 10-QSB filed August 19, 2003.                                                                                
|               | 
|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 
Incorporated by reference to the Companys Quarterly Report on Form 10-QSB filed November 14, 2001.                                                            
|               | 
|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 
Incorporated by reference to the Companys Registration Statement on Form S-3 filed January 22, 2004.                                                         
|               | 
|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 
Incorporated by reference to the Companys Registration Statement on Form S-3 filed January 14, 2005.                                                          
|               | 
|3.6*           |  | 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 12,
2007.*                                                                                                                                                               
|               | 
|3.7            |  | Bylaws, as amended  Incorporated by reference to the Companys Form 8-K filed on December 26, 2007.                                                                                                                                                                                                                                               
|               | 
|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)  Incorporated by reference to the Companys Current Report on Form 8-K filed September 7, 1999.                     
|               | 
|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)  Incorporated by reference to the Companys Quarterly Report on Form 10-QSB filed May 14, 1999.                                                
|               | 
|4.3            |  | 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)  Incorporated by reference to the Companys Definitive Proxy Statement on Form 14A filed March 5, 2001.            
|               | 
|4.4            |  | Registration Rights Agreement, dated March 28, 2001, between EP Med and the Purchasers identified therein Incorporated by reference to the Companys Annual Report on Form 10-KSB filed
April 2, 2001.                                                                                                                                            
|               | 
|4.5            |  | Warrant, dated March 28, 2001, issued by EP Med to Cardiac Capital, LLC  Incorporated by reference to the Companys Annual Report on Form 10-KSB filed April 2, 2001.                                                                                                                                                                             
|               | 
|4.6            |  | Warrant, dated March 28, 2001, issued by EP Med to Texada Trust  Incorporated by reference to the Companys Annual Report on Form 10-KSB filed April 2, 2001.                                                                                                                                                                                     



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|     |  |                                                                                                                                                                                                                                                                                                                                                            
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.7  |  | Warrant, dated as of July 20, 2001, issued by EP Med to Reinhard Schmidt  Incorporated by reference to the Companys Registration Statement on Form SB-2 and Pre-Effective
Amendments No.1 through 4 filed June 26, 2001, August 24, 2001, September 28, 2001 and October 12, 2001, respectively.                                                         
|     | 
|4.8  |  | Preferred Stock Purchase Agreement, dated as of October 23, 2001, between EP MedSystems and Medtronic, Inc.  Incorporated by reference to the Companys Quarterly Report on Form 10-QSB
filed November 14, 2001.                                                                                                                                          
|     | 
|4.9  |  | Registration Rights Agreement, dated as of October 23, 2001, between EP MedSystems and Medtronic, Inc.  Incorporated by reference to the Companys Quarterly Report on Form 10-QSB
filed November 14, 2001.                                                                                                                                               
|     | 
|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.  Incorporated
by referenced to the Companys Current Report on Form 10-KSB filed March 31, 2003.                                                                             
|     | 
|4.11 |  | Registration Rights Agreement, dated as of January 31, 2003, by and between EP MedSystems, Inc. and the Initial Investors referred to therein.  Incorporated by referenced to the
Companys Current Report on Form 10-KSB filed March 31, 2003.                                                                                                           
|     | 
|4.12 |  | Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to Michael R. Hamblett.  Incorporated by referenced to the Companys Current Report on Form 10-KSB filed March 31, 2003.                                                                                                                                                                   
|     | 
|4.13 |  | Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to Heimdall Investments Ltd.  Incorporated by referenced to the Companys Current Report on Form 10-KSB filed March 31,
2003.                                                                                                                                                              
|     | 
|4.14 |  | Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to EGS Private Healthcare Partnership, L.P.  Incorporated by referenced to the Companys Current Report on Form 10-KSB
filed March 31, 2003.                                                                                                                                               
|     | 
|4.15 |  | Warrant, dated January 31, 2003, issued by EP MedSystems, Inc. to EGS Private Healthcare Counterpart, L.P.  Incorporated by referenced to the Companys Current Report on Form 10-KSB
filed March 31, 2003.                                                                                                                                               
|     | 
|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.  Incorporated by referenced to the Companys Current Report on Form 10-KSB filed March 31, 2003.
|     | 
|4.17 |  | Stock Purchase Agreement, dated as of September 5, 2002, between EP MedSystems, Inc. and Boston Scientific Corporation.  Incorporated by reference to the Companys Quarterly Report on
Form 10-QSB filed November 14, 2002.                                                                                                                              
|     | 
|4.18 |  | Registration Rights Agreement, dated as of September 5, 2002, between EP MedSystems, Inc. and Boston Scientific Corporation  Incorporated by reference to the Companys Quarterly
Report on Form 10-QSB filed November 14, 2002.                                                                                                                          
|     | 
|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  Incorporated by referenced
to the Companys Current Report on Form 10-KSB filed March 31, 2003.                                                                                           



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|     |  |                                                                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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  Incorporated by
referenced to the Companys Current Report on Form 10-KSB filed March 31, 2003.                                            
|     | 
|4.21 |  | Agreement between Anthony Varrichio and EP MedSystems, Inc., dated April 2, 2003,  Incorporated by reference to the Companys Registration Statement on Form S-3 filed April 18, 2003.                                                                                                                      
|     | 
|4.22 |  | Agreement between William Winstrom and EP MedSystems, Inc., dated April 2, 2003  Incorporated by reference to the Companys Registration Statement on Form S-3 filed April 18, 2003.                                                                                                                        
|     | 
|4.23 |  | Common Stock Purchase Agreement between EP MedSystems, Inc. and the several purchasers named therein, dated as of April 11, 2003  Incorporated by reference to the Companys
Registration Statement on Form S-3 filed April 18, 2003.                                                                       
|     | 
|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 
Incorporated by reference to the Companys Registration Statement on Form S-3 filed April 18, 2003.                
|     | 
|4.25 |  | Agreement made as of June 27, 2003, by and between EP MedSystems, Inc. and Anthony Varrichio  Incorporated by reference to the Companys Quarterly Report on Form 10-QSB filed August
19, 2003.                                                                                                             
|     | 
|4.26 |  | Agreement made as of June 27, 2003, by and between EP MedSystems, Inc. and William Winstrom  Incorporated by reference to the Companys Quarterly Report on Form 10-QSB filed August
19, 2003.                                                                                                              
|     | 
|4.27 |  | Notice of EP MedSystems Right to Repurchase Warrants, dated July 23, 2003  Incorporated by reference to the Companys Quarterly Report on Form 10-QSB filed August 19,
2003.                                                                                                                               
|     | 
|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  Incorporated by reference to the Companys Current Report on Form 8-K filed September 12, 2003.
|     | 
|4.29 |  | Amendment, dated November 25, 2003 to Registration Rights Agreement dated August 28, 2003 with Laurus Master Fund, Ltd.  Incorporated by reference to the Companys Annual Report on
Form 10-KSB filed March 30, 2004.                                                                                      
|     | 
|4.30 |  | Warrant, dated August 28, 2003, issued by EP MedSystems, Inc. to Laurus Masterfund, Ltd.  Incorporated by reference to the Companys Current Report on Form 8-K filed September 12,
2003.                                                                                                                   
|     | 
|4.31 |  | Warrant, dated August 28, 2003, issued by EP MedSystems, Inc. to Biscayne Capital Markets, Inc.  Incorporated by reference to the Companys Registration Statement on Form S-3 filed
October 28, 2003.                                                                                                      
|     | 
|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)
 Incorporated by reference to the Companys Registration Statement on Form S-3 filed January 22, 2004.      
|     | 
|4.33 |  | Form of Registration Rights Agreement dated December 26, 2003 (identified agreements were executed by each of the selling shareholders)  Incorporated by reference to the Companys
Registration Statement on Form S-3 filed January 22, 2004.                                                              



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|     |  |                                                                                                                                                                                                                                                                                                
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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  Incorporated by reference to the
Companys Current Report on Form 8-K filed December 21, 2004.                                             
|     | 
|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  Incorporated by reference to the
Companys Current Report on Form 8-K filed December 21, 2004.                                                
|     | 
|4.36 |  | Security Agreement, dated August 28, 2003, by and between Laurus Master Fund, Ltd. and EP MedSystems, Inc.  Incorporated by reference to the Companys Current Report on Form 8-K filed
September 12, 2003.                                                                                   
|     | 
|4.37 |  | Security Agreement, dated August 28, 2003, by and between Laurus Master Fund, Ltd. and Procath Corporation  Incorporated by reference to the Companys Current Report on Form 8-K filed
September 12, 2003.                                                                                   
|     | 
|4.38 |  | Guaranty dated August 28, 2003, by Procath Corporation  Incorporated by reference to the Companys Current Report on Form 8-K filed September 12, 2003.                                                                                                                                       
|     | 
|10.1 |  | License Agreement, dated as of November 1, 1995, between EP Med and Dr. Eckhard Alt, as amended  Incorporated by reference to the Companys Registration Statement on Form SB-2 and
Pre-Effective Amendments No. 1 and 2 filed April 18, 1996, May 28, 1996 and June 13, 1996, respectively.  
|     | 
|10.2 |  | License Agreement, dated as of November 1, 1995, between EP Med and Sanjeev Saksena  Incorporated by reference to the Companys Registration Statement on Form SB-2 and Pre-Effective
Amendments No. 1 and 2 filed April 18, 1996, May 28, 1996 and June 13, 1996, respectively.              
|     | 
|10.3 |  | License Agreement, dated February 27, 1997 between EP MedSystems and EchoCath, Inc. together with settlement agreement, dated November 6, 2001 between EP MedSystems and EchoCath, Inc. 
Incorporated by reference to the Companys Annual Report on Form 10-KSB filed March 31, 1997.        
|     | 
|10.4 |  | Master Manufacturing Agreement, dated April 16, 1996, between EP Med and Hi Tronics Designs, Inc.  Incorporated by reference to the Companys Registration Statement on Form SB-2 and
Pre-Effective Amendments No. 1 and 2 filed April 18, 1996, May 28, 1996 and June 13, 1996, respectively.
|     | 
|10.5 |  | Amended and Restated 1995 Long-Term Incentive Plan  Incorporated by reference to the Companys Definitive Proxy Statement on Form 14A filed June 26, 2000.                                                                                                                                    
|     | 
|10.6 |  | Amended and Restated 1995 Director Option Plan  Incorporated by reference to the Companys Definitive Proxy Statement on Form 14A filed June 26, 2000.                                                                                                                                        
|     | 
|10.7 |  | Amendment to EP MedSystems, Inc. 1995 Director Option Plan  Incorporated by reference to the Companys Definitive Proxy Statement on Form 14A filed July 30, 2002.                                                                                                                            
|     | 
|10.8 |  | EP MedSystems, Inc. 2002 Stock Option Plan as Amended by First Amendment  Incorporated by reference to the Companys Definitive Proxy Statement on Form 14A filed November 24, 2004.                                                                                                          
|     | 
|10.9 |  | Agreement of Lease, dated August 25, 1997, between EP Med and Provident Mutual Life Insurance Company, as landlord  Incorporated by reference to the Companys Annual Report on Form
10-KSB filed March 31, 1998.                                                                             



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|      |  |                                                                                                                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.10 |  | Note Purchase Agreement, dated as of November 15, 2000, between EP Med and Medtronic Asset Management, Inc.  Incorporated by reference to the Companys Quarterly Report on
Form 10-QSB filed November 20, 2000.                                                                                            
|      | 
|10.11 |  | Secured Promissory Note, dated November 15, 2000, issued by EP Med to Medtronic Asset Management, Inc.  Incorporated by reference to the Companys Quarterly Report on Form 10-QSB
filed November 20, 2000.                                                                                                 
|      | 
|10.12 |  | Stock Pledge Agreement, dated as of November 15, 2000, between Medtronic Asset Management, Inc. and David A. Jenkins  Incorporated by reference to the Companys Quarterly Report on
Form 10-QSB filed November 20, 2000.                                                                                   
|      | 
|10.13 |  | Subordination Agreement, dated as of November 15, 2000, between Medtronic Asset Management, Inc. and Fleet National Bank  Incorporated by reference to the Companys Quarterly Report
on Form 10-QSB filed November 20, 2000.                                                                               
|      | 
|10.14 |  | Agreement, dated as of March 9, 1998, between ProCath Corporation and Allan Willis  Incorporated by reference to the Companys Annual Report on Form 10-KSB filed May 1,
2001.                                                                                                                              
|      | 
|10.15 |  | License Agreement, dated as of January 21, 1998, between EP Med and Incontrol, Inc.  Incorporated by reference to the Companys Registration Statement on Form SB-2 and Pre-Effective
Amendments No.1 through 4 filed June 26, 2001, August 24, 2001, September 28, 2001 and October 12, 2001, respectively.
|      | 
|10.16 |  | Promissory Note dated December 30, 2002 between EP MedSystems, Inc. and EGS Healthcare Limited Partnership  Incorporated by reference to the Companys Annual Report on Form
10-KSB filed March 31, 2003.                                                                                                   
|      | 
|10.17 |  | Form of Senior Management Incentive Agreements  Incorporated by reference to the Companys Quarterly Report on Form 10-Q filed May 16, 2005.                                                                                                                                                                
|      | 
|10.18 |  | Software Development, License and Distribution Agreement, dated as of December 19, 2005, by and between EP MedSystems, Inc. and Biosense Webster Inc.  Incorporated by reference to the
Companys Annual Report on Form 10-KSB filed March 31, 2006.                                                        
|      | 
|10.19 |  | Amended 2006 Stock Option Plan  Incorporated by reference to the Companys Definitive Proxy Statement on Form 14A filed August 2, 2007.                                                                                                                                                                     
|      | 
|10.20 |  | Amended 2006 Director Option Plan  Incorporated by reference to the Companys Definitive Proxy Statement on Form 14A filed August 2, 2007.                                                                                                                                                                  
|      | 
|10.21 |  | Common Stock Purchase Agreement dated March 24, 2006  Incorporated by reference to the Companys Current Report on Form 8-K filed March 29, 2006                                                                                                                                                            
|      | 
|10.22 |  | Common Stock Purchase Agreement dated March 24, 2006  Incorporated by reference to the Companys Current Report on Form 8-K filed March 29, 2006                                                                                                                                                            
|      | 
|10.23 |  | Registration Rights Agreement dated March 24, 2006  Incorporated by reference to the Companys Current Report on Form 8-K filed March 29, 2006                                                                                                                                                              
|      | 
|10.24 |  | Revolving/Term Loan Agreement, dated February 28, 2008, by and between EP MedSystems, Inc, ProCath Corporation and Keltic Financial Partners, LP.  Incorporated by reference to the
Companys Current Report on Form 8-K filed March 5, 2008.                                                               
|      | 
|10.25 |  | Common Stock Purchase Warrant, dated February 28, 2008, issued to Keltic Financial Partners, LP  Incorporated by reference to the Companys Current Report on Form 8-K filed March 5,
2008.                                                                                                                 
|      | 
|10.26 |  | Revolving Note of EP MedSystems, Inc. and ProCath Corporation dated as of February 28, 2008  Incorporated by reference to the Companys Current Report on Form 8-K filed March 5, 2008.                                                                                                                     
|      | 
|10.27 |  | Term Note of EP MedSystems, Inc. and ProCath Corporation dated as of February 28, 2008  Incorporated by reference to the Companys Current Report on Form 8-K filed March 5,
2008.                                                                                                                          
|      | 
|10.28 |  | General Security Agreement made by and from EP MedSystems, Inc. and ProCath Corporation in favor of Keltic Financial Partners, LP dated as of February 28, 2008  Incorporated by reference
to the Companys Current Report on Form 8-K filed March 5, 2008.                                                 
|      | 
|10.29 |  | Patent Security Agreement made by EP MedSystems, Inc. in favor of Keltic Financial Partners, LP dated as of February 28, 2008  Incorporated by reference to the Companys Current
Report on Form 8-K filed March 5, 2008.                                                                                   
|      | 
|10.30 |  | Patent Security Agreement made by ProCath Corporation in favor of Keltic Financial Partners, LP dated as of February 28, 2008  Incorporated by reference to the Companys Current
Report on Form 8-K filed March 5, 2008.                                                                                   
|      | 
|10.31 |  | Trademark and Tradename Security Agreement made by EP MedSystems, Inc. in favor of Keltic Financial Partners,                                                                                                                                                                                                



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|       |  |                                                                                                                                                                                                                                                                                                                                                     
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | LP dated as of February 28, 2008  Incorporated by reference to the Companys Current Report on Form 8-K filed March 5, 2008.                                                                                                                                                                                                                       
|       | 
|10.32  |  | Copyright Security Agreement made by EP MedSystems, Inc. in favor of Keltic Financial Partners, LP dated as of February 28, 2008  Incorporated by reference to the Companys
Current Report on Form 8-K filed March 5, 2008.                                                                                                                       
|       | 
|10.33  |  | Mortgage and Security Agreement on Property in Berlin, Camden County, New Jersey given by ProCath Corporation and Subordination of Lease and Consent to All Terms and Conditions of Mortgage
given by EP MedSystems, Inc. dated as of February 28, 2008  Incorporated by reference to the Companys Current Report on Form 8-K filed March 5, 2008.
|       | 
|10.34* |  | Senior Management Agreement, dated February 26, 2008 by and between the Company and David I. Bruce.*                                                                                                                                                                                                                                                
|       | 
|10.35* |  | Senior Management Agreement, dated February 26, 2008, by and between the Company and James J. Caruso.*                                                                                                                                                                                                                                              
|       | 
|21.1   |  | Subsidiaries of the Registrant  Incorporated by reference to the Companys Annual Report on Form 10-KSB filed March 30, 2004.                                                                                                                                                                                                                      
|       | 
|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.                                                                                                                                                                                                                             



|* | Filed herewith.
|- | ---------------



70