----

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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

| ý | **Quarterly Report  pursuant to Section 13 or 15 (d) of the Securities Exchange Act   of 1934** |
|--------|-------------------------------------------------------------------------------------------------|
|   |                                                                                            |
|   | **for  the quarterly period ended June 30, 2001**                                               |
|   |                                                                                            |
| o      | **Transition Report  pursuant to Section 13 or 15 (d) of the Securities Exchange Act  of 1934** |
|   |                                                                                            |
|   | **for  the transition period from ______________ to ______________.**                           |

 

**Commission File No. 0-22233**

| **Endocardial Solutions, Inc.**                         |
|---------------------------------------------------------|
| (Exact name of  registrant as specified in its charter) |

 

| **Delaware******                             | **41-1724963******                                             |
|----------------------------------------------|----------------------------------------------------------------|
| **(State  or other jurisdiction of**         | **(IRS  Employer Identification**                              |
| **incorporation  or organization)**          | **Number)**                                                    |
|                                         |                                                           |
| **1350  Energy Lane  Suite 110**             | **(651)  523-6900******                                        |
| **Saint  Paul, Minnesota  55108******   | **(Registrant’s  telephone number  including area code)** |
| **(Address  of principal executive offices** |                                                           |
| **and  zip code)**                           |                                                           |

 

**Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding twelve (12) months (or for such shorter period that the Registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.**

**YES     ****ý****         NO      ****o**

**Indicatethe number of shares outstanding of each of the issuer’s classes of common stock,as of thelatest practicable date.**

| **Common  Stock, $.01 par value****** | **14,809,570******                                    |
|---------------------------------------|-------------------------------------------------------|
| **(Class)**                           | **(Number  of Shares Outstanding at August 3, 2001)** |

 

----

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**INDEX**

**Endocardial Solutions, Inc.**

 

| **PART I.  FINANCIAL INFORMATION**                                                          |
|--------------------------------------------------------------------------------------------------|
|                                                                                             |
| Item 1.                                                                                          | Financial Statements  (Unaudited) |
|                                                                                             |   |
|                                                                                             | Balance Sheets –  June 30, 2001 and December 31, 2000 |
|                                                                                             |   |
|                                                                                             | Statements  of Operations - Three and six months ended June 30, 2001 and June 30, 2000 |
|                                                                                             |   |
|                                                                                             | Statements  of Cash Flows – Three and six months ended June 30, 2001 and June 30, 2000 |
|                                                                                             |   |
|                                                                                             | Notes to Financial  Statements |
|                                                                                             |   |
| Item  2.                                                                                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                                                                             |   |
| Item  3.                                                                                    | Quantitative  and Qualitative Disclosures about Market Risk |
|                                                                                             |   |
| **PART II.  OTHER INFORMATION**                                                             |
|                                                                                             |   |
| Items  1 through 3 and5 have been omitted since all items are inapplicable or  answers negative. |
|                                                                                             |   |
| Item  4.                                                                                         | Submission  of Matters to a Vote of Security Holders |
|                                                                                             |   |
| Item 6.                                                                                          | Exhibits And Reports On Form 8-K |
|                                                                                             |

**PART I - FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**Endocardial Solutions, Inc.**

**Balance Sheets**

|                                                                                             | June 30,2001                                                                                |        | December 31,2000 |        |
|--------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|-------------|------------------|-------------|
|                                                                                             |                                                                                             |        |                  |        |
|                                                                                             | (Unaudited)                                                                                 |        | (Note)           |        |
| **ASSETS**                                                                                       |                                                                                        | ** **  |             | ** **  |
| Current Assets:                                                                                  |                                                                                        |        |             |        |
|                                                                                             | Cash and cash equivalents                                                                   | $           | 3,922,375        |        | $ | 7,771,540 |   |
|                                                                                             | Short-term investments                                                                      | 3,474,083   |             | 2,987,588   |   |
|                                                                                             | Accounts Receivable, net of  reserve for doubtful accounts (2001 - $60,000; 2000 - $60,000) | 2,940,164   |             | 3,522,166   |   |
|                                                                                             | Inventories                                                                                 | 2,592,433   |             | 3,211,818   |   |
|                                                                                             | Prepaid expenses and other  current assets                                                  | 702,719     |             | 500,694     |   |
|                                                                                             |                                                                                        |             |             |             |   |
| Total  current assets                                                                            | 13,631,774                                                                                  |        | 17,993,806       |        |
|                                                                                             |                                                                                        |        |             |        |
| Furniture  and equipment                                                                         | 6,753,645                                                                                   |        | 6,441,554        |        |
| Less  accumulated depreciation                                                                   | (4,187,816                                                                                  | )           | (3,631,652       | )           |
|                                                                                             |                                                                                             |        |                  |        |
|                                                                                             | 2,565,829                                                                                   |        | 2,809,902        |        |
|                                                                                             |                                                                                        | ** **  |             | ** **  |
| Deposits                                                                                         | 40,174                                                                                      |        | 40,174           |        |
| Patents,  net of accumulated amortization (2001 - $106,168; 2000 - $102,511)                     | 25,130                                                                                      |        | 28,137           |        |
| Software  development costs, net of accumulated amortization (2001 - $572,372; 2000 -  $308,201) | 515,920                                                                                     |        | 484,314          |        |
| Notes  receivable                                                                                | 371,250                                                                                     |        | -                |        |
|                                                                                             |                                                                                             |        |                  |        |
| Total  assets                                                                                    | $                                                                                           | 17,150,077  |             | $           | 21,356,333 |   |
|                                                                                             |                                                                                             |        |                  |        |
|                                                                                             |                                                                                        |        |             |        |
| **LIABILITIES AND STOCKHOLDERS'  EQUITY**                                                        |                                                                                        | ** **  |             | ** **  |
| Current  Liabilities:                                                                            |                                                                                        |        |             |        |
|                                                                                             | Accounts payable                                                                            | $           | 1,477,476        |        | $ | 938,866 |   |
|                                                                                             | Accrued salaries and expenses                                                               | 1,647,564   |             | 1,634,346   |   |
|                                                                                             | Current portion of capital lease  obligations                                               | 648,514     |             | 593,264     |   |
|                                                                                             | Current portion of long-term debt                                                           | -           |             | 7,000,000   |   |
|                                                                                             | Current portion of deferred  revenue                                                        | 612,916     |             | 554,374     |   |
|                                                                                             |                                                                                        |             |             |             |   |
| Total  current liabilities                                                                       | 4,386,470                                                                                   |        | 10,720,850       |        |
|                                                                                             |                                                                                        |        |             |        |
| Long-term  Liabilities:                                                                          |                                                                                        |        |             |        |
|                                                                                             | Capital lease obligations                                                                   | 486,848     |             | 584,252     |   |
|                                                                                             | Long-term debt                                                                              | -           |             | -           |   |
|                                                                                             | Deferred revenue                                                                            | 156,028     |             | 187,062     |   |
|                                                                                             |                                                                                        |             |             |             |   |
| Total  long-term liabilities                                                                     | 642,876                                                                                     |        | 771,314          |        |
|                                                                                             |                                                                                        |        |             |        |
| Stockholders'  equity:                                                                           |                                                                                        |        |             |        |
|                                                                                             | Undesignated Preferred Stock, par  value $.01 per share:                                    |        |             |        |   |
|                                                                                             | Authorized shares--10,000,000                                                               | -           |             | -           |   |
|                                                                                             | Issued and outstanding  shares--none                                                        |        |             |        |   |
|                                                                                             | Common Stock, $.01 par value                                                                |        |             |        |   |
|                                                                                             | Authorized shares--40,000,000                                                               |        |             |        |   |
|                                                                                             | Issued and outstanding  shares--June 30, 2001--14,809,570; December 31, 2000--12,249,695    | 148,096     |             | 122,497     |   |
|                                                                                             | Additional paid-in capital                                                                  | 79,251,596  |             | 71,769,626  |   |
|                                                                                             | Accumulated deficit                                                                         | (66,960,761 | )                | (62,007,171 | ) |
|                                                                                             | Deferred compensation                                                                       | (318,200    | )                | (20,783     | ) |
|                                                                                             |                                                                                        |             |             |             |   |
| Total  stockholders' equity                                                                      | 12,120,731                                                                                  |        | 9,864,169        |        |
|                                                                                             |                                                                                             |        |                  |        |
| Total  liabilities and stockholders' equity                                                      | $                                                                                           | 17,150,077  |             | $           | 21,356,333 |   |
|                                                                                             |                                                                                             |        |                  |        |
|                                                                                                  |                                                                                             |             |                  |             |  |  |  |  |

 

| Note: | The balance sheet at December 31, 2000 has  been derived from the audited financial statements at that date but does not  include all of the information and footnotes required by generally accepted  accounting principles for complete financial statements. |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**EndocardialSolutions, Inc.**

**Statementsof Operations**(Unaudited)

|                                    | For  the Three Months Ended |       | For  the Six Months Ended |      |
|-----------------------------------------|-----------------------------|------------|---------------------------|-----------|
|                                    |                             |       |                           |      |
|                                    | June  30,                   |       | June  30,                 |      | June  30, |   | June  30, |   |
|                                    | 2001                        |       | 2000                      |      | 2001 |   | 2000 |   |
|                                    |                             |       |                           |      |  |   |  |   |
|                                    |                        |       |                      |      |   |   |   |   |
| Revenue                                 | $                           | 5,577,704  |                      | $         | 3,737,131 |   | $ | 10,179,870 |   | $ | 7,097,189 |   |
|                                    |                        |       |                      |      |   |   |   |   |
|                                    | Cost of goods sold          | 2,223,112  |                      | 1,929,316 |   | 4,301,171 |   | 3,804,991 |   |
|                                    |                        |            |                      |           |   |  |   |  |   |
| Gross profit                            | 3,354,592                   |       | 1,807,815                 |      | 5,878,699 |   | 3,292,198 |   |
|                                    |                        |       |                      |      |   |   |   |   |
| Operating expenses:                     |                        |       |                      |      |   |   |   |   |
|                                    | Research and development    | 1,456,515  |                      | 1,165,236 |   | 2,469,842 |   | 2,227,645 |   |
|                                    | General and administrative  | 602,961    |                      | 533,924   |   | 1,193,406 |   | 1,067,443 |   |
|                                    | Sales and marketing         | 3,826,037  |                      | 3,147,878 |   | 7,239,933 |   | 5,501,670 |   |
|                                    |                        |            |                      |           |   |  |   |  |   |
| Operating loss                          | (2,530,921                  | )          | (3,039,223                | )         | (5,024,482 | ) | (5,504,560 | ) |
|                                    |                        |       |                      |      |   |   |   |   |
| Other income  (expense):                |                        |       |                      |      |   |   |   |   |
|                                    | Interest income             | 90,970     |                      | 76,505    |   | 175,413 |   | 202,043 |   |
|                                    | Interest expense            | (22,528    | )                         | (174,743  | ) | (104,521 | ) | (337,358 | ) |
|                                    |                        |            |                      |           |   |  |   |  |   |
|                                    | 68,442                      |       | (98,238                   | )         | 70,892 |   | (135,315 | ) |
|                                    |                             |       |                           |      |  |   |  |   |
|                                    |                        |       |                      |      |   |   |   |   |
| Net loss for the  period                | $                           | (2,462,479 | )                         | $         | (3,137,461 | ) | $ | (4,953,590 | ) | $ | (5,639,875 | ) |
|                                    |                             |       |                           |      |  |   |  |   |
| Net loss per share -  basic and diluted | $                           | (0.17      | )                         | $         | (0.31 | ) | $ | (0.36 | ) | $ | (0.55 | ) |
|                                    |                             |       |                           |      |  |   |  |   |
| Weighted average  shares outstanding    | 14,809,361                  |       | 10,201,284                |      | 13,637,960 |   | 10,193,233 |   |
|                                    |                             |       |                           |      |  |   |  |   |

See accompanying notes*.*

 

**EndocardialSolutions, Inc.**

**Statementsof Cash Flows**(Unaudited)

|                                                                         | For the Three Months Ended                    |       | For the Six Months Ended |       |
|------------------------------------------------------------------------------|-----------------------------------------------|------------|--------------------------|------------|
|                                                                         |                                               |       |                          |       |
|                                                                         | June 30,                                      |       | June 30,                 |       | June 30, |   | June 30, |   |
|                                                                         | 2001                                          |       | 2000                     |       | 2001 |   | 2000 |   |
|                                                                         |                                               |       |                          |       |  |   |  |   |
| **Operating activities**                                                     |                                          |       |                     |       |   |   |   |   |
| Net  loss                                                                    | $                                             | (2,462,479 | )                        | $          | (3,137,461 | ) | $ | (4,953,590 | ) | $ | (5,639,875 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |                                          |       |                     |       |   |   |   |   |
|                                                                         | Depreciation and amortization                 | 402,762    |                     | 367,862    |   | 846,196 |   | 610,317 |   |
|                                                                         | Amortization of deferred  compensation        | 15,357     |                     | 2,227      |   | 17,584 |   | 4,454 |   |
|                                                                         | Loss on disposal of equipment                 | 6,344      |                     | 1,394      |   | 6,344 |   | 1,394 |   |
|                                                                         | Changes in operating assets and  liabilities: |       |                     |       |   |   |   |   |   |
|                                                                         | Accounts Receivable                           | 329,526    |                     | (1,707,873 | ) | 582,002 |   | (1,169,516 | ) |
|                                                                         | Inventory                                     | 125,150    |                     | (373,205   | ) | 619,385 |   | (635,843 | ) |
|                                                                         | Prepaid expenses and other assets             | (84,255    | )                        | 494,868    |   | (573,277 | ) | 111,606 |   |
|                                                                         | Accounts payable                              | 464,308    |                     | (72,727    | ) | 538,611 |   | (129,542 | ) |
|                                                                         | Accrued salaries and expenses                 | 564,364    |                     | 248,807    |   | 13,216 |   | (227,692 | ) |
|                                                                         | Deferred revenue                              | 42,717     |                     | 24,404     |   | 27,508 |   | 127,915 |   |
|                                                                         |                                          |            |                     |            |   |  |   |  |   |
| Net  cash used in operating activities                                       | (596,206                                      | )          | (4,151,704               | )          | (2,876,021 | ) | (6,946,782 | ) |
|                                                                         |                                          |       |                     |       |   |   |   |   |
| **Investing activities**                                                     |                                          |       |                     |       |   |   |   |   |
| Purchases  of short-term investments                                         | (44,623                                       | )          | 19,475                   |       | (2,938,752 | ) | (1,016,444 | ) |
| Maturities  of short-term investments                                        | 52,258                                        |       | 2,555,000                |       | 2,452,258 |   | 4,055,000 |   |
| Purchases  of furniture and equipment                                        | 96,224                                        |       | (430,092                 | )          | (67,363 | ) | (652,167 | ) |
| Patent  expenditures                                                         | -                                             |       | (7,320                   | )          | (650 | ) | (7,320 | ) |
| Software  development costs                                                  | -                                             |       | (210,678                 | )          | (295,777 | ) | (493,967 | ) |
| Proceeds  from sale of equipment                                             | -                                             |       | 2,200                    |       | - |   | 2,200 |   |
|                                                                         |                                               |       |                          |       |  |   |  |   |
| Net  cash used in investing activities                                       | 103,859                                       |       | 1,928,585                |       | (850,284 | ) | 1,887,302 |   |
|                                                                         |                                          |       |                     |       |   |   |   |   |
| **Financing activities**                                                     |                                          |       |                     |       |   |   |   |   |
| Proceeds  from notes payable                                                 | -                                             |       | -                        |       | - |   | 3,500,000 |   |
| Principal  payments on notes payable and capital lease obligations           | (159,505                                      | )          | (193,663                 | )          | (7,315,430 | ) | (354,115 | ) |
| Proceeds  from issuance of common stock                                      | (84,546                                       | )          | 11,915,851               |       | 7,192,570 |   | 11,915,851 |   |
|                                                                         |                                               |       |                          |       |  |   |  |   |
| Net  cash provided by (used in) financing activities                         | (244,051                                      | )          | 11,722,188               |       | (122,860 | ) | 15,061,736 |   |
|                                                                         |                                          |       |                     |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                            | (736,398                                      | )          | 9,499,069                |       | (3,849,165 | ) | 10,002,256 |   |
| Cash  and cash equivalents at beginning of period                            | 4,658,773                                     |       | 2,274,167                |       | 7,771,540 |   | 1,770,980 |   |
|                                                                         |                                               |       |                          |       |  |   |  |   |
| Cash  and cash equivalents at end of period                                  | $                                             | 3,922,375  |                     | $          | 11,773,236 |   | $ | 3,922,375 |   | $ | 11,773,236 |   |
|                                                                         |                                               |       |                          |       |  |   |  |   |
| **Supplemental disclosure of  non-cash investing and financing activities**  |                                          |       |                     |       |   |   |   |   |
| Purchase  of equipment and inventory through capital lease obligations       | $                                             | 273,275    |                     | $          | - |   | $ | 273,275 |   | $ | - |   |
|                                                                              |                                               |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |

See accompanying notes.

 

**Endocardial Solutions, Inc.**

**Notesto Financial Statements******(Unaudited)

**1.          Basis of Presentation**

             Theaccompanying unaudited financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have beenincluded.  Operating results for thethree and six months ended June 30, 2001, are not necessarily indicative of theresults that may be expected for the year ending December 31, 2001.  These financial statements should be read inconjunction with the audited financial statements and accompanying notes forthe fiscal year ended December 31, 2000, contained in the Company’sForm 10-K/A.

**2.          Inventories**

             Inventoriesare carried at the lower of cost (first-in, first-out basis) or market.  The majority of inventory consists ofpurchased components.  To determine thetechnological feasibility of its software efforts, the Company utilizes theworking model approach available under SFAS No. 86 and believes that theworking model was achieved when the software was available for commercial usein June 1998.

**3.          Reclassifications**

             Certainprior year items have been reclassified to conform to current yearpresentations.

**4.          Stock Offering**

             In March 2001, the Company receivedproceeds of $7,349,000 from a private placement of 2,449,666 shares of itscommon stock at a price of $3.00 per share, to accredited investors.

**5.          Segment Reporting**

             Salesby geographic destination as a percentage of total sales were as follows:

|           | For  the Three Months Ended June 30, | For  the Six Months Ended June 30, |   |
|----------------|--------------------------------------|------------------------------------|--------|
|           | 2001                                 |                               | 2000   |   | 2001 |   | 2000 |   |
|           |                                      |                               |        |   |
| Domestic       | 85                                   | %                                  | 75     | % | 85 | % | 67 | % |
| International: |                                 |                               |   |   |   |   |   |   |
|           | Europe                               | 8                                  | %      | 24 | % | 8 | % | 24 | % |
|           | Asia Pacific                         | 5                                  | %      | 1 | % | 4 | % | 6 | % |
|           | Canada                               | 2                                  | %      | 0 | % | 3 | % | 3 | % |
|                |                                      |                                    |        |  |  |  |  |  |  |  |  |  |  |

 

**Item 2.              Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

**General**

Endocardial Solutions Inc. (the“Company”), was incorporated in May 1992. The Company develops, manufactures and markets the EnSite 3000Ò clinical workstationand EnSiteÒcatheter (together, the “EnSite System”) for use by electrophysiologists indiagnosing and mapping abnormal heart rhythms known as tachycardias.  During the second quarter of 1999, wereceived approval from the U.S. Food and Drug Administration to market the EnSiteSystem in the U.S. for use in the right atrium of the heart.  The EnSite System is also available toelectrophysiologists in Europe for use in the right atrium and left ventricleof the heart.

**Resultsof Operations**

**General.**  Net losses were $2,462,479, or $.17 pershare, for the three months ended June 30, 2001, as compared to$3,137,461, or $.31 per share, for the same period in 2000.  For the six months ended June 30, 2001, netlosses were $4,953,590, or $.36 per share, as compared to $5,639,875, or $.55per share, for the same period in 2000. The Company expects lossesto continue at least through third quarter of 2002.  The projected losses were extended by two quarters with theannounced termination of the distribution agreement the Company had withMedtronic in Europe and Japan.   TheCompany plans on building its own sales organization in Europe and has enteredinto an agreement with a new distributor in Japan to promote future revenuegrowth.  The Company is ina period of growth in sales and marketing expenses related to productintroduction, including increases in personnel costs.

**Revenueand Cost of Goods Sold.**  Worldwide revenue for the three months endedJune 30, 2001 was $5.6 million, a $1.8 million, or 49%, increase over the sameperiod in 2000.  For the six monthsended June 30, 2001, worldwide revenue was $10.2 million, a $3.1 million, or43%, increase over the same period in 2000. Revenue for domestic sales increased $1.9 million, or 69%, for the threemonths ended June 30, 2001, compared to the same period in 2000.  For the six months ended June 30, 2001,domestic sales increased $4.0 million, or 83%, over the same period in2000.  This increase in revenues can bedirectly attributed to a higher number of EnSite clinical workstations soldduring the first six months of 2001, compared to the same period in 2000.  Additionally, with a 109% increase in theinstalled base of the EnSite clinical workstation since June 30, 2000 and anoverall increase in EnSite catheter utilization per system per month, EnSitecatheter revenues increased 102% for the six months ended June 30, 2001,compared to the same period in 2000. However, revenue for international sales, which includes sales todistributors in Europe and Asia Pacific, for the three months ended June 30,2001, decreased $80,000, or 9%, over the same period in 2000.  For the six months ended June 30, 2001,international sales decreased $870,000, or 37%, over the same period in 2000.  A majority of this decline related to ourEuropean distributor, Medtronic, which did not purchase any EnSite clinicalworkstations during the quarter and also did not increase its purchases ofEnSite catheters over the previous quarter. The Company does not believe there has occurred any fundamental declinein the European market for the EnSite workstation.  Rather, the Company believes that Medtronic did not devotesufficient resources during the quarter necessary to further develop theEuropean market.  With the terminationof the distribution agreement with Medtronic in Europe, the Company believes byselling direct to the end-users it will improve sales in the European market.Other revenue, which represents 6.3% and 5.7% of worldwide sales for the threemonth periods ending June 30, 2001 and 2000, respectively, includes revenuegenerated from extended service contracts, repairs and accessories salesrelated to the EnSite System.  For thesix months ended June 30, 2001, other revenue represents 6.2% and 5.7% ofworldwide sales.

EnSite clinical workstation sales were$2.8 million for the three months ended June 30, 2001, compared to $2.2 millionfor the same period in 2000.  For thesix months ended June 30, 2001, EnSite clinical workstation sales were $5.2million, compared to $4.4 million for the same period in 2000.  The increase is due mainly to the highersales of the EnSite clinical workstation in U.S. and Canada.  Domestic sales accounted for 88% of totalEnSite clinical workstation sales for the June 2001 quarter end, compared to74% for the same period in 2000.  Forthe six months ended June 30, 2001, domestic sales accounted for 88% of totalEnSite clinical workstation sales, compared to 62% for the same period in 2000.
EnSite catheter sales were $2.6 millionfor the quarter ended June 2001, compared to $1.5 million for the same periodin 2000, or an increase of 71%.  For thesix months ended June 30, 2001, EnSite catheter sales were $4.8 million,compared to $2.6 million for the same period in 2000.  Domestic sales accounted for 84% of total EnSite catheter salesfor the June 30, 2001 quarter end, compared to 77% for the same period in2000.  For the six months ended June 30,2001, domestic sales accounted for 84% of total EnSite catheter sales, comparedto 75% for the same period in 2000.

Cost of goods sold including unabsorbedmanufacturing expenses was $2.2 million and $1.9 million for the quarters endedJune 30, 2001 and 2000, respectively. For the six months ended June 30, 2001 cost of goods sold was $4.3million, compared to $3.8 million for the same period in 2000.  With the market release of the Company’sClarity software starting in June 2000, capitalized software development costsare being amortized through cost of goods sold over the expected 18-month productlife cycle.

The gross profit margin was 60.1% for thethree months ended June 30, 2001, compared with 48.4% during the same period in2000.  For the six months ended June 30,2001, gross profit margin was 57.8%, compared to 46.4% for the same period in2000.  The increase in margins is mainlyattributed to the growth in domestic sales of $1.9 and $4.0 million, or 69% and83%, over the three and six months ended June 30, 2001, respectively, ascompared to the same periods in 2000. Additionally, because the Company’s margins on its domestic sales aresubstantially higher than those of its international sales, the Company sawmore favorable results in margins with 85% of the revenue, during the threemonths ended June 30, 2001, occurring from domestic sales, compared to 75% fromthe same period in 2000.  For the sixmonths ended June 30, 2001, domestic sales accounted for 85% of worldwiderevenues, compared to 67% for the same period in 2000.

**Researchand Development Expenses.**  Research and development expenses includecompensation and benefit costs within the clinical, software, hardware,catheter and applied research departments as well as costs associated withregulatory expenses.  Research anddevelopment expenses were $1.5 million for the three month period ended June30, 2001, compared to $1.2 million during the same period in 2000, an increaseof $291,000.  For the six months endedJune 30, 2001, research and development expenses were $2.5 million, compared to$2.2 million for the same period in 2000, an increase of $242,000.  The Company believes research anddevelopment expenditures will increase for the remainder of 2001 with the startof the Company’s left atrium study and the reduction of capitalization ofsoftware development costs, which stopped at the end of March 2001.

**Generaland Administrative Expenses.**  General and administrative expenses were$603,000 and $532,000 for the three months ended June 30, 2001 and 2000,respectively, an increase of $71,000. For the six months ended June 30, 2001, general and administrativeexpenses were $1.2 million, compared to $1.1 million for the same period in2000, an increase of $105,000.  Theincrease is due primarily to an increase in professional services expense.

**Salesand Marketing Expenses.**  Sales and marketing expenses were $3.8million during the three months ended June 30, 2001, and $3.1 million duringthe same period in 2000, an increase of $678,000.  For the six monthsended June 30, 2001, sales and marketing expenses were $7.2 million, comparedto $5.5 million for the same period in 2000, an increase of $1.7 million.  The increase is primarily attributable toincreases in personnel and costs associated with building and training of theU.S. sales and clinical engineering team. As the Company continues to penetrate the U.S. market, increases insales and marketing expenses are expected in the next quarter, as it addsadditional headcount in both its selling and field clinical engineeringareas.  Additionally, the Companyexpects, in the next three to nine months, increased sales and marketingexpenses related to the building of the sales organization in Europe.

**InterestIncome and Expense.**  Interest income was $91,000 and $77,000 forthe three months ended June 30, 2001 and 2000, respectively.  For the six months ended June 30, 2001,interest income was $175,000, compared to $202,000 for the same period in2000.  The increase for the three monthsended June 30, 2001 was due to higher average cash and cash equivalentbalances, while the decrease for the six months ended June 30, 2001, was due tolower average cash and cash equivalent balances.  Interest expense was $23,000 and $175,000 for the three monthsended June 30, 2001 and 2000, respectively. For the six months ended June 30, 2001, interest expense was $105,000,compared to $337,000 for the same period in 2000.  The decrease is related to the repayment of the Medtronic loanduring February 2001.
**Liquidityand Capital Resources.**

The Company’s operations since inceptionhave been funded by net proceeds from the sales of common and preferred stocktotaling approximately $79.4million.  As of June 30, 2001 andDecember 31, 2000, the Company had cash, cash equivalents and short-terminvestments of $7.4 and$10.8 million, respectively.

For the three months ended June 30, 2001,the Company used cash of $596,000 for operations, compared to $4.2 million forthe same period in 2000.  For the sixmonths ended June 30, 2001, cash used to support operations was $2.9 million,compared to $6.9 million for the same period in 2000.  The Company saw a decline in its accounts receivable balances of$330,000 from March 31, 2001, even though it had an increase in sales over lastquarter of 21%.  Cash collections forthe three months ended March 31, 2001 were approximately $6.0 million,contributing to the decline of accounts receivable from the March 31, 2001balance.  Inventory balances fell$125,000 since March 31, 2001.  TheCompany has more efficiently managed the levels of its raw material,work-in-process, and finished goods inventories over the last nine to twelvemonths.  The Company believes inventorybalances will grow slightly over the remaining six months of 2001 due toincreases in production as revenues are expected to increase during this timeperiod.  Accounts payable increased$464,000 since March 31, 2001.  TheCompany expects accounts payable to grow slightly over the remaining twoquarters of 2001 as operating and production expenses increase to supportrevenue growth.  Accrued salaries andrelated expenses increased $564,000 since March 31, 2001.  A majority of this increase is attributed toaccrued 2001 annual performance compensation. The Company expects this accrual balance to increase over the remainingsix months of 2001, as it continues to accrue the 2001 annual performancecompensation for payment in the first quarter 2002.  Purchases of short-term investments were $44,600 and $2.9 millionfor the three and six months ended June 30, 2001.    The Company’s current investment portfolio will mature over asix-month period, resulting in increased activity in the purchasing andmaturing of investments.

In January 1999, the Company announced afinancing agreement with Medtronic, Inc. Under the agreement, the Company received $7 million from MedtronicAsset Management, which was repayable in February 2001 or, if earlier, at theclose of a significant round of debt or equity financing.  The Company received $3.5 million of thedebt financing in February 1999 and the remaining $3.5 million in January 2000.  The $7 million was repaid to Medtronic AssetManagement in February 2001.

In June 2000, the Company receivedproceeds of $12,687,500 from a private placement of 2,030,000 shares of itscommon stock to accredited investors. The placement was priced at $6.25 per share.  In July 2000, these shares were registered under the SecuritiesAct of 1933 on behalf of the investors.

In March 2001, the Company receivedproceeds of $7,347,000 from a private placement of 2,449,666 shares of itscommon stock to accredited investors. The placement was priced at $3.00 per share.  In June 2001, these shares were registered under the SecuritiesAct of 1933 on behalf of the investors.

In June 2001, the Company announced a$3.5 million credit facility agreement with Silicon Valley Bank.  $1.5 million is related to a capital leaseline, from which the Company had drawn $273,000 as of the end of June2001.  Re-payment of the loan occursover a 33 month term, based upon quarterly draw schedules over the next year.  The remaining $2.0 million of the $3.5million credit facility is a revolving line of credit.   As of the end of June 2001, the Company hadno outstanding obligations associated with this revolving line of credit.

The Company believes that its existingcash, cash equivalents, short-term investments and bank financing will besufficient to fund the operations of the Company through first quarter2002.  The Company’s future liquidityand capital requirements will depend on numerous factors, including the timingof regulatory actions regarding the Company’s products, the results of clinicaltrials and competition, the extent to which the Company’s EnSite System gainsmarket acceptance, the costs and timing of expansion of sales, marketing andmanufacturing activities and the ability of the Company to obtain bank financing.
**CautionaryStatement**

Except for the historical informationcontained herein, this Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  When used in this Form 10-Qand in future filings by the Company with the Securities and ExchangeCommission, in the Company’s press releases and in oral statements made withthe approval of an authorized executive officer, the word or phrases“believes,” “anticipates,” “expects,” ”intends,” “will likely result,”“estimates,” “projects” or similar expressions are intended to identify suchforward-looking statements, but are not the exclusive means of identifying suchstatements.  These forward-lookingstatements involve risks and uncertainties that may cause the Company’s actualresults to differ materially from the results discussed in the forward-lookingstatements.  Factors that might causesuch differences include, but are not limited to, the following:  risks associated with the successfuldevelopment and commercialization of a new technology;  continued clinical testing experience;uncertainty of obtaining Food and Drug Administration and international regulatoryclearances; uncertainty of availability of treatments employing the Company’sEnSite system ; uncertainty of market acceptance of the EnSite System; trainingrequirements for electrophysiologists; the uncertainty of the ability todiagnose and treat atrial fibrillation; the expectation of future losses;significant competition and rapid technological change in the tachycardiadiagnostic market; risks associated with the Company’s dependence on patentsand proprietary technology; risks associated with the Company’s limitedmanufacturing experience and dependence on suppliers; and the uncertainty ofthird-party reimbursement for diagnostic medical procedures employing theEnSite System.  These factors are discussedin the cautionary statements included in Exhibit 99 to our Form 10-K/A for theyear ended December 31, 2000.  Otherforward looking statements are found in the Company’s disclosures about marketrisk.  The Company cautions investorsand others to review the statements set forth in Management’s Discussion andAnalysis of Financial Condition and Results of Operations, Exhibit 99 and inthe Company’s other reports filed with the Securities and Exchange Commissionand that other factors may prove to be important in affecting the Company’sbusiness and results of operations.

**Item 3. Qualitative andQuantitative Disclosures about Market Risk.**

The Company had approximately $7.4million of cash and investments as of June 30, 2001.  Substantially all of the investments were U.S. government orinvestment grade, fixed income securities from domestic issuers.  Because of the credit risk criteria of theCompany’s investment policies, the primary market risk associated with theseinvestments is interest rate risk.  TheCompany does not use derivative financial instruments to manage interest raterisk or to speculate on futures changes in interest rates.  A rise in interest rates could negativelyaffect the fair value of the Company’s investments; however, because managementconsiders it unlikely that the Company would need or choose to substantiallyliquidate the Company’s investments, management believes that such an increasein interest rates would not have a material impact on the Company’s futureearnings or cash flows.  Even though theCompany distributes products abroad, the Company does not conduct sales inforeign currencies.  Therefore,management does not believe that Company is exposed to any material foreigncurrency exchange rate risk.

**PartII.  OTHER INFORMATION**

**Item 4. Submission ofMatters to a Vote of Security Holders**

The Annual Meeting of the Company’sstockholders was held on May 15, 2001. At the meeting, stockholders voted on the reelection of two directorsfor terms expiring at the Annual Meeting of the Company in 2004.  Each of the directors was reelected by avote as follows:  Graydon E. Beattyreceived 9,403,786 votes “For” and 980,957 votes were “Withheld”; James W.Bullock received 9,433,854 votes “For” and 950,889 votes were “Withheld”.   The Company’s 1993 Long Term Incentive andStock Option Plan was amended to increase the number of shares authorized forissuance under the Plan by 750,000 with 6,324,462 votes in favor, 645,690 votesagainst, 18,091 abstentions and 3,396,500 broker non-votes.
**Item 6. Exhibits and Reports on Form 8-K**

(a)         Exhibits
ExhibitDescription  10.11993  Long Term Incentive and Stock Option Plan (as amended May 15, 2001)  10.2Fourth  Amendment to the Distribution/Supply Agreement dated September 4, 1997  between the Company and Medtronic, Inc.  10.3Loan  and Security Agreement dated June 28, 2001, between the Company and Silicon  Valley Bank  10.4Warrant  to Purchase Stock, dated June 28, 2001, issued by the Company to Silicon  Valley Bank
             b)          Reports on Form 8-K

             Noreports on Form 8-K were filed by the Company during the quarter ended June 30,2001.
**SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
  **Endocardial Solutions, Inc.**         Dated:August  14, 2001By:  /S/ James W. Bullock  James  W. Bullock  President  and Chief Executive Officer  (Principal  Executive, Financial and  Accounting  Officer)