<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549
                      -------------------------------------

                                    FORM 10-Q

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934. 
     For the quarterly period ended September 30, 1997

                                       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: 000-28372

                          CARDIAC PATHWAYS CORPORATION

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                DELAWARE                                         77-0278793
      State or other jurisdiction                             (I.R.S. Employer
   of incorporation or organization)                         Identification No.)


   995 BENECIA AVENUE, SUNNYVALE, CA                                94086
(Address of principal executive offices)                          (Zip Code)


Registrant's telephone number, including area code:  (408) 737-0505



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


As of October 21, 1997 there were 9,529,805 shares of the Registrant's Common
Stock outstanding.


<PAGE>   2
                          CARDIAC PATHWAYS CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
PART I.      FINANCIAL INFORMATION                                                PAGE NO.
<S>          <C>                                                                     <C>
Item 1.      Financial  Statements and Notes (Unaudited)

             Consolidated Balance Sheets as of September 30, 1997 and
             June 30, 1997 .....................................................      3

             Consolidated Statements of Operations for the three months
             ended September 30, 1997 and 1996 .................................      4

             Consolidated Statements of Cash Flows for the three months
             ended September 30, 1997 and 1996..................................      5

             Notes to Consolidated Financial Statements.........................      6

Item 2.      Management's Discussion and Analysis of Financial Condition
             and Results of Operations .........................................      8


PART II.     OTHER INFORMATION

Item 2.      Changes in Securities .............................................     25

Item 4.      Submission of Matters to a Vote of Security Holders................     25
             

Item 6.      Exhibits and Reports on Form 8-K...................................     26

SIGNATURES       ...............................................................     27
</TABLE>





                                       2
<PAGE>   3
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS AND NOTES


                          CARDIAC PATHWAYS CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                               September 30,       June 30,
                                                                                   1997             1997(1)
                                                                               ------------       ------------
<S>                                                                            <C>                <C>         
                                     ASSETS
Current assets:
   Cash and cash equivalents                                                   $  8,111,172       $  5,091,426
   Short-term investments                                                        29,280,442         36,475,534
   Accounts receivable, net of allowance for doubtful accounts
      of $16,500 at September 30, 1997 and $9,500 June 30, 1997                     286,387            168,828
   Receivable from related party                                                      1,552              1,552
   Inventories                                                                      413,159            420,005
   Prepaid expenses                                                                 353,276            411,758
   Other current assets                                                             441,373            528,528
                                                                               ------------       ------------
             Total current assets                                                38,887,361         43,097,631
Property and equipment, net                                                       3,079,338          3,140,849
Notes receivable from related parties                                               242,705            319,491
Deposits and other assets                                                           107,459             97,283
                                                                               ------------       ------------
                                                                               $ 42,316,863       $ 46,655,254
                                                                               ============       ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                             $    419,682       $    788,384
  Accrued compensation and related benefits                                         610,476            462,814
  Accrued clinical expenses                                                         763,555            696,106
  Other accrued expenses                                                            719,508            870,242
  Current obligations under capital leases                                          635,394            768,813
                                                                               ------------       ------------
           Total current liabilities                                              3,148,615          3,586,359
Long-term obligations under capital leases                                          364,035            472,588
Deferred royalty income                                                           2,943,306          2,950,473
Note payable                                                                      4,500,000          4,500,000
Interest payable on note                                                          1,251,375          1,153,625
Commitments
Stockholders' equity:
   Preferred stock, $.001 par value; 5,000,000 shares authorized and none
        issued and outstanding at September 30, 1997 and June 30, 1997                   --                 --
   Common stock, $.001 par value; 30,000,000 shares authorized; 9,529,718
       shares issued and outstanding at September 30, 1997 and 9,523,540
       at June 30, 1997                                                               9,530              9,524
   Additional paid-in capital                                                    79,206,373         79,089,193
   Receivables from stockholders                                                   (420,000)          (420,000)
   Accumulated deficit                                                          (47,985,583)       (43,918,832)
   Deferred compensation                                                           (700,788)          (767,676)
                                                                               ------------       ------------
           Total stockholders' equity                                            30,109,532         33,992,209
                                                                               ------------       ------------
                                                                               $ 42,316,863       $ 46,655,254
                                                                               ============       ============
</TABLE>

(1) Derived from the Company's audited consolidated balance sheet as of June 30,
1997.


                See notes to consolidated financial statements.




                                       3
<PAGE>   4
                          CARDIAC PATHWAYS CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                       Three months ended
                                                          September 30,
                                                  -----------------------------
                                                      1997              1996
                                                  -----------       -----------
<S>                                               <C>               <C>        
Net sales                                         $   561,787       $   779,205
Cost of goods sold                                    649,926           607,813
                                                  -----------       -----------
   Gross margin (deficit)                             (88,139)          171,392
Operating expenses:
   Research and development                         3,496,614         2,616,695
   Selling, general and administrative                863,995           680,062
                                                  -----------       -----------
           Total operating expenses                 4,360,609         3,296,757
                                                  -----------       -----------
Loss from operations                               (4,448,748)       (3,125,365)
Other income (expense):
   Interest income                                    557,441           696,441
   Interest expense                                  (187,338)         (125,031)
   Other, net                                          11,894             3,668
                                                  -----------       -----------
           Total other income (expense), net          381,997           575,078
                                                  -----------       -----------
Net loss                                          ($4,066,751)      ($2,550,287)
                                                  ===========       ===========

Net loss per share                                $     (0.43)      $     (0.27)
                                                  ===========       ===========

Shares used in computing
    net loss per share                              9,528,000         9,284,000
                                                  ===========       ===========
</TABLE>


                See notes to consolidated financial statements.



                                       4
<PAGE>   5
                          CARDIAC PATHWAYS CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                  Three months ended
                                                                     September 30,
                                                            -------------------------------
                                                                1997               1996
                                                            ------------       ------------
<S>                                                         <C>                <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                    $ (4,066,751)      $ (2,550,287)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization                                 315,237            238,418
   Amortization of deferred compensation                          66,888             42,930
   Issuance of common stock warrants                              60,351                 --
   Issuance of nonqualified stock options for services            46,963                 --
Changes in operating assets and liabilities:
   Accounts receivable                                          (117,559)          (138,544)
   Receivable from related party                                      --             21,725
   Inventories                                                     6,846           (111,812)
   Prepaid expenses                                               58,482             29,922
   Other current assets                                           87,155           (162,012)
   Accounts payable                                             (368,702)           (38,931)
   Accrued compensation and related benefits                     147,662            147,921
   Accrued clinical expenses                                      67,449                 --
   Other accrued expenses                                       (150,734)           (97,912)
   Interest payable                                               97,750             94,875
   Deferred royalty income                                        (7,167)                --
                                                            ------------       ------------
Net cash used in operating activities                         (3,756,130)        (2,523,707)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments                           (8,160,108)       (21,922,146)
Maturities and sales of short-term investments                15,355,200          4,500,000
Purchases of property and equipment, net                        (253,726)                --
(Increase) decrease in notes receivable                           76,786            253,860
(Increase) in deposits and other assets                          (10,176)              (722)
                                                            ------------       ------------
Net cash provided by (used in) investing activities            7,007,976        (17,169,008)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations              (241,972)          (177,718)
Capital lease obligations incurred, net                               --            140,865
Proceeds from sale of common stock                                 9,872             47,765
                                                            ------------       ------------
Net cash provided by (used in) financing activities             (232,100)            10,912
                                                            ------------       ------------
Net increase (decrease) in cash and cash equivalents           3,019,746        (19,681,803)
   Cash and cash equivalents at beginning of period            5,091,426         29,112,255
                                                            ------------       ------------
   Cash and cash equivalents at end of period               $  8,111,172       $  9,430,452
                                                            ============       ============
</TABLE>


                See notes to consolidated financial statements.



                                       5
<PAGE>   6
                                 CARDIAC PATHWAYS CORPORATION

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                      SEPTEMBER 30, 1997
                                         (UNAUDITED)


1.      BASIS OF PRESENTATION

        The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
financial information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included.

        The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

        The operating results for the three month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1998. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1997.

2.      SHORT-TERM INVESTMENTS

        At September 30, 1997 and June 30, 1997, all short-term investments were
classified as held-to-maturity and available-for-sale. The amortized cost of
held-to-maturity securities is adjusted for the amortization of premiums and the
accretion of discounts to maturity. Such amortization of premiums and accretion
of discounts are included in interest income. At September 30, 1997 and June 30,
1997, these securities were valued at amortized cost, which approximates fair
value. Available-for-sale securities are carried at fair value with unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. To date, the Company has not experienced any significant unrealized
gains or losses on available-for-sale securities and, accordingly, no
adjustments have been made to stockholders' equity.




                                       6
<PAGE>   7
        The following is a summary of held-to-maturity and available-for-sale
securities at cost, which approximates fair value:

<TABLE>
<CAPTION>
                                               SEPTEMBER 30,      JUNE 30,
DESCRIPTION                                         1997            1997
-----------                                     -----------      -----------
<S>                                             <C>              <C>        
Held-to-maturity:
   U.S. government agency                       $ 4,990,092      $15,485,479
   U.S. corporate obligations                    24,981,659       20,329,767

Available-for-sale:
   Auction rate preferred stock                   1,300,000        2,100,000
   U.S corporate obligations                             --        1,055,206
                                                -----------      -----------
                                                 31,271,751       38,970,452
Amounts classified as cash equivalents            1,991,309        2,494,918
                                                -----------      -----------

Amounts included in short-term investments      $29,280,442      $36,475,534
                                                ===========      ===========
</TABLE>

        There were no realized gains or losses for the three-month periods
ending September 30, 1997 and 1996. The cost of securities sold is based on the
specific identification method. Held-to-maturity securities at September 30,
1997 mature at various dates through August 1998.

3.      CONSOLIDATED BALANCE SHEET COMPONENTS

        Certain balance sheet components are as follows:

<TABLE>
<CAPTION>
                                             SEPTEMBER 30,      JUNE 30,
                                                  1997            1997
                                             -------------     ----------
        <S>                                     <C>           <C>     
        Inventories:

            Raw materials                       $213,019      $252,349
            Work-in-process                       46,687        26,929
            Finished goods                       153,453       140,727
                                                --------      --------
                                                $413,159      $420,005
                                                ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                             SEPTEMBER 30,      JUNE 30,
                                                  1997            1997
                                             -------------     ----------
        <S>                                     <C>           <C>     
        Property and equipment:
            Equipment                          $5,254,922      $4,799,030
            Leasehold improvements                332,833         274,307
            Equipment-in-process                  815,465       1,076,157
                                               ----------      ----------
                                                6,403,220       6,149,494
            Less accumulated depreciation
            and amortization                    3,323,882       3,008,645
                                               ----------      ----------
                                               $3,079,338      $3,140,849
                                               ==========      ==========
</TABLE>




                                       7
<PAGE>   8
4.       STOCK PLANS

        In August 1997, the Board of Directors approved increases in the number
of shares reserved for issuance under the Company's stock plans as follows:
380,000 shares under the 1991 Stock Plan, 20,000 shares under the 1996 Director
Option Plan and 70,000 shares under the 1996 Employee Stock Purchase Plan. These
increases were approved by the stockholders at the 1997 Annual Meeting of
Stockholders on October 14, 1997.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

        The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements based
upon current expectations that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, that include, but are
not limited to, the risks discussed in "Factors That May Impact Future
Operations" as well as those discussed in the following "Overview" section.
These forward-looking statements include the statement in the first paragraph of
"Overview" relating to expectations of operating losses, the statement in the
second paragraph of "Overview" relating to anticipated filing and approval time
periods for premarket approval ("PMA") applications and the commercialization of
products that have received United States Food and Drug Administration ("FDA")
marketing clearance or approval, the statements in the third paragraph of
"Overview" related to the manufacturing, marketing and distribution of the
Company's products, the statements in the last paragraph of "Net Sales," the
statements in the last sentence of the first paragraph and the entire second
paragraph of "Cost of Goods Sold," the statements in the last sentence of each
of the "Research and Development" and "Selling, General, and Administrative"
paragraphs, the statements regarding future capital expenditures in the third
paragraph of "Liquidity and Capital Resources" and the Company's forecast in the
fourth paragraph of "Liquidity and Capital Resources" of the period of time
through which its financial resources will be adequate to support its
operations.

OVERVIEW

        The Company was founded in April 1991 and to date has engaged primarily
in researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception and, as of September 30, 1997, had an accumulated deficit of $48.0
million. The Company has generated only limited revenues from sales of Radii
supraventricular tachycardia mapping and ablation catheters, Trio/Ensemble
diagnostic catheters, Mercator Mapping Baskets, Radiofrequency Generator Systems
and Arrhythmia Mapping Systems. The Company expects its operating losses to
continue through at least the end of calendar 1999 as it continues to expend
substantial funds for clinical trials in support of regulatory approvals,
expansion of research and development activities, establishment of
commercial-scale manufacturing capabilities and expansion of sales and marketing
activities.




                                       8
<PAGE>   9
        The Company believes that its Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System and their
component catheters and equipment are currently the Company's only significant
potential products. The FDA granted 510(k) clearance to the Company in August
1997 for the Model 8100/8300 Arrhythmia Mapping System for basic diagnostic
electrophysiology studies. The Ventricular Tachycardia Ablation System and
Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia are
in various stages of clinical testing, and clinical data obtained to date are
insufficient to demonstrate the safety and efficacy of these products under
applicable FDA regulatory guidelines. In addition, the ablation catheter and
ablation equipment that together form the Atrial Fibrillation Ablation System
and the mapping catheter and mapping equipment that together form the Arrhythmia
Mapping System for atrial fibrillation are in the early stages of clinical
testing and will require further development. See "Factors That May Impact
Future Operating Results - Clinical Trials" for a discussion of the status of
the clinical trials conducted to date for the Company's products. The design,
manufacturing, labeling, distribution and marketing of the Company's products
are subject to extensive and rigorous government regulation in the United States
and certain other countries where the process of obtaining required regulatory
approvals is lengthy, expensive and uncertain. In order for the Company to
market the Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems
or Atrial Fibrillation Ablation System and related catheters and equipment in
the United States, the Company must obtain clearance or approval from the FDA.
At the earliest, the Company does not anticipate filing a PMA application for
any system for at least three months, and does not anticipate receiving a PMA
for any such system until at least one to two years after such PMA application
is accepted for filing, if at all. The Company will not generate any significant
revenue in the United States until such time, if ever, as its Ventricular
Tachycardia Ablation System, Arrhythmia Mapping Systems or its Atrial
Fibrillation Ablation System obtain clearance or approval from the FDA. Even if
one or more of the Company's products obtain FDA clearance or approval, there
can be no assurance that any of the Company's products for diagnosis and
treatment of ventricular tachycardia and atrial fibrillation will be
successfully commercialized or that the Company will achieve significant
revenues from either international or domestic sales. Although the FDA granted
510(k) clearance for basic electrophysiology studies for the Company's Model
8100/8300 Arrhythmia Mapping System in August 1997, such product cannot be
marketed for use with the Company's diagnostic mapping catheters unless and
until such catheters receive marketing clearance from the FDA. Until such
regulatory approval is obtained, the Arrhythmia Mapping System may only be used
with other manufacturer's catheters. There can be no assurance that this system
will be successfully commercialized in the United States or in international
markets where it has not yet received approval.






                                       9
<PAGE>   10
        The Company does not have any experience in manufacturing, marketing or
selling its products for diagnosis and treatment of ventricular tachycardia and
atrial fibrillation in commercial quantities. If the Company receives FDA
clearance or approval for its products, it will need to expend significant
capital resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Nor does the Company have any experience in
manufacturing, marketing or selling its mapping equipment for the Arrhythmia
Mapping System in commercial quantities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. In
addition, if FDA clearances or approvals are received, the Company intends to
market its products primarily through a direct sales force in the United States
and indirect sales channels internationally. Although the Company received
marketing clearance for the Model 8100/8300 Arrhythmia Mapping System in August
1997, the Company has not to date established a direct sales force to market
this product. Establishing a marketing and sales capability sufficient to
support sales in commercial quantities will require substantial efforts and
require significant management and financial resources.


RESULTS OF OPERATIONS

        Net Sales. The Company's net sales to date have resulted primarily from
limited sales of Radii supraventricular tachycardia mapping and ablation
catheters, Trio/Ensemble diagnostic catheters, Mercator Mapping Baskets,
Radiofrequency Generator Systems and Arrhythmia Mapping Systems. The Company's
net sales decreased to $562,000 for the three months ended September 30, 1997
compared to $779,000 for the three months ended September 30, 1996. The decrease
in net sales was primarily attributable to decreased sales of Trio/Ensemble
diagnostic catheters following the transfer of manufacturing and distribution
for the U.S. market to Arrow International, Inc. ("Arrow") and slightly lower
demand for these products in Japan as initial stocking orders were filled in the
prior year. These decreases were offset in part by increased sales of Radii
mapping and ablation catheters and the sale of an Arrhythmia Mapping System in
the three months ended September 30, 1997.

        In December 1995, the Company received $3.0 million pursuant to a
royalty agreement with Arrow. This amount was recorded as deferred royalty
income and will be amortized to income for those Trio/Ensemble catheters that
Arrow manufactures and sells. The royalty rate is 5% of the Trio/Ensemble
catheter's sales price and approximately $57,000 of royalty income has been
recorded through September 30, 1997, of which $7,000 was recognized in the first
quarter of fiscal 1998. There was no royalty income recorded for the first
quarter of fiscal 1997.

        Cost of Goods Sold. Cost of goods sold primarily includes raw materials
costs, catheter fabrication costs, and system assembly and test costs. Cost of
goods sold was $650,000 for the three months ended September 30, 1997, resulting
in a gross margin deficit of $88,000 or 16% of net sales. For the three months
ended September 30, 1996, cost of goods sold was $608,000, resulting in a gross
margin of $171,000 or 22% of net sales. The decrease in gross margin in the
three months ended September 30, 1997 compared to September 30, 1996 was
primarily attributable to lower net sales, changes in sales mix, higher fixed
overhead costs resulting from the expansion of catheter and equipment production
capacity, higher materials procurement costs, and increased compensation and
associated labor costs for assembly, quality control and engineering support
personnel. The Company expects future gross margins to fluctuate as other
products are commercialized.




                                       10
<PAGE>   11
        The Company is currently encountering low yields, vendor shortages and
other significant production inefficiencies in the manufacture of its Mercator
Mapping Basket catheters. Although the Company is taking appropriate steps to
address these yield and other production inefficiencies, there can be no
assurance that such improvements will be achieved. Although the Company
anticipates resolving such production inefficiencies by December 1997, no
assurance can be given that the Company will succeed in such attempts. Failure
to obtain acceptable yields in the manufacture of such products will adversely
affect the ability of the Company to expand its mapping system clinical sites
and commence commercialization of this product in international markets.

        Research and Development. Research and development expenses include
costs associated with product research, clinical trials, prototype development,
obtaining regulatory approvals and costs associated with hiring regulatory,
clinical, research and engineering personnel. Research and development expenses
increased to $3.5 million for the three months ended September 30, 1997 compared
to $2.6 million for the three months ended September 30, 1996. This increase was
primarily attributable to increased costs associated with the hiring of
additional engineering, regulatory and clinical personnel, costs associated with
designing certain manufacturing processes, certain costs in connection with
materials procurement and vendor qualification, and increased costs related to
the placement of Arrhythmia Mapping Systems and catheter products at clinical
sites in the United States and Europe. The Company believes that research and
development expenditures will increase in the future as the Company invests in
product and process improvements related to its ventricular tachycardia and
atrial fibrillation products, expands clinical research activities and increases
its research and development efforts related to new products and technologies.

        Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, senior
management and administrative personnel, various legal and professional fees
including those in connection with obtaining patent protection, and costs of
trade shows. Selling, general and administrative expenses increased to $864,000
for the three months ended September 30, 1997 compared to $680,000 for the three
months ended September 30, 1996. The increase was primarily attributable to
increased expenditures for administrative personnel and services to support
expanding international sales and marketing activities, increased costs
associated with demonstration units and product marketing materials, and certain
increased facilities related costs. The Company anticipates that selling,
general and administrative expenses will increase in future periods as
additional personnel are added to support growing business operations in all
functional areas.

        Other Income (Expense), Net. Other income (expense), net decreased to
net other income of $382,000 for the three months ended September 30, 1997
compared to net other income of $575,000 for the three months ended September
30, 1996. The reduction in net other income is the result of declining interest
income on lower cash, cash equivalent and short-term investment balances and
increased interest expense associated with equipment lease financing activity.

        Net Loss. The Company's net loss increased to $4.1 million for the three
months ended September 30, 1997 compared to $2.6 million for the three months
ended September 30, 1996. The increase in the net loss primarily resulted from
the gross margin deficit in the three months ended September 30, 1997, and
increased product development, clinical research and selling, general and
administrative expenses.




                                       11
<PAGE>   12
        Impact of Adoption of New Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings per Share," which the Company is required
to adopt on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded. The Company has
studied the implications of FAS 128 and does not expect its adoption to have a
material impact on the Company's calculation of earnings per share.


LIQUIDITY AND CAPITAL RESOURCES

        Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding $33.5 million, a
private placement of debt securities yielding $4.5 million, equipment lease
financing arrangements yielding $3.2 million and a prepaid royalty arrangement
yielding $3.0 million. In addition, the Company closed its initial public
offering in June 1996 raising net proceeds of $43.1 million. As of September 30,
1997, the Company had $37.4 million in cash, cash equivalents and short-term
investments.

        Net cash used in operating activities was $3.8 million and $2.5 million
for the three months ended September 30, 1997 and 1996, respectively. For such
periods, net cash used in operating activities resulted primarily from net
losses. Net cash provided by investing activities was $7.0 million for the three
months ended September 30, 1997 and net cash used in investing activities was
$17.2 million for the three months ended September 30, 1996. Net cash provided
by investing activities primarily resulted from maturities and sales of
short-term investments, offset in part by purchases of short-term investments.
The net cash used in investing activities for the three months ended September
30, 1996 was primarily attributable to the purchase of short-term investments
following the Company's initial public offering in June 1996, partially offset
by maturities and sales of short-term investments. Net cash used in financing
activities was $232,000 for the three months ended September 30, 1997 and net
cash provided by financing activities was $11,000 for the three months ended
September 30, 1996.

        As of September 30, 1997, the Company had capital equipment of $6.4
million less accumulated depreciation and amortization of $3.3 million to
support its clinical, development, manufacturing and administrative activities.
The Company has financed approximately $3.2 million from capital lease
obligations through September 30, 1997. In September 1997, the Company secured
an additional equipment lease financing facility of $2.0 million, which is
available to the Company in two equal increments of $1.0 million in each of the
next two years. In connection with the origination of the $2.0 million lease
facility in September 1997, the Company issued a warrant to purchase 35,170
shares of its Common Stock to the lessor at an exercise price of $8.53 per
share. The Company expects to fully utilize the first increment of this lease
line and a portion of existing cash resources in connection with the purchase of
additional capital equipment over the next 12 months. The Company expects
capital expenditures to increase over the next several years as it expands
facilities and acquires equipment to support the planned expansion of
manufacturing capabilities.

        The Company's future liquidity and capital requirements will depend upon
numerous factors, including the progress of the Company's product development
efforts, the progress of the Company's clinical trials, actions relating to
regulatory matters, the costs and timing of expansion of product development,
manufacturing, marketing and sales activities, the extent to which the Company's
products gain market acceptance, and competitive developments. Although the
Company believes that its current




                                       12
<PAGE>   13
cash, cash equivalent and short-term investment balances and cash generated from
the future sale of products will be sufficient to meet the Company's operating
and capital requirements through calendar 1998, there can be no assurance that
the Company will not require additional financing within this time frame.

        The factors described in the previous paragraph and elsewhere in this
Report will impact the Company's future capital requirements and the adequacy of
its available funds. The Company may be required to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms attractive to the Company, or at all. Furthermore,
any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. Collaborative
arrangements, if necessary to raise additional funds, may require the Company to
relinquish its rights to certain of its technologies, products or marketing
territories. The failure of the Company to raise capital when needed could have
a material adverse effect on the Company's business, financial condition and
results of operations.

FACTORS THAT MAY IMPACT FUTURE OPERATIONS

LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES

        The Company was founded in 1991 and to date has engaged primarily in
researching, developing, testing and obtaining regulatory clearances for its
products. The Company has experienced significant operating losses since
inception. As of September 30, 1997, the Company had an accumulated deficit of
$48.0 million. The Company has generated only limited revenues from sales of its
products and expects its operating losses to continue through at least the end
of calendar 1999 as it continues to expend substantial funds for clinical trials
in support of regulatory approvals, expansion of research and development
activities, establishment of commercial scale manufacturing capabilities and
expansion of sales and marketing activities. There can be no assurance that any
of the Company's potential products for diagnosis and treatment of Ventricular
Tachycardia and Atrial Fibrillation will be successfully commercialized or that
the Company will achieve significant revenues from either international or
domestic sales. In addition, there can be no assurance that the Company will
achieve or sustain profitability in the future. The Company's results of
operations may fluctuate significantly from quarter to quarter or year to year
and will depend on numerous factors, including actions relating to regulatory
matters, progress of clinical trials, the extent to which the Company's products
gain market acceptance, the timing of scale-up of manufacturing abilities, the
timing of expansion of sales and marketing activities and competition.

CLINICAL TRIALS

        The Ventricular Tachycardia Ablation System, Arrhythmia Mapping System
for diagnostic mapping of ventricular tachycardia and Arrhythmia Mapping System
for diagnostic mapping of the right atrium are in various stages of clinical
testing. Clinical data obtained to date are insufficient to demonstrate the
safety and efficacy of these products under applicable FDA regulatory
guidelines. There can be no assurance that any of the Company's products will
prove to be safe and effective in clinical trials under applicable United States
or international regulatory guidelines or that additional modifications to the
Company's products will not be necessary. In addition, the clinical trials may
identify significant technical or other obstacles to be overcome prior to
obtaining necessary regulatory or reimbursement approvals. In addition, the
ablation catheter and ablation equipment that together form the Company's Atrial
Fibrillation Ablation System are still under development. There can be no
assurance that the




                                       13
<PAGE>   14
Company will be successful in completing development of the atrial fibrillation
product and submitting the appropriate Investigational Device Exemption
supplement ("IDEs") or that the FDA will permit the Company to undertake
clinical trials of the atrial fibrillation product. Although the FDA granted
510(k) clearance for basic electrophysiology studies for the Company's
Arrhythmia Mapping System in August 1997, such product cannot be marketed with
the Company's mapping catheters unless and until such catheters receive FDA
marketing clearance or approval. Until such regulatory approval is obtained, the
Arrhythmia Mapping System may only be used with other manufacturer's catheters.
There can be no assurance that physicians will adopt the Arrhythmia Mapping
System for electrophysiology studies in lieu of a system incorporating mapping
equipment and catheters from a single manufacturer or at all. If the Ventricular
Tachycardia Ablation System, Arrhythmia Mapping Systems and Atrial Fibrillation
Ablation System and their component catheters and equipment do not prove to be
safe and effective in clinical trials or if the Company is otherwise unable to
commercialize these products successfully, the Company's business, financial
condition and results of operations will be materially adversely affected. In
addition, because ablation treatment of these cardiac arrhythmias is a
relatively new and to date untested treatment, the long-term effects of
radiofrequency ablation on patients are unknown. As a result, the long-term
success of ablation therapy in treating ventricular tachycardia and atrial
fibrillation will not be known for several years.

        The Company is currently conducting a clinical trial of the Chilli
Cooled Ablation Catheter and the Models 8002 and 8004 Radiofrequency Generator
and Integrated Fluid Pump, the products that together form the Company's
Ventricular Tachycardia Ablation System. In May 1997, the Company completed an
IDE feasibility study of the Mercator Left Ventricular Mapping Basket and the
Model 8100/8300 Arrhythmia Mapping System, the products that together form the
Company's Arrhythmia Mapping System for diagnostic mapping of ventricular
tachycardia and has filed an IDE supplemental submission in July 1997 for the
Local Sector Mapping Basket, a variation of the Mercator Left Ventricular
Mapping Basket. The Company is currently conducting a clinical trial of the
Mercator Atrial Mapping Basket and the Model 8100/8300 Arrhythmia Mapping
System, the products that together form the Company's Arrhythmia Mapping System
for diagnostic mapping of the right atrium. In April 1997, the Company completed
a feasibility study of the Nexus Linear Lesion Catheter and Model 8002
Radiofrequency Generator and Integrated Fluid Pump, the products that together
form the Company's Atrial Fibrillation Ablation System. In October 1997, an IDE
supplement was submitted for a second version of the Nexus Linear Lesion
Catheter for the treatment of atrial flutter.

        Ventricular Tachycardia Ablation System. The Company initiated a
clinical trial for the Ventricular Tachycardia Ablation System in the United
States and Europe in November 1995 under an IDE approved by the FDA. The
clinical trials are being conducted at a maximum of 15 clinical sites and will
involve 155 patients randomized using the Ventricular Tachycardia Ablation
System. Pursuant to the IDE, the FDA will evaluate the safety and efficacy of
the Ventricular Tachycardia Ablation System. The primary endpoint of the
clinical trial is clinical recurrence of ventricular tachycardia in patients
randomized to receive ablation treatment versus patients in the control group
receiving antiarrhythmic drugs. The required post-treatment follow-up prior to
submission of a PMA application will be 30 days for safety. However, the Company
is required to follow up with some patients for up to 24 months after the PMA
application filing. The Company anticipates that enrollment for the clinical
trial will be completed prior to calendar 1998. At the conclusion of the
clinical trial, the Company plans to file a PMA application for approval to
market the Ventricular Tachycardia Ablation System and its component catheters
and equipment in the United States.

        As of May 15, 1997, the FDA no longer required randomization, and all
patients enrolled have been able to receive ablation initially. This
modification to the protocol has resulted in more rapid enrollment into the
clinical trial. As of October 21, 1997, 153 patients had been enrolled in the
trial; 75 patients




                                       14
<PAGE>   15
randomized to ablation, 46 patients non-randomized to ablation, and 32 patients
randomized to control of which 17 patients have subsequently received ablation
therapy due to VT recurrence. In addition, 18 patients have received ablation
therapy under a compassionate use protocol. An interim data analysis of acute
and long-term success was performed as of May 31, 1997, comparing patients
randomized to ablation to patients randomized to control. Acute success of
ablation therapy, defined as eradication of all mappable VT at the end of the
ablation procedure, was attained in 74% of patients. The incidence of major
adverse events associated with the procedure has been approximately 9%.

   Arrhythmia Mapping System for Ventricular Tachycardia. In January 1996, the
Company received FDA approval to conduct an IDE feasibility study to evaluate
the safety of the Arrhythmia Mapping System for diagnostic mapping of
ventricular tachycardia. The feasibility study was conducted at three clinical
sites in the United States and Europe and involved a total of 13 patients. The
purpose of the clinical trial was to evaluate and test the success of the
deployment of the Mercator Left Ventricular Mapping Basket into the ventricle,
the fit of the catheter and the system's ability to accurately map the
electrical signals of the left ventricle. In addition, 15 patients have been
studied in Europe outside of the IDE in a similar protocol. There was no
thrombus formation on any mapping basket used in the 28 studies. Of the 28
patients evaluated, one patient developed asymptomatic aortic regurgitation, one
patient had a transient ischemic attack, and two patients developed pericardial
effusions associated with the procedure. In July 1997, the Company submitted an
IDE supplement to support commercialization of two types baskets; the Mercator
Left Ventricular Mapping Basket, the full chamber "global" basket evaluated in
the feasibility study, as well as a smaller, partial chamber high density local
sector basket. Conditional approval was granted to initiate enrollment of 30
patients at five sites for the global basket. The FDA requested a separate IDE
number for a study of the Sector basket. A new IDE will be submitted by the end
of October 1997 and it is anticipated that this study will begin in December
1997. This study will enable the use of both ventricular mapping baskets with
the Ventricular Tachycardia Ablation System simultaneously. Furthermore,
ventricular mapping should enable the treatment of high rate ventricular
tachycardia, which is more common than slow rate ventricular tachycardia which
is the only type amenable to ablation therapy using current techniques.

   Arrhythmia Mapping System for Atrial Fibrillation. In June 1996, the Company
received IDE approval by the FDA to conduct a clinical trial of the Mercator
Atrial Mapping Basket for the right atrium and Arrhythmia Mapping System for
complex atrial tachyarrhythmias including atrial fibrillation. The clinical
trial is being conducted at eight clinical sites in the United States and one in
Europe. The purpose of this clinical trial is to demonstrate the equivalency of
the Mercator Atrial Mapping Basket and the Arrhythmia Mapping System to
commercially available mapping catheters. As of October 21, 1997, the Mercator
Atrial Mapping Basket was evaluated in 52 patients. There was no thrombus
formation on any mapping basket used in the 52 studies. The Company anticipates
submission of a 510(k) application for clearance during early 1998.

   The Company has also evaluated the Mercator Atrial Mapping Basket outside of
the U.S. IDE at two European sites. As of October 21, 1997, the Mercator Atrial
Mapping Basket was safely deployed and fit properly in the right atrium in six
European patients. In addition, the Mercator Atrial Mapping Basket for the left
atrium was also tested in one of the patients. None of the patients in the U.S.
and Europe had complications as a result of the Mercator Atrial Mapping Basket
and Arrhythmia Mapping System.

   Atrial Fibrillation Ablation System. The Company received FDA approval of an
IDE feasibility study to evaluate the safety of the Atrial Fibrillation Ablation
System in August 1996. The purpose of the IDE feasibility study for the Atrial
Fibrillation Ablation System was to assess the safety and performance in




                                       15
<PAGE>   16
creating continuous linear lesions. The feasibility study was completed with 10
patients undergoing testing.

        The purpose of the clinical test was to verify that a linear lesion
could be made in a location in the atrium anticipated to eliminate atrial
fibrillation. In a majority of the patients undergoing ablation, linear lesions
were created in the right atrium either with the Nexus Linear Lesion Catheter
alone or with commercial ablation catheter supplementation. One patient
developed a pericardial effusion attributed to perforation by a commercial
diagnostic (non-ablation) catheter. No other complications occurred. The Company
also tested the Nexus Linear Lesion Catheter in two patients in Europe. As of
October 21, 1997, the Nexus Linear Lesion Catheter was used in a total of 12
patients.

        The Nexus Linear Lesion Catheter was modified to improve the ability to
create linear lesions minimizing the need for commercial ablation catheter
supplementation. The modifications include the addition of active deflection to
facilitate tissue contact. It is anticipated that an IDE supplement will be
submitted in October 1997 to support commercialization of the Nexus Linear
Lesion Catheter in the right atrium to treat atrial flutter. Atrial flutter is
an abnormal heart rhythm now commonly treated using catheter ablation, requiring
the creation of a two to four centimeter linear lesion in the right atrium. The
study is expected to begin in December 1997 involving 102 patients at 12
investigative sites.

        The Company anticipates the submission of an IDE for use of the modified
Nexus Linear Lesion Catheter in the left atrium for the treatment of atrial
fibrillation in November 1997.

NO EXISTING MARKET

        The Company's Model 8100/8300 Arrhythmia Mapping System (the "Model
8100/8300") received 510(k) clearance from the FDA in August 1997 for basic
diagnostic electrophysiology studies. The Company has begun marketing such
system commercially in the United States. However, there can be no assurance
that such system will gain any significant degree of market acceptance among
physicians, patients, and health care payors. The Company believes that
physician's acceptance of procedures performed using the Company's Model
8100/8300 will be essential for market acceptance of such system. Even though
the clinical efficacy of such system has been established, electrophysiologists,
cardiologists, and other physicians may elect not to recommend the use of the
Model 8100/8300 for any number of reasons. The Company believes that, as with
any novel medical technology, there will be a significant learning process
involved for physicians to become proficient. Broad use of such system will
require training of electrophysiologists, and the time required to complete such
training could adversely affect market acceptance. Failure of such product to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. Even if
the Model 8100/8300 achieves market acceptance, if the Company is unable to
manufacture sufficient quantities of such product to satisfy customer demand,
the Company's business, financial condition and results of operations would
materially adversely affected.

MARKETING AND DISTRIBUTION

        The Company currently has only a limited sales and marketing
organization. If FDA clearances or approvals are received for the Company's
ventricular tachycardia or atrial fibrillation products, the Company intends to
market its products primarily through a direct sales force in the United States
and indirect sales channels internationally. Although the Company received
marketing clearance for the Arrhythmia Mapping System in August 1997, the
Company has not to date established a direct sales force to market this product.




                                       16
<PAGE>   17
        Establishing a marketing and sales capability sufficient to support
sales in commercial quantities will require substantial efforts and require
significant management and financial resources. There can be no assurance that
the Company will be able to build such a marketing staff or sales force, that
establishing such a marketing staff or sales force will be cost-effective or
that the Company's sales and marketing efforts will be successful. If the
Company is successful in obtaining the necessary regulatory approvals for its
ventricular tachycardia and atrial fibrillation products in international
markets, it expects to establish a sales and marketing capability in those
markets primarily through distributors. There can be no assurance that the
Company will be able to enter into agreements with desired distributors on a
timely basis or at all, or that such distributors will devote adequate resources
to selling the Company's products. Failure to establish appropriate distribution
relationships could have a material adverse effect upon the Company's business,
financial condition and results of operations.

MANUFACTURING

        Components and raw materials are purchased from various qualified
suppliers and subjected to stringent quality specifications. The Company
conducts quality audits of suppliers and is establishing a vendor certification
program. A number of the components for the Company's products are provided by
sole source suppliers. For certain of these components, there are relatively few
alternative sources of supply, and establishing additional or replacement
vendors for such components could not be accomplished quickly. The Company plans
to qualify additional suppliers if and as future production volumes increase.
Because of the long lead time for some components that are currently available
from a single source, a vendor's inability to supply such components in a timely
manner could have a material adverse effect on the Company's ability to
manufacture the mapping basket, mapping equipment and ablation equipment and
therefore on its business, financial condition and ability to market its
products as currently contemplated.

        The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high-volume manufacturing capacity
can be established or maintained at commercially reasonable costs. If the
Company receives FDA clearance or approval for its products, it will need to
expend significant capital resources and develop manufacturing expertise to
establish large-scale manufacturing capabilities. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply
shortages, shortages of qualified personnel, compliance with FDA regulations,
and the need for further FDA approval of new manufacturing processes. In
addition, the Company believes that substantial cost reductions in its
manufacturing operations will be required for it to commercialize its catheters
and systems on a profitable basis. Any inability of the Company to establish and
maintain large-scale manufacturing capabilities would have a material adverse
effect on the Company's business, financial condition and results of operations.

        The Company's manufacturing facilities are subject to periodic
inspection by regulatory authorities, and its operations must undergo Quality
System compliance inspections conducted by the FDA. To date, the Company's
facilities and manufacturing processes have not undergone any such inspections.
The Company will be required to comply with Quality System requirements in order
to produce products for sale in the United States and with ISO 9001/EN46001
standards in order to produce products for sale in Europe. The Company has
received ISO/EN46001 certification by its European Notified Body and anticipates
final certification for the Medical Device Directive Quality System requirements
by the end of October 1997. Any failure of the Company to comply with Quality
System or ISO 9001/EN46001




                                       17
<PAGE>   18
standards may result in the Company being required to take corrective actions,
such as modification of its policies and procedures. The State of California
also requires that the Company obtain a license to manufacture medical devices.
The Company has applied for a device manufacturing license from the California
Department of Health Services ("CDHS"), however, the Company has not yet
received an inspection by the CDHS which is required before a license can be
issued. If the Company is unable to maintain such a license, it would be unable
to manufacture or ship any product, which inability would have a material
adverse effect on the Company's business, financial condition and results of
operations.

PATENTS AND PROPRIETARY RIGHTS

        The Company's success will depend in part on its ability to obtain
patent and copyright protection for its products and processes, to preserve its
trade secrets and to operate without infringing or violating the proprietary
rights of third parties. The Company's strategy is to actively pursue patent
protection in the United States and foreign jurisdictions for technology that it
believes to be proprietary and that offers a potential competitive advantage for
its products. The Company holds issued and allowed patents covering a number of
fundamental aspects of the Company's Ventricular Tachycardia Ablation System,
Arrhythmia Mapping Systems and Atrial Fibrillation Ablation System. The patent
positions of medical device companies, including those of the Company, are
uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. In addition, there can be no assurance
that competitors, many of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets. Litigation or regulatory proceedings, which could result
in substantial cost and uncertainty to the Company may also be necessary to
enforce patent or other intellectual property rights of the Company or to
determine the scope and validity of other parties' proprietary rights. There can
be no assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.

        In addition to patents, the Company relies on trade secrets and
proprietary know-how to compete, which it seeks to protect, in part, through
appropriate confidentiality and proprietary information agreements. These
agreements generally provide that all confidential information developed or made
known to individuals by the Company during the course of the relationship with
the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering service to the
Company shall be the exclusive property of the Company. There can be no
assurance that proprietary information or confidentiality agreements with
employees, consultants and others will not be breached, that the Company will
have adequate remedies for any breach, or that the Company's trade secrets will
not otherwise become known to or independently developed by competitors.

        The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and
companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. There can be no assurance that the
Company will not become subject to patent infringement claims or litigation in a
court of law, or interference proceedings declared by the United States Patent
and Trademark Office ("USPTO") to




                                       18
<PAGE>   19
determine the priority of inventions or an opposition to a patent grant in a
foreign jurisdiction. The defense and prosecution of intellectual property
suits, USPTO interference or opposition proceedings and related legal and
administrative proceedings are both costly and time-consuming. Any litigation,
opposition or interference proceedings will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require the Company to cease using such technology.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses from
others would be available to the Company on satisfactory terms, if at all.
Adverse determinations in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
is aware of certain patents owned or licensed by others and relating to cardiac
catheters and cardiac monitoring. Certain enhancements of the Company's products
are still in the design and pre-clinical testing phase. Depending on the
ultimate design specifications and results of pre-clinical testing of these
enhancements there can be no assurance that the Company would be able to obtain
a license to such patents or that a court would find that such patents are
either not infringed by such enhancements or are invalid. Further, there can be
no assurance that owners or licensees of these patents will not attempt to
enforce their patent rights against the Company in a patent infringement suit or
other legal proceeding, regardless of the likely outcome of such suit or
proceeding.

COMPETITION

        At present, the Company considers its primary competition to be
companies involved in current, more established therapies for the treatment of
ventricular tachycardia and atrial fibrillation, including drugs, external
electrical cardioversion and defibrillation, implantable defibrillators,
ablation accompanied by pacemaker implantation, and open-heart surgery. In
addition, several competitors are also developing new approaches and new
products for the treatment and mapping of ventricular tachycardia and atrial
fibrillation, including ablation systems using ultrasound, microwave, laser and
cryoablation technologies and mapping systems using contact mapping,
single-point spacial mapping and non-contact, multisite electrical mapping
technologies. Many of the Company's competitors have an established presence in
the field of interventional cardiology and electrophysiology. Many competitors
have substantially greater financial and other resources than the Company,
including larger research and development staffs and more experience and
capabilities in conducting research and development activities, testing products
in clinical trials, obtaining regulatory approvals, and manufacturing, marketing
and distributing products. There can be no assurance that the Company will
succeed in developing and marketing technologies and products that are more
clinically efficacious and cost-effective than the more established treatments
or the new approaches and products developed and marketed by its competitors.
Furthermore, there can be no assurance that the Company will succeed in
developing new technologies and products that are available prior to its
competitors' products. The failure of the Company to demonstrate the efficacy
and cost-effective advantages of its products over those of its competitors or
the failure to develop new technologies and products before its competitors
could have a material adverse effect on the Company's business, financial
condition and results of operations.

        The Company believes that the primary competitive factors in the market
for cardiac ablation and mapping devices are safety, efficacy, ease of use and
price. In addition, the length of time required for




                                       19
<PAGE>   20
products to be developed and to receive regulatory and, in some cases, third
party payor reimbursement approval is an important competitive factor. The
medical device industry is characterized by rapid and significant technological
change. Accordingly, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development and
introduction of new products. Product development involves a high degree of risk
and there can be no assurance that the Company's new product development efforts
will result in any commercially successful products. The Company believes it
competes favorably with respect to these factors, although there is no assurance
that it will be able to continue to do so.

GOVERNMENT REGULATION

United States

        Clinical testing, manufacture and sale of the Company's products are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act of 1938, as amended (the "FDC Act"), the FDA
regulates the clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.

        Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act ("510(k)") or an approval of a PMA application
under Section 515 of the FDC Act. Commercial distribution of a device for which
a 510(k) clearance is required can begin only after the FDA issues an order
finding the device to be "substantially equivalent" to a predicate device. If
the Company cannot establish that a proposed device is substantially equivalent
to a legally marketed predicate device, the Company must seek premarket approval
of the proposed device from the FDA through the submission of a PMA application.

        The process of obtaining a PMA and other required regulatory approvals
can be expensive, uncertain, and lengthy, and there can be no assurance that the
Company will ever obtain such approvals. At the earliest, the Company does not
anticipate filing a PMA application for any system for at least the next three
months, and does not anticipate receiving a PMA for any such system until at
least one to two years after such PMA application is accepted for filing, if at
all. There can be no assurance that the FDA will act favorably or quickly on any
of the Company's submissions to the FDA and significant difficulties and costs
may be encountered by the Company in its efforts to obtain FDA clearance that
could delay or preclude the Company from selling its products in the United
States. Furthermore, there can be no assurance that the FDA will not request
additional data or require that the Company conduct further clinical studies,
causing the Company to incur substantial cost and delay. In addition, there can
be no assurance that the FDA will not impose strict labeling requirements,
onerous operator training requirements or other requirements as a condition of
its PMA approval, any of which could limit the Company's ability to market its
systems. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission ("FTC"). FDA
enforcement policy strictly prohibits the marketing of FDA cleared or approved
medical devices for unapproved uses. Further, if a company wishes to modify a
product after FDA approval of a PMA, including changes in 




                                       20
<PAGE>   21
indications or other modifications that could affect safety or efficacy,
additional clearances or approvals will be required from the FDA. Failure to
receive or delays in receipt of FDA clearances or approvals, including the need
for additional clinical trials or data as a prerequisite to clearance or
approval, or any FDA conditions that limit the ability of the Company to market
its systems, could have a material adverse effect on the Company's business,
financial condition and results of operations.

International

        The European Union ("EU") has promulgated rules which require that
medical products receive by June 12, 1998 the right to affix the CE mark, an
international symbol of adherence to quality assurance standards and compliance
with applicable European medical device directives. Quality Systems
certification is one of the CE mark requirements. The Company has been
recommended for Medical Device Directive Quality System certification by its
European Notified Body, one of the CE mark certification prerequisites for its
manufacturing facility in Sunnyvale, California. Final certification is expected
by the end of October 1997. While the Company intends to satisfy the requisite
policies and procedures that will permit it to receive the CE mark
certification, there can be no assurance that the Company will be successful in
meeting the European certification requirements and failure to receive the right
to affix the CE mark will prohibit the Company from selling its products in
member countries of the European Union.

        The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval, and the requirements
may differ. Export sales of investigational devices that are subject to PMA or
IDE requirements and have not received FDA marketing approval are subject to FDA
export requirements. In accordance with the FDA Export Reform & Enforcement Act
of 1996, such devices may be exported to any country provided that the device
has marketing authorization in one of the countries identified in that Act. If
the device has no such marketing authorization and is intended for marketing
approval must be obtained from the FDA to export to any country. In order to
obtain export approval, the Company may be required to provide the FDA with
documentation from the medical device regulatory authority of the country in
which the study is to be conducted or the purchaser is located, stating that the
device has the approval of the country. In addition, the FDA must find that the
exportation of the device is not contrary to the public health and safety of the
country in order for the Company to obtain the permit. The Company is in the
process of obtaining the necessary approvals or initiating clinical trials in
the United Kingdom, Germany, France, Canada, Australia and Asia.

THIRD-PARTY REIMBURSEMENT AND UNCERTAINTY RELATED TO HEALTH CARE REFORM

        In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients,
generally rely on third-party payors, principally federal Medicare, state
Medicaid and private health insurance plans, to reimburse all or a part of the
costs and fees associated with the procedures performed using these products.
The Company's success will be dependent upon, among other things, the ability of
health care providers to obtain satisfactory reimbursement from third-party
payors for medical procedures in which the Company's products are used.
Third-party payors may deny reimbursement if they determine that a prescribed
device has not received appropriate regulatory clearances or approvals, is not
used in accordance with cost-effective treatment methods as determined by the
payor, or is experimental, unnecessary or inappropriate.

        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 for new




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<PAGE>   22
products and procedures. In most markets, there are private insurance systems as
well as government managed systems. Market acceptance of the Company's products
will depend on the availability and level of reimbursement in international
markets targeted by the Company. There can be no assurance that the Company will
obtain reimbursement in any country within a particular time, for a particular
time, for a particular amount, or at all.

        Regardless of the type of reimbursement system, the Company believes
that physician advocacy of the Company's products will be required to obtain
reimbursement. The Company believes that less invasive procedures generally
provide less costly overall therapies as compared to conventional drug, surgery
and other treatments. In addition, the Company believes that a patient's
underlying arrhythmia will typically not recur after treatment with the
Company's procedures. The Company anticipates that hospital administrators and
physicians would justify the use of the Company's products by the attendant cost
savings and clinical benefits that the Company believes would be derived from
the use of its products. However, there can be no assurance that this will be
the case. There can be no assurance that reimbursement for the Company's
products will be available in the United States or in international markets
under either government or private reimbursement systems, or that physicians
will support and advocate reimbursement for procedures using the Company's
products. Failure by hospitals and other users of the Company's products to
obtain reimbursement from third party payors, or changes in government and
private third-party payors' policies toward reimbursement for procedures
employing the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is 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 the Company.

PRODUCT LIABILITY AND INSURANCE

        The development, manufacture and sale of medical products entail
significant risk of product liability claims and product failure claims. The
Company has conducted only limited clinical trials and does not yet have, and
will not have for a number of years, sufficient clinical data to allow the
Company to measure the risk of such claims with respect to its products. The
Company faces an inherent business risk of financial exposure to product
liability claims in the event that the use of its products results in personal
injury or death. The Company also faces the possibility that defects in the
design or manufacture of the Company's products might necessitate a product
recall. There can be no assurance that the Company will not experience losses
due to product liability claims or recalls in the future. In addition, the
Company will require increased product liability coverage if any potential
products are successfully commercialized. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
Any claims against the Company, regardless of their merit or eventual outcome,
could have a material adverse effect upon the Company's business, financial
condition and results of operations.

EMPLOYEES

        The Company's ability to operate successfully depends in significant
part upon the continued service of certain key scientific, technical, clinical,
regulatory and managerial personnel, and its continuing ability to attract and
retain additional highly qualified scientific, technical, clinical, regulatory
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that the Company can retain such personnel or that it can
attract or retain other highly qualified scientific, technical, clinical,
regulatory and managerial personnel in the future, including key sales and
marketing




                                       22
<PAGE>   23
personnel. The loss of key personnel or the inability to hire and retain
qualified personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations.

        In addition, in order to complete clinical trials in progress, prepare
additional products for clinical trials, and develop future products, the
Company believes that it will be required to expand its operations, particularly
in the areas of research and development, manufacturing and sales and marketing.
As the Company expands its operations in these areas, such expansion will likely
result in new and increased responsibilities for management personnel and place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate any such growth and compete effectively,
the Company will be required to implement and improve information systems,
procedures, and controls, and to expand, train, motivate and manage its work
force. The Company's future success will depend to a significant extent on the
ability of its current and future management personnel to operate effectively,
both independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's future operations. Any failure to implement and improve the Company's
operational, financial and management systems or, to expand, train, motivate or
manage employees as required by future growth, if any, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

ISSUANCE OF PREFERRED STOCK COULD DELAY OR PREVENT CORPORATE TAKEOVER

        The Board of Directors has the authority to issue up to 5,000,000 shares
of undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
the stockholders. To date, the Board of Directors has designated 30,000 shares
as Series A Participating Preferred Stock in connection with the Company's
Stockholder Rights Plan. The issuance of Preferred Stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company or otherwise adversely affecting the rights of the
holders of Common Stock.

        On April 22, 1997, pursuant to a Preferred Shares Rights Agreement (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A. (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right (a "Right") to purchase 1/1000th of a share of the Company's Series A
Participating Preferred Stock ("Series A Preferred") for each outstanding share
of Common Stock of the Company. The dividend was payable on May 23, 1997 to
stockholders of record as of the close of business on April 30, 1997 (the
"Record Date"). Each Right entitles the registered holder to purchase from the
Company 1/1000th of a share of Series A Preferred at an exercise price of $125
(the "Purchase Price"), subject to adjustment. The Rights approved by the Board
are designed to protect and maximize the value of the outstanding equity
interests in the Company in the event of an unsolicited attempt by an acquirer
to take over the Company, in a manner or on terms not approved by the Board of
Directors. The Rights have been declared by the Board in order to deter coercive
tactics, including a gradual accumulation of shares in the open market of a 15%
or greater position to be followed by a merger or a partial or two-tier tender
offer that does not treat all stockholders equally. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors. However, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.




                                       23
<PAGE>   24
POTENTIAL VOLATILITY OF STOCK PRICE

        The market price of shares of Common Stock, like that of the common
stock of many medical products and high technology companies, has in the past
been, and is likely in the future to continue to be highly volatile. Factors
such as fluctuations in the Company's operating results, announcements of
technological innovations or new commercial products by the Company's or
competitors, government regulation, changes in the current structure of the
health care financing and payment systems, developments in or disputes regarding
patent or other proprietary rights, economic and other external factors and
general market conditions may have a significant effect on the market price of
the Common Stock. Moreover, the stock market has from time to time experienced
extreme price and volume fluctuations which have particularly affected the
market prices for medical products and high technology companies and which have
often been unrelated to the operating performance of such companies. These broad
market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's Common Stock.
In the past, following periods of volatility in the market price of a company's
stock, securities class action litigation has occurred against the issuing
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect on the Company's business, operating results and
financial condition. Any adverse determination in such litigation could also
subject the Company to significant liabilities.

ABSENCE OF DIVIDENDS

        The Company has not paid any cash dividends since inception and does not
anticipate paying cash dividends in the foreseeable future.









                                       24
<PAGE>   25
                          CARDIAC PATHWAYS CORPORATION


PART II.     OTHER INFORMATION


ITEM 2.      CHANGES IN SECURITIES


        Recent Sales of Unregistered Securities. Since June 30, 1997, the
Company has issued and sold (without payment of any selling commission to any
person) the following unregistered securities:

        1.  On September 26, 1997 the Company issued a warrant to purchase
            35,170 shares of the Company's Common Stock to LINC Capital, Inc.
            ("LINC") in connection with the execution of Amendment No. 5 to the
            Master Lease Agreement No. 5811 between the Company and LINC.

        The sales of the above securities were deemed to be exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act, or Regulation D
promulgated thereunder, as transactions by an issuer not involving a public
offering. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationship
with the Company or otherwise, to information about the Registrant.

        Use of Proceeds. With respect to the requirements of Item 701(f) of
Regulation S-K regarding the reporting of use of proceeds, pursuant to the
information required to be reported by Item 701(f)(4)(viii), the Company used
net proceeds in the amounts noted for the stated purposes since its March 12,
1997 report on Form SR: purchase and installation of machinery and equipment -
$562,062; repayment of indebtedness - $239,088; and working capital -
$3,628,298.


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


        At the Company's 1997 Annual Meeting of Stockholders on October 14,
1997, the stockholders approved the following actions:


        A.      Election of Class II Directors.

               Dr. Thomas J. Fogerty:     For:  7,325,632    Withheld:  469,748
               Dr. Joseph P. Ilvento:     For:  7,777,183    Withheld:   18,197

        B.     Amendment of 1996 Employee Stock Option Plan to increase the
               number of shares available for issuance thereunder by 70,000
               shares.

               For:  6,768,817     Against:  1,018,109     Abstain:  8,454





                                       25
<PAGE>   26
        C.     Amendment of 1996 Director Option Plan to increase the number of
               shares available for issuance thereunder by 20,000 shares.

               For:  6,977,749     Against:    809,377     Abstain:   8,254

        D.     Amendment of 1991 Stock Plan to (i) approve the amendment of the
               1991 Stock Plan to increase the number of shares available for
               issuance thereunder by 380,000 shares and (ii) to approve the
               material terms of the Stock Plan, including but not limited to,
               share limitations for purposes of Section 162(m) of the Internal
               Revenue Code of 1986, as amended.

               For:  5,304,061     Against:  2,462,638     Abstain:  28,681

        E.     Ratification of the appointment of Ernst & Young LLP as
               independent auditors for the Company for the fiscal year ending
               June 30, 1998.

               For:  7,763,460     Against:     24,410     Abstain:   7,510


ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

               (a)  The exhibits listed on the accompanying Exhibit Index are
                    filed as a part hereof.

               (b)  No reports on Form 8-K were filed by the Registrant during
                    the three months ended September 30, 1997.






                                       26
<PAGE>   27
                          CARDIAC PATHWAYS CORPORATION


                                   SIGNATURES


   Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



DATE:  OCTOBER 23, 1997                    CARDIAC PATHWAYS CORPORATION



                                           /S/ WILLIAM N. STARLING
                                           -------------------------------------
                                           WILLIAM N. STARLING
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER



                                           /S/ DAVID W. GRYSKA
                                           -------------------------------------
                                           DAVID W. GRYSKA
                                           VICE PRESIDENT OF FINANCE AND CHIEF
                                           FINANCIAL OFFICER







                                       27
<PAGE>   28
                                 CARDIAC PATHWAYS CORPORATION

                                      INDEX TO EXHIBITS



<TABLE>
<CAPTION>
  EXHIBIT NO.       EXHIBIT DESCRIPTION                                             PAGE NO.
----------------    ----------------------------------------------------------     ----------
<S>    <C>          <C>                                                             <C>
       10.2         1991 Stock Plan, as amended

       10.12.1      Amendment No. 5 to Master Lease Agreement No. 5811 between
                    the Registrant and LINC Capital, Inc. dated September 26,
                    1997

       27.1         Financial Data Schedule
</TABLE>













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