<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 December 31, 1996
    

                                       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 December 31, 1996 there were 9,346,661 shares of the Registrant's Common
Stock outstanding.




                                       1

<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  December  31, 1996 and
            June 30, 1996 ....................................................      3

            Consolidated Statements of Operations for the three and six months
            ended December 31, 1996 and 1995 .................................      4

            Consolidated Statements of Cash Flows for the six months ended
            December 31, 1996 and 1995 .......................................      5

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

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


PART II.    OTHER INFORMATION

Item 4.     Submission of Matters to a Vote of Security Holders ..............     22

Item 6.     Exhibits and Reports on Form 8-K .................................     22

SIGNATURES ...................................................................     23
</TABLE>




                                       2



<PAGE>   3
PART 1.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS AND NOTES

                          CARDIAC PATHWAYS CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                  December 31,             June 30,
                                                                                     1996                  1996 (1)
                                                                                  ------------          ------------
                                     ASSETS
<S>                                                                               <C>                   <C>         
Current assets:
   Cash and cash equivalents                                                      $ 12,724,863          $ 29,112,255
   Short-term investments                                                           35,457,463            23,760,812
   Accounts receivable, net of allowance for doubtful accounts
      of $9,500 at December 31, 1996 and June 30, 1996                                 433,712               398,997
   Receivable from related party                                                          --                  21,725
   Inventories                                                                         284,113               162,516
   Prepaid expenses                                                                    150,077               234,339
   Notes receivable from related parties                                                  --                 256,656
   Other current assets                                                                430,163               340,291
                                                                                  ------------          ------------
             Total current assets                                                   49,480,391            54,287,591

Property and equipment, net                                                          3,011,713             2,835,355
Notes receivable from related parties                                                  284,854                 5,760
Deposits and other assets                                                               76,806                59,188
                                                                                  ============          ============
                                                                                  $ 52,853,764          $ 57,187,894
                                                                                  ============          ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                                $    437,264          $    511,386
  Accrued compensation and related benefits                                            293,315               193,511
  Accrued clinical expenses                                                            395,200               150,004
  Other accrued expenses                                                               590,416               733,565
  Current obligations under capital leases                                             915,679               671,538
                                                                                  ------------          ------------
           Total current liabilities                                                 2,631,874             2,260,004

Long-term obligations under capital leases                                             792,553               602,574
Deferred royalty income                                                              3,000,000             3,000,000
Note payable                                                                         4,500,000             4,500,000
Interest payable                                                                       964,171               774,421
Commitments
Stockholders' equity:
   Preferred stock, $.001 par value; 5,000,000 shares authorized and none
        issued and outstanding at December 31, 1996 and June 30, 1996                     --                    --
   Common stock, $.001 par value; 30,000,000 shares authorized; 9,346,661
       shares issued and outstanding at December 31, 1996 and 9,269,332
       at June 30, 1996                                                                  9,346                 9,270
   Additional paid-in capital                                                       78,724,658            77,656,634
   Receivables from stockholders                                                      (395,000)             (406,000)
   Accumulated deficit                                                             (36,472,385)          (31,053,238)
   Deferred compensation                                                              (901,453)             (155,771)
                                                                                  ------------          ------------
           Total stockholders' equity                                               40,965,166            46,050,895
                                                                                  ------------          ------------
                                                                                  $ 52,853,764          $ 57,187,894
                                                                                  ============          ============
</TABLE>


(1) Derived from the Company's audited consolidated balance sheet as of June 30,
    1996.




                See notes to consolidated financial statements.


                                        3
<PAGE>   4
                          CARDIAC PATHWAYS CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                  (UNAUDITED)




<TABLE>
<CAPTION>
                                                             Three months ended                           Six months ended
                                                                December 31,                               December 31,
                                                     --------------------------------          --------------------------------
                                                        1996                 1995                 1996                 1995
                                                     -----------          -----------          -----------          -----------
<S>                                                  <C>                  <C>                  <C>                  <C>
Net sales                                            $   903,715          $   443,354          $ 1,682,920          $   566,684
Operating expenses:
   Manufacturing start-up and cost
     of goods sold                                       669,803              653,541            1,277,616            1,039,797
   Research and development                            2,940,869            1,643,192            5,557,564            3,082,131
   Selling, general and administrative                   717,073              512,306            1,397,135              888,681
                                                     -----------          -----------          -----------          -----------
           Total operating expenses                    4,327,745            2,809,039            8,232,315            5,010,609
                                                     -----------          -----------          -----------          -----------
Loss from operations                                  (3,424,030)          (2,365,685)          (6,549,395)          (4,443,925)
Other income (expense):
   Interest income                                       680,765              144,468            1,377,206              297,856
   Interest expense                                     (133,016)            (144,969)            (258,047)            (284,049)
   Other, net                                              7,421                2,833               11,089               11,644
                                                     -----------          -----------          -----------          -----------
           Total other income (expense), net             555,170                2,332            1,130,248               25,451
                                                     ===========          ===========          ===========          ===========
Net loss                                             $(2,868,860)         $(2,363,353)         $(5,419,147)         $(4,418,474)
                                                     ===========          ===========          ===========          ===========

Net loss per share                                   $     (0.31)                              $     (0.58)
                                                     ===========                               ===========

Shares used in computing
    net loss per share                                 9,318,000                                 9,301,000
                                                     ===========                               ===========

Pro forma net loss per share                                              $     (0.34)                              $     (0.63)
                                                                          ===========                               ===========

Shares used in computing pro forma
    net loss per share                                                      6,975,000                                 6,975,000
                                                                          ===========                               ===========
</TABLE>





                See notes to consolidated financial statements.



                                        4
<PAGE>   5
                          CARDIAC PATHWAYS CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                   Six months ended
                                                                     December 31,
                                                           ------------------------------
                                                               1996              1995
                                                           ------------      ------------
<S>                                                        <C>               <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                   $ (5,419,147)     $ (4,418,474)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization                                598,682           365,762
   Amortization of deferred compensation                        109,818             9,622
   Loss on disposal of property and equipment                      --              12,860
   Issuance of nonqualified stock options for services           10,000             4,400

Changes in operating assets and liabilities:
   Accounts receivable                                          (34,715)         (104,188)
   Receivable from related party                                 21,725           114,976
   Inventories                                                 (121,597)           13,513
   Prepaid expenses                                              84,262            38,466
   Other current assets                                         (89,872)           70,401
   Accounts payable                                             (74,122)         (424,148)
   Accrued compensation and related benefits                     99,804            93,058
   Accrued clinical expenses                                    245,196             7,000
   Other accrued expenses                                      (143,149)         (171,718)
   Interest payable                                             189,750           210,093
   Deferred royalty income                                         --           3,000,000
                                                           ------------      ------------
Net cash used in operating activities                        (4,523,365)       (1,178,377)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments                         (31,141,651)       (3,000,191)
Maturities and sales of short-term investments               19,445,000         2,559,136
Purchases of property and equipment, net                           --            (195,259)
(Increase) decrease in notes receivable                         (22,438)            6,656
(Increase) in deposits and other assets                         (17,618)          (17,628)
                                                           ------------      ------------
Net cash used in investing activities                       (11,736,707)         (647,286)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations             (389,765)         (273,840)
Capital lease obligations incurred, net                          48,845              --
Proceeds from sale of preferred stock                              --           4,499,002
Proceeds from sale of common stock                              202,600            34,051
Decrease in notes receivable from stockholders                   11,000              --
                                                           ------------      ------------
Net cash provided by (used in) financing activities            (127,320)        4,259,213
                                                           ------------      ------------
Net increase (decrease) in cash and cash equivalents        (16,387,392)        2,433,550
   Cash and cash equivalents at beginning of period          29,112,255         5,372,945
                                                           ============      ============
   Cash and cash equivalents at end of period              $ 12,724,863      $  7,806,495
                                                           ============      ============
</TABLE>



                See notes to consolidated financial statements.



                                        5

<PAGE>   6
                          CARDIAC PATHWAYS CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1996
                                   (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 and six month periods ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1997. 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, 1996.

2.        SHORT-TERM INVESTMENTS

         At December 31, 1996 and June 30, 1996, 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 December 31, 1996 and June 30,
1996, 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>
                                                         DECEMBER 31,      JUNE 30,
          DESCRIPTION                                       1996             1996
          -----------                                    -----------     -----------
          <S>                                            <C>             <C>
          Held-to-maturity:
              U.S. government agency                      $10,487,530     $ 1,999,879
              U.S. corporate bonds                         21,769,933      16,760,933

          Available-for-sale:
              Money market instruments                      3,200,000       5,000,000
                                                          -----------     -----------
                                                          $35,457,463     $23,760,812
                                                          ===========     ===========
</TABLE>

         There were no realized gains or losses for the three and six month
periods ending December 31, 1996 and 1995. The cost of securities sold is based
on the specific identification method. Held-to-maturity securities at December
31, 1996 mature at various dates through June 1998.

3.       CONSOLIDATED BALANCE SHEET COMPONENTS

         Certain balance sheet components are as follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,      JUNE 30,
                                                              1996             1996
                                                            --------         --------
          <S>                                               <C>              <C>
          Inventories:

               Raw materials                                 $184,800         $125,459
               Work-in-process                                 26,761              --
               Finished goods                                  72,552           37,057
                                                             --------         --------
                                                             $284,113         $162,516
                                                             ========         ========
</TABLE>


<TABLE>
<CAPTION>
                                                         DECEMBER 31,         JUNE 30,
                                                            1996                1996
                                                         ----------         ----------
          <S>                                            <C>                <C>
          Property and equipment:
               Equipment                                 $3,967,051         $3,472,535
               Leasehold improvements                       125,296             83,047
               Equipment-in-process                       1,266,147          1,027,872
                                                         ----------         ----------
                                                          5,358,494          4,583,454
               Less accumulated depreciation and
               amortization                               2,346,781          1,748,099
                                                         ----------         ----------
                                                         $3,011,713         $2,835,355
                                                         ==========         ==========
</TABLE>



                                       7
<PAGE>   8
4.       STOCKHOLDERS' EQUITY

         In June 1996, the Company completed its initial public offering of
2,500,000 shares of common stock. The net proceeds to the Company were
approximately $43,137,000. Upon completion of the offering, all of the preferred
stock outstanding automatically converted into common stock.

5.       NET LOSS PER SHARE

         Except as noted below, net loss per share is computed using the
weighted average number of shares of common stock outstanding. Common equivalent
shares from stock options, warrants and convertible preferred stock are excluded
from the computation of net loss per share for the three and six months ended
December 31, 1996 as their effect is antidilutive. Pro forma net loss per share
for the three and six months ended December 31, 1995 is computed using the
weighted average number of shares of common stock outstanding and includes,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common and common equivalent shares issued at prices substantially below the
public offering price during the twelve-month period prior to the filing of the
initial public offering as if they were outstanding for the entire period (using
the treasury stock method). In addition, the computation of pro forma net loss
per share for the three and six months ended December 31, 1995 gives effect to
the conversion of convertible preferred shares not included above that
automatically converted upon completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.


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 PMA applications, the statements in the last paragragh of "Net
Sales," the statements in the last sentence in each of the "Manufacturing
Start-up and Cost of Goods Sold", "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 December 31, 1996, had an accumulated deficit of
approximately $36.5 million. The Company has generated only limited revenues
from sales of Trio/Ensemble diagnostic catheters, Radii supraventricular
tachycardia mapping and ablation catheters and Model 8002 and 8004
Radiofrequency Generator Systems. The Company expects its operating 


                                       8
<PAGE>   9

losses to continue through at least the end of calendar 1998 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.

         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 Ventricular Tachycardia Ablation System and Arrhythmia
Mapping System for diagnostic mapping of ventricular tachycardia are in the
early stages of clinical testing, and clinical data obtained to date are
insufficient to demonstrate the safety and efficacy of these products under
applicable United States Food and Drug Administration ("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. 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 approval from the FDA. At the earliest, the Company does
not anticipate filing a PMA application for any system for at least one year,
and does not anticipate receiving a PMA for any such system until at least one
to three 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 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. 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 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. 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. Establishing a marketing and sales capability sufficient to
support sales in commercial quantities will require substantial efforts and
require significant management and financial resources.



                                       9
<PAGE>   10
RESULTS OF OPERATIONS

         Net Sales. The Company's net sales to date have resulted primarily from
limited sales of the Trio/Ensemble diagnostic catheters, Radii supraventricular
tachycardia mapping and ablation catheters and Radiofrequency Generator Systems.
The Company's net sales increased to $904,000 for the three months ended
December 31, 1996 compared to $443,000 for the three months ended December 31,
1995. The increase in net sales was primarily attributable to increased sales of
Trio/Ensemble diagnostic catheters in Japan. For the six months ended December
31, 1996, the Company had net sales of $1.7 million compared to $567,000 for the
six months ended December 31, 1995. The increase in net sales is primarily due
to higher overall shipments of Trio/Ensemble catheters.

         In December 1995, the Company received $3.0 million pursuant to a
royalty agreement with Arrow International, Inc. ("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 no royalty income has been
recorded through December 31, 1996. During the three months ended December 31,
1996, Arrow purchased certain quantities of Trio/Ensemble catheters from the
Company and also began to manufacture and sell the Trio/Ensemble catheters. As a
result, it is anticipated that Arrow will no longer purchase these catheters
from the Company after December 31, 1996. Additionally, the Company will begin
to recognize royalty income from Arrow's sales of the Trio/Ensemble catheter.
The deferred royalty will be amortized to income based on 5% of the selling
price paid by Arrow's customers for the Trio/Ensemble catheters.

         The Company expects its Trio/Ensemble catheter revenue to decrease
significantly in future periods because Arrow is now manufacturing the product
for its territories and the rate of sales to Japan will decrease as initial
stocking orders have been filled.

         Manufacturing Start-Up and Cost of Goods Sold. Manufacturing start-up
and cost of goods sold primarily includes raw materials costs, catheter
fabrication costs and system assembly and test costs. Cost of goods sold was
$670,000 for the three months ended December 31, 1996, resulting in a gross
margin of approximately $234,000 or 26% of net sales. For the three months ended
December 31, 1995, manufacturing start-up and cost of goods sold were $654,000,
producing a gross margin deficit of approximately $210,000. For the six months
ended December 31, 1996, the Company had a gross margin of $405,000 or 24%
compared to a gross margin deficit of $473,000 for the six months ended December
31, 1995. The improvement in gross margins in each period were primarily
attributable to the non-recurrence of certain manufacturing start-up costs
associated with the expansion of catheter production capacity, partially offset
by increased compensation and associated labor costs for assembly, quality
control and engineering support personnel. In addition, increased production and
sales levels for the Trio/Ensemble diagnostic catheters have resulted in
generally lower per unit manufacturing costs. The Company expects future gross
margins to fluctuate as other products are commercialized.

         The Company is currently encountering low yields, vendor shortages and
other significant production inefficiencies in the manufacture of its Mercator
Left Ventricular Mapping Basket and Mercator Atrial Mapping Basket. 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. 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 within the next six months.




                                       10
<PAGE>   11

         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 $2.9 million for the three months ended December 31, 1996 compared
to $1.6 million for the three months ended December 31, 1995. Research and
development expenses were $5.6 million for the six months ended December 31,
1996 compared to $3.1 million for the six months ended December 31, 1995. The
increases in each period were primarily attributable to increased costs
associated with the hiring of additional engineering, regulatory and clinical
personnel, increased prototype development costs, and increased costs related to
manufacture and placement of Ventricular Tachycardia Ablation and Arrhythmia
Mapping Systems and related 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
$717,000 for the three months ended December 31, 1996 compared to $512,000 for
the three months ended December 31, 1995. Selling, general and administrative
expenses were $1.4 million of the six months ended December 31, 1996 compared to
$889,000 for the six months ended December 31, 1995. The increases in each
period were primarily attributable to increased expenditures for administrative
personnel, increased professional fees related to the filing and registration of
the Company's patents, costs related to obtaining certain insurance policies,
costs related to the Company's internal computer network and investor relations
expenses. 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 increased to
net other income of $555,000 for the three months ended December 31, 1996
compared to net other income of $2,000 for the three months ended December 31,
1995. Other income (expense), net increased to net other income of $1.1 million
for the six months ended December 31, 1996 compared to net other income of
$25,000 for the six months ended December 31, 1995. The net increases in each
period are the result of interest income earned on substantially higher cash,
cash equivalent and short-term investment balances following the closing of the
Company's initial public offering in June 1996, the net proceeds of which were
approximately $43.1 million.

         Net Loss. The Company's net loss increased to $2.9 million for the
three months ended December 31, 1996 compared to $2.4 million for the three
months ended December 31, 1995. Net loss for the six months ended December 31,
1996 was $5.4 million compared to $4.4 million for the six months ended December
31, 1995. The increase in the net loss in each period primarily resulted from
increased product development and clinical research activity, partially offset
by increased sales and interest income.



                                       11
<PAGE>   12
LIQUIDITY AND CAPITAL RESOURCES

         Since inception, the Company has financed its operations through a
combination of private placements of equity securities yielding approximately
$33.5 million, a private placement of debt securities yielding approximately
$4.5 million, equipment lease financing arrangements yielding approximately $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 approximately $43.1 million. As of December 31, 1996, the Company had
approximately $48.2 million in cash, cash equivalents and short-term
investments.

         Net cash used in operating activities was approximately $4.5 million
and $1.2 million for the six months ended December 31, 1996 and 1995,
respectively. For such periods, net cash used in operating activities resulted
primarily from net losses, partially offset in the six months ended December 31,
1995 by the $3.0 million prepaid royalty discussed above. Net cash used in
investing activities was approximately $11.7 million for the six months ended
December 31, 1996 and approximately $647,000 for the six months ended December
31, 1995. The net cash used in investing activities for the six months ended
December 31, 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 approximately $127,000 for the six months ended
December 31, 1996 and net cash provided by financing activities was
approximately $4.3 million for the six months ended December 31, 1995. The net
cash provided by financing activities for the six months ended December 31, 1995
primarily resulted from the sale of preferred stock in December 1995.

         As of December 31, 1996, the Company had capital equipment of $5.4
million less accumulated depreciation and amortization of $2.3 million to
support its clinical, development, manufacturing and administrative activities.
The Company has financed approximately $3.2 million from capital lease
obligations through December 31, 1996. 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 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 the end of calendar 1998, there can be no assurance that
the Company will not require additional financing within this time frame.



                                       12
<PAGE>   13
         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

CLINICAL TRIALS

         The Ventricular Tachycardia Ablation System and Arrhythmia Mapping
System for diagnostic mapping of ventricular tachycardia are in the early 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 and the mapping catheter and
mapping equipment that together form the Company's Arrhythmia Mapping Systems
for atrial fibrillation are still under development. There can be no assurance
that the Company will be successful in completing development of the atrial
fibrillation products and submitting the appropriate IDEs or that the FDA will
permit the Company to undertake clinical trials of the atrial fibrillation
products. 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 Model 8004 Radio Frequency Generator and
Integrated Fluid Pump, the products that together form the Company's Ventricular
Tachycardia Ablation System. In addition, the Company is currently conducting
clinical trials 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. In June 1996, the Company received IDE approval from the FDA to
conduct a clinical trial of the Mercator Atrial Mapping Basket for the right
atrium. In August, 1996, the Company received IDE approval from the FDA to
conduct a clinical trial of the Atrial Fibrillation System for the right atrium.




                                       13
<PAGE>   14

         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 will be conducted at a maximum of 15
clinical sites and will involve a total of approximately 200 patients randomized
using the Ventricular Tachycardia Ablation System versus antiarrhythmic drugs.
Pursuant to the IDE, the FDA will evaluate the safety and efficacy of the
Ventricular Tachycardia Ablation System. The Company anticipates that this
clinical trial will not be completed prior to early calendar 1998. At the
conclusion of the clinical trials, 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 February 3, 1997, 80 patients had been enrolled in the clinical
trial for the Ventricular Tachycardia Ablation System, of whom 47 had received
ablation treatment and 25 patients were in the drug control group. Eight
patients did not receive treatment. In approximately 75% of patients receiving
ablation, the procedures were acutely successful and in 77% of the patients
there were chronic successes. Acute success is defined as patients in whom
ventricular tachycardia can not be induced post the ablation procedure. Chronic
success is defined as patients in whom there was a 75% reduction in ventricular
tachycardia episodes in the two months after the ablation procedure compared to
the two month period before the procedure. Thirteen patients from the drug
control group crossed over to the ablation group. Among all treated patients
there were three major adverse events: one death due to stroke, one non-fatal
stroke and one cardiac perforation, most likely the consequence of the use of a
non-Cardiac Pathways right ventricular diagnostic catheter. In addition, two
patients had complete heart block created intentionally, which required
permanent pacemaker insertion.

         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 is being
conducted at two clinical sites in the United States and will involve a total of
12 patients. The purpose of the clinical trial is 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. At the conclusion of the
feasibility study, the Company intends to submit an IDE to the FDA to perform
additional clinical trials. Enrollment in the clinical trial began in March
1996, and as of February 3, 1997 six patients had been enrolled. One of the
enrolled patients developed asymptomatic mild aortic valvular regurgitation
following the procedure that the Company believes resulted from basket
deployment difficulties. In response, the Company made a slight modification to
the deployment system of the Mercator Left Ventricular Mapping Basket. In June
1996, the Company received an IDE supplement approval for the modification to
the deployment system.

         The Company is also testing the Mercator Left Ventricular Mapping
Basket and Arrhythmia Mapping System in Europe. As of February 3, 1997, the
Mercator basket was used to map the ventricular tachycardia of twelve patients.
One patient developed cardiac perforation attributed to the use of a non-Cardiac
Pathways right ventricular diagnostic catheter. None of the other patients has
had complications as a result of the Mercator Left Ventricular Mapping Basket
and Arrhythmia Mapping System.

         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 atrial fibrillation. The clinical trial is being
conducted at five clinical sites in the United States. The purpose of this
clinical trial will be to demonstrate the equivalency of the Right Mercator
Atrial Mapping Basket and the Arrhythmia Mapping System to commercially
available mapping catheters. As of February 3, 



                                       14
<PAGE>   15

1997 seven patients in the United States enrolled in the clinical trial and no
patient complications have been noted. In Europe seven patients have been
treated; six with the right atrial mapping system and one with the left atrial
mapping system and no patient complications have been noted.

         In January 1997, the Company received IDE approval by the FDA to
conduct a clinical trial of the Atrial Fibrillation Ablation System. The purpose
of this clinical trial will be to assess the safety and performance in creating
continuous linear lesions. As of February 3, 1997, four patients in the U.S.
have been enrolled in the clinical trial and no patient complications were
noted. In 1996 the Nexus Linear Lesion Catheter was used in two patients in
Europe and no patient complications have been noted.

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.

         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. The Company has not begun discussions
with all needed international distributors. The Company is currently in
discussions with its distributor in France to terminate the relationship. 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 components such as the computer workstation, the fluid
pump, integrated circuit components, flex circuit and biocompatible coating 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, particularly flex circuits, 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 



                                       15
<PAGE>   16

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 GMP
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 GMP requirements in order to produce products
for sale in the United States and with ISO 9001 standards in order to produce
products for sale in Europe. Any failure of the Company to comply with GMP or
ISO 9001 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. To date, the Company's facilities and manufacturing processes
have not undergone any such inspection. 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.




                                       16
<PAGE>   17

         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 by 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 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




                                       17
<PAGE>   18

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 products to be developed and
to receive regulatory and, in some cases, 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 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 only begin 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.




                                       18
<PAGE>   19

         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 two
years, and does not anticipate receiving a PMA for any such system until at
least one to three 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, 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 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

         In order for the Company to market its products in Europe and certain
other foreign jurisdictions, the Company must obtain required regulatory
approvals and clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearance to market and the time
required for regulatory review, vary from country to country. There can be no
assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in receipt of approvals to
market the Company's products, failure to receive these approvals or future loss
of previously received approvals could have a material adverse effect on the
Company's business, financial condition and results of operations.

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
county and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. 



                                       19
<PAGE>   20

Many international markets have government managed health care systems that
control reimbursement for new 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'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 



                                       20
<PAGE>   21

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.



                                       21
<PAGE>   22
                          CARDIAC PATHWAYS CORPORATION


PART II.        OTHER INFORMATION

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

                The Company held its annual meeting of stockholders on October
                9, 1996 and solicited votes by proxy in connection with such
                meeting. The following matters were approved by the
                stockholders:

                  (a) The election of Annette J. Campbell-White and Michael L.
                      Eagle as Class I Directors of the Company for three-year
                      terms ending in 1999. Stockholders approved management's
                      nominees to the Board of Directors by votes as follows:
                      7,098,751 in favor and 1,000 withheld.

                  (b) The ratification of the appointment of Ernst & Young LLP
                      to audit the consolidated financial statements of the
                      Company for the fiscal year ending June 30, 1997. The
                      proposal received 7,099,291 votes in favor and 460 votes
                      opposed.

                There were no broker non-votes with respect to any matter.


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 six months ended December 31, 1996.




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<PAGE>   23
                          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:  FEBRUARY 6, 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





                                       23
<PAGE>   24
                          CARDIAC PATHWAYS CORPORATION

                                INDEX TO EXHIBITS


<TABLE>
<CAPTION>
   EXHIBIT NO.         EXHIBIT DESCRIPTION                                          PAGE NO.
   -----------         -----------------------------------------------------------  --------

       <S>             <C>                                                            <C>
       11.1            Statement Regarding Computation of Net Loss Per Share......    25
       27.1            Financial Data Schedule....................................    26
</TABLE>






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