<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, 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 February 11, 1998 there were 9,742,399 shares of the Registrant's Common
Stock outstanding.




                                       1

<PAGE>   2



                          CARDIAC PATHWAYS CORPORATION

                                      INDEX


<TABLE>
<S>            <C>                                                                                 <C> 
PART I.         FINANCIAL INFORMATION                                                               PAGE NO.


Item 1.         Financial  Statements and Notes (Unaudited)

                Consolidated Balance Sheets as of December 31, 1997 and
                June 30, 1997....................................................................     3

                Consolidated Statements of Operations for the three and six months
                ended December 31, 1997 and 1996.................................................     4

                Consolidated Statements of Cash Flows for the six months ended
                December 31, 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............................................................    26
                

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>
                                                                                December 31,           June 30,
                                                                                    1997               1997 (1)
                                                                                ------------        ------------
                                     ASSETS
<S>                                                                             <C>                 <C>         
Current assets:
   Cash and cash equivalents                                                    $  8,403,314        $  5,091,426
   Short-term investments                                                         24,312,871          36,475,534
   Accounts receivable, net of allowance for doubtful accounts
      of $16,500 at December 31, 1997 and $9,500 at June 30, 1997                    318,762             168,828
   Inventories                                                                       490,012             420,005
   Prepaid expenses                                                                  310,622             411,758
   Other current assets                                                              629,809             530,080
                                                                                ------------        ------------
             Total current assets                                                 34,465,390          43,097,631
Property and equipment, net                                                        3,612,055           3,140,849
Notes receivable from related parties                                                216,160             319,491
Deposits and other assets                                                            174,318              97,283
                                                                                ============        ============
                                                                                $ 38,467,923        $ 46,655,254
                                                                                ============        ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                              $    355,922        $    788,384
  Accrued compensation and related benefits                                          524,645             462,814
  Accrued clinical expenses                                                          876,921             696,106
  Other accrued expenses                                                             948,374             870,242
  Current obligations under capital leases                                           621,444             768,813
                                                                                ------------        ------------
           Total current liabilities                                               3,327,306           3,586,359
Long-term obligations under capital leases                                           530,877             472,588
Deferred royalty income                                                            2,935,474           2,950,473
Note payable                                                                       4,500,000           4,500,000
Interest payable on note                                                           1,349,125           1,153,625
Commitments
Stockholders' equity:
   Preferred stock, $.001 par value; 5,000,000 shares authorized and none
        issued and outstanding at December 31, 1997 and June 30, 1997                     --                  --
   Common stock, $.001 par value; 30,000,000 shares authorized; 9,580,533
       shares issued and outstanding at December 31, 1997 and 9,523,540
       at June 30, 1997                                                                9,580               9,524
   Additional paid-in capital                                                     79,428,262          79,089,193
   Receivables from stockholders                                                    (415,000)           (420,000)
   Accumulated deficit                                                           (52,562,091)        (43,918,832)
   Deferred compensation                                                            (635,610)           (767,676)
                                                                                ------------        ------------
           Total stockholders' equity                                             25,825,141          33,992,209
                                                                                ------------        ------------
                                                                                $ 38,467,923        $ 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                      Six months ended
                                                             December 31,                           December 31,
                                                   ------------------------------        ------------------------------
                                                       1997               1996               1997              1996
                                                   -----------        -----------        -----------        -----------
<S>                                                <C>                <C>                <C>                <C>      
Net sales                                          $   359,717        $   903,715        $   921,504        $ 1,682,920
Cost of goods sold                                     620,383            669,803          1,270,309          1,277,616
                                                   -----------        -----------        -----------        -----------
   Gross margin (deficit)                             (260,666)           233,912           (348,805)           405,304
Operating expenses:
   Research and development                          3,609,910          2,940,869          7,106,524          5,557,564
   Selling, general and administrative               1,094,421            717,073          1,958,416          1,397,135
                                                   -----------        -----------        -----------        -----------
           Total operating expenses                  4,704,331          3,657,942          9,064,940          6,954,699
                                                   -----------        -----------        -----------        -----------
Loss from operations                                (4,964,997)        (3,424,030)        (9,413,745)        (6,549,395)
Other income (expense):
   Interest income                                     498,087            680,765          1,055,528          1,377,206
   Interest expense                                   (121,034)          (133,016)          (308,372)          (258,047)
   Other, net                                           11,436              7,421             23,330             11,089
                                                   -----------        -----------        -----------        -----------
           Total other income (expense), net           388,489            555,170            770,486          1,130,248
                                                   -----------        -----------        -----------        -----------
Net loss                                           ($4,576,508)       ($2,868,860)       ($8,643,259)       ($5,419,147)
                                                   ===========        ===========        ===========        ===========

Net loss per share - basic and diluted             $     (0.48)       $     (0.31)       $     (0.91)       $     (0.58)
                                                   ===========        ===========        ===========        ===========

Shares used in computing
    net loss per share - basic and diluted           9,559,000          9,318,000          9,544,000          9,301,000
                                                   ===========        ===========        ===========        ===========
</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,
                                                             --------------------------------
                                                                 1997                1996
                                                             ------------        ------------
<S>                                                          <C>                 <C>          
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                     $ (8,643,259)       $ (5,419,147)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization                                  654,308             598,682
   Amortization of deferred royalty income                        (14,999)                 --
   Amortization of deferred compensation                          132,066             109,818
   Issuance of common stock warrants                               60,351                  --
   Issuance of nonqualified stock options for services             62,671              10,000
Changes in operating assets and liabilities:
   Accounts receivable                                           (149,934)            (34,715)
   Inventories                                                    (70,007)           (121,597)
   Prepaid expenses                                               101,136              84,262
   Other current assets                                           (99,729)            (68,147)
   Accounts payable                                              (432,462)            (74,122)
   Accrued compensation and related benefits                       61,831              99,804
   Accrued clinical expenses                                      180,815             245,196
   Other accrued expenses                                          78,132            (143,149)
   Interest payable                                               195,500             189,750
                                                             ------------        ------------
Net cash used in operating activities                          (7,883,580)         (4,523,365)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments                           (16,138,787)        (31,141,651)
Maturities and sales of short-term investments                 28,301,450          19,445,000
Purchases of property and equipment, net                         (755,459)                 --
(Increase) decrease in notes receivable                           103,331             (22,438)
(Increase) in deposits and other assets                           (77,035)            (17,618)
                                                             ------------        ------------
Net cash provided by (used in) investing activities            11,433,500         (11,736,707)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations               (459,135)           (389,765)
Capital lease obligations incurred, net                                --              48,845
Proceeds from sale of common stock                                216,103             202,600
Decrease in notes receivable from shareholders                      5,000              11,000
                                                             ------------        ------------
Net cash used in financing activities                            (238,032)           (127,320)
                                                             ------------        ------------
Net increase (decrease) in cash and cash equivalents            3,311,888         (16,387,392)
   Cash and cash equivalents at beginning of period             5,091,426          29,112,255
                                                             ============        ============
   Cash and cash equivalents at end of period                $  8,403,314        $ 12,724,863
                                                             ============        ============
</TABLE>





                See notes to consolidated financial statements.


                                       5


<PAGE>   6

                          CARDIAC PATHWAYS CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 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 and six month periods ended
December 31, 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 December 31, 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 December 31, 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>
                                                  DECEMBER 31,       JUNE 30,
DESCRIPTION                                          1997              1997
                                                 -----------       -----------
<S>                                              <C>               <C>        
Held-to-maturity:
    U.S. government agency                       $ 3,994,061       $15,485,479

    U.S. corporate obligations                    19,018,810        20,329,767

Available-for-sale:
    Auction rate preferred stock                   1,300,000         2,100,000
    U.S corporate obligations                           --           1,055,206
                                                 -----------       -----------
                                                  24,312,871        38,970,452
Amounts classified as cash equivalents                  --           2,494,918
                                                 -----------       -----------
Amounts included in short-term investments       $24,312,871       $36,475,534
                                                 ===========       ===========
</TABLE>


         There were no material realized gains or losses for the three and six
month periods ending December 31, 1997 and 1996. The cost of securities sold is
based on the specific identification method. Held-to-maturity securities at
December 31, 1997 mature at various dates through October 1999.

3.       CONSOLIDATED BALANCE SHEET COMPONENTS

         Certain balance sheet components are as follows:

<TABLE>
<CAPTION>
                                            DECEMBER 31,            JUNE 30,
                                               1997                   1997
                                             --------               --------
<S>                                         <C>                    <C>   
          Inventories:

               Raw materials                 $315,684               $252,349
               Work-in-process                 13,546                 26,929
               Finished goods                 160,782                140,727
                                             --------               --------
                                             $490,012               $420,005
                                             ========               ========
</TABLE>



<TABLE>
<CAPTION>
                                                              DECEMBER 31,               JUNE 30,
                                                                  1997                     1997
                                                               ----------               ----------
<S>                                                           <C>                      <C>    
          Property and equipment:
               Equipment                                       $5,216,443               $4,799,030
               Leasehold improvements                             340,913                  274,307
               Equipment-in-process                             1,364,137                1,076,157
                                                               ----------               ----------
                                                                6,921,493                6,149,494
               Less accumulated depreciation and
               amortization                                     3,309,438                3,008,645
                                                               ==========               ==========
                                                               $3,612,055               $3,140,849
                                                               ==========               ==========
</TABLE>





                                       7

<PAGE>   8

4.        NET LOSS PER SHARE

         In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings per
Share," which the Company was required to adopt on December 31, 1997. Under the
new requirements for calculating basic earnings per share, the dilutive effect
of stock options is excluded. The adoption of FAS 128 did not have a material
impact on the Company's reported basic and diluted net loss per share due to the
exclusion of antidilutive options from the calculations when the Company
incurred a net loss.



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 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 December 31, 1997, had an accumulated deficit of $52.6
million. The Company has generated only limited revenues from sales of Radii
supraventricular tachycardia mapping and ablation catheters, Trio/Ensemble
diagnostic catheters, Chilli cooled ablation 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.

         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






                                       8
<PAGE>   9

electrophysiology studies. The Company filed a PMA application for the
Ventricular Tachycardia Ablation System in January 1998. The Arrhythmia Mapping
System for diagnostic mapping of ventricular tachycardia is in various stages of
clinical testing, and clinical data obtained to date are insufficient to
demonstrate the safety and efficacy of this product 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. The Company
filed a PMA application for the Ventricular Tachycardia Ablation System in
January 1998. At the earliest, the Company does not anticipate filing a PMA
application for any other system for at least nine 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.

         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.





                                       9

<PAGE>   10

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, Chilli cooled ablation 
catheters, Mercator Mapping Baskets, Radiofrequency Generator Systems and 
Arrhythmia Mapping Systems. The Company's net sales decreased to $360,000 for 
the three months ended December 31, 1997 compared to $904,000 for the three 
months ended December 31, 1996. The decrease in net sales was primarily 
attributable to decreased sales of Trio/Ensemble diagnostic catheters in Japan 
and overall lower demand for these products following the transfer, during 
fiscal 1997, of manufacturing and distribution for the U.S. market to Arrow 
International, Inc. ("Arrow"). In addition, the Company had reduced sales of 
Radii catheters during the quarter. In the three months ended December 31,
1997, one customer indicated that it would return certain Radii catheters to 
the Company which were sold in the first quarter of fiscal 1998, due to the 
failure of the catheters to meet a change in certain customer specifications. 
As of December 31, 1997, the Company has established a sales returns reserve of
approximately $125,000 related to these catheters. For the six months ended 
December 31, 1997, the Company had net sales of $922,000 compared to $1.7 
million for the six months ended December 31, 1996. The decrease in net sales 
was attributable to decreases in Trio/Ensemble and Radii catheters, offset in 
part by the sale of Arrhythmia Mapping Systems in the six months ended December
31, 1997. In addition, the Company has experienced a delay in the international
launch of Radii catheters, a delay in the release of a software revision for 
the Company's Arrhythmia Mapping System, and delays in obtaining CE mark 
approval for the Chilli cooled ablation catheter in Europe, resulting in lower 
than expected revenue in the six months ended December 31, 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 a total of $65,000 of royalty income related to the
agreement has been recorded through December 31, 1997, of which $8,000 was
recognized in the second quarter of fiscal 1998. There was no royalty income
recorded for the second 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 $620,000 for the three months ended December 31, 1997, resulting
in a gross margin deficit of $261,000. For the three months ended December 31,
1996, cost of goods sold was $670,000, resulting in a gross margin of $234,000
or 26% of net sales. For the six months ended December 31, 1997, the Company had
a gross margin deficit of $349,000 compared to a gross margin of $405,000 for
the six months ended December 31, 1996. The decrease in gross margins in the
three and six months ended December 31, 1997 compared to December 31, 1996 were
primarily attributable to lower net sales, changes in sales mix, increased fixed
overhead costs resulting from the expansion of catheter and equipment production
capacity, higher catheter materials and procurement costs, and increased
compensation and associated labor costs for assembly, quality control and
engineering support personnel. In addition, cost of goods sold increased in the
three months ended December 31, 1997 due to the additional expenses arising from
the change in specifications in the Radii catheters discussed in "Net Sales"
above. 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
and Sector mapping catheters, and Nexus catheters. Although the Company believes
it is taking appropriate steps to address these yield and other





                                       10

<PAGE>   11
production inefficiencies, there can be no assurance that such improvements will
be achieved. Although the Company anticipates resolving such production
inefficiencies in 1998, 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 these products 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 $3.6 million for the three months ended December 31, 1997 compared
to $2.9 million for the three months ended December 31, 1996. Research and
development expenses were $7.1 million for the six months ended December 31,
1997 compared to $5.6 million for the six months ended December 31, 1996. The
increases in research and development expenses were primarily attributable to
increased costs associated with the hiring of additional engineering personnel,
costs associated with designing certain manufacturing processes, certain costs
in connection with materials procurement and vendor qualification, increased
facilities costs, increased costs related to conducting clinical trials in the
United States and the placement of Arrhythmia Mapping Systems, Radiofrequency
Generator 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 $1.1
million for the three months ended December 31, 1997 compared to $717,000 for
the three months ended December 31, 1996. Selling, general and administrative
expenses were $2.0 million for the six months ended December 31, 1997 compared
to $1.4 million for the six months ended December 31, 1996. The increases were
primarily attributable to increased expenditures for sales and marketing
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 $388,000 for the three months ended December 31, 1997
compared to net other income of $555,000 for the three months ended December 31,
1996. Other income (expense), net was $770,000 for the six months ended December
31, 1997 compared to net other income of $1.1 million for the six months ended
December 31, 1996. The reduction in net other income was the result of declining
interest income on lower cash, cash equivalent and short-term investment
balances and slightly increased interest expense associated with equipment lease
financing activity.

         Net Loss. The Company's net loss increased to $4.6 million for the
three months ended December 31, 1997 compared to $2.9 million for the three
months ended December 31, 1996. The net loss was $8.6 million for the six months
ended December 31, 1997 compared to $5.4 million for the six months ended
December 31, 1996. The increases in the Company's net loss primarily resulted
from the gross margin deficits in the three and six months ended December 31,
1997, increased product




                                       11
<PAGE>   12

development, clinical research and selling, general and administrative expenses,
and lower interest income.

    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 was
required to adopt on December 31, 1997. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options is
excluded. The adoption of FAS 128 did not have a material impact on the
Company's reported basic and diluted net loss per share due to the exclusion of
antidilutive options from the calculations when the Company incurred a net loss.

    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income" which requires the reporting and presentation of comprehensive income
and its components in the financial statements. Comprehensive income reflects
certain items not currently reported in measuring net income such as changes in
the value of available-for-sale securities and foreign currency translation
adjustments. FAS 130 will become effective for the Company's year ending June
30, 1999.

    In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of
an Enterprise and Related Information" which supercedes the current segment
reporting requirements of Statement of Financial Accounting Standards No. 14
(FAS 14), "Financial Reporting for Segments of a Business Enterprise," as
amended. FAS 131 requires the reporting of certain financial and other
disclosures related to the Company's operating segments which are identified
using a "management approach." Operating segments are revenue-producing
components of the business for which separate financial information is produced
internally and are subject to evaluation by the chief operating decision maker
in the resource allocation process. FAS 131 will become effective for the
Company's year ending June 30, 1999.


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 $3.3 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 December 31,
1997, the Company had $32.7 million in cash, cash equivalents and short-term
investments.

         Net cash used in operating activities was $7.9 million and $4.5 million
for the six months ended December 31, 1997 and 1996, respectively. For such
periods, net cash used in operating activities resulted primarily from net
losses and the timing of payment of accounts payable. Net cash provided by
investing activities was $11.4 million for the six months ended December 31,
1997 and net cash used in investing activities was $11.7 million for the six
months ended December 31, 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 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 $238,000 for the six
months ended December 31, 1997 and $127,000 for the six months ended December
31, 1996.




                                       12


<PAGE>   13

         As of December 31, 1997, the Company had capital equipment of $6.9
million less accumulated depreciation and amortization of $3.3 million to
support its clinical, development, manufacturing and administrative activities.
The Company has financed approximately $3.3 million from capital lease
obligations through December 31, 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 annual increments of $1.0 million in each.
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. As of
December 31, 1997, the Company has utilized approximately $370,000 of the first
increment of this lease line and expects to utilize its remaining unused 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 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 existing 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 December 31, 1997, the Company had an accumulated deficit of
$52.6 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





                                       13

<PAGE>   14

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 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 manufacturers' 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 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 completed 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






                                       14
<PAGE>   15

Generator and Integrated Fluid Pump, the products that together form the
Company's Atrial Fibrillation Ablation System. In October 1997, the Company
submitted an IDE supplement 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. 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
was 30 days for safety. However, the Company is required to follow some patients
for up to 24 months after the PMA application filing. Enrollment for the
clinical trial was completed on December 19, 1997. A PMA application was
submitted on January 29, 1998 for approval to market the Ventricular Tachycardia
Ablation System and its component catheters and equipment in the United States.
The Company has requested that the FDA permit it to continue the study while the
PMA application is under review.

    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 resulted in more rapid enrollment into the clinical
trial. As of February 2, 1998, 167 patients had been enrolled in the trial; 75
patients randomized to ablation, 60 patients non-randomized to ablation, and 32
patients randomized to (drug) 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. Analysis of 150
patients was included in the PMA application. Clinical recurrence of VT was
significantly less in the patients randomized to ablation compared 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 76% of
patients. The incidence of major adverse events associated with the procedure
was 8.6%.

    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 14 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, as of February 2, 1997,
17 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 31
studies. Of the 31 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 of
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 was submitted
and received conditional approval in November 1997 to initiate enrollment of 30
patients at five sites in the Sector study. It is anticipated that this study
will begin in March 1998. This study will enable the use of either of the
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.




                                       15
<PAGE>   16


    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 February 2, 1998, the Mercator
Atrial Mapping Basket had been evaluated in 71 patients. There was no thrombus
formation on any mapping basket used in the 71 studies. The Company anticipates
submission of a 510(k) application for clearance during 1998.

    The Company has also evaluated the Mercator Atrial Mapping Basket outside of
the U.S. IDE at two European sites. As of February 2, 1998, 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
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
February 2, 1998, the Nexus Linear Lesion Catheter had been 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. An IDE supplement was 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 received
conditional approval in December 1997 to involve 30 patients at five sites. The
study is expected to begin in February 1998.

    The Company anticipates clinical use of the modified Nexus Linear Lesion
Catheter in the right and left atrium for the treatment of atrial fibrillation
in Europe during 1998.

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,






                                       16

<PAGE>   17

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 be
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 only
started to establish 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. 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.




                                       17
<PAGE>   18

    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. For
example, the Company has encountered low yields, vendor shortages and other
production inefficiencies in the manufacture of its Mercator mapping basket
catheters and Radii catheters. 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. The Company is 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. In December 1997, the Company received ISO 9001/EN46001
certification for the Medical Device Directive Quality System requirements from
its European Notified Body. Any failure of the Company to comply with Quality
System or ISO 9001/EN46001 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"), and received
an inspection from the CDHS in October 1997. As a result of the inspection, CDHS
recommended the issuance of a device manufacturing license to the Company;
however, such license has not been granted to date. If the Company is unable to
maintain such a license, it would be unable to manufacture or ship any product,
and such 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





                                       18

<PAGE>   19

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 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.




                                       19

<PAGE>   20

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 products to be developed and
to receive regulatory and, in some cases, third party payor reimbursement
approval are important competitive factors. 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/or 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.





                                       20
<PAGE>   21


    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 any additional PMA applications for any system for at least
the next nine 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 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 received
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. Furthermore, the Company has received the
right to affix the CE mark to its Arrhythmia Mapping System and Chilli Cooled
Ablation System. While the Company intends to satisfy the requisite policies and
procedures that will permit it to receive the CE mark certification for other
products, including the Radii and Trio/Ensemble SVT catheters, 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 these and other products in member
countries of the European Union.






                                       21
<PAGE>   22


    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, China and several other
countries in Europe 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
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






                                       22
<PAGE>   23

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 entails
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 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.
The Company hired a new Vice President of Sales in January 1997. However, there
can be no assurance that he will be able to build a successful sales force or
that he will be able to operate effectively with the existing management team.
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




                                       23

<PAGE>   24

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.

YEAR 2000 COMPLIANCE

    The Company's proprietary software products that operate its Arrhythmia
Mapping System and Radiofrequency Generator System are designed for use with
certain hardware developed by other vendors. Furthermore, these systems will be
used in various operating environments once installed at customer sites. It is
likely that, commencing in the year 2000, the functionality of certain operating
environments will be adversely affected when one or more component products of
the environment would not be in "Year 2000 compliance." The Company believes its
products are in Year 2000 compliance, but has not conducted any formal audit of
its products with respect to Year 2000 compliance. There can be no assurance
that the Company's fully compliant products will be able to function properly
when integrated with other vendor's noncompliant component products.

    The Company is in the process of identifying Year 2000 dependencies in the
Company's internal systems and implementing changes to its internal information
systems to make them Year 2000 compliant. While the Company currently expects
that the Year 2000 will not pose significant operational problems, delays in the
implementation of new information systems, or a failure to fully identify all
Year 2000 dependencies in the Company's systems could have a material adverse
consequences, including delays in the delivery or sale of products.

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






                                       24
<PAGE>   25


Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.

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.











                                       25

<PAGE>   26

                          CARDIAC PATHWAYS CORPORATION


PART II.        OTHER INFORMATION


ITEM 2.         CHANGES IN SECURITIES


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

    1.   On January 28, 1998 the Company issued an option to purchase 90,000
         shares of the Company's Common Stock to an employee of the Company
         pursuant to a stock option agreement in connection with the
         commencement of his employment with the Company at an exercise price of
         $6.75 per share, the closing price of the Company's Common Stock on the
         Nasdaq National Market on the date of grant.

    The sale of the above securities was 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 a transaction by an issuer not involving a public offering. The recipients of
securities in the transaction represented his 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. The recipient had
adequate access, through his relationship with the Company or otherwise, to
information about the Registrant.


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 December 31, 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:  FEBRUARY 12, 1998                  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


  EXHIBIT NO.       EXHIBIT DESCRIPTION                              PAGE NO.
---------------     -----------------------------------------------  --------

     27.1           Financial Data Schedule























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