<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, 1998.

                                              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 16, 1999 there were 9,978,351 shares of the Registrant's Common
Stock outstanding.


<PAGE>   2

                          CARDIAC PATHWAYS CORPORATION

                                      INDEX
<TABLE>
<CAPTION>


PART I.       FINANCIAL INFORMATION                                                PAGE NO.

<S>           <C>                                                                  <C>     
Item 1.       Financial  Statements and Notes (Unaudited)

              Consolidated Balance Sheets as of December 31, 1998 and
              June 30, 1998 ......................................................   3

              Consolidated Statements of Operations for the Three and Six
              Months Ended December 31, 1998 and 1997 ............................   4

              Consolidated Statements of Cash Flows for the Six Months Ended
              December 31, 1998 and  1997 ........................................   5

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

Item 2.       Management's Discussion and Analysis of Financial Condition
              and Results of Operations ..........................................   9

Item 3.       Quantitative and Qualitative Disclosures about Market Risk .........  27

PART II.      OTHER INFORMATION

Item 2.       Changes in Securities and Use of Proceeds ..........................  28

Item 4.       Submission of Matters to a Vote of Security Holders.................  28

Item 6.       Exhibits and Reports on Form 8-K  ..................................  29
                                               

SIGNATURES .......................................................................  30
                    

</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,
                                                                               1998          1998(1)
                                                                           ------------   ------------
<S>                                                                          <C>            <C>       
                                   ASSETS
Current assets:
   Cash and cash equivalents                                                $ 2,134,688    $ 7,268,877
   Short-term investments                                                    11,510,948     17,248,500
   Accounts receivable, net of allowance for doubtful accounts
      of $16,500 at December 31, 1998 and June 30, 1998                         807,366        523,455
   Inventories                                                                1,242,203        668,042
   Prepaid expenses                                                             295,535        317,549
   Other current assets                                                         396,964        526,193
                                                                           ------------   ------------
             Total current assets                                            16,387,704     26,552,616
Property and equipment, net                                                   4,092,129      3,632,488
Notes receivable from related parties                                           248,003        260,477
Deposits and other assets                                                       380,639        488,996
                                                                           ------------   ------------
                                                                            $21,108,475    $30,934,577
                                                                           ============   ============

                    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                          $   894,158    $ 1,079,772
  Accrued compensation and related benefits                                     521,792        601,307
  Accrued clinical expenses                                                   1,103,654      1,144,556
  Other accrued expenses                                                        488,102        654,670
  Current obligations under capital leases                                      495,039        554,806
  Current portion of long-term debt                                           1,166,667        166,667
                                                                           ------------   ------------
           Total current liabilities                                          4,669,412      4,201,778
Long-term obligations under capital leases                                      467,139        483,586
Deferred royalty income                                                       2,780,862      2,930,862
Long-term debt, less current portion                                          4,833,333      5,833,333

Commitments
Stockholders' equity:
   Preferred stock, $.001 par value; 5,000,000 shares authorized and none
     issued and outstanding at December 31, 1998 and June 30, 1998                   --             --
   Common stock, $.001 par value; 30,000,000 shares authorized; 9,958,390
     shares issued and outstanding at December 31, 1998 and 9,795,974
     at June 30, 1998                                                             9,958          9,796
   Additional paid-in capital                                                80,032,156     79,783,779
   Receivables from stockholders                                               (385,000)      (385,000)
   Accumulated deficit                                                      (71,028,284)   (61,417,629)
   Deferred compensation                                                       (271,101)      (505,928)
                                                                           ------------   ------------
           Total stockholders' equity                                         8,357,729     17,485,018
                                                                           ------------   ------------
                                                                            $21,108,475    $30,934,577
                                                                           ============   ============
</TABLE>

(1)     Derived from the Company's audited consolidated balance sheet as of June
        30, 1998.

                 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,
                                            -------------------------   -------------------------
                                                1998         1997          1998          1997
                                            -----------   -----------   -----------   -----------
<S>                                         <C>           <C>           <C>           <C>     
Net sales                                   $   966,911   $   359,717   $ 2,104,317   $   921,504
Cost of goods sold                            1,051,118       620,383     2,120,558     1,270,309
                                            -----------   -----------   -----------   -----------
   Gross margin (deficit)                       (84,207)     (260,666)      (16,241)     (348,805)
Operating expenses:
   Research and development                   3,293,684     3,609,910     6,713,411     7,106,524
   Selling, general and administrative        1,670,901     1,094,421     3,073,238     1,958,416
                                            -----------   -----------   -----------   -----------
         Total operating expenses             4,964,585     4,704,331     9,786,649     9,064,940
                                            -----------   -----------   -----------   -----------
Loss from operations                         (5,048,792)   (4,964,997)   (9,802,890)   (9,413,745)
Other income (expense):
   Interest income                              218,317       498,087       511,809     1,055,528
   Interest expense                            (165,176)     (121,034)     (339,606)     (308,372)
   Other, net                                     7,917        11,436        20,032        23,330
                                            -----------   -----------   -----------   -----------
         Total other income (expense), net       61,058       388,489       192,235       770,486
                                            -----------   -----------   -----------   -----------
Net loss                                    ($4,987,734)  ($4,576,508)  ($9,610,655)  ($8,643,259)
                                            ===========   ===========   ===========   ===========

Net loss per share - basic and diluted           $(0.50)       $(0.48)       $(0.97)       $(0.91)
                                            ===========   ===========   ===========   ===========

Shares used in computing
    net loss per share - basic and diluted    9,909,000     9,559,000     9,877,000     9,544,000
                                            ===========   ===========   ===========   ===========
</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,
                                                        ---------------------------
                                                           1998           1997
                                                        ------------   ------------
<S>                                                     <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                $ (9,610,655)  $ (8,643,259)
Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization                             645,688        654,308
   Amortization of deferred royalty income                  (150,000)       (14,999)
   Amortization of deferred compensation                     100,420        132,066
   Issuance of common stock warrants                              --         60,351
   Issuance of nonqualified stock options for services         3,811         62,671
Changes in operating assets and liabilities:
   Accounts receivable                                      (283,911)      (149,934)
   Inventories                                              (574,161)       (70,007)
   Prepaid expenses                                           22,014        101,136
   Other current assets                                      129,229        (99,729)
   Accounts payable                                         (185,614)      (432,462)
   Accrued compensation and related benefits                 (79,515)        61,831
   Accrued clinical expenses                                 (40,902)       180,815
   Other accrued expenses                                   (166,568)        78,132
   Interest payable                                               --        195,500
                                                        ------------   ------------
Net cash used in operating activities                    (10,190,164)    (7,883,580)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments                       (5,612,448)   (16,138,787)
Maturities and sales of short-term investments            11,350,000     28,301,450
Purchases of property and equipment, net                    (878,928)      (755,459)
Decrease in notes receivable                                  12,474        103,331
(Increase) decrease in deposits and other assets             108,357        (77,035)
                                                        ------------   ------------
Net cash provided by (used in) investing activities        4,979,455     11,433,500
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital lease obligations          (302,615)      (459,135)
Proceeds from sale of common stock                           379,135        216,103
Decrease in notes receivable from shareholders                    --          5,000
                                                        ------------   ------------
Net cash provided by (used in) financing activities           76,520       (238,032)
                                                        ------------   ------------
Net increase (decrease) in cash and cash equivalents      (5,134,189)     3,311,888
   Cash and cash equivalents at beginning of period        7,268,877      5,091,426
                                                        ------------   ------------
   Cash and cash equivalents at end of period           $ 2,134,688    $ 8,403,314
                                                        ============   ============

</TABLE>

                See notes to consolidated financial statements.


                                       5
<PAGE>   6
                          CARDIAC PATHWAYS CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998
                                   (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, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending June 30, 1999. 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, 1998.

2.       SHORT-TERM INVESTMENTS

        At December 31, 1998 and June 30, 1998, 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, 1998 and June 30,
1998, 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                                         1998             1998
-----------                                     -----------      -----------
<S>                                             <C>              <C>       
Held-to-maturity:
   U.S. government agency                       $ 1,999,417      $ 2,996,886
   U.S. corporate obligations                    10,510,864       10,751,614

Available-for-sale:
   Auction rate preferred stock                          --        3,500,000
                                                -----------      -----------
                                                 12,510,281       17,248,500
Amounts classified as cash equivalents              999,333               --
                                                -----------      -----------
Amounts included in short-term investments      $11,510,948      $17,248,500
                                                ===========      ===========
</TABLE>

        There were no material realized gains or losses for the three and six
month periods ending December 31, 1998 and 1997. The cost of securities sold is
based on the specific identification method. Held-to-maturity securities at
December 31, 1998 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,
                                                1998                   1998
                                             ----------              --------
       <S>                                   <C>                     <C>     
       Inventories:

            Raw materials                    $  557,768              $432,867
            Work-in-process                     272,792               123,052
            Finished goods                      411,643               112,123
                                             ----------              --------
                                             $1,242,203              $668,042
                                             ==========              ========
</TABLE>

<TABLE>
<CAPTION>
                                             DECEMBER 31,           JUNE 30,
                                                1998                  1998
                                             ----------            ----------
     <S>                                     <C>                   <C>       
      Property and equipment:
           Equipment                         $6,175,542            $5,626,967
           Leasehold improvements               422,062               348,610
           Equipment-in-process               1,857,920             1,523,411
                                             ----------            ----------
                                              8,455,524             7,498,988
           Less accumulated depreciation
           and amortization                   4,363,395             3,866,500
                                             ----------            ----------
                                             $4,092,129            $3,632,488
                                             ==========            ==========
</TABLE>


                                       7
<PAGE>   8

4.      STOCK PLANS

        In August 1998, the Board of Directors of the Company approved the
termination of the open offering periods for the 1996 Employee Stock Purchase
Plan effective as of October 31, 1998 and the termination of any future offering
periods under the 1996 Employee Stock Purchase Plan. In August 1998, the
Company's Board of Directors approved the adoption of the Cardiac Pathways
Corporation 1998 Employee Stock Purchase Plan and the initial reservation of
100,000 shares of Common Stock under the Plan. The 1998 Employee Stock Purchase
Plan provides for an annual increase, commencing as of July 1, 1999, in the
number of Common Stock shares reserved for issuance equal to the lesser of
200,000 shares or 1.5% of the Company's outstanding Common Stock or such an
amount as may be determined by the Company's Board of Directors. The 1998
Employee Stock Purchase Plan was approved by the stockholders at the 1998 Annual
Meeting of Stockholders on November 30, 1998.

        In August 1998, the Board of Directors of the Company approved the
adoption of the Cardiac Pathways Corporation 1998 Nonstatutory Stock Option Plan
under which 400,000 shares of Common Stock were reserved for issuance.

        In October 1998, the Board of Directors of the Company approved the
amendment of the 1991 Stock Plan and 1996 Director Option Plan to increase the
number of shares reserved for issuance by 300,000 and 20,000 shares,
respectively. These increases were approved by the stockholders at the 1998
Annual Meeting of Stockholders on November 30, 1998.

5.      RECENT PRONOUNCEMENTS

        In June 1997, the FASB 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 reported
in measuring net income such as changes in value of available-for-sale
securities and foreign currency translation adjustments. The Company has adopted
FAS 130 as of the first quarter of fiscal 1999. FAS 130 establishes new rules
for the reporting and display of comprehensive income and its components,
however it has no impact on the Company's net income or total stockholder's
equity.

        In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and
Related Information" which supersedes 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.

        In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities" which is required to be adopted in years beginning after June 15,
1999. The Company has not in the past and does not anticipate in the future
using derivative instruments, and the Company does not expect that the adoption
of FAS 133 will have a significant impact on its financial condition or results
of operations.



                                       8
<PAGE>   9

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 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 (i) the statements in the
"Overview" section including the statement in the first paragraph relating to
expectations of operating losses, the statement in the third paragraph relating
to anticipated filing and approval time periods for premarket approval
applications, the statements in the fourth paragraph relating to the
commercialization of products that have received Food and Drug Administration
("FDA") manufacturing approval and the statements related to the manufacturing,
marketing, and distribution of the Company's products; (ii) the statements in
"Results of Operations" including statements in the last sentence of "Cost of
Goods Sold," the statements in the last sentence of each of the "Research and
Development", "Selling, General and Administrative" paragraphs; and (iii) the
statements in the "Liquidity and Capital Resources" section including the
statements regarding future capital expenditures in the third paragraph, the
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations in the sixth paragraph and the
statements in the seventh paragraph regarding potential sources of additional
capital resources.

OVERVIEW

   The Company was founded in April 1991, operates in a single industry segment,
and 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, 1998 had an accumulated
deficit of approximately $71.0 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,
certain mapping baskets, Radiofrequency Generator Systems and Arrhythmia Mapping
Systems. The Company expects its operating losses to continue through at least
the end of fiscal 2000 as it continues to expend substantial funds for clinical
trials to support its efforts to obtain regulatory approvals for its products,
conduct its research and development activities, establish commercial-scale
manufacturing capabilities and expand its 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. On February 2, 1999, the FDA granted approval of the
Company's premarket approval ("PMA") application to commercially release its
Ventricular Tachycardia Ablation System which consists of the Chilli(R) Cooled
Ablation Catheter and the Model 8004 Radiofrequency Generator. In January 1999,
the FDA granted clearance of the Company's application pursuant to section
510(k) of the Food, Drug & Cosmetics Act of 1938, as amended (the 510(k)
application) to commercially release its Mercator(R) Atrial High Density Array
Catheter which is intended to be used in the right atrium for diagnostic mapping
procedures. In August 1997, the FDA granted clearance of the Company's 510(k)
application for the Model 8100/8300 Arrhythmia Mapping System for basic
diagnostic electrophysiology studies. 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 


                                       9
<PAGE>   10

applicable FDA regulatory guidelines. In addition, the ablation catheter and
ablation equipment that together form the Atrial Fibrillation Ablation System
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 its products in the United States, the Company must obtain
clearance or approval from the FDA. The Company does not anticipate filing a PMA
application for any additional system for at least a year, and does not
anticipate receiving a PMA for any such system for at least one year 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 from its
Arrhythmia Mapping System for diagnostic mapping of ventricular tachycardia or
its Atrial Fibrillation Ablation System unless and until such products obtain
clearance or approval from the FDA.

   For the Company's products which have recently obtained FDA clearance or
approval, there can be no assurance that any such products will be successfully
commercialized or that the Company will achieve significant revenues from either
domestic or international sales. Although the FDA granted PMA approval for the
Ventricular Tachycardia Ablation System, 510(k) clearance for the Mercator
atrial catheter, and 510(k) clearance for the Arrhythmia Mapping System for
basic diagnostic studies, the Company does not have any experience in
manufacturing, marketing or selling these products in commercial quantities. In
order to successfully implement its business plan, the Company must manufacture
in commercial quantities and sell the Ventricular Tachycardia Ablation System.
Furthermore, the Company 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. The Company intends to market its
products primarily through a direct sales force in the United States and
indirect sales channels internationally. Establishing a marketing and sales
capability sufficient to support sales in commercial quantities will require
substantial efforts and require significant management and financial resources.
See "Factors That May Impact Future Operations."

   Reduction in Force. In February 1999, the Company reduced its work force
company-wide by approximately 15%. The Company will record costs associated with
the reduction in force of approximately $150,000 in the three month period
ending March 31, 1999. The Company does not expect to realize any material
reductions in expenses from the reduction in force until the last quarter of
fiscal 1999 or the first quarter of fiscal 2000 at the earliest.




                                       10
<PAGE>   11

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 increased to $967,000 for the three
months ended December 31, 1998 compared to $360,000 for the three months ended
December 31, 1997. For the six months ended December 31, 1998, the Company had
net sales of $2.1 million compared to $922,000 for the six months ended December
31, 1997. The increase in net sales for the three and six months ended December
31, 1998 compared to the same periods in the prior year was primarily due to
higher overall shipments of Trio/Ensemble and Radii catheters.

   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 or ratably over the period for which the related
technology patents expire. A total of $219,000 of royalty income related to the
agreement has been recorded through December 31, 1998, of which $75,000 was
recognized in the three months ended December 31, 1998.

   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 $1.1 million for the three months ended December 31, 1998 and
resulted in a gross margin deficit of $84,000. For the three months ended
December 31, 1997, cost of goods sold was $620,000 and resulted in a gross
margin deficit of $261,000. For the six months ended December 31, 1998, the
Company had a gross margin deficit of $16,000 compared to $349,000 for the six
months ended December 31, 1997. The decrease in the gross margin deficit for the
three and six months ended December 31, 1998 compared to the same periods in the
prior year was primarily due to increased sales volumes, changes in sales mix
and improved manufacturing yields. These improvements were offset in part by
increased overhead and training costs for manufacturing personnel in connection
with the expansion of catheter production capacity. In addition, the Company
incurred higher costs associated with quality control and manufacturing
engineering activities to support higher production volumes in the three and six
months ended December 31, 1998. The Company expects its gross margins to
fluctuate in the future as its products are commercialized.

   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
decreased slightly to $3.3 million for the three months ended December 31, 1998
from $3.6 million for the three months ended December 31, 1997. Research and
development expenses were $6.7 million for the six months ended December 31,
1998 compared to $7.1 million for the six months ended December 31, 1997. The
decrease in research and development expenses was primarily attributable to
decreased costs related to clinical trials of the Chilli cooled ablation system,
for which patient enrollment was completed in December 1997, and decreased costs
in the procurement of prototype materials. These decreases were offset by
increased costs associated with consulting services, facilities and the
placement at clinical sites of Arrhythmia Mapping Systems and Radiofrequency
Generator Systems and catheter products to support the Company's high resolution
mapping and linear ablation studies. 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 


                                       11
<PAGE>   12

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 $1.7
million for the three months ended December 31, 1998 from $1.1 million for the
three months ended December 31, 1997. Selling, general, and administrative
expenses were $3.1 million for the six months ended December 31, 1998, compared
to $2.0 million for the six months ended December 31, 1997. The increase was
primarily attributable to higher expenditures for sales and marketing personnel
and services to support expanding international and domestic sales, marketing
and customer service activities and increased costs associated with
demonstration units and product marketing materials. 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 $61,000 for the three months ended December 31, 1998 from
$388,000 for the three months ended December 31, 1997. Other income (expense),
net was $192,000 for the six months ended December 31, 1998, compared to
$770,000 for the six months ended December 31, 1997. The reduction in net other
income was the result of declining interest income on lower cash, cash
equivalent and short-term investment balances.

   Net Loss. The Company's net loss increased to $5.0 million for the three
months ended December 31, 1998 from $4.6 million for the three months ended
December 31, 1997. The net loss was $9.6 million for the six months ended
December 31, 1998, compared to $8.6 million for the six months ended December
31, 1997. The increase in the Company's net loss primarily resulted from
increased costs associated with expanded manufacturing capacity, increased
selling, general and administrative expenses and lower interest income.

   Impact of Adoption of New Accounting Standards. In June 1997, the FASB 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 value of available-for-sale securities and foreign
currency translation adjustments. FAS 130 was adopted in the first quarter of
fiscal year 1999 and did not have a material effect on its financial statements.

   In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 (FAS 131), "Disclosures about Segments of an Enterprise and Related
Information" which supersedes 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. The Company does not expect the adoption of FAS 131 to have a material
effect on its financial statements. FAS 131 will become effective for the
Company's year ending June 30, 1999.

                                       12
<PAGE>   13

   In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities"
which is required to be adopted in years beginning after June 15, 1999. The
Company has not in the past and does not anticipate in the future using
derivative instruments, and the Company does not expect that the adoption of FAS
133 will have a significant impact on its financial condition or results of
operations.

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
bank line of credit of $6.0 million, equipment lease financing arrangements
yielding $4.0 million and a prepaid royalty arrangement yielding $3.0 million.
In addition, the Company closed its initial public offering in June 1996 and
raised net proceeds of $43.1 million. As of December 31, 1998, the Company had
$13.6 million in cash, cash equivalents and short-term investments.

   Net cash used in operating activities was $10.2 million and $7.9 million for
the six months ended December 31, 1998 and 1997, respectively. For each of these
periods, the net cash used in operating activities resulted primarily from net
losses. Net cash provided from investing activities was $5.0 million and $11.4
million for the six months ended December 31, 1998 and 1997, respectively. 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 and equipment. Net cash provided by financing activities was $77,000
for the six months ended December 31, 1998 and net cash used in financing
activities was $238,000 for the six months ended December 31, 1997.

   As of December 31, 1998, the Company had capital equipment of $8.5 million,
less accumulated depreciation and amortization of $4.4 million, to support its
clinical, development, manufacturing and administrative activities. The Company
had financed $4.0 million from capital lease obligations through December 31,
1998. 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. As of December 31, 1998, the Company
had available an unused equipment lease financing facility (the "lease line") of
approximately $1.1 million. The Company expects to utilize the lease line and a
portion of the Company's existing cash resources to purchase additional
equipment over the next six months.

   In May 1998, the Company obtained a term loan credit facility of $8.0 million
from a commercial bank. The loan agreement provided for an initial advance of
$6.0 million available for the repayment of a note payable and related accrued
interest due to Sorin Biomedical (described below) with the remaining $2.0
million available for general corporate purposes. Advances can be made to the
Company during a 12-month non-revolving drawdown period that expires in May
1999. Borrowings under the credit facility bear floating interest at the bank's
prime rate plus 1.25% (9.00% at December 31, 1998), and the Company can elect a
fixed interest rate option at the end of the 12-month drawdown period. Interest
payments are due monthly following commencement of each advance and the
outstanding balance of all borrowings under the credit facility will be fully
amortized over the 36-month period following the end of the drawdown period with
principal and interest payments due monthly. Under the terms of the loan
agreement, all borrowings are collateralized by substantially all of the
Company's assets and the Company must maintain certain financial ratios and
other covenants. At December 31, 1998, the Company had an unused amount of $2.0
million under the credit facility that is available for drawdowns through May
1999. The Company was in compliance with all covenants as of December 31, 


                                       13
<PAGE>   14

1998. However, if the Company does not raise additional funds from the sale of
equity capital or generate substantial revenues from operations, there can be no
assurance that the Company will be able to continue to comply with such
covenants.

   In May 1998, the Company utilized $6.0 million of the term loan credit
facility in order to repay a $4.5 million note payable and related accrued
interest of approximately $1.5 million due to Sorin Biomedical. The $4.5 million
note payable bore interest at the prime rate as quoted in the Wall Street
Journal, and all principal and accrued interest was due on June 27, 1999. The
early repayment of the note payable was made in connection with the termination
of a product distribution agreement with Sorin Biomedical.

   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 and the extent to which the
Company's products gain market acceptance, and competitive developments. In
order to successfully manufacture in commercial quantities and market and sell
its FDA-cleared products and to apply for FDA marketing clearance for its
remaining products, the Company will be required to raise additional funds
through equity or debt financing in fiscal 1999. Absent successful fund raising,
the Company will not have sufficient resources to successfully commercialize its
products and believes that such inability will have a material adverse effect on
the Company's business, financial condition and results of operations.

   The factors described in the previous paragraph, "Factors That May Impact
Future Operations" and elsewhere in this Report will impact the Company's future
capital requirements and the adequacy of its available funds. The Company will
be required to raise additional funds through public or private financing,
collaborative relationships or other arrangements in fiscal 1999. There can be
no assurance that such additional funding, will be available on terms acceptable
to the Company, if at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
additional restrictive covenants. Collaborative arrangements with a capital
raising component 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 would have a material adverse effect on the Company's business,
financial condition and results of operations.

    YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY AND BUDGETS AND YEAR 2000
COMPLIANCE

   Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than one year, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance. The
Company commenced a program in fiscal 1998, to be substantially completed by mid
calendar 1999, to review the Year 2000 compliance status of the software and
systems used in its internal business processes, to obtain appropriate
assurances of compliance from the manufacturers of these products and agreements
to modify or replace all non-compliant products. The Company has contacted its
major suppliers to determine whether the products obtained by the Company from
such vendors are Year 2000 compliant. To date, the Company has not received
responses from many of such suppliers. The Company's suppliers are under no
contractual obligation to provide such information to the Company. In addition,
the Company is considering converting certain of its software and systems to
commercial products that are known to be Year 2000 




                                       14
<PAGE>   15

compliant. Implementation of software products of third parties, however, will
require the dedication of substantial administrative and management information
resources, the assistance of consulting personnel from third party software
vendors and the training of the Company's personnel using such systems. Based on
the information available to date, the Company believes it will be able to
complete its Year 2000 compliance review and make necessary modifications prior
to mid calendar 1999. Software or systems that are deemed critical to the
Company's business are scheduled to be Year 2000 compliant by mid calendar 1999.
Nevertheless, particularly to the extent the Company is relying on the products
of other vendors to resolve Year 2000 issues, there can be no assurances that
the Company will not experience delays in implementing such products. If key
systems, or a significant number of systems were to fail as a result of Year
2000 problems, or the Company were to experience delays implementing Year 2000
compliant software products, the Company could incur substantial costs and
disruption of its business, which would potentially have a material adverse
effect on the Company's business, financial condition and results of operations.

   The Company in its ordinary course of business tests and evaluates its own
software products. 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. The Company believes that
its software products are generally Year 2000 compliant, meaning that the use or
occurrence of dates on or after January 1, 2000 will not materially affect the
performance of the Company's software products with respect to four digit date
dependent data or the ability of such products to correctly create, store,
process and output information related to such data. To the extent the Company's
software products are not fully Year 2000 compliant, there can be no assurance
that the Company's software products contain all necessary software routines and
codes necessary for the accurate calculation, display, storage and manipulation
of data involving dates. Furthermore, these systems will be used in various
operating environments once installed at customer sites. The Company believes
its products are in Year 2000 compliance. In certain circumstances, the Company
has warranted that the use or occurrence of dates on or after January 1, 2000
will not adversely affect the performance of the Company's products with respect
to four digit date dependent data or the ability to create, store, process and
output information related to such data. If any of the Company's licensees
experience Year 2000 problems, such licensees could assert claims for damages
against the Company.

   To date the Company has not identified a complete and separate budget for
investigating and remedying issues related to Year 2000 compliance whether
involving the Company's own software products or the software or systems used in
its internal operations. The Company has incurred costs and expects to incur
approximately $20,000 in connection with the procurement of software upgrades,
if required, and the implementation of new Year 2000 compliant information
systems. There can be no assurance that the Company's resources spent on
investigating and remedying Year 2000 compliance issues will not 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, 1998, the Company had an accumulated deficit of
$71.0 million. To date, 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 fiscal 2000 as it continues to expend 

                                       15
<PAGE>   16

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 either receive regulatory approvals for marketing or be
successfully commercialized or that the Company will achieve significant
revenues from either international or domestic sales. The Company anticipates
that it will need to raise additional funds in fiscal 1999 in order to
successfully manufacture in commercial quantities and sell its FDA-cleared
products and to apply for FDA clearance for additional products. In addition,
there can be no assurance that the Company will achieve or sustain profitability
in the future or meet the expectations of securities industry analysts. 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 scale-up of manufacturing
abilities, the expansion of sales and marketing activities and competition.

   Additional Financing Required

   The Company will continue to expend substantial resources for research and
development, including costs associated with conducting preclinical testing and
clinical trials. The Company will be required to expend substantial funds in the
course of completing required additional development, preclinical testing and
clinical trials and regulatory approval for its products. The Company's future
liquidity and capital requirements will depend on many factors, including (i)
the timing and scope of the Company's manufacturing scale up for its products
that have recently received FDA clearance; (ii) the scope and results of
preclinical testing and clinical trials; (iii) the retention of existing and
establishment of further collaborative arrangements, if any; (iv) continued
scientific progress in research and development programs; (v) the size and
complexity of these programs; (vi) the time and expense involved in obtaining
regulatory approvals, if any; (vii) competing technological and market
developments; (viii) the time and expense of filing and prosecuting patent
applications and enforcing patent claims; (ix) the cost of establishing
manufacturing capabilities and conducting commercialization activities; and (x)
other factors not within the Company's control.

   The Company will need to raise additional financing in fiscal 1999 through
public or private financing, collaborative arrangements or other arrangements.
Additional funding may not be available to the Company on favorable terms, if at
all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. Collaborative arrangements may require the Company to relinquish its
rights to certain of its technologies, products or marketing territories. If the
Company fails to raise additional funds when needed, its business, financial
condition and results of operations will be materially adversely affected.

   Clinical Trials

   The Ventricular Tachycardia Ablation System, Arrhythmia Mapping Systems and
Atrial Fibrillation Ablation System are in various stages of clinical testing.
Other than with respect to the Ventricular Tachycardia Ablation System, the
Mercator Atrial Mapping Basket, and the Arrhythmia Mapping System for basic
electrophysiology studies for which FDA approval or clearance was obtained, the
clinical data to date is insufficient to demonstrate the safety and efficacy of
these products under applicable FDA regulations and 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 regulations
and guidelines or that additional modifications to the Company's products will
not be necessary. In addition, the clinical trials may identify significant 

                                       16
<PAGE>   17

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. If the Arrhythmia Mapping System for
Ventricular Tachycardia and Atrial Fibrillation Ablation System and their
component catheters and equipment do not prove to be safe and effective in
clinical trials or if the Company is otherwise unable to commercialize these
products successfully, the Company's business, financial condition and results
of operations will be materially adversely affected. In addition, because
ablation treatment of these cardiac arrhythmias is a relatively new and to date
untested treatment, the long-term effects of radiofrequency ablation on patients
are unknown. As a result, the long-term success of ablation therapy in treating
ventricular tachycardia and atrial fibrillation will not be known for several
years.

   On February 2, 1999, the Company obtained PMA approval for the Chilli Cooled
Ablation Catheter and the Model 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. The Company is currently conducting a clinical trial for the Local
Sector Mapping Basket, a variation of the Mercator Left Ventricular Mapping
Basket. On January 27, 1999, the Company received 510(k) clearance for the
Mercator Atrial Mapping Basket sizes 70cc and 100cc 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. The
company is continuing to enroll patients in the study for the 130cc-size basket
to support a special 510(k) submission. The Company is currently conducting a
clinical trial of the Local Sector Mapping Basket in the right atrium. In April
1997, the Company completed a feasibility study of the Nexus Linear Lesion
Catheter and Model 8002 Radiofrequency Generator and Integrated Fluid Pump, the
products that together form the Company's Atrial Fibrillation Ablation System.
The Company submitted an IDE for the treatment of Atrial Fibrillation for a
second version of the Nexus Linear Lesion Catheter in December 1998 which was
conditionally approved in January 1999. The Company discontinued a clinical
trial for a second version of the Nexus Linear Lesion Catheter for the treatment
of atrial flutter in February 1999.

   Ventricular Tachycardia Ablation System. The Company obtained PMA approval
for the Chilli Cooled Ablation Catheter and Model 8004 Radiofrequency Generator
and Fluid Pump on February 2, 1999. The approval requires a post approval study
be performed.

   Arrhythmia Mapping System for Ventricular Tachycardia. In January 1997, 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 


                                       17
<PAGE>   18

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. There was no thrombus formation on any mapping basket used
in the 40 studies. Of the 40 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, a full chamber global basket evaluated in the feasibility study and 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. Three patients have been enrolled in this study as of February 9, 1999.
The FDA requested a separate IDE for a study of the Sector Mapping 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. This study was
initiated April 8, 1998, and seven patients have been enrolled in this trial as
of February 9, 1999. These studies allow the use of the ventricular mapping
baskets with the Ventricular Tachycardia Ablation System simultaneously. The
Company believes that ventricular mapping will be an enabling technology for the
treatment of high rate ventricular tachycardia, which is more common than slow
rate ventricular tachycardia. Slow rate ventricular tachycardia is currently the
only type of ventricular tachycardia amenable to ablation therapy using current
techniques.

   Arrhythmia Mapping System for Atrial Fibrillation. In June 1997, 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 was being conducted at seven clinical sites in the United States and one
in Europe. The purpose of this clinical trial was to demonstrate the equivalency
of the Mercator Atrial Mapping Basket and the Arrhythmia Mapping System to
commercially available mapping catheters. Enrollment in the clinical trial was
completed on March 10, 1998 and the trial included 74 patients. There was no
thrombus formation on any mapping basket used in the 74 studies. The Company
submitted a 510(k) application for clearance of the Mercator Atrial Mapping
Basket on July 17, 1998 and received clearance of two of the three basket sizes
(70 and 100cc). Data for 12 additional cases will need to be collected for a
special 510(k) submission requesting approval of the 130cc-sized basket. An IDE
was submitted for a clinical study of the Local Sector Mapping Basket for the
right atrium on February 20, 1998. The Company has approval to test 95 subjects
at ten clinical sites, and 17 patients have been enrolled as of February 9,
1999.

   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 1997. 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 testing 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.

   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 


                                       18
<PAGE>   19

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 and was further amended in October
1998 to allow delivery of 70 watts of power and use a superior approach to
accessing the right atrium. The study was initiated in February 1998 and eight
patients were enrolled as of February 3, 1999. The Company has also tested the
Nexus Linear Lesion Catheter for atrial flutter and fibrillation in 13 patients
in Europe as of February 9, 1999.

   A feasibility IDE for use of the modified Nexus Linear Lesion Catheter in the
right and left atrium to treat atrial fibrillation was submitted on December 30,
1998, and was conditionally approved on January 29, 1999. Because the FDA is now
open to an approval study route for the indication of treating atrial
fibrillation with right atrial lesions exclusively, the Company has changed its
regulatory strategy to pursue commercialization of the Nexus 2.0 for treating
atrial fibrillation. On February 3, 1999, the Company discontinued the Nexus
study to treat atrial flutter.

   No Existing Market

   On February 2, 1999, the Company received approval from the FDA of its PMA
application to commercially release its Chilli Cooled Ablation System. In
January 1999, the FDA granted 510(k) clearance of the Company's Mercator Atrial
High Density Array Catheter. 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. Although the Company has
received such approval or clearance, there can be no assurance that such
products will gain any significant degree of market acceptance among physicians,
patients, and health care payors. There can be no assurance that these products
will be successfully commercialized in the United States or in international
markets. 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 any
or all such products achieve 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.
The Company intends to market its products primarily through a direct sales
force in the United States and indirect sales channels internationally.
Establishing a marketing and sales capability sufficient to support sales in
commercial quantities will require substantial efforts and require significant
management and financial resources. There can be no assurance that the Company
will be able to build such a marketing staff or sales force, that establishing
such a marketing staff or sales force will be cost effective or that the
Company's sales and marketing efforts will be successful. If the Company is
successful in obtaining the necessary regulatory approvals for its 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. For example, the Company is currently in the
process of selecting a new distributor in certain European countries. Failure to
establish appropriate distribution relationships, 


                                       19
<PAGE>   20

including those European markets in which the Company does not currently have a
distributor in place, could have a material adverse effect upon the Company's
business, financial condition and results of operations.

   Manufacturing

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

   The Company has no experience manufacturing its products in the volumes that
will be necessary for the Company to achieve significant commercial sales, and
there can be no assurance that reliable, high volume manufacturing capacity can
be established or maintained at commercially reasonable costs. If the Company
receives FDA clearance or approval for its products, it will need to expend
significant capital resources and develop manufacturing expertise to establish
large scale manufacturing capabilities. In particular, the Company received FDA
clearance for its Chilli Cooled Ablation Catheter on February 2, 1999 and will
be required to manufacture such catheters in large volumes to successfully
commercialize the product. Manufacturers often encounter difficulties in scaling
up production of new products, including problems involving production yields,
quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations and the need for further
FDA approval of new manufacturing processes. In addition, the Company believes
that substantial per unit 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
Regulation ("QSR;" the successor regulations to current Good Manufacturing
Practices) compliance inspections conducted by the FDA. The Company is required
to comply with QSR 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
from its European Notified Body. Any failure of the Company to comply with QSR
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 and granted the Company such a license in February
1998. 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.

                                       20
<PAGE>   21

   Patents and Proprietary Rights

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

   In addition to patents, the Company relies on trade secrets and proprietary
know how to compete. The Company seeks to protect its trade secrets and
proprietary know how, 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 (the "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 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 


                                       21
<PAGE>   22

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 parties' patents or that a court would find
that such patents are either not infringed by the Company's enhancements or that
the Company's patents are invalid. Further, there can be no assurance that
owners or licensees of these patents will not attempt to enforce their patent
rights against the Company in a patent infringement suit or other legal
proceeding, regardless of the likely outcome of such suit or proceeding.

   Competition

   At present, the Company considers its primary competition to be companies
involved in current, more established therapies for the treatment of ventricular
tachycardia and atrial fibrillation, including drugs, external electrical
cardioversion and defibrillation, implantable defibrillators, ablation
accompanied by pacemaker implantation and open-heart surgery. In addition,
several competitors are also developing new approaches and new products for the
treatment and mapping of ventricular tachycardia and atrial fibrillation,
including ablation systems using ultrasound, microwave, laser and cryoablation
technologies and mapping systems using contact mapping, single-point spatial
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 


                                       22
<PAGE>   23

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

   The design, pre-clinical and clinical testing, manufacture, labeling, sale,
distribution and promotion of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. 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 authorization, 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.

   Before a new device can be introduced into the market, a manufacturer must
generally obtain marketing clearance through a premarket notification under
Section 510(k) of the FDC Act 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. 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. 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.

                                       23
<PAGE>   24

   International

   The European Union has promulgated rules which require that medical products
distributed after June 14, 1998 bear the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. Quality system certification is one of the CE mark
requirements. The Company has received ISO9001/EN46001 certification by its
European Notified Body, one of the CE mark certification prerequisites for its
manufacturing facility in Sunnyvale, California. Furthermore, in January 1998,
the Company received the right to affix the CE mark to its Arrhythmia Mapping
System and Chilli Cooled Ablation System. In April 1998, the Company received
the right to affix the CE mark to its Radii catheters. In July 1998, the Company
received the right to affix the CE mark to its Trio/Ensemble catheters. While
the Company intends to satisfy the requisite policies and procedures that will
permit it to receive the CE Mark Certification for other products, 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.

   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 medical devices that have not received FDA marketing
authorization 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 meets a number of criteria including marketing
authorization in one of the "Tier I" countries identified in that act. If the
device has no marketing authorization in a Tier I country, and is intended for
marketing, it may be necessary to obtain approval from the FDA to export the
device. 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 currently has marketing authorization in one or more Tier I
countries for all its clinically used products. The Company is in the process of
obtaining the necessary marketing approvals or conducting clinical trials in the
United Kingdom, Germany, France, Canada, Japan 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. Third party reimbursement is
generally provided on the basis of the procedure's diagnosis-related group
("DRG") code and such code is established by the United States Health Care
Finance Administration. The failure of the procedures in which the Company's
products are used or an insufficient level of reimbursements for such procedures
would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, medical equipment
reimbursements have been mandated by statute to be reduced in the past, and
there can be no assurance that any such 


                                       24
<PAGE>   25

reimbursements with respect to the Company's products will be adequate or
provided at all. Failure by hospitals and other users of the Company's products
to obtain reimbursement from third party payors, or changes in government and
private third party payors' policies toward reimbursement for procedures
employing the Company's products, would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, the
Company is unable to predict what additional legislation or regulation, if any,
relating to the health care industry or third party coverage and reimbursement
may be enacted in the future, or what effect such legislation or regulation
would have on the Company.

   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 treatment with the
Company's products will be more efficacious than currently available therapies.
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 procedures using the Company's products.

   Product Liability and Insurance

   The development, manufacture and sale of medical products entail significant
risk of product liability claims and product failure claims. The Company has
conducted only limited clinical trials to date 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.

                                       25
<PAGE>   26

   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, 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.
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.

   Impact of Introduction of Single European Currency

   The introduction of the Single European Currency (Euro) is scheduled for
initial implementation as of January 1, 1999 with a transition period through to
January 1, 2002. The Company expects that the introduction and use of the Euro
will not have a material adverse impact on the Company's internal systems or
will result in increased costs related to its European business activities.
Furthermore, the Company does not believe that the introduction of the Euro will
have a material adverse effect on its business, financial condition and results
of operations.

   Issuance of Preferred Stock Could Delay or Prevent Corporate Takeover

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

   On April 22, 1997, pursuant to a Preferred Shares Rights Agreement (the
"Rights Agreement") between the Company and Norwest Bank Minnesota, N.A. (the
"Rights Agent"), the Company's Board of Directors declared a dividend of one
right to purchase 1/1000th a share of the Company's Series A Participating
Preferred Stock ("Series A Preferred") for each outstanding share of Common
Stock of the Company (a "Right"). Each Right entitles the registered holder to
purchase from the Company 1/1000th 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



                                       26
<PAGE>   27

equity interests in the Company in the event of an unsolicited attempt by an
acquirer to take over the Company, in a manner or on terms not approved by the
Board of Directors. The Rights have been declared by the Board in order to deter
coercive tactics, including a gradual accumulation of shares in the open market
of a 15% or greater position to be followed by a merger or a partial or two tier
tender offer that does not treat all stockholders equally. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors. However, the Rights may have the effect of rendering more difficult
or discouraging an acquisition of the Company deemed undesirable by the Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.

   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 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, release of reports by securities analysts, changes in
securities analysts recommendations, economic and other external factors and
general market conditions may have a significant effect on the market price of
the Common Stock. Also, at some future time, the Company's revenues and results
of operations may be below the expectations of securities analysts or investors,
resulting in significant fluctuations in the market price of the Company's
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, financial condition and
results of operations. 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.


ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   There have been no material changes to the Company's disclosures about market
risk from those set forth in the Company's Annual Report on Form 10-K for the
year ended June 30, 1998.


                                       27
<PAGE>   28

                          CARDIAC PATHWAYS CORPORATION


PART II.     OTHER INFORMATION


ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

   Use of Proceeds. With respect to the requirements of Item 701(f) of
Regulation S-K regarding the reporting of use of proceeds, pursuant to the
information required to be reported by Item 701(f)(4)(viii), the Company used
net proceeds in the amounts noted for the stated purposes since its quarterly
report on Form 10-Q for the period ended September 30, 1998: purchase and
installation of machinery and equipment - $286,600; repayment of indebtedness -
$150,923; and working capital - $5,273,915.

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

   At the Company's Annual Meeting of Stockholders on November 30, 1998, the
stockholders approved the following actions:

A.      Election of Class III Directors
<TABLE>
<S>                                      <C>       <C>                <C>           <C>  
          Louis G. Lange, M.D.:           For:     8,890,630          Withheld:     368,427
          William N. Starling:            For:     8,890,630          Withheld:     368,427
</TABLE>

B.        The adoption of the 1998 Employee Stock Purchase Plan, to (i)
          reserve 100,000 shares of common stock for sale thereunder and
          (ii) increase the annual number of shares of common stock for
          sale thereunder, beginning on July 1, 1999, by the lesser of (a)
          200,000 shares, (b) 1.5% of the common stock (outstanding as of
          the last day of the prior fiscal year) or (c) such amount as may
          be determined by the Company's Board of Directors.
<TABLE>
<S>                <C>           <C>           <C>               <C>             <C>
          For:     5,329,467      Against:     1,695,074          Abstain         7,315
</TABLE>

C.        The amendment of the 1996 Director Option Plan to increase the
          number of shares available for issuance thereunder by 20,000
          shares.
<TABLE>
<S>                <C>           <C>           <C>               <C>             <C>
          For:     5,260,966      Against:     1,736,936          Abstain        33,954
</TABLE>

D.        The amendment of the 1991 Stock Plan to increase the number of
          shares available for issuance thereunder by 300,000 shares.
<TABLE>
<S>                <C>           <C>           <C>               <C>             <C>
          For:     4,996,494      Against:     2,023,564          Abstain        11,798
</TABLE>

E.        Ratification of the appointment of Ernst & Young LLP as
          independent auditors for the Company for the fiscal year ending
          June 30, 1999.
<TABLE>
<S>                <C>           <C>           <C>               <C>             <C>
          For:     9,225,550      Against:        29,542          Abstain         3,965

</TABLE>

                                       28
<PAGE>   29


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, 1998.



                                       29
<PAGE>   30

                          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 16, 1999                 CARDIAC PATHWAYS CORPORATION


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


                                         /S/ G. MICHAEL LATTA
                                         --------------------------------------
                                         G. MICHAEL LATTA
                                         VICE PRESIDENT OF FINANCE AND CHIEF
                                         FINANCIAL OFFICER

                                       30
<PAGE>   31

                          CARDIAC PATHWAYS CORPORATION

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>

  EXHIBIT NO.        EXHIBIT DESCRIPTION                                            PAGE NO.
  -----------        -------------------                                            --------
      <S>            <C>                                                            <C>
      27.1           Financial Data Schedule

</TABLE>

                                       31