UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q

(Mark One)

(X)
      
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For the period ended: September 30, 2005(  )
      
      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT
      OF 1934For the transition period from __________ to __________Commission File Number: 0-28260




|                                                                  
|------------------------------------------------------------------
|EP MEDSYSTEMS, INC.                                               
|(Exact name of registrant as
    specified in its charter)        
|                                                                  
|New Jersey                                                        
|(State or other jurisdiction of
    incorporation or organization)
|                                                                  
|575 Route 73 N. Building
    D, West Berlin, New Jersey 08091     
|(Address of principal executive
    offices)                      
|                                                                  
|(856) 753-8533                                                    
|(Registrant's telephone number)                                   

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 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

Indicate by check mark whether
the registrant is an accelerated filer (as defined in Rule 12b-2, of the
Exchange Act).
 __Yes  X No

Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). 
__Yes  X No

APPLICABLE
ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of
the issuer's classes of common equity, as of the latest practicable date:

| | Class                               |  | Outstanding at November 10, 2005
| | ----------------------------------- |  | --------------------------------
| | Common Stock, without
    par value |  | 25,910,176 shares               



EP MEDSYSTEMS, INC. AND
SUBSIDIARIES
FORM 10-Q
CONTENTS

|PART I - FINANCIAL INFORMATION | Page         
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|                               | Item 1.      
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|                               | Item 2.      
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|                               | Item 3.      
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|                               | Item 4.      
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|PART II -- OTHER INFORMATION   |              
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|                               | Item 1.      
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|                               | Item 2.      
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|                               | Item 3.      
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|                               | Item 4.      
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|                               | Item 5.      
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|                               | Item 6.      
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|                               | Signatures   
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|                               | Exhibit Index

PART I.  FINANCIAL INFORMATION
Item 1. Financial Statements.

EP MEDSYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCESHEETS

|ASSETS                                                                                                                                                                                       |   | September 30, 2005
    (Unaudited) |   | December 31, 2004
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------- | - | -----------------
|Current assets:                                                                                                                                                                              |   |                                    |   |                  
|Cash and cash equivalents                                                                                                                                                                    | $ | 6,606,815                          | $ | 9,345,000        
|Accounts
    receivable, net of allowances for doubtful accounts of $139,000, for each
    period                                                                                            |   | 4,074,505                          |   | 4,335,075        
|Inventories, net of reserves                                                                                                                                                                 |   | 3,329,620                          |   | 2,947,853        
|Prepaid expenses and other current
    assets                                                                                                                                                |   | 385,795                            |   | 472,654          
|Total current assets                                                                                                                                                                         |   | 14,396,735                         |   | 17,100,582       
|                                                                                                                                                                                             |   |                                    |   |                  
|Property, plant and equipment, net                                                                                                                                                           |   | 2,190,905                          |   | 2,223,421        
|Goodwill                                                                                                                                                                                     |   | 341,730                            |   | 341,730          
|Other intangible assets, net                                                                                                                                                                 |   | 195,039                            |   | 158,162          
|Other assets                                                                                                                                                                                 |   | 23,335                             |   | 179,046          
|Total assets                                                                                                                                                                                 | $ | 17,147,744                         | $ | 20,002,941       
|                                                                                                                                                                                             |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                         |  
|Current liabilities:                                                                                                                                                                         |   |                                    |   |                  
|Accounts payable                                                                                                                                                                             | $ | 2,616,874                          | $ | 2,107,463        
|Accrued expenses                                                                                                                                                                             |   | 2,230,244                          |   | 1,776,816        
|Deferred revenue                                                                                                                                                                             |   | 455,443                            |   | 460,393          
|Total current liabilities                                                                                                                                                                    |   | 5,302,561                          |   | 4,344,672        
|Secured convertible note, non-current                                                                                                                                                        |   | 1,977,716                          |   | 1,958,611        
|Deferred warranty revenue,
    non-current                                                                                                                                                   |   | 398,107                            |   | 348,184          
|Total liabilities                                                                                                                                                                            |   | 7,678,384                          |   | 6,651,467        
|Commitments and contingencies                                                                                                                                                                |   |                                    |  
|Shareholders' equity:                                                                                                                                                                        |   |                                    |   |                  
|Preferred stock,
    no par value, 5,000,000 shares authorized, no shares issued or outstanding
    at September 30, 2005 and 373,779 shares issued and outstanding at December
    31, 2004 |   | -                                  |   | 618,161          
|Common stock,
    $.001 stated value, 40,000,000 shares authorized 25,910,176 and 25,387,630
    shares issued at September 30, 2005 and December 31, 2004, respectively                     |   | 25,911                             |   | 25,388           
|Additional paid-in capital                                                                                                                                                                   |   | 56,639,250                         |   | 55,650,822       
|Accumulated other comprehensive loss                                                                                                                                                         |   | (111,515)                          |   | (280,582)        
|Treasury stock, 50,000 shares at cost                                                                                                                                                        |   | (100,000)                          |   | (100,000)        
|Accumulated deficit                                                                                                                                                                          |   | (46,984,286)                       |   | (42,562,315)     
|Total shareholders' equity                                                                                                                                                                   |   | 9,469,360                          |   | 13,351,474       
|Total liabilities and shareholders'
    equity                                                                                                                                               | $ | 17,147,744                         | $ | 20,002,941       
|                                                                                                                                                                                             |   |                                    |   |                  

The accompanying notes are an
integral part of these statements.

EP MEDSYSTEMS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                            |   | For the Three Months Ended
|------------------------------------------- | - | --------------------------
|                                            |   | September 30,             
|                                            |   | 2005                      
|                                            |   |                           
|Net sales                                   | $ | 4,269,781                 
|Cost of products sold                       |   | 1,591,354                 
|Gross profit                                |   | 2,678,427                 
|                                            |   |                           
|Operating costs and expenses:               |   |                           
|Sales and marketing expenses                |   | 2,110,433                 
|General and administrative expenses         |   | 1,811,112                 
|Research and development expenses           |   | 587,535                   
|Total operating expenses                    |   | 4,509,080                 
|Loss from operations                        |   | (1,830,653)               
|                                            |   |                           
|Interest income                             |   | 50,299                    
|Interest expense                            |   | (68,399)                  
|Net loss                                    | $ | (1,848,753)               
|                                            |   |                           
|Basic and diluted loss per share            | $ | (.07)                     
|                                            |   |                           
|Weighted average shares outstanding used    |   |                           
|to compute basic and diluted loss per share |   | 25,847,567                

The
accompanying notes are an integral part of these statements.





EP
MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                            |   | For the Nine Months Ended
|------------------------------------------- | - | -------------------------
|                                            |   | September 30,            
|                                            |   | 2005                     
|                                            |   |                          
|Net sales                                   | $ | 12,500,664               
|Cost of products sold                       |   | 4,619,099                
|Gross profit                                |   | 7,881,565                
|                                            |   |                          
|Operating costs and expenses:               |   |                          
|Sales and marketing expenses                |   | 6,412,717                
|General and administrative expenses         |   | 4,071,536                
|Research and development expenses           |   | 1,760,475                
|Total operating expenses                    |   | 12,244,728               
|Loss from operations                        |   | (4,363,163)              
|                                            |   |                          
|Interest income                             |   | 138,304                  
|Interest expense                            |   | (197,112)                
|Net loss                                    | $ | (4,421,971)              
|                                            |   |                          
|Basic and diluted loss per share            | $ | (.17)                    
|                                            |   |                          
|Weighted average shares outstanding used    |   |                          
|to compute basic and diluted loss per share |   | 25,755,732               



The accompanying notes are an integral part of these statements.

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(unaudited)

|                                                                              | Common Stock
    Shares | Common Stock
    Amount | Preferred Stock
    Shares | Preferred Stock
    Amount | Additional
    Paid-in Capital | Accumulated
    Other Comprehensive Loss | Treasury Stock | Accumulated
    Deficit | Total      
|----------------------------------------------------------------------------- | ----------------------- | ----------------------- | -------------------------- | -------------------------- | ------------------------------ | ---------------------------------------- | -------------- | ----------------------- | -----------
|Balance, December 31, 2004                                                    | 25,387,630              | $25,388                 | 373,779                    | $618,161                   | $55,650,822                    | $(280,582)                               | $(100,000)     | $(42,562,315)           | $13,351,474
|                                                                              |                         |                         |                            |                            |                                |                                          |                |                         |            
|Issuance of common stock in connection with conversion of
    preferred stock | 387,946                 | 388                     | (373,779)                  | (618,161)                  | 617,773                        | -                                        | -              | -                       | -          
|                                                                              |                         |                         |                            |                            |                                |                                          |                |                         |            
|Issuance of common stock in connection with exercise of
    options           | 134,600                 | 135                     | -                          | -                          | 269,655                        | -                                        | -              | -                       | 269,790    
|                                                                              |                         |                         |                            |                            |                                |                                          |                |                         |            
|Issuance of options in connection with clinical affairs
    consulting        | -                       | -                       | -                          | -                          | 101,000                        | -                                        | -              | -                       | 101,000    
|                                                                              |                         |                         |                            |                            |                                |                                          |                |                         |            
|Foreign currency translation                                                  | -                       | -                       | -                          | -                          | -                              | 169,067                                  | -              | -                       | 169,067    
|                                                                              |                         |                         |                            |                            |                                |                                          |                |                         |            
|Net loss                                                                      | -                       | -                       | -                          | -                          | -                              | -                                        | -              | (4,421,971)             | (4,421,971)
|Balance,
    September 30, 2005                                               | 25,910,176              | $25,911                 | -                          | -                          | $56,639,250                    | $(111,515)                               | $(100,000)     | $(46,984,286)           | $9,469,360 
|                                                                              |                         |                         |                            |                            |                                |                                          |                |                         |            



The accompanying notes are an
integral part of these statements.

EP MEDSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                                                      |   | For the Nine Months Ended
|------------------------------------------------------------------------------------- | - | -------------------------
|                                                                                      |   | September 30,            
|                                                                                      |   | 2005                     
|Cash flows from operating activities:                                                 |   |                          
|Net loss                                                                              | $ | (4,421,971)              
|Adjustments to reconcile net loss to net cash                                         |   |                          
|used in operating activities:                                                         |   |                          
|Depreciation and amortization                                                         |   | 594,020                  
|Accretion of note discount                                                            |   | 19,105                   
|Change in value of warrants and amortization of 
       beneficial conversion feature |   | 40,026                   
|Non cash expenses in connection with issuance of   common stock and
    options       |   | 101,000                  
|Changes in assets and liabilities:                                                    |   |                          
|Decrease (increase) in accounts receivable                                            |   | 260,570                  
|Increase in inventories                                                               |   | (701,695)                
|Decrease in prepaid expenses and other assets                                         |   | 202,544                  
|Decrease in deferred tax asset                                                        |   | -                        
|Increase (decrease) in accounts payable                                               |   | 509,411                  
|Increase (decrease) in accrued expenses and deferred       revenue                    |   | 498,400                  
|Net cash used in operating activities                                                 | $ | (2,898,590)              
|                                                                                      |   |                          
|Cash flows from investing activities:                                                 |   |                          
|Capital expenditures                                                                  |   | (176,457)                
|Patent costs                                                                          |   | (101,995)                
|Net cash used in investing activities                                                 | $ | (278,452)                
|                                                                                      |   |                          
|Cash flows from financing activities:                                                 |   |                          
|Payments under notes payable                                                          |   | -                        
|Decrease in restricted cash                                                           |   | -                        
|Net proceeds from issuance of common stock, net of
          offering costs           |   | 269,790                  
|Net cash provided by (used in) financing activities                                   | $ | 269,790                  
|                                                                                      |   |                          
|Effect of exchange rate changes                                                       |   | 169,067                  
|                                                                                      |   |                          
|Net decrease in cash and cash equivalents                                             |   | (2,738,185)              
|Cash and cash equivalents, beginning of period                                        |   | 9,345,000                
|Cash and cash equivalents, end of period                                              | $ | 6,606,815                
|Supplemental cash flow information                                                    |   |                          
|Cash paid for interest                                                                | $ | 148,774                  

The accompanying notes are an
integral part of these statements.



EP MEDSYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1.  Basis of Presentation

The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and in accordance
with the instructions to Form 10-Q.  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 (including normal recurring adjustments) considered
necessary for a fair presentation have been included.

The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America 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 results of operations for the respective interim periods are not
necessarily indicative of the results to be expected for the full year. 
The accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in EP MedSystems, Inc.'s (the "Company" or "EP MedSystems'")
Annual Report on Form 10-KSB for the year ended December 31, 2004 filed with the
Securities and Exchange Commission ("SEC" or "Commission").

Note 2.  Inventories

Inventories are valued at the lower of cost or market with cost being
determined on a first-in, first-out basis.  Inventories consist of the
following at September 30, 2005 and December 31, 2004:

| |                          |   | September 30,
    2005
    (unaudited) |   | December 31,
    2004
| | ------------------------ | - | -------------------------------------- | - | ---------------------
| | Raw materials            | $ | 1,446,961                              | $ | 1,201,449            
| | Work in process          |   | 609,188                                |   | 516,893              
| | Finished goods           |   | 1,463,471                              |   | 1,399,511            
| | Reserve for obsolescence |   | (190,000)                              |   | (170,000)            
| |                          | $ | 3,329,620                              | $ | 2,947,853            
| |                          |   |                                        |   |                      



Note 3.  Notes payable

On November 15, 2000, EP MedSystems, Inc. completed a debt financing
for $3.2 million with Medtronic Asset Management, Inc., an affiliate of
Medtronic, Inc., and one of EP MedSystems' shareholders.  Approximately
$2.3 million was utilized to repay outstanding amounts on EP MedSystems'
then-existing revolving credit facility.  The principal and all accrued
interest on the note was to be repaid on November 15, 2003, and the note was
secured by a pledge by David Jenkins, EP MedSystems' Chairman, of shares of
common stock of a privately-held corporation.  On March 12, 2003, the due
date of the note was extended to April 1, 2004.  In connection with the
extension, the Company paid $1 million of the note upon receipt of certain
equity proceeds and increased the interest rate to the prime rate plus 3%. 
In February 2004, the principal amount of this note, along with all accrued
interest totaling approximately $2,920,000, was repaid.

On August 28, 2003, the Company issued a Secured Convertible Note
(the "Convertible Note") to Laurus Master Fund, Ltd. ("Laurus") and entered into
a related Security Agreement with Laurus, pursuant to which Laurus provided the
Company with a $4,000,000 revolving asset-based credit facility in the form of a
three-year Convertible Note secured by the accounts receivable, inventory, real
property and other assets of the Company, other than intellectual property.

At the closing of the transaction, the Company issued the Convertible
Note to Laurus having a principal amount of $4,000,000 and received net proceeds
of $2,661,600.  An additional $1,000,000 of the Convertible Note was
previously restricted, and those restrictions were released during the third
quarter of 2004.  The balance of the proceeds was used to pay fees incurred
in connection with this transaction.  Deferred financing fees are being
amortized over the life of the Convertible Note using the effective interest
method.  In addition, the Company paid a portion of the fees payable to an
intermediary, Biscayne Capital Markets, Inc. ("Biscayne"), in 40,000 shares of
the Company's Common Stock having a market value on the date of closing of this
transaction equal to $100,000.  The net proceeds of the Convertible Note
have been and will be used by the Company for working capital purposes and
payment of outstanding debt.

The portion of the Convertible Note against which Laurus advances
funds based on the Company's accounts receivable bears interest at the prime
rate, with a floor of 4%, and the balance (the "Advance Amounts") bears interest
at the prime rate plus 2%.  The effective interest rate is approximately
17%, which includes accretion of debt discount and amortization of the
beneficial conversion feature.  One half of Advance Amounts outstanding on
February 28, 2005 was required to be repaid on or before that date. 
However, there were no Advance Amounts on that date, as the net collateral
exceeded the principal amount outstanding on the Convertible Note.  The
remaining balance of the Advance Amounts outstanding on the date of the closing
was required to be repaid on or before August 28, 2006.  On November 9,
2005, the Convertible Note's maturity date was amended to be February 28, 2008. 
The Company, subject to certain rights of cancellation, may extend the credit
facility by Laurus, on a year-by-year basis, commencing February 28, 2008. 
The Company may repay in cash, without penalty, up to $500,000 of the
Convertible Note in any one calendar year, plus all Advance Amounts.

Subject to certain volume limitations
and other conditions, all or a portion of the Convertible Note was convertible
into Common Stock of the Company at the Company's option if the market price of
the Company's Common Stock reached a level, for 11 consecutive trading days,
which was more than 120% of the Fixed Conversion Price.  Through December
14, 2004, the Fixed Conversion Price was $2.55 and was a price in excess of the
market price of the Company's Common Stock on the date of closing.  Subject
to certain volume limitations and other conditions, Laurus has the option to
convert all or a portion of the Convertible Note into shares of the Company's
Common Stock at the Fixed Conversion Price.

Following the conversion into the
Company's Common Stock by the Company and/or Laurus of an aggregate of
$2,000,000 of the principal amount of the Convertible Note (a "Conversion
Event"), the Fixed Conversion Price will be adjusted upward to a price which is
115% of the average of the closing price of the Company's Common Stock for the
three trading days prior to the Conversion Event.  On December 15, 2004,
the balance of the first $2,000,000 of the principal amount was converted into
shares of the Company's Common Stock.  The fixed conversion price was
adjusted upwards from $2.55 to $4.20, on the remaining $2,000,000 principal
balance.  Subject to certain limitations, including the repayment
obligations with respect to Advance Amounts described above, the dollar amounts
of the Convertible Note converted may be re-borrowed.

The Fixed Conversion Price is subject
to adjustment, with customary exceptions and on a weighted-average basis, in
connection with sales of the Company's securities below the Fixed Conversion
Price then in effect, and is also subject to adjustment for stock splits,
combinations, stock dividends and similar events.  As part of the credit
facility transaction, Laurus and the intermediary also received warrants to
purchase an aggregate of 240,750 shares of the Company's Common Stock (the
"Warrants"), with exercise prices set as follows:  $2.93 per share for the
purchase of up to the first 133,750 shares, $3.19 per share for the purchase of
up to the next 80,250 shares, and $3.70 per share for the purchase of up to the
final 26,750 shares.  The expiration date of the warrant is August 28,
2010.  The exercise price of the warrants and the number of shares
underlying the warrants are subject to adjustments for stock splits,
combinations, stock dividends and similar events.

In October 2003, the Company
registered, under the Securities Act of 1933, as amended, 1,500,000 shares of
its Common Stock which may be received by Laurus upon conversion of the
Convertible Note and exercise of the Warrant, and the remaining 293,628 of such
shares were registered in November of 2004.

In accordance with the provisions of
Emerging Issues Task Force (EITF) Issue 00-27, "Application of EITF Issue No.
98-5 'Accounting for Convertible Securities with Beneficial Conversion Features
of Contingently Adjustable Conversion Ratios', to Certain Convertible
Securities", the allocated value of the Convertible Note contained a beneficial
conversion feature calculated based on the difference between the effective
conversion price of the proceeds allocated to the Convertible Notes and the
Warrants at the date of issuance. The amount arising from the beneficial
conversion feature aggregated approximately $486,000 and is being amortized as
interest expense from the date of the issuance of the Convertible Note to the
mandatory redemption date of August 28, 2006.  The Company valued the
Convertible Note and the Warrants at issuance.  The fair value of the
Warrants at the time of issue was $407,500.  In accordance with EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock," the Company marked the Warrants to market at
September 30, 2003 incurring a non-cash charge of $264,000.  The
registration rights agreement associated with the Convertible Note was amended
on November 25, 2003 and, as a result, the amount associated with the Warrants
was transferred to equity.  The net carrying value of the Convertible Note,
after allocation of the fair value of the Warrants is being accreted to its
redemption value through interest expense over the term of the Convertible Note
using the effective interest method.

Note 4.  Shareholders' Equity

Preferred Stock

P MedSystems is authorized to issue 5,000,000 shares of undesignated
preferred stock, no par value per share.  The Board of Directors has the
authority to issue preferred stock in one or more classes, to fix the number of
shares constituting a class and the stated value thereof, and to fix the terms
of any such class, including dividend rights, dividend rates, conversion or
exchange rights, voting rights, rights and terms of redemption, the redemption
price and the liquidation preference of such shares or class.



During the year ended December 31, 2001, EP MedSystems consummated
the private sale and issuance of Series A convertible preferred stock to
Medtronic, Inc. ("Medtronic").  In 2002, Medtronic converted a portion of
its preferred stock into shares of common stock of the Company.  At
December 31, 2004, Medtronic held 373,779 of the Company's Series A Preferred
Shares which were convertible into 387,946 shares of common stock of the Company
at the option of Medtronic or the Company in accordance with the terms of the
agreement with Medtronic.  During the first quarter of 2005, Medtronic
converted all of its 373,779 shares of preferred stock into 387,946 shares of
common stock of the Company.



Common Stock

EP MedSystems is authorized to issue 40,000,000 shares of common
stock, no par value, $.001 stated value per share, of which a total of
25,910,176 and 25,387,630 shares were issued and 50,000 shares were held as
Treasury Stock at September 30, 2005 and December 31, 2004.



On December 23, 2003, the Company completed an $8,200,000 private
placement of its common stock to various accredited investors.  The Company
issued 3,200,000 shares of its common stock at a purchase price of $2.56 per
share.

In May of 2004, the Company engaged a physician as a consultant to
head its clinical affairs department.  In connection with that agreement,
the Company issued 10,000 shares of the Company's common stock to the physician
and granted the physician an option to purchase 10,000 shares of the Company's
common stock which vests twelve months from the date of grant.  Also in
connection with the agreement, the Company granted the physician an option to
purchase 40,000 shares of the Company's common stock which vests in equal
installments over three years.  In addition, in July 2005, the Company
granted the physician an option to purchase 40,000 shares of the Company's
common stock which vests in equal installments over three years.  The
exercise price of each of the options was the fair market value of the Company's
common stock on the date of the grant.  The transactions were accounted for
in accordance with Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."  The fair value was measured
using the Black-Scholes option pricing model under Statement of Financial
Accounting Standard No. 123 using the following assumptions for the 2004 grant
as follows: risk free rate: 3.07%, 10-year life, and a volatility percentage of
83.86%.  For the options issued in July of 2005, the assumptions used in
the Black-Schole option pricing model were as follows:  risk free rate
3.77%, 10-year life and a volatility percentage of 77.98%.

In October 2004, the Company engaged a physician as a consultant to
manage a clinical study.  In connection with that agreement, the Company
granted the physician a warrant to purchase 10,000 shares of the Company's
common stock which vested immediately.  The exercise price of the warrants
was the fair market value of the Company's common stock on the date of the
grant.  The transaction was accounted for in accordance with Emerging
Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services."  The fair value was measured using the Black-Scholes
option pricing model under Statement of Financial Accounting Standard No. 123
using the following assumptions: risk free rate of 3.36%, 10-year life, and a
volatility percentage of 77.25%.

On December 15, 2004, the Company completed a $4,500,000 private
placement of its common stock to two accredited investors.  The Company
issued 1,500,000 shares of its common stock at a purchase price of $3.00 per
share.

Note 5.  Stock Based Compensation

EP MedSystems accounts for stock options granted to employees and
non-employee directors in accordance with the "intrinsic value" method set forth
in Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees", with supplemental pro forma disclosures of "fair
value" as required by Statement of Financial Accounting Standards No. 123 ("
No.123"), "Accounting for Stock Based Compensation."

On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based
Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based
Compensation.  This new standard eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires
such transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in our financial statements.  This new standard
is effective for awards that are granted, modified or settled inc ash beginning
in the first fiscal year beginning after June 15, 2005.  In addition, this
new standard will apply to unvested options granted prior to the effective date. 
We will adopt this new standard effective for the first quarter of 2006, and
have not yet determined what impact this standard will have on our financial
position or results of operations, but it is likely that the adoption of this
standard will have a material impact on our results of operations.

EP MedSystems records the fair value of stock option issuances to
non-employees based on the market price on the date issued.  The amount is
expensed, capitalized or recorded as a reduction of paid-in capital, depending
on the purpose for which the stock is issued.  It is EP MedSystems' policy
to account for stock options granted to non-employees in accordance with
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services," and the fair value is measured using the Black-Scholes
option pricing model under SFAS No. 123.

Had compensation costs for EP MedSystems' stock option plans been
determined consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation", EP MedSystems' proforma net loss and loss per share for the three
and nine months ended September 30, 2005 and 2004 would have been as follows:



|                                                                                                                      | For the Nine
    Months Ended
    September 30, |              | For the Three
    Months Ended
    September 30,
|--------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------ | ------------------------------------------------
|                                                                                                                      | 2005                                            | 2004         |                                                 
|                                                                                                                      |                                                 |              |                                                 
|Net loss, as reported                                                                                                 | $(4,421,971)                                    | $(3,924,368) |                                                 
|                                                                                                                      |                                                 |              |                                                 
|Deduct:  Total stock-based employee compensation expense determined
    under fair value based method for all options | (558,819)                                       | (456,709)    |                                                 
|                                                                                                                      |                                                 |              |                                                 
|Pro forma net loss                                                                                                    | $(4,980,790)                                    | $(4,381,077) |                                                 
|                                                                                                                      |                                                 |              |                                                 
|Earnings per share:                                                                                                   |                                                 |              |                                                 
|Basic and diluted - as
    reported                                                                                   | $(0.17)                                         | $(0.17)      |                                                 
|Basic and diluted - pro
    forma                                                                                     | $(0.19)                                         | $(0.19)      |                                                 
|                                                                                                                      |                                                 |              |                                                 

Note 6.  Industry Segment and Geographic Information

EP MedSystems manages its business based on one
reportable segment, the manufacture and sale of cardiac electrophysiology
products.  EP MedSystems' chief operating decision-makers use consolidated
results to make operating and strategic decisions.

The following table sets forth product sales by
geographic segment for the nine and three months ended September 30, 2005 and
2004.

|                     | For The Nine Months | For The Three Months
|-------------------- | ------------------- | --------------------
|                     | Ended September 30, | Ended September 30, 
|                     | 2005                | 2004                
|United States        | $ 9,965,000         | $ 8,708,000         
|Europe/Middle East   | 1,297,000           | 1,736,000           
|Asia and Pacific Rim | 1,239,000           | 705,000             
|                     | $12,501,000         | $11,149,000         

Sales of EP MedSystems' cardiac electrophysiology
equipment and related catheters aggregated approximately $11,195,000 and
$1,306,000, respectively, for the nine months ended September 30, 2005, and
$10,084,000 and $1,065,000, respectively, for the comparable period in 2004. 
EP > MedSystems' long-lived assets are primarily located in the U.S.

Net sales for the nine months ended September 30,
2005 were billed in two currencies: $12,108,000 in U.S. dollars and the
equivalent of $393,000 in Euros.  Management has determined the aggregate
impact of foreign currency risk on sales to be minimal since a majority of sales
are billed in U.S. dollars.  EP MedSystems does incur translation gains and
losses, which are recorded in shareholders' equity.  Cumulative translation
losses amounted to approximately $112,000 as of September 30, 2005.  In
addition, EP MedSystems had not entered into any derivative financial
instruments for hedging or other purposes.

Note 7.  Net Loss Per Share

Basic net loss per share is computed using the
weighted-average number of shares of common stock outstanding.  Due to the
losses incurred for the quarter and nine months then ended, diluted net loss per
share does not differ from basic net loss per share, since potential shares of
common stock issuable upon the exercise of stock options, warrants, and
convertible debt are anti-dilutive for all periods presented.  Accordingly,
potential common shares of 3,773,085 and 4,928,831 for the nine months ended
September 30, 2005 and 2004, respectively, have been excluded from the diluted
per share calculation.

Note 8.  Comprehensive Income/Loss

For the three and nine months ended September 30,
2005 and 2004, EP MedSystems' comprehensive loss consisted of net loss and
foreign currency translation adjustments.  The comprehensive losses for the
three months ended September 30, 2005 and 2004 were approximately $1,802,000 and
$724,000, respectively.  The comprehensive losses for the nine months ended
September 30, 2005 and 2004, were approximately $4,253,000 and $3,918,000,
respectively.

Note 9.  Recently Issued Accounting Standards

In January 2003, the FASB issued FIN 46,
"Consolidation of Variable Interest Entities -- an Interpretation of Accounting
Research Bulletin (ARB) No. 51."  FIN 46 requires the primary beneficiary
to consolidate a variable interest entity (VIE) if it has a variable interest
that will absorb a majority of the entity's expected losses if they occur,
receive a majority of the entity's expected residual returns if they occur, or
both.  FIN 46 applies immediately to VIEs created after January 31, 2003,
and to VIEs in which the entity obtains an interest after that date.  For
VIEs acquired before February 1, 2003, the effective date for EP MedSystems is
July 1, 2003.  In December 2003, the FASB published a revision to FIN 46
("FIN 46R") to clarify some of the provisions of the interpretation and defer to
the effective date of implementation for certain entities.  Under the
guidance of FIN 46R, entities that do not have interests in structures that are
commonly referred to at special purpose entities are required to apply the
provisions of the interpretation in financials statements for periods ending
after March 14, 2004.  The adoption of this  Statement did not 
have a material impact on our results of operations, financial position, or cash
flows.

In November 2004, the FASB issued SFAS No. 151,
Inventory Costs - an amendment of ARB No. 43, Chapter 4.  This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage).  Paragraph 5 of ARB 43, Chapter 4,
previously stated that " . . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges . . . ." 
This Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal."  In
addition, this Statement requires that allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production
facilities.  This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005.  At this time,
management does not believe the adoption of this Statement will have any
material impact on the Company's results of operation, financial position or
cash flow.

On December 16, 2004 the FASB issued SFAS No.
123(R), Share-Based Payment, which is an amendment to SFAS No. 123, Accounting
for Stock-Based Compensation.  This new standard eliminates the ability to
account for share-based compensation transactions using Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
generally requires such transactions to be accounted for using a
fair-value-based method and the resulting cost recognized in our financial
statements.  This new standard is effective for awards that are granted,
modified or settled in cash beginning in the first fiscal year beginning after
June 15, 2005.  In addition, this new standard will apply to unvested
options granted prior to the effective date.  We will adopt this new
standard effective for the first quarter of 2006, and have not yet determined
what impact this standard will have on our financial position or results of
operations, but it is likely the adoption of this standard will have a material
impact on our results of operations.

In December 2004, the FASB issued SFAS No.153,
Exchange of Nonmonetary Assets.  This Statement addresses the measurement
of exchanges of nonmonetary assets.  The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged.  The guidance in that Opinion, however, included
certain exceptions to that principle.  This Statement amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance.  A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange.  This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005.  Earlier application is permitted for nonmonetary asset exchanges
incurred during fiscal years beginning after the date of this statement is
issued.  Management believes the adoption of this Statement will have no
impact on the financial statements of the company.

In December 2004, the FASB issued two FASB Staff
Positions (FSP) regarding the accounting implications of the American Jobs
Creation Act of 2004.  The Company is assessing the impact, if any, that
FAS No. 109-1, "Application of FASB Statement No. 109 'Accounting for Income
Taxes' to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004" and FSP No. 109-2 "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" will have on the Company's effective tax rate in
2005.

At its September 29-30, 2004, meeting, the FASB
reached a conclusion on Emerging Issues Task Force (EITF) Issue No. 04-8, "The
Effect of Contingently Convertible Debt on Diluted Earnings Per Share", that
contingently convertible debt instruments will be subject to the if-converted
method under FASB Statement No. 128 (SFAS No. 128), Earnings Per Share,
regardless of the contingent features included in the instrument.  Under
current practice, issuers of contingently convertible debt instruments exclude
potential common shares underlying the debt instruments from the calculation of
diluted earnings per share until the market price or other contingency is met. 
Due to the losses incurred for the quarter, diluted net loss per share does not
differ from basic net loss per share, since potential shares of common stock
issuable upon the conversion of the convertible debt are anti-dilutive for all
periods presented.  EITF 04-8 could have a future impact on the Company's
results of operations in the event that the potential shares of common stock
issuable upon conversion of the convertible debt were included in the diluted
earnings per share calculation.  The effective date for Issue 04-8 is for
reporting periods ending after December 15, 2004.

Note 10.  Commitments and Contingencies

During the second quarter of 2005, the Company
received an Administrative Subpoena from the Bureau of Industry and Security of
the U.S. Department of Commerce (the "Department of Commerce") seeking
production of records and documents relating to the sale and/or export of the
Company's products to Iran and to Syria.  Subsequent to the end of the
second quarter of 2005, the Company was informed that the United States
Attorney's Office for the District of New Jersey had commenced a criminal
investigation into the same matter.

In a letter dated August 16, 2005, EP MedSystems,
Inc. (the "Company") was informed by the Philadelphia District Office of the
Securities and Exchange Commission (the "SEC District Office") that the
Securities and Exchange Commission (the "Commission") is conducting a
confidential, informal inquiry to determine whether there have been violations
of certain provisions of the federal securities laws in connection with the
Company's financial and accounting reporting, including relating to disclosures
the Company made in its Form 8-K filed with the Commission on August 12, 2005
regarding ongoing government investigations of sales by the Company of its
products to Iran.

The Company is cooperating fully with the federal
government in connection with these matters.

Based on the Company's investigation of this matter
to date, management believes that a limited number of the Company's heart
monitor systems were distributed to medical facilities in Iran in prior periods
without U.S. government authorization.  Management believes the aggregate
revenues generated by these transactions were not material to the Company's
cumulative financial results during the period in which such transactions
occurred, and the Company has taken steps to implement certain control
procedures designed to prevent the Company's products or services from being
provided to any foreign countries in violation of applicable law.

The fact that certain of the Company's heart
monitor systems were distributed to medical facilities in Iran without U.S.
government authorization was voluntarily disclosed by the Company in 2003 to the
Department of Commerce and to the Office of Foreign Assets Control of the U.S.
Treasury Department.  The federal government is also investigating the
accuracy and completeness of those voluntary disclosures.

Separately, the Audit Committee of the Company's
Board of Directors is conducting an independent investigation into these matters
and has retained outside counsel to assist it.  At this time meetings have
been scheduled in November with various governmental agencies to review the
results of the investigation.  In the third quarter of 2005, the Company
incurred approximately $911,000 in legal, consulting and accounting expenses
associated with the governmental and Audit Committee investigations. 
Additional amounts over previously estimated costs are associated with the
additional resource requirement with the SEC's inquiry, additional document
review, additional interviews and the termination of Reinhard Schmidt. 
Management currently estimates that additional legal fees and other expenses to
be incurred by the Company in connection with the investigation by the Audit
Committee may be in excess of $500,000 but cannot predict whether such fees and
other expenses will be significantly higher.  This estimate does not
include any costs associated with the defense of the Company or negotiation with
the various governmental entities to resolve these outstanding issues as these
costs are not estimable but may have a material impact on the Company's results
of operations and financial condition.

Violations of applicable law may result in civil,
administrative or criminal fines or penalties, but due primarily to the ongoing
nature of the investigations referred to above, it is not possible at this time
to predict the outcome of these investigations or the impact of costs of
ultimately resolving this matter on our results of operations or financial
condition  However, any fees or expenses or any fines or penalties which
might be incurred by the Company in connection with these matters may have a
material impact on the Company's results of operations and financial condition. 
The Company has made no provision for any future costs associated with the
investigations or any costs associated with the Company's defense or
negotiations with the various governmental entities to resolve these outstanding
issues.

On October 9, 2005, the Board of Directors of the
Company terminated Reinhard Schmidt's employment as its President, Chief
Executive Officer and Chief Operating Officer for cause.  Mr. Schmidt's
termination resulted from his certification and authorization of statements to
the U.S. Department of Commerce some of which the Audit Committee has uncovered
in its independent investigation to have been inaccurate or incomplete. 
Mr. Schmidt's termination was not a result of the discovery of any financial or
accounting irregularity by the investigation.  Pursuant to Mr. Schmidt's
employment agreement, his position as a Director of the Company ceased upon the
termination of his employment.

At this time, Mr. Schmidt has not contested this
termination however, it is possible he could contest it at a later time. 
The likelihood of such a contest, if any, or results of any arbitration or
adjudication, cannot be estimated at this time.

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

Overview

EP MedSystems was incorporated in January 1993 and
operates in a single industry segment.  We develop, manufacture, market and
sell a line of products for the cardiac rhythm management, or electrophysiology
(EP), market used to diagnose, monitor, visualize and treat irregular heartbeats
known as arrhythmias.  Since our inception, we have acquired technology and
marketing rights, have developed new products and have begun marketing various
electrophysiology products, including our EP-WorkMate® computerized
electrophysiology workstation, the RPM RealTime Position Management navigation
technology, our EP-3 Stimulator, our EP-4 Computerized Cardiac Stimulator,
diagnostic electrophysiology catheters (including our unique one-piece catheter)
and our ALERT® System (including the ALERT® Companion II and ALERT® family of
internal cardioversion catheters), ViewMate® intracardiac ultrasound catheter
system and related disposable supplies.

Our core diagnostic product is the EP-WorkMate®
which consists of the EP- WorkMate®, the EP-WorkMate® integrated with RPM
RealTime Position Management System and the EP-4 Computerized Cardiac
Stimulator.  The EP-WorkMate® is a computerized electrophysiology
workstation that monitors displays and stores cardiac electrical activity and
arrhythmia data.  It offers, among other features, display and storage of
up to 192 intracardiac signals, real-time diagnosis, analysis and integration
with our own proprietary systems, such as our EP-4 Stimulator, as well as with
the systems of other market leaders and with other technologies and systems. We
received FDA market clearance to sell the EP-WorkMate® integrated with the RPM
RealTime Position Management System in the third quarter of 2003.  This
approval was the culmination of a strategic joint development project between
Boston Scientific Corporation and EP Med.  It is the only EP recording
system on the market to integrate advanced recording and stimulation with
anatomic modeling, advanced mapping and 3-D navigation features, allowing
electrophysiology studies to be more efficient and user friendly.  The
EP-4 Stimulator is a computerized signal generator and processor which, when
integrated with the EP-WorkMate®, is used to stimulate the heart with electrical
impulses in order to locate arrhythmia.  For the nine months ended
September 30, 2005 and 2004, the EP-WorkMate® platform accounted for
approximately 86% and 87%, respectively, of our total sales.  We also
market a line of diagnostic electrophysiology catheters for stimulation and
sensing of electrical signals during electrophysiology studies, which
represented approximately 2% and 5% of our total sales revenues for the nine
months ended September 30, 2005 and 2004, respectively.

We have also developed the ViewMate® intracardiac
ultrasound catheter system, including the ViewMate® ultrasound imaging console
and ViewFlex intracardiac imaging catheter.  These products offer
high-resolution, real-time ultrasound capability designed to improve a
physician's or clinician's ability to visualize inside the chambers of the
heart.  We believe the ViewMate® Ultrasound System may play an important
role for a broad range of potential applications in electrophysiology and
cardiology.  In April of 2003, we received CE approval to market the
ViewMate® in Europe.  In October 2003, we received FDA market clearance to
sell the ViewMate® System in the United States.  Sales of the ViewMate®
system and related ViewFlex catheters accounted for approximately 9% and 5% of
our total sales revenues in the nine months ended September 30, 2005 and 2004,
respectively.

We have also developed a product for the treatment
of atrial fibrillation known as the ALERT® System, which uses a patented
electrode catheter to deliver measured, variable, low-energy electrical impulses
directly to the inside of the heart to convert atrial fibrillation to a normal
heart rhythm.  We have obtained Class III Design Examination Certification
from a European Notified Body allowing us to label the ALERT® System with a CE
Mark, an international symbol of adherence to quality assurance standards,
design reviews and hazard analysis, which permits us to sell the ALERT®System in
the European Community.  In September 2003, we received pre-market approval
to sell the ALERT® Companion II in the United States.  Sales of the ALERT®
System and related catheters accounted for approximately 3% and 5% of our total
sales revenues for the nine months ended September 30, 2005 and 2004,
respectively.  We are in the process of redesigning the ALERT® System
console to give it the same look and feel as the EP-4 to eventually integrate
the system into the WorkMate® for ease of use by the physician.

In May of this year, the Company filed a pre-market
approval supplement with the FDA for the ALERT® CS/RA product line.  The
Company has been informed by the FDA that, the agency, among other things, is
requesting additional clinical data to support the PMA supplement.  The
Company is evaluating whether or not to perform such clinical studies.  The
system is approved for sale in Europe.

Critical Accounting Policies

Financial Reporting Release No. 60 requires all
companies to include a discussion of critical accounting policies or methods
used in the preparation of financial statements.  The SEC indicated that a
critical accounting policy is one which is important to the portrayal of the
company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. 
Note 2 of our Notes to the Consolidated Financial Statements included in our
Annual Report on Form 10-KSB for the period ended December 31, 2004 includes a
summary of the significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements.  In addition,
Financial Reporting Release No. 61 requires all companies to include a
discussion to address, among other things, liquidity, off-balance sheet
arrangements, contractual obligations and commercial commitments.  The
information provided below describing our debt and future commitments is
provided to facilitate a review of our liquidity and capital resources. 
The following is a brief discussion of the more significant accounting policies
and methods used by us.

General

The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.  The
primary estimates used by management are in the determination of the allowance
for doubtful accounts, inventory obsolescence reserve and warranty reserve. 
Although these estimates are based upon management's knowledge of current
events, the estimates may ultimately differ from actual results.

Revenue Recognition

We ship products to our customers based on FOB
shipping point and, as such, recognize product sales on the date of shipment. 
Installation of the products is considered perfunctory.  Payments received
in advance of shipment of product are deferred until such products are shipped. 
We do not have royalty agreements that result in revenue to EP Med.  We do
not provide distributors or end-users with a general right to return products
purchased.

We have three sales channels:  direct sales to
customers, sales to independent distributors, and sales to alliance partners. 
Our products do not require "installation" in the traditional sense, but the EP-WorkMate®
does require a set-up.  For sales to distributors, the distributor is
responsible for all set-up of all electronic hardware products.  For direct
sales, the customer can perform the set-up on its own, however, EP Med personnel
generally will assist customers in this process.  The set-up process, which
takes approximately 1-2 hours to complete, is usually performed shortly after
shipment and primarily consists of assembling the workstation cart and plugging
in the monitors, printer, isolation transformer, and the EP-4 Stimulator to the
main computer.  This process does not impact our standard payment terms. 
For sales to distributors, payment terms are defined in the distributor
agreements as 100% of the purchase price being due 30-60 days after shipment. 
For direct sales, payment terms are agreed in advance of the sale and generally
require a 50% deposit prior to shipment, with the balance due 30-60 days after
shipment.

EP MedSystems provides a one-year warranty on all
of its electronic products and, in accordance with Statement of Financial
Accounting Standard No. 5 "Accounting for Contingencies", accrues for the
estimated cost of providing this warranty at the time of sale.  Further,
the Company incurs discretionary costs to service its products in connection
with product performance issues.  The estimates of the future warranty
costs are based on historical experience.



|                  |   | For the Nine Months Ended
    September 30, |   | For the Three Months Ended
    September 30,
|----------------- | - | ------------------------------------------- | - | --------------------------------------------
|                  |   | 2005                                        |   | 2004                                        
|Beginning balance | $ | 331,000                                     | $ | 126,000                                     
|Warranties        |   | 359,000                                     |   | 444,000                                     
|Warranty payments |   | (382,000)                                   |   | (320,000)                                   
|                  |   |                                             |   |                                             
|Ending balance    | $ | 308,000                                     | $ | 250,000                                     

We also sell various types of warranty contracts to
our customers.  These contracts range in term from one to five years. 
Revenue is recognized on these contracts on a straight-line basis over the life
of the contract.

Valuation of Accounts Receivable

We continuously monitor customers' balances,
collections and payments, and maintain a provision for estimated credit losses
based upon our historical experience and any specific customer collection issues
that we have identified.  We may request letters of credit from our
customers when we believe that there is a significant risk of credit loss. 
While such credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have in the past.

Valuation of Inventory

We value our inventory at the lower of cost or
market, with cost being determined on a first-in, first-out basis.  We
continually monitor our slow-moving items, and establish reserve amounts on a
specific identification basis, as necessary.  In addition, due to the fact
that our business is dependent on the latest computer technology, we continually
monitor our inventory and products for obsolescence.  If we determine
market value to be less than cost, we write down the cost to that value. 
Generally, we do not experience significant writedowns, losses, etc. with the
valuation of our inventory; however, these reserves are estimates, which could
change significantly, either favorably or unfavorably, depending on market and
competitive conditions.

Valuation of Goodwill, Intangible Assets, and Other Long-Lived Assets

We assess the impairment of identifiable
intangibles, long-lived assets and enterprise level goodwill whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.  Factors we consider important which could trigger an
impairment review include the following:

- significant underperformance relative to expected historical or projected
  future operating results;
- significant changes in the manner of our use of the acquired assets or the
  strategy for our overall business;
- significant negative industry or economic trends;
- significant decline in our stock price for a sustained period; and
- our
  market capitalization relative to net book value.

When we determine that the carrying value of
intangibles, long-lived assets and related goodwill and enterprise level
goodwill may not be recoverable based upon the existence of one or more of the
above indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model.

Income Taxes

We account for our income taxes under the liability
method. Under the liability method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the enacted tax rates which will be in
effect when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities.

Accounting for Stock-Based Compensation.

We have elected to measure our stock-based
compensation expense relating to grants to employees under our stock option
plans using the intrinsic value method. Under this method, we record no
compensation expense when we grant stock options to employees if the exercise
price for a fixed stock option award to an employee is equal to the fair value
of the underlying common stock at the date we grant the stock option.

A different method for accounting for employee
stock option grants is the fair value method.  Under the fair value method,
a company is required to determine the fair value of options granted to
employees based on an option pricing model which incorporates such factors as
the current stock price, exercise prices of the options, expected volatility of
future movements in the price of the underlying stock, risk-free interest rates,
the term of the options and any dividends expected to be paid. The fair value
determined under this method is then amortized over the vesting period of the
related options. Had we chosen to account for employee stock options using the
fair value method, we would have recorded additional stock based compensation
expense of approximately $558,819 and $456,709 for the nine months ended
September 30, 2005, and 2004, respectively.

On December 16, 2004 the FASB
issued SFAS No. 123(R), Share-Based Payment, which is an amendment to SFAS No.
123, Accounting for Stock-Based Compensation.  This new standard eliminates
the ability to account for share-based compensation transactions using
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and generally requires such transactions to be accounted for using
a fair-value-based method and the resulting cost recognized in our financial
statements.  This new standard is effective for awards that are granted,
modified or settled in cash beginning in the first fiscal year beginning after
June 15, 2005.  In addition, this new standard will apply to unvested
options granted prior to the effective date.  We will adopt this new
standard effective for the first quarter of 2006, and have not yet determined
what impact this standard will have on our financial position or results of
operations, but it is likely that the adoption of this standard will have a
material impact on our results of operations.

Results of Operations.

Nine Months Ended September 30, 2005 and 2004.

The Company had net sales of $12,501,000 for the
nine months ended September 30, 2005, as compared to $11,149,000 for the
comparable period in 2004.  This $1,352,000 (or 12%) increase was primarily
due to an increase in sales of our WorkMate® product line and an 84% increase in
sales of ViewMate® and ViewFlex ultrasound products.  Our sales of
consumable products increased 23% driven by a 105% growth in the sales of
ViewFlex, partially offset by a decrease in sales of our diagnostic catheters. 
Sales in Europe may have been impacted by the termination of our European Sales
Manager and the termination of certain distributors.  We believe this may
continue until a replacement manager is retained and possibly some time period
thereafter while we locate alternate distributors.  Sales in Asia continue
to be strong with the renewed relationship with our Japanese distributor.

Gross profit on sales for the nine months ended
September 30, 2005 was $7,882,000 as compared with $6,485,000 for the same
period in 2004.  Gross profit as a percentage of sales increased from 58%
to 63%, primarily due to lower sales in Europe where margins are typically
lower.

Sales and marketing expenses increased $556,000 (or
9%) to $6,413,000 for the nine months ended September 30, 2005 as compared to
the same period in 2004.  This increase was a result of an increase in
salaries, benefits, commissions and recruiter fees of $681,000 related to higher
sales and headcount.  With the increase in salaries and sales, there was a
corresponding increase in travel related costs of $185,000.  Primarily in
connection with our clinical affairs department and our efforts in Asia, we
incurred an additional $76,000 in consulting and honorarium costs.  Our
clinical affairs department, which we initiated in the second quarter of 2004,
accounted for approximately $389,000 of the overall cost increase for sales and
marketing.  The additional expenditures noted above were offset by lower
royalty costs and lower bad debt losses.

General and administrative expenses increased
$1,794,000 (or 79%) to $4,072,000 for the nine months ended September 30, 2005
as compared to the same period in 2004.  The increase in general and
administrative expenses was due to a number of factors.  There was an
increase in our legal costs of $1,300,000 primarily as a result of legal fees
associated with the Company's receipt of the governmental subpoena,
investigations and inquiries described in Note 10 of the Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q.  We anticipate
additional legal costs in the coming quarters as we work to resolve these
matters and continue to implement control procedures designed to prevent our
products or services from being provided to any foreign countries in violation
of applicable law.  We have incurred approximately $911,000 of legal,
consulting and accounting expenses in the third quarter of 2005 associated with
the investigation.  Additional amounts over previously estimated costs are
associated with the additional resource requirements with the SEC's inquiry,
additional document review, additional interviews and the termination of
Reinhard Schmidt.  Management currently estimates that the legal fees and
other expenses to be incurred by the Company and the Audit Committee in
connection with those matters may be in excess of $500,000, but cannot predict
whether such fees and expenses will be significantly higher or the aggregate
impact the amount of such fees or expenses or any fines or penalties which might
be incurred by the Company in connection with these matters will have on the
Company's results of operations or financial condition.  In addition to
increased legal costs, we had an increase in non-cash expenses of $170,000 as a
result of fluctuations in foreign currency.  Expenses in connection with
being a public company increased significantly in the first half of 2005 as we
incurred an additional $157,000 in consulting costs primarily as a result of our
efforts to comply with section 404 of Sarbanes-Oxley and an increase in other
public company expenses of $53,000.  There were also additional
compensation and benefit costs of $64,000.

Research and development expenses decreased $9,000
(less than 1%) to $1,760,000 for the nine months ended September 30, 2005 as
compared to the same period in 2004.  The decrease was due to lower overall
project costs of $35,000 as products were launched in 2004 and lower patent
costs of $64,000 associated with the conclusion of certain patent strategies. 
This was offset by higher compensation costs with additional headcount in the
Regulatory and Quality Assurance department.  Costs for research and
development can fluctuate on a quarter-by-quarter basis depending on status of
projects and intellectual property strategies.

Interest expense decreased $351,000 to $197,000 for
the nine months ended September 30, 2005, as compared to the same period in
2004.  This decrease in interest expense is primarily the result of a
decrease in amortization of the beneficial conversion feature of $170,000 and a
decrease in the accretion of debt discount of $164,000 as a result of the
conversion of debt to equity related to the convertible note issued to Laurus. 
The decrease in interest expense was partially offset by higher interest rates
in 2005.

Three Months Ended September 30, 2005 versus September 30, 2004

Net sales were $4,270,000 for the three months
ended September 30, 2005, as compared to $4,677,000 for the comparable period in
2004.  This $407,000 (or 9%) decrease is a result of lower sales of our
WorkMate® product line offset by a 335% increase in sales of the ViewMate® and
ViewFlex products.  Overall sales of electronics decreased 12% due to the
before mentioned decrease in WorkMate® sales offset by a 35% increase in
consumable sales due to ViewFlex sales.  Sales in Europe may have been
impacted by the termination of our European Sales Manager and the termination of
certain distributors, as previously discussed.  Sales in the quarter to
Asia were up due to our renewed relationship with our Japanese distributor.

Gross profit on sales for the three months ended
September 30, 2005 was $2,678,000, as compared to $2,802,000 for the same period
in 2004.  The gross profit increased as a percentage of sales from 60% to
63%.  The increase in gross profit percentage is a result of lower European
sales where margins are typically lower.  The decrease in gross profit
dollars was a result of lower sales.

Sales and marketing expenses decreased $46,000 (or
2%) to $2,110,000 for the three months ended September 30, 2005, as compared to
the same period in 2004.  The decrease in sales and marketing expenses is a
result of lower freight out of $67,000, lower commissions and travel in Europe
of $119,000 and lower royalties and bad debts.  These were offset by a
$249,000 increase in salary, benefits and commissions in the United States due
to headcount changes.  Our clinical affairs department, which we initiated
in the second quarter of 2004, showed a $113,000 cost increase in the third
quarter of 2005 versus the same quarter in 2004, some of which is included in
the headcount and benefit cost increases discussed above.

General and administrative
expenses increased $1,095,000 (or 153%) to $1,811,000 for the three months ended
September 30, 2005 as compared to the same period in 2004.  The increase in
general and administrative expenses was due to a number of factors.  There
was an increase in our legal, consulting and accounting costs of approximately
$911,000 associated with the Company's receipt of the Government Subpoena
investigations and inquiries described in Note 10 of the Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q.  We anticipate
additional legal costs in the coming quarters as we work to resolve these
matters and continue to implement control procedures designed to prevent our
products or services from being provided to any foreign countries in violation
of applicable law.  Management currently estimates that the legal fees and
other expenses to be incurred by the Company and the Audit Committee in
connection with those matters may be in excess of $500,000, but cannot predict
whether such fees and expenses will be significantly higher or the aggregate
impact the amount of such fees or expenses or any fines or penalties which might
be incurred by the Company in connection with these matters will have on the
Company's results of operations or financial condition.  In addition to
increased legal costs, we had an increase in non-cash expenses of $66,000 as a
result of fluctuations in foreign currency.  Expenses in connection with
being a public company increased significantly as we incurred an additional
$75,000 in consulting costs primarily as a result of our efforts to comply with
section 404 of Sarbanes-Oxley and an increase in other public company expenses
of $44,000.

Research and development expenses increased $56,000
(or 11%) to $587,535 for the three months ended September 30, 2005 as compared
to the same period in 2004.  This increase was primarily the result of an
increase of $61,000 in compensation costs associated with an increase in
headcount in the Regulatory and Quality Assurance department offset by lower
overall project costs of $11,000 as products were launched in 2004.  Costs
for research and development can fluctuate on a quarter-by-quarter basis
depending on status of projects and intellectual property strategies.

Interest expense decreased $55,000 for the three
months ended September 30, 2005, as compared to the same period in 2004. 
The decrease in interest expense is a result of a decrease in the amortization
of the  beneficial conversion feature of $31,000 and decrease in the
accretion of debt discount of $29,000 as a result of the conversion of debt to
equity.

Liquidity and Capital Resources

Since our incorporation in January 1993, our
expenses have exceeded sales, resulting in an accumulated deficit of
approximately $42.6 million at December 31, 2004 and approximately $47 million
at September 30, 2005.

On November 15, 2000, we completed a $3.2 million
debt financing with Medtronic Asset Management, Inc., an affiliate of Medtronic,
Inc., one of our shareholders.  Approximately $2.3 million of that amount
was used to repay outstanding amounts on our then-existing revolving credit
facility.  The principal and all accrued interest on the Medtronic note was
to be repaid on November 15, 2003, and the note was secured by a pledge by David
Jenkins, the Chairman of our Board of Directors, of shares of common stock of a
privately-held corporation.  On March 12, 2003, the due date of the note
was extended to April 1, 2004.  In connection with the extension, we paid
$1 million of the note upon receipt of certain equity proceeds and increased the
interest rate to the prime rate plus 3% from the prime rate plus 2%.  We
had accrued approximately $728,000 of interest expense as of December 31, 2003. 
In February 2004, the principal amount of this note along with all accrued
interest was repaid.

During the year ended December 31, 2001, we
consummated the private sale and issuance of our Series A convertible preferred
stock to Medtronic, Inc. ("Medtronic").  In 2002, Medtronic converted a
portion of its preferred stock into shares of our common stock.  At
September 30, 2004 and December 31, 2003, Medtronic held 373,779 of our Series A
Preferred Shares which were convertible into 387,946 shares of our common stock
at the option of Medtronic or us in accordance with the terms of the agreement
with Medtronic.  During the first quarter of 2005, Medtronic converted all
of its shares of our preferred stock into 387,946 shares of our common stock.

On August 28, 2003, we issued a Secured Convertible
Note (the "Laurus Convertible Note") to Laurus Master Fund, Ltd. ("Laurus") and
entered into a related Security Agreement with Laurus, pursuant to which Laurus
provided us with a $4,000,000 revolving asset-based credit facility in the form
of a three-year Laurus Convertible Note secured by our accounts receivable,
inventory, real property and other assets, other than intellectual property.

At the closing of the transaction, we issued the
Laurus Convertible Note to Laurus having a principal amount of $4,000,000 and
received net proceeds of $2,661,600.  An additional $1,000,000 of the
Laurus Convertible Note was previously restricted.  Those restrictions were
released during the third quarter of 2004, and that amount became available to
us.  The balance of the proceeds was used to pay fees incurred in
connection with this transaction.  Deferred financing fees are being
amortized over the life of the Laurus Convertible Note using the effective
interest method.  In addition, we paid a portion of the fees payable to an
intermediary, Biscayne Capital Markets, Inc. ("Biscayne"), in 40,000 shares of
our common stock having a market value on the date of closing of this
transaction equal to $100,000.  The net proceeds of the Laurus Convertible
Note have been, and will be, used for working capital purposes and payment of
outstanding debt.

The portion of the Laurus Convertible Note against
which Laurus advances funds based on our accounts receivable bears interest at
the prime rate, with a floor of 4%, and the balance (the "Advance Amounts")
bears interest at the prime rate plus 2%.  The effective interest rate is
approximately 17% which includes accretion of discount and amortization of
beneficial conversion feature.  One half of Advance Amounts outstanding on
February 28, 2005 was required to be repaid on or before that date. 
However, there were no "Advance Amounts" outstanding on that date, as the net
collateral exceeded the principal amount outstanding on the Laurus Convertible
Note.  The remaining balance of the Advance Amounts outstanding on the date
of the closing was required to be repaid on or before August 28, 2006.  On
November 9, 2005, the Convertible Note's maturity date was amended to be
February 28, 2008.  Subject to certain rights of cancellation, we may
extend the Laurus credit facility, on a year-by-year basis, commencing February
28, 2008.  We may repay in cash, without penalty, up to $500,000 of the
Laurus Convertible Note in any one calendar year, plus all Advance Amounts.

Subject to certain volume limitations and other
conditions, all or a portion of the Laurus Convertible Note was convertible into
our common stock at our option if the market price of our common stock reached a
level, for 11 consecutive trading days, which was more than 120% of the "Fixed
Conversion Price".  Through December 14, 2004, the Fixed Conversion Price
was $2.55, which was a price that was greater than the market price of our
common stock on the date of closing.  Subject to certain volume limitations
and other conditions, Laurus has the option to convert all or a portion of the
Laurus Convertible Note into shares of our common stock at the Fixed Conversion
Price.

Following the conversion into our common stock by
us and/or Laurus of an aggregate of $2,000,000 of the principal amount of the
Laurus Convertible Note (a "Conversion Event"), the Fixed Conversion Price will
be adjusted upward to a price which is 115% of the average of the closing price
of our common stock for the three trading days prior to the Conversion Event. 
On December 15, 2004, the balance of the first $2,000,000 of the principal
amount was converted into shares of our common stock and the Fixed Conversion
Price on the remaining $2,000,000 principal balance was adjusted upward from
$2.55 to $4.20.  Subject to certain limitations, including the repayment
obligations with respect to Advance Amounts described above, the dollar amounts
of the Laurus Convertible Note converted may be re-borrowed.  The Fixed
Conversion Price is subject to adjustment, with customary exceptions and on a
weighted-average basis, in connection with sales of our securities below the
Fixed Conversion Price then in effect, and is also subject to adjustment for
stock splits, combinations, stock dividends and similar events.

As part of the credit facility transaction, Laurus
and the intermediary also received warrants to purchase an aggregate of 240,750
shares of our common stock (the "Warrants"), with exercise prices set as
follows:  $2.93 per share for the purchase of up to the first 133,750
shares, $3.19 per share for the purchase of up to the next 80,250 shares, and
$3.70 per share for the purchase of up to the final 26,750 shares.  The
expiration date of the Warrants is August 28, 2010.  The exercise price of
the Warrants and the number of shares underlying the Warrants are subject to
adjustments for stock splits, combinations, stock dividends and similar events.

In October 2003, we registered, under the
Securities Act of 1933, as amended, 1,500,000 shares of our common stock which
may be received by Laurus upon conversion of the Laurus Convertible Note and
exercise of the Warrant, and the remaining 293,628 of such shares were
registered in November 2004.  In accordance with the provisions of Emerging
Issues Task Force (EITF) Issue 00-27, "Application of EITF Issue No. 98-5
'Accounting for Convertible Securities with Beneficial Conversion Features of
Contingently Adjustable Conversion Ratios', to Certain Convertible Securities",
the allocated value of the Laurus Convertible Note contained a beneficial
conversion feature calculated based on the difference between the effective
conversion price of the proceeds allocated to the Laurus Convertible Note and
the Warrants at the date of issuance.  The amount arising from the
beneficial conversion feature aggregated approximately $486,000 and is being
amortized as interest expense from the date of the issuance of the Laurus
Convertible Note to the mandatory redemption date of August 28, 2006.  We
valued the Laurus Convertible Note and the Warrants at issuance.  The fair
value of the Warrants at the time of issue was $407,500.  In accordance
with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock," we marked the Warrants to
market at September 30, 2003 incurring a non-cash charge of $264,000.  The
registration rights agreement associated with the Laurus Convertible Note was
amended on November 25, 2003 and, as a result, the amount associated with the
warrants was transferred to equity.  We marked the Warrants to market at
the date of the amendment which reduced the overall expense to $210,750 for the
year ended December 31, 2003.  The net carrying value of the Laurus
Convertible Note, after allocation of the fair value of the Warrants, is being
accreted to interest expense over the life of the agreement using the effective
interest method.

On December 26, 2003, we completed an $8,200,000
private placement of our common stock to various accredited investors whereby we
issued 3,200,000 shares of our common stock at a purchase price of $2.56 per
share.

In May of 2004, we engaged a physician as a
consultant to head our clinical affairs department.  In connection with
that agreement, we issued 10,000 shares of the Company's common stock to the
physician and granted the physician an option to purchase 10,000 shares of the
common stock which vests twelve months from the date of grant.  Also in
connection with the agreement, we granted the physician an option to purchase
40,000 shares of our common stock which vests in equal installments over three
years.  In addition, in July 2005, the Company granted the physician an
option to purchase 40,000 shares of the Company's common stock which vests in
equal installments over three years.  The exercise price of each of the
options was the fair market value of our common stock on the date of the grant. 
The transactions were accounted for in accordance with Emerging Issues Task
Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."  The fair value was measured using the Black-Scholes option
pricing model under Statement of Financial Accounting Standard No. 123 using the
following assumptions for the 2004 grant as follows:  risk free rate: 
3.07%, 10-year life, and a volatility percentage of 83.86%.  For the
options issued in July 2005, the assumptions used in the Black-Scholes option
pricing model were as follows:  risk for rate 3.77%, 10-year life, and a
volatility percentage of 77.98%.

In October 2004, we engaged a physician as a
consultant to manage a clinical study.  In connection with that agreement,
we granted the physician a warrant to purchase 10,000 shares of our common
stock, which vested immediately.  The exercise price of the warrants was
the fair market value of our common stock on the date of the grant.  The
transaction was accounted for in accordance with Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."  The fair value was measured using the Black-Scholes option
pricing model under Statement of Financial Accounting Standard No. 123 using the
following assumptions:  risk free rate of 3.36%, 10-year life, and a
volatility percentage of 77.25%.

On December 15, 2004, we completed a $4,500,000
private placement of our common stock to two accredited investors in which we
issued 1,500,000 shares of our common stock at a purchase price of $3.00 per
share.

Net cash used in operating activities for the nine
months ended September 30, 2005 decreased by $1,375,000 from $4,274,000 as for
the nine months ended September 30, 2004 to $2,899,000 for the nine months ended
September 30, 2005.  The decrease in our net use of cash in operations
during 2005 was primarily due to a decrease in accounts receivable, an increase
in accounts payable and accrued expenses associated with higher legal costs and
a lower overall increase in inventory as products were launched last year. 
Capital expenditures were $176,000 and $98,000 for the nine months ended
September 30, 2005 and 2004, respectively.  We expect to purchase capital
equipment in 2005 as we grow.  We lease office space and certain office
equipment under operating leases.  In connection with certain intellectual
property strategies, we spent $102,000 in patent filings in the first nine
months of 2005.

Assets decreased by $2,855,000 from $20,003,000 at
December 31, 2004 to $17,148,000 at September 30, 2005.  The change in
assets was due to the cash and cash equivalents, which decreased by $2,738,000
from $9,345,000 at December 31, 2004 to $6,607,000 at September 30, 2005,
primarily due to our net loss.

Liabilities increased approximately $1,027,000 from
$6,651,000 at December 31, 2004 to $7,678,000 at September 30, 2005.  This
increase was primarily due to an increase in our accounts payable and accrued
expenses associated with the previously discussed Administrative Subpoena.

We evaluate the collectability of our receivables
quarterly.  The allowance for bad debts is based upon specific
identification of customer accounts for which collection is doubtful and our
estimate of the likelihood of potential loss.  To date, we have experienced
only modest credit losses with respect to our accounts receivable.  To
date, we have experienced insignificant inventory write-downs, and the reserve
is consistent with management's expectations.

We have a history of operating losses, and we
expect to continue to incur operating losses in the near future as we continue
to expend substantial funds for increased manufacturing activity expansion of
sales and marketing activities and legal costs associated with various
governmental investigations.  The amount and timing of future losses will
depend upon, among other things, volume of sales of our existing products,
market acceptance of the ALERT® System and ultrasound products, and
developmental, regulatory and market success of new products under development,
as well as our ability to establish, preserve and enforce intellectual property
rights related to our products and the results of the before mentioned
investigations.  There can be no assurance that any of our development
projects will be successful or that if development is successful, the products
will generate any sales and the results of the before mentioned investigations. 
Based upon our current plans and projections, we believe that our existing
capital resources will be sufficient to meet our anticipated capital needs for
at least the next twelve months, however that does not preclude us from raising
capital either through the issuance of common stock, debt or other methods.

Cautionary Statement Regarding Forward-Looking Statements

In addition to historical information, this
Quarterly Report on Form 10-Q contains forward-looking statements relating to
such matters as anticipated financial and operational performance, business
prospects, technological developments, results of clinical trials, new products,
research and development activities and similar matters.  The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements.  We emphasize to you that a variety of factors
could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements.  When we use the words or phrases "believe," "anticipate,"
"expect," "intend," "will likely result," "estimate," "project" or similar
expressions in this Quarterly Report on Form 10-Q, we intend to identify such
forward-looking statements, but they are not the exclusive means by which such
statements are made.  The forward-looking statements are only expectations
and/or predictions which are subject to risks and uncertainties, including the
significant factors discussed under "Risk Factors" in our most recent Form
10-KSB, and general economic, market or business conditions, opportunities or
lack of opportunities that may be presented to us, competitive actions, changes
in laws and regulations and other matters discussed herein in the section
entitled "Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations" and in other sections herein.

We caution readers to review the cautionary
statements set forth in this Quarterly Report on Form 10-Q and in our other
reports filed with the Securities and Exchange Commission, including, but not
limited to, statements regarding government inquires and investigations, and
caution that other factors may prove to be important in affecting our business
and results of operations.  We caution you not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Quarterly Report.  We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date of this report.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to a variety of risks, including changes in interest rates
affecting our outstanding debt balance and fixed rate investments of our cash
and cash equivalents and foreign currency fluctuations. The Company does not
have any market risk with respect to such factors as commodity prices or equity
prices.  We do not invest in, or otherwise use, foreign currency or other
derivative financial or derivative commodity instruments, and we do not engage
in hedging transactions for speculative or trading or any other purposes.

Interest Rate Risk.

Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio for our non-current debt
obligations and our cash and cash equivalents.

At September 30, 2005, we had a Secured Convertible
Note outstanding in the approximate amount of $2,000,000.  Interest on the
Secured Convertible Note is based on the prime rate.  This floating rate
debt may lead to additional interest expense if interest rates increase. 
Because management does not believe that our exposure to interest rate market
risk is material at this time, we have not developed or implemented a strategy
to manage this market risk through the use of derivative financial instruments
or otherwise.  We will assess the significance of interest rate market risk
from time to time and will develop and implement strategies to manage that
market risk as appropriate.

We invest our excess cash in money market funds and
government securities, which creates a degree of interest rate risk.  Our
primary exposure to market risk relates to changes in interest rates on our cash
and cash equivalents.  Our primary investment objective with respect to our
cash and cash equivalents is to preserve principal, while at the same time
maximizing yields without significantly increasing risk.

Our portfolio includes money markets funds and/or
government securities.  The diversity of our portfolio helps us to achieve
our investment objective.  As of September 30, 2005, 100% of our investment
portfolio matures less than 90 days from the date of purchase.  Due to the
short-term nature of these investments, we believe that we are not subject to
any material market risk exposure, and as a result, the estimated fair value of
our cash and cash equivalents approximates their principal amounts.  If
market interest rates were to increase immediately and uniformly by 10% from
levels at September 30, 2005, we estimate that the fair value of investment
portfolio would decline by an immaterial amount.

Foreign Currency Risk.

Our international revenues were 20% and 22% of our
total revenues for the nine months ended September 30, 2005 and 2004,
respectively.  Our international sales are made through international
distributors, our direct sales force and sales to alliance partners, with
payments to the Company typically denominated in United States dollars and the
Euro.  Approximately 15% of our foreign sales are denominated in the Euro. 
Management has determined that the aggregate impact of foreign currency risk is
minimal since a majority of our sales are billed in United States dollars. 
Our international business is subject to risks typical of an international
business, including, but not limited to, differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely affected by changes in these or other
factors.  We do not hedge our foreign currency exposure at present.

Item 4.  Controls and Procedures.

As of the end of the period covered by this report,
the Company conducted an evaluation, under the supervision and with the
participation of our principal executive officer and principal financial
officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15 and 15d-15 of the Exchange Act). 
Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms.  It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.

There was no change in the Company's internal
control over financial reporting during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially effect, the Company's internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) On October 10, 2005 the Company announced the
termination of the Company's President, CEO and COO Reinhard Schmidt and
announced the appointment of David Jenkins to these positions in addition to his
duties as Chairman of the Board.  It was also announced that at this time,
Mr. Jenkins will not be paid a salary by the Company for the positions of
President, Chief Executive Officer and Chief Operating Officer.  On October
11, 2005, the Compensation Committee of the Board of Directors approved a grant
to Mr. Jenkins of nonqualified options to purchase 200,000 shares of the
Company's common stock.  The exercise price of the options is $2.67. 
The options have a five-year term and vest 1/3 immediately, 1/3 on the first
anniversary of the date of grant and 1/3 on the second anniversary.  The
Compensation Committee also determined to grant to Jenkins an option to purchase
an additional 200,000 shares under the 2006 Stock Option Plan which was approved
by the Board of Directors on October 21, 2005, subject to approval of the plan
by the Company's stockholders. This option will have the same terms as the
options referred to above, and the price was the fair market value at the time
of grant.

During July of 2005, the Company granted its Senior
Medical Advisor an option to purchase 40,000 shares of the Company's common
stock at the fair value at the date of grant.

(b) Not applicable.

(c) Not applicable.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

(a)  None.

(b)  None.

Item 6. Exhibits.

The exhibits are listed in the Exhibit Index
appearing at page 32 herein.



SIGNATURES

In accordance with the
requirements of the Exchange Act, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                           |  |     | EP MEDSYSTEMS, INC.                                                                             
|-------------------------- |  | --- | ------------------------------------------------------------------------------------------------
|                           |  |     | (Registrant)                                                                                    
|                           |  |     |                                                                                                 
|Date:  November    , 2005  |  | By: | /s/ David A. Jenkins                                                                            
|                           |  |     | David A. Jenkins                                                                                
|                           |  |     | Chairman of the Board and Chief Executive
    Officer and Director (Principal Executive Officer)
|                           |  |     |                                                                                                 
|                           |  |     |                                                                                                 
|Date:  November     , 2005 |  | By: | /s/ Matthew C. Hill                                                                             
|                           |  |     | Matthew C. Hill                                                                                 
|                           |  |     | Chief Financial Officer                                                                         
|                           |  |     | (Principal Financial and Accounting Officer)                                                    
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Index to Exhibits

|31.1**                                |  | Certification Pursuant to
    Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
    amended.          
|------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------
|                                      |  |                                                                                                                                
|31.2**                                |  | Certification Pursuant to
    Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
    amended.          
|                                      |  |                                                                                                                                
|32.1**                                |  | Certification Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.
|                                      |  |                                                                                                                                
|32.2**                                |  | Certification Pursuant to 18
    U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.
|                                      |  |                                                                                                                                
|_______________
    **Filed herewith. |