UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

(Mark One)
(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
          For the period ended: June 30, 2002
                                -------------

( )  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
     OF 1934
          For the transition period from __________ to __________

                         Commission File Number: 0-28260
                                                 -------

                               EP MEDSYSTEMS, INC.
                               -------------------
        (Exact name of small business issuer as specified in its charter)

         New Jersey                                         22-3212190
         -----------                                        ----------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)

100 Stierli Court, Mount Arlington, New Jersey            07856
----------------------------------------------            -----
(Address of principal executive offices)                (Zip Code)

                                 (973) 398-2800
                                 --------------
                           (Issuer's telephone number)

Check  whether  the issuer  (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
                                                                  ---    ---

                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the  registrant  filed all  documents  and reports  required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the  distribution  of
securities under a plan confirmed by a court.    Yes    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 August 5, 2002
-----                                           -----------------------------
Common Stock, without par value                      14,963,652 shares

     Transitional Small Business Disclosure Format (check one): Yes    No X
                                                                   ---   ---
<PAGE>

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

PART I  -- Financial INFORMATION                                           Page
                                                                           -----

     Item 1. Financial Statements

          Consolidated Balance Sheet at June 30, 2002 (unaudited)              3

          Consolidated Statements of Operations for three months ended
          June 30, 2002 and 2001 (unaudited)                                   4

          Consolidated  Statements  of  Operations  for the six months
          ended June 30, 2002 and 2001 (unaudited)                             5

          Consolidated  Statements  of Cash  Flows for the six  months
          ended June 30, 2002 and 2001 (unaudited)                             6

          Notes to Consolidated Financial Statements (unaudited)            7-14

     Item 2. Management's Discussion and Analysis or Plan of Operation     14-23


PART II  -- OTHER INFORMATION

     Item 1. Legal Proceedings                                                24

     Item 2. Changes in Securities                                            24

     Item 3. Defaults Upon Senior Securities                                  24

     Item 4. Submission of Matters to a Vote of Security Holders              24

     Item 5. Other Information                                             24-25

     Item 6. Exhibits and Reports on Form 8-K                                 25

     Signatures                                                               26

     Exhibit Index                                                            27



                                  2
<PAGE>

                      EP MEDSYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

                                                            JUNE 30,
                                                              2002
                                                          ------------
ASSETS                                                    (unaudited)
Current assets:
  Cash and cash equivalents                               $  1,610,742
  Accounts receivable, net of allowances for
       doubtful accounts of $76,075                          3,057,830
  Inventory, net                                             2,322,863
  Prepaid expenses and other current assets                    623,879
                                                          ------------
          Total current assets                               7,615,314

  Property and equipment, net                                1,979,420
  Goodwill, net                                                341,730
  Intangible assets, net                                        27,432
  Other assets                                                 417,563
                                                          ------------
          Total assets                                    $ 10,381,459
                                                          ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                        $  1,359,460
  Accrued expenses and other current liabilities               366,116
  Deferred warranty revenue, current                            41,119
  Customer deposits                                            330,841
                                                          ------------
          Total current liabilities                          2,097,536

  Accrued interest on long term debt, non-current              412,206
  Deferred warranty revenue, non-current                       308,761
  Note payable to Medtronic, Inc.                            3,200,000
                                                          ------------
          Total liabilities                               $  6,018,503
                                                          ------------

Commitments and contingencies                                       --

Shareholders' equity:
  Preferred Stock, no par value, 5,000,000 shares
      authorized, 373,779 shares issued and outstanding   $    618,161
  Common stock, $.001 stated value, 25,000,000
      shares authorized, 14,963,652 shares issued
      and outstanding                                           14,964
  Additional paid-in capital                                32,039,620
  Deferred offering costs                                     (554,515)
  Receivable from executive officer                           (265,000)
  Accumulated deficit                                      (27,490,274)
                                                          ------------
          Total shareholders' equity                         4,362,956
                                                          ------------
          Total liabilities and shareholders' equity      $ 10,381,459
                                                          ============


    The accompanying notes are an integral part of this statement.


                                  3
<PAGE>

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

                                                 FOR THE THREE MONTHS ENDED
                                                 JUNE 30,         JUNE 30,
                                                  2002             2001
                                              ------------    ------------

Net sales                                     $  3,095,109    $  2,413,418
Cost of products sold                            1,302,737       1,131,148
                                              ------------    ------------
   Gross profit                                  1,792,372       1,282,270

Operating costs and expenses:
Sales and marketing expenses                     1,085,210       1,184,233
General and administrative expenses                461,476         524,029
Research and development expenses                  832,265         652,319
                                              ------------    ------------
   Loss from operations                           (586,579)     (1,078,311)

Interest expense, net                              (52,680)        (79,641)
Other income (expense), net                          5,194         (13,475)
                                              ------------    ------------
   Net loss                                   $   (634,065)   $ (1,171,427)
                                              ============    ============

Basic and diluted loss per share              $       (.04)   $       (.09)
                                              ============    ============

Weighted average shares outstanding used
to compute basic and diluted loss per share     14,838,377      13,668,923
                                              ============    ============

   The accompanying notes are an integral part of these statements.

                                  4
<PAGE>

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

                                                FOR THE SIX MONTHS ENDED
                                                 JUNE 30,        JUNE 30,
                                                  2002            2001
                                              ------------    ------------

Net sales                                     $  6,084,084    $  4,481,741
Cost of products sold                            2,527,926       2,081,976
                                              ------------    ------------
   Gross profit                                  3,556,158       2,399,765

Operating costs and expenses:
Sales and marketing expenses                     2,193,456       2,286,270
General and administrative expenses              1,038,698       1,080,208
Research and development expenses                1,557,912       1,298,442
                                              ------------    ------------
   Loss from operations                         (1,233,908)     (2,265,155)

Interest expense, net                             (107,144)       (169,651)
Other income (expense), net                          5,370         (10,324)
                                              ------------    ------------
   Net loss                                   $ (1,335,682)   $ (2,445,130)
                                              ============    ============

Basic and diluted loss per share              $       (.09)   $       (.19)
                                              ============    ============

Weighted average shares outstanding used
to compute basic and diluted loss per share     14,673,804      12,882,236
                                              ============    ============

   The accompanying notes are an integral part of these statements.


                                  5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   FOR THE SIX MONTHS ENDED
                                                                    JUNE 30,       JUNE 30,
                                                                      2002          2001
                                                                  -----------    -----------
<S>                                                               <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                          $(1,335,682)   $(2,445,130)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation and amortization                                       344,828        420,453
  Non-cash compensation expense related to employee agreement          27,000             --
Changes in assets and liabilities:
  Decrease (increase) in accounts receivable                          739,192       (325,059)
  Increase in inventories                                            (301,502)      (306,301)
  Increase in prepaid expenses and other
    current assets                                                   (115,839)      (456,243)
  Decrease in deferred tax asset                                      474,688        419,031
  Increase in other assets                                             (5,437)            --
  Increase in amounts due to related parties                               --            (75)
  Increase in accounts payable                                        121,972        275,465
  (Decrease) increase in accrued expenses, deferred
    revenue, customer deposits, and accrued interest                 (138,218)       269,852
                                                                  -----------    -----------
          NET CASH USED IN OPERATING ACTIVITIES                   $  (188,998)   $(2,148,007)
                                                                  -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                (94,290)      (204,985)
  Patent costs                                                         (7,311)            --
                                                                  -----------    -----------
         NET CASH USED IN INVESTING ACTIVITIES                    $  (101,601)   $  (204,985)
                                                                  -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from exercise of stock options                                 --          1,600
   Net (payments) borrowings under term notes payable                (436,111)     1,560,594
   Net payments - revolving line of credit                                 --       (761,560)
   Net  proceeds from issuance of common stock, net of offering
          expenses                                                         --      2,994,703
                                                                  -----------    -----------
         NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES      $  (436,111)   $ 3,795,337
                                                                  -----------    -----------

EFFECT OF EXCHANGE RATE CHANGES                                        (5,851)      (262,259)
                                                                  -----------    -----------

NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                (732,561)     1,180,086
Cash and cash equivalents, beginning of period                      2,343,303        302,279
                                                                  -----------    -----------
Cash and cash equivalents, end of period                          $ 1,610,742    $ 1,482,365
                                                                  ===========    ===========
</TABLE>


   The accompanying notes are an integral part of these statements.


                                  6
<PAGE>

                      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 for interim
financial  information and in accordance  with the  instructions to Form 10-QSB.
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  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'  (the  "Company")  Annual  Report  on Form
10-KSB/A  for the year ended  December  31, 2001 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 at June 30, 2002 consist
of the following:

               Raw materials              $ 1,315,409
               Work in process                325,225
               Finished goods                 793,435
               Reserve for obsolescence      (111,206)
                                          -----------
                                          $ 2,322,863
                                          ===========


NOTE 3.  NOTE PAYABLE

     On November 15, 2000, EP  MedSystems,  completed a debt  financing for $3.2
million with Medtronic Asset Management,  Inc., an affiliate of Medtronic, Inc.,
one of EP MedSystems'  shareholders.  Approximately $2.3 million was utilized to
repay outstanding  amounts on EP MedSystems'  revolving credit facility with its
bank. The note to Medtronic Asset  Management,  Inc. bears interest at the prime
rate plus 2%.  The  principal  and all  accrued  interest  on the note are to be
repaid  on  November  15,  2003 and the  note is  secured  by a pledge  by David
Jenkins,  EP MedSystems'  Chairman of the Board and Chief Executive Officer,  of
shares of common stock of a privately-held  corporation.  EP MedSystems received
$1.6 million at closing and $1.6 million on January 17, 2001. For the six months
ended June 30, 2002, EP MedSystems  accrued  approximately  $109,000 of interest
expense related to this note.

                                  7
<PAGE>

     EP  MedSystems  entered into a financing  arrangement  with a bank in March
1999,  consisting of a $2,000,000  revolving  line of credit and a $500,000 term
loan,  secured by a lien on EP MedSystems'  facility in West Berlin,  New Jersey
and the machinery, equipment and inventory located there. EP MedSystems borrowed
approximately  $2  million  under  the  revolving  line  of  credit,  which  was
subsequently  repaid with the proceeds of the Medtronic  note payable  discussed
above.  The related term loan remained in place through the end of 2001, and was
repaid in March 2002.

NOTE 4.  SHAREHOLDER'S EQUITY

PREFERRED STOCK

     On October  23,  2001,  EP  MedSystems  consummated  the  private  sale and
issuance of newly-designated  Series A convertible preferred stock to Medtronic,
Inc.  ("Medtronic"),  a shareholder  and creditor of EP MedSystems,  and Century
Medical,  Inc.  ("CMI"),  its  Japanese  distributor.  An aggregate of 1,259,717
preferred  shares were  issued in the  transactions.  On December  31, 2001 each
preferred  share became  convertible  into equal shares of EP MedSystems  common
stock, at the option of the holder. In addition,  the shares may be converted by
EP  MedSystems  at any time after  receipt from the United  States Food and Drug
Administration   ("FDA")  of  510K  approval  of  EP  MedSystems'   ViewMate(TM)
Ultrasound  Imaging  System device or of pre-market  approval of EP  MedSystems'
ALERT(R) System device. The transaction with CMI involved the sale of the shares
of preferred  stock at a price of $2.048 per share as well as an amendment to EP
MedSystems'  Distribution  Agreement  with CMI. The  transaction  with Medtronic
involved  the sale of  preferred  stock  at a price  of  $1.781  per  share.  EP
MedSystems  received  aggregate  gross  proceeds  of  $2,400,000  from  the  two
transactions.  The preferred stock is recorded in Stockholders'  Equity,  net of
issuance  costs.  In the first quarter of 2002, CMI converted all 585,938 shares
of  preferred  stock  into an equal  number of shares of EP  MedSystems'  common
stock.  In the second  quarter of 2002,  Medtronic  converted  300,000 shares of
preferred  stock  into an equal  number  of EP  MedSystems'  common  stock.  The
converted  shares of both CMI and  Medtronic  were  registered  for resale by EP
MedSystems pursuant to a registration  statement on Form S-3, which was declared
effective by the SEC in May 2002.

COMMON STOCK

     On March 28, 2001, EP MedSystems  consummated the private sale and issuance
to certain  investors of 1,625,000  shares of common stock of EP MedSystems  and
warrants for 812,500 additional shares at a purchase price of $2.00 per share of
common  stock and  warrants.  The warrants  have an exercise  price of $4.00 per
share. Among the investors is Cardiac Capital, LLC, a limited liability company,
of which EP MedSystems'  Chairman of the Board and Chief Executive  Officer is a
50% owner. EP MedSystems received  $3,250,000 in gross proceeds,  which was used
for working capital purposes.

     On June 11,  2001,  EP  MedSystems  entered  into a common  stock  purchase
agreement  with Fusion  Capital  Fund II, LLC  ("Fusion  Capital");  the related
shares of which were  registered on Form SB-2 and declared  effective by the SEC
in October 2001. In June 2002, EP MedSystems  amended the common stock  purchase
agreement to,

                                  8
<PAGE>

among  other  things,  extend  the term of the  agreement,  establish  a minimum
selling price, and revise the daily purchase  amounts.  Because of the amendment
made to the  original  agreement,  EP  Medsystems  was  required to withdraw the
registration  statement  previously  filed with  respect  to the Fusion  Capital
shares, and in lieu thereof,  the Company filed a new registration  statement on
Form SB-2 with the  Securities  and Exchange  Commission  on July 30,  2002.  EP
MedSystems then further amended the agreement to fix the purchase price floor at
$1.00 per share,  and EP MedSystems then filed an amendment to the July 30, 2002
filing on Form SB-2. This new registration  statement was declared  effective on
August 13, 2002.  Under the registration  statement,  Fusion Capital is offering
for sale up to 2,700,000 shares of EP MedSystems'  common stock, which it has or
may in the future,  acquire  from the Company  under the common  stock  purchase
agreement. The shares being offered by Fusion Capital consist of up to 2,475,000
shares of common stock that Fusion  Capital may purchase from EP MedSystems at a
purchase  price based on the future market price of the  Company's  common stock
and 225,000 shares of common stock issued to Fusion Capital as compensation  for
its purchase  commitment  under the common stock purchase  agreement.  Under the
common stock purchase  agreement EP MedSystems  generally has the right, but not
the obligation,  to sell to Fusion Capital on each trading day $25,000 of common
stock up to an aggregate of $10 million worth of the Company's  common stock. If
the  market  price of EP  Medsystems'  common  stock is at or above  $3.00 for a
specified period, the Company may increase the daily purchase amount in its sole
option by $5,000 for every $.50 increase in the threshold price of the Company's
common stock above $2.50. If on any trading day the purchase price of the common
stock is less than  $1.00 per  share,  no shares  may be sold to Fusion  Capital
under the common stock purchase agreement on such day. The term of the agreement
with Fusion Capital is for 31 months,  commencing as of October 2001, subject to
EP  MedSystems'  right to extend the agreement  for an  additional 6 months.  To
date, EP MedSystems  has not sold any of its common stock under the common stock
purchase agreement.

     Since EP MedSystems  only  registered  2,475,000  shares for sale by Fusion
Capital  (exclusive  of  the  225,000  shares  issued  to  Fusion  Capital  as a
commitment  fee),  the selling  price of the  Company's  common  stock to Fusion
Capital will have to average at least $4.04 per share for the Company to receive
the maximum  proceeds of $10 million without  registering  additional  shares of
common  stock.  Also,  in the event that the Company  decides to issue more than
2,716,144 shares (19.9% of the Company's  outstanding  shares of common stock on
the date EP MedSystems  entered into the common stock purchase  agreement),  the
Company  would  be  required  to seek  shareholder  approval  in  order to be in
compliance with Nasdaq National Market rules.

     In light of the set  number  of  shares  being  registered,  funding  to be
afforded to EP MedSystems in connection  with the agreement  with Fusion Capital
is directly  correlated to the Company's stock price. The lower the price of the
Company's  stock,  the greater the number of shares that will need to be sold to
obtain  the  same  proceeds  and,  since a fixed  number  of  shares  are  being
registered for sale to Fusion Capital (the 2,475,000  shares),  the price of the
Company's  stock will  determine  the amount of the  proceeds  available  absent
registering  additional shares and obtaining  shareholder approval to issue more
than 2,716,144  shares.  Assuming that EP MedSystems  has an adequate  number of
shares of common stock to sell,  the price of the  Company's  common stock stays
above  the  floor  price of $1.00  per  share  and that EP  MedSystems  stays in
compliance with the

                                  9
<PAGE>

agreement, depending on the price at which shares are sold, Fusion Capital could
provide  the  Company  with  sufficient   funding  to  sustain   operations  for
approximately  two years.  Alternatively,  as described above, a low stock price
will limit the amount of proceeds  available to the Company  under the agreement
(absent shareholder  approval to issue a greater number of shares) and, thereby,
the amount of time during  which EP  MedSystems'  operations  will be  sustained
solely from funds under the agreement.

     As noted above,  EP  MedSystems  issued an  aggregate of 225,000  shares of
common  stock to Fusion  Capital  as a  commitment  fee under the  common  stock
purchase  agreement and recorded the fair value of such shares of  approximately
$555,000  as  a  separate  line  item  labeled  "Deferred   Offering  Costs"  in
Shareholders'  Equity. In addition,  EP MedSystems paid  approximately  $480,000
related to the filing,  legal,  and  accounting  expenses  associated  with this
transaction,  which is  recorded  in  Other  Assets  on the  Balance  Sheet.  EP
MedSystems  intends to reclassify the balances from Deferred  Offering Costs (in
Shareholders'  Equity and Other Assets) to  Additional  Paid-In  Capital,  as $1
million of shares are sold to Fusion  Capital.  If, at any time,  EP  MedSystems
determines  that it is no longer  probable that it will sell shares of its stock
to Fusion  Capital,  any remaining  amounts of Deferred  Offering  Costs will be
expensed.  EP MedSystems  currently intends to exercise its right to sell shares
prior to the expiration of the agreement.

NOTE 5. STOCK COMPENSATION

     In  connection  with the  hiring of a new  President  and  Chief  Operating
Officer  in the third  quarter  of 2001,  EP  MedSystems  entered  into  certain
employment  arrangements  with the  executive  pursuant  to which the  executive
purchased  100,000  shares of EP  MedSystems'  common  stock at $2.20 per share,
received  a  five-year  warrant,  which  vested  immediately,   to  purchase  an
additional  100,000 shares of EP MedSystems'  common stock, at an exercise price
of $2.75 per share,  and was granted an option  under EP  MedSystems'  Long Term
Incentive  program,  vesting over four years,  to purchase  100,000 shares at an
exercise  price of $1.91  per  share  (the  stock  price as of grant  date).  In
connection with the stock purchase,  EP MedSystems provided the executive with a
two-year, interest-free,  non-recourse loan in the amount of $220,000, which was
secured by a pledge to EP MedSystems of the shares. The principal balance of the
loan was to be  forgiven  ratably  over the term of the loan.  In July 2002,  EP
MedSystems and the executive  agreed to rescind the stock  purchase  transaction
with  respect to 75,000 of the shares (the  portion  which had not already  been
paid for through  forgiveness  of the loan) and to cancel the unpaid  portion of
the loan. A new grant was made to the executive of an incentive  stock option to
purchase  75,000  shares of common stock  pursuant to the 2002 Stock Option Plan
(subject to  shareholder  approval  of such plan at the 2002  annual  meeting of
shareholders)  at an  exercise  price  equal to $2.20  per share  (the  original
purchase price  established in connection  with the  executive's  stock purchase
rights and greater than the fair market value of the common stock on the date of
grant of the  stock  option).  There may be a  compensation  charge if the share
price on August 29, 2002 (the date of the 2002 annual  meeting of  shareholders)
is greater than $2.20 which would be  amortized  over the vesting  period.  This
stock option vests over four years from the date of grant.

                                       10
<PAGE>

     Until the  stock  purchase  transaction  was  rescinded  in July  2002,  EP
MedSystems  determined  that the  treatment for the valuing and recording of the
restricted shares purchased would be similar to the accounting for stock options
that qualify for variable plan accounting  pursuant to footnote 2 of APB No. 25.
Based  on the  purchase  price  of the  shares  of  common  stock at the time of
issuance,  the intrinsic  value of these  instruments  was zero and, as such, no
compensation expense was recorded.  These shares were re-measured on a quarterly
basis and compensation expense was determined as the difference between the fair
market  value and the  purchase  price of the stock at the end of the  reporting
period.  The purchase price was adjusted  downward in conjunction  with the loan
amount forgiven on a quarterly basis as defined in the promissory  note. For the
six months ended June 30, 2002, EP MedSystems  recorded  $55,000 in compensation
expense related to the forgiven portion of the note and a recorded a gain on the
fair market value adjustment of $28,000.

NOTE 6. SALE OF STATE NET OPERATING LOSSES

     During the six months ended June 30, 2002 and 2001, EP MedSystems  received
approximately  $475,000  and  $419,000,  respectively,  related to the sale of a
portion  of  its   cumulative   unused  New  Jersey  State  Net  Operating  Loss
carryforwards  for its statutory  subsidiaries.  The sales of the cumulative net
operating  losses are a result of a New Jersey State law enacted January 1, 1999
allowing emerging  technology and biotechnology  companies to transfer or "sell"
their unused New Jersey State Net Operating  Loss  carryforwards  and New Jersey
research  and  development  tax  credits to any  profitable  New Jersey  company
qualified  to  purchase  them for cash.  As of December  31,  2001 and 2000,  EP
MedSystems had recorded  approximately $475,000 and $419,000,  respectively,  in
deferred  tax assets  related to these  sales.  These  deferred  tax assets were
reversed upon receipt of cash from the sales of these  benefits to third parties
in the six months ended June 30, 2002 and 2001.

NOTE 7. 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
three and six months ended June 30, 2002 and 2001.



                           FOR THE SIX MONTHS
                             ENDED JUNE 30
                          2002          2001
                          ----          ----
United States          $3,705,000   $2,427,000
Europe/Middle East      1,309,000    1,287,000
Asia and Pacific Rim    1,070,000      768,000
                       ----------   ----------
                       $6,084,000   $4,482,000
                       ==========   ==========

                                       11
<PAGE>

     Sales of EP  MedSystems'  cardiac  electrophysiology  equipment and related
catheters aggregated  approximately $5,487,000 and $597,000,  respectively,  for
the six months ended June 30, 2002 and  $3,863,000  and $619,000,  respectively,
for the comparable period in 2001. EP MedSystems'  long-lived assets are located
in the U.S.

     Net  sales  for the six  months  ended  June 30,  2002  were  billed in two
currencies:  $5,831,000  in U.S.  dollars  and 304,000 in Euro.  Management  has
determined  the 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/losses, which are recorded in Stockholder's Equity. Cumulative
translation  losses  amounted to  approximately  $86,000 as of June 30, 2002. In
addition,   EP  MedSystems  had  not  entered  into  any  derivative   financial
instruments for hedging or other purposes.

NOTE 8. 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,
diluted net loss per share does not differ from basic net loss per share,  since
potential shares of common stock from the exercise of stock options and warrants
are  anti-dilutive  for all periods  presented.  Accordingly,  potential  common
shares of  2,680,294  and  2,285,758  for the six months ended June 30, 2002 and
2001, respectively, have been excluded from the diluted per share calculation.

NOTE 9. COMPREHENSIVE INCOME

     For  the  six  months  ended  June  30,  2002  and  2001,  EP   MedSystems'
comprehensive  income  approximated  net  income,  except for  foreign  currency
translation adjustments.  The comprehensive losses for the six months ended June
30, 2002 and 2001 were approximately $1,342,000 and $2,445,000, respectively.

NOTE 10.  ADOPTION OF SFAS NO. 142

     In June 2001, the FASB issued Statement of Financial  Accounting  Standards
No. 142 ("SFAS No. 142"),  "Goodwill and Other Intangible  Assets." SFAS No. 142
supercedes Accounting Principles Board Opinion No. 17, "Intangible Assets." SFAS
No. 142 primarily  addresses the accounting  for goodwill and intangible  assets
subsequent to their  acquisition.  The  provisions of SFAS No. 142 are effective
for fiscal years  beginning  after December 15, 2001,  therefore,  EP MedSystems
adopted SFAS No.142 on January 1, 2002. The primary changes made by SFAS No. 142
are: (1)  goodwill  and  indefinite  lived  intangible  assets will no longer be
amortized,  (2) goodwill will be tested for  impairment at least annually at the
reporting unit level,  (3) intangible  assets deemed to have an indefinite  life
will be tested for impairment at least annually, and (4) the amortization period
of intangible assets with finite lives will no longer be limited to forty years.
In connection  with the adoption of this standard,  EP  MedSystems'  unamortized
goodwill  balance is no longer  amortized,  but will  continue  to be tested for
impairment.  EP  MedSystems  plans  to test  impairment  of  goodwill,  at least
annually, using a two-step impairment test consisting of comparing goodwill fair
value and book value of determined reporting units and, if applicable, measuring
the excess of the  recorded  amount of  goodwill  with its  implied  fair value.
During the second  quarter of 2002,  EP MedSystems  completed  the  transitional
goodwill  impairment  test and,  determined that as

                                       12
<PAGE>

of January 1, 2002,  the fair value of  goodwill  exceeds  its  carrying  value.
Therefore,  EP MedSystems has not recorded any goodwill transitional  impairment
loss and step two of the transitional test is not required.

     The  following  table  presents  the impact of SFAS No. 142 on net loss and
loss per  share  had the  standard  been in  effect  for the three and six month
period ended June 30, 2002 and 2001:



<TABLE>
<CAPTION>
                                     FOR THE THREE MONTHS ENDED    FOR THE SIX MONTHS ENDED
                                              JUNE 30,                     JUNE 30
                                        2002           2001          2002           2001
                                        ----           ----          ----           ----
<S>                                <C>            <C>            <C>            <C>
Reported net loss                  $  (634,065)   $(1,171,427)   $(1,335,682)   $(2,445,130)
Add back:  Goodwill amortization            --         12,903             --         25,804
                                   -----------    -----------    -----------    -----------
Adjusted net loss                  $  (634,065)   $(1,158,524)   $(1,335,682)   $(2,419,326)

Basic and diluted loss per share:
  Reported net loss                      $(.04)         $(.09)         $(.09)         $(.19)
Goodwill amortization                       --             --             --             --
                                         -----          -----          -----          -----
Adjusted net loss                        $(.04)         $(.09)         $(.09)         $(.19)
                                         =====          =====          =====          =====
</TABLE>


At June 30, 2002 and 2001, other intangible  assets consist  primarily of patent
costs. Accumulated amortization at June 30, 2002 was approximately $147,000. For
the  six  months  ended  June  30,  2002  and  2001,  EP   MedSystems   recorded
approximately  $16,000 and $18,000 in amortization  expense for other intangible
assets. For the year ended, December 31, 2002 and 2003,  amortization expense is
estimated to be approximately $33,000 and $10,000, respectively.

NOTE 11. RECENTLY ISSUED ACCOUNTING STANDARDS

     In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS No. 143"),  "Accounting for Asset Retirement  Obligations."  This
standard  requires that  obligations  associated with the retirement of tangible
long-lived  assets  be  recorded  as  liabilities  when  those  obligations  are
incurred,  with the amount of the  liability  initially  measured at fair value.
Upon initially  recognizing a liability for an asset retirement  obligation,  an
entity must  capitalize  the cost by  recognizing  an  increase in the  carrying
amount of the related long-lived asset. Over time, this liability is accreted to
its present value,  and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS No. 143 is  effective  for  financial  statements  issued for fiscal  years
beginning after June 15, 2002,  which for EP MedSystems  means the standard will
be adopted on January 1, 2003. EP  MedSystems  does not expect that the adoption
of this  statement  will have a material  impact on its  results of  operations,
financial position or cash flows.

     In  October  2001,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 144 ("SFAS No. 144"),  "Accounting  for the Impairment or Disposal
of  Long-Lived  Assets,"  which  supercedes  Statement of  Financial  Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived

                                       13
<PAGE>

Assets to Be  Disposed  Of." SFAS No.  144  applies  to all  long-lived  assets,
including discontinued operations, and consequently amends Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of  Disposal  of a  Segment  of  a  Business,  and  Extraordinary,  Unusual  and
Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No.
144 develops one accounting model for long-lived  assets that are to be disposed
of by sale, as well as addresses the principal  implementation  issues. SFAS No.
144  requires  that  long-lived  assets  that are to be  disposed  of by sale be
measured  at the  lower  of  book  value  or  fair  value  less  cost  to  sell.
Additionally,  SFAS No. 144  expands  the scope of  discontinued  operations  to
include  all  components  of  an  entity  with   operations   that  (1)  can  be
distinguished  from the rest of the entity and (2) will be  eliminated  from the
ongoing  operations  of the  entity in a disposal  transaction.  SFAS No. 144 is
effective  for  financial  statements  issued for fiscal years  beginning  after
December 15, 2001,  therefore EP  MedSystems  adopted the standard on January 1,
2002.  The  adoption  had no  impact on its  results  of  operations,  financial
position or cash flows.

     On April 30,  2002,  the FASB  issued  Statement  of  Financial  Accounting
Standards No. 145 ("SFAS No. 145"), "Recission of FASB Statements No. 4, 44, 64,
Amendment of FASB No. 13 and Technical  Corrections".  This statement eliminates
the  requirement  that  gains  and  losses  from the  extinguishment  of debt be
aggregated  and classified as an  extraordinary  item, net of the related income
tax. In addition,  SFAS No.145 requires that capital leases that are modified so
that the  resulting  lease  agreement is  classified  as an  operating  lease be
accounted for in the same manner as sale-lease back transactions. SFAS No.145 is
generally effective for transactions occurring after May 15, 2002. EP MedSystems
does not expect that the adoption of SFAS No. 145 will have a material impact on
its results of its operations, financial position or cash flows.

     On July 30,  2002,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 146 ("SFAS No. 146"),  "Accounting for Costs  Associated with Exit
or Disposal  Activities."  This  statement  requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 also establishes that fair value is the objective for the
initial measurement of the liability. SFAS No. 146 will be effective for exit or
disposal  activities  that are initiated  after December 31, 2002. EP MedSystems
does not expect the  adoption  of SFAS No. 146 to have a material  impact on its
results of its operations, financial position or cash flows.

NOTE 12. SUBSEQUENT EVENTS

     In June 2002 and August  2002,  EP  MedSystems  amended the Fusion  Capital
Agreement.  In  connection  with  the  amendments,  EP  MedSystems  filed  a new
registration  statement on Form SB-2 which was declared  effective on August 13,
2002. (See Note 4).

     In July 2002, EP MedSystems and the President and Chief  Operating  Officer
mutually agreed to terminate the stock purchase transaction. (See Note 5).

                                       14
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW
--------

     EP MedSystems ("EP Med") 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 electrophysiology market used to diagnose,  monitor and
treat irregular  heartbeats known as arrhythmias.  Since EP Med's inception,  we
have acquired  technology and marketing rights,  have developed new products and
have  begun  marketing  various   electrophysiology   products,   including  the
EP-WorkMate(R)   computerized   electrophysiology   workstation,   the  EP-3(TM)
Stimulator,  diagnostic  electrophysiology  catheters  and the ALERT(R)  System,
including the ALERT(R) Companion and ALERT(R) internal  cardioversion  catheters
and related disposable  supplies.  To date, these products have generated nearly
all of EP Med's sales.

     EP Med's leading diagnostic product is the  EP-WorkMate(R),  a computerized
electrophysiology   workstation  that  monitors,  displays  and  stores  cardiac
electrical activity and arrhythmia data. The EP-WorkMate(R)  offers, among other
features,  display  and  storage of up to 192  intracardiac  signals,  real-time
analysis and integration with our own proprietary systems,  such as the EP-3(TM)
Stimulator,  as  well as with  other  technologies  and  systems.  The  EP-3(TM)
Stimulator  is  a  computerized  signal  generator  and  processor  which,  when
integrated  with  the  EP-WorkMate(R),  is  used to  stimulate  the  heart  with
electrical impulses in order to produce,  and thereby locate an arrhythmia.  For
the six months  ended June 2002,  the  EP-WorkMate(R)  and  EP-3(TM)  Stimulator
accounted for  approximately  90% of total sales.  EP Med also markets a line of
diagnostic electrophysiology catheters for stimulation and sensing of electrical
signals during electrophysiology  studies, which represented approximately 4% of
EP Med's total sales revenues for the six months ended June 2002.

     We have  identified the diagnosis and treatment of atrial  fibrillation,  a
particular  type of arrhythmia,  as a primary focus for our ongoing  development
efforts. Atrial fibrillation is a condition where erratic electrical signals are
present within the atria, the upper chambers of the heart,  causing fibrillation
of the atria,  which  prevents the atria from providing  appropriate  blood flow
output. In an effort to address this medical condition,  we have developed a new
product for internal  cardioversion of atrial fibrillation known as the ALERT(R)
System, which uses a patented electrode catheter to deliver measured, low-energy
bi-phasic  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(R) 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(R) System in the European  Community.  International sales of the
ALERT(R) System and related catheters accounted for approximately 6% of EP Med's
total sales revenues for the six months ended June 2002. The ALERT(R)  System is
not  approved  for sale in the United  States,  but we have  completed  clinical
trials and have submitted our application for pre-market  approval of the device
to the U.S. Food and Drug  Administration and have responded to FDA requests for
supplemental information; we are awaiting further action on this application and
on other regulatory matters. As such,

                                       15
<PAGE>

approval to market and sell the  ALERT(R)  System in the U.S. may take until the
end of the second half of 2002 or later, if approved at all.

     We are also  involved  in the  development  of an  intracardiac  ultrasound
product  line  including  the  ViewMate(TM)   ultrasound   imaging  console  and
intracardiac imaging catheters. These products offer high-resolution,  real-time
ultrasound  capability  designed to improve a physician's or clinician's ability
to  visualize  the  inside of the  chambers  of the heart.  We believe  that the
ViewMate(TM)  Ultrasound  System may play an important  diagnostic role allowing
more  effective  treatment  options  of  complex  cardiac  arrhythmias  such  as
ventricular  tachyarrhythmia  and atrial  fibrillation.  Our ultrasound products
currently  are not  approved  for sale.  We expect to file our  application  for
510(k) approval and CE Mark  authorization in the second half of 2002. We do not
anticipate  receiving approval to sell the ViewMate(TM)  Ultrasound System until
at least the fourth quarter of 2002, if approved at all.

     EP Med has 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  research  and  development,   clinical  trials  in  support  of  regulatory
approvals, increased manufacturing activity and expansion of sales and marketing
activities. The amount and timing of future losses will be dependent upon, among
other things, increased sales of our existing products, the timing of regulatory
approval and market  acceptance of the ALERT(R)  System and ultrasound  products
and  developmental,   regulatory  and  market  success  of  new  products  under
development  as well as EP Med's  ability to  establish,  preserve  and  enforce
intellectual property rights to its products. There can be no assurance that any
of our  development  projects  will be  successful  or that  if  development  is
successful, that the products will generate any sales.

SIX MONTHS ENDED JUNE 30, 2002 AND 2001

     Net  sales  were  $6,084,000  for the six  months  ended  June 30,  2002 as
compared to $4,482,000 for the comparable  period in 2001.  This  $1,602,000 (or
35%) increase is primarily due to a 59%increase in the number of EP WorkMates(R)
sold in the six months  ended June 30, 2002  compared to the same period in 2001
due to continued market  acceptance of our new NT Platform coupled with improved
sales in our domestic market.

     Net sales for the six months ended June 2002 were billed in two currencies:
$5,831,000 in U.S.  dollars and 304,000 in Euro.  Management  has determined the
impact of foreign currency risk on sales to be minimal since a majority of sales
are  billed in U.S.  dollars.  EP Med does  incur  translation  gains/losses  in
Stockholder's Equity. EP Med incurred a translation loss of approximately $6,000
for the six  months  ended  June  30,  2002.  EP Med has not  entered  into  any
derivative financial instruments for hedging or other purposes.

     Cost of products sold increased $446,000 (or 21%) to $2,528,000 for the six
months ended June 30, 2002 as compared to the same period in 2001. This increase
is related  to the  increase  in sales.  Cost of  products  sold  improved  as a
percentage of sales from 46% to 42% primarily due to reductions in manufacturing
labor costs  (primarily  resulting  from the cost  initiatives  initiated in the
fourth quarter of 2001) and lower raw material component costs.

                                       16
<PAGE>

     Gross profit on sales for the six months ended June 30, 2002 was $3,556,000
as  compared  with  $2,400,000  for the same  period in 2001.  The gross  profit
improved as a percentage  of sales from 54% to 58%,  primarily the result of the
above mentioned cost improvements.  We anticipate improvement in EP Med' overall
gross  profit  percentage  as sales of the  ALERT(R)  System and other  catheter
products  increase,   which  should  offset  the  fixed  costs  associated  with
maintaining a catheter manufacturing operation.

     Sales and marketing  expenses  decreased  $93,000 to $2,193,000 for the six
months ended June 30, 2002 as compared to the same period in 2001.  The decrease
during  this  period  was  primarily  due to a  reduction  in  compensation  and
advertising costs.

     General and administrative expenses decreased $42,000 to $1,039,000 for the
six months  ended June 30, 2002 as compared to the same period in of 2001.  This
was  primarily due to a decrease in foreign  exchange  losses of $102,000 as the
Euro strengthened against the dollar partially offset by an increase in business
insurance and travel costs.

     Research and development expenses increased $259,000 (or 20%) to $1,558,000
for the six months  ended June 30,  2002 as compared to the same period in 2001.
This is primarily  due to  professional  fees related to our latest  development
initiatives  around the  ALERT(R)  System and  ViewMate(TM)  ultrasound  imaging
console and  intracardiac  imaging  catheters  and costs  relating to addressing
regulatory  and  submission  requirements.  EP Med  expects  that  research  and
development  expenses are likely to increase in future  periods,  in part due to
ongoing expenses related to the ALERT(R) and  ViewMate(TM)  Ultrasound  Systems,
new product  development  activities  and continued  costs  associated  with the
regulatory approval process.

     Interest  expense  decreased  $63,000 to $107,000  for the six months ended
June 30, 2002 as  compared  to the same  period in 2001.  This was a result of a
reduction in the prime  interest rate in the first six months as compared to the
same period in 2001 and the paydown of  long-term  debt in the first  quarter of
2002.

THREE MONTHS ENDED JUNE 30, 2002 AND 2001.

     Net sales were  $3,095,000  for the three  months  ended  June 30,  2002 as
compared to $2,413,000 for the comparable period in 2001. This $682,000 (or 28%)
increase is the result of a 73% increase in the number of  EP-WorkMates(R)  sold
in the three months ended June 30, 2002  compared to the same period in 2001 due
to continued  market  acceptance  of our new NT Platform  coupled with  improved
sales efforts in our domestic market.

     Net  sales  for the  three  months  ended  June  2002  were  billed  in two
currencies:  $2,996,000  in U.S.  dollars  and  99,000 in Euro.  Management  has
determined  the impact of foreign  currency  risk on sales to be minimal since a
majority  of sales are billed in U.S.  dollars.  EP Med does  incur  translation
gains/losses,  which are recorded in Shareholder's  Equity. EP Med's translation
gain for the three months ended June 30, 2002 was approximately $3,000.

     Cost of products sold  increased  $172,000 (or 15%) to  $1,303,000  for the
three  months  ended June 30, 2002 as compared to the same period in 2001.  This
increase is related to the increase in sales. Cost of products sold decreased as
a  percentage  of  sales

                                       17
<PAGE>

from  47% to 42%  primarily  due to  reductions  in  manufacturing  labor  costs
(primarily  resulting from the cost initiatives  initiated in the fourth quarter
of 2001) and lower raw material component costs.

     Gross  profit  on sales  for the  three  months  ended  June  30,  2002 was
$1,792,000  as compared  to  $1,282,055  for the same period in 2001.  The gross
profit improved as a percentage of sales from 53% to 58%,  primarily as a result
of the above mentioned cost improvements.

     Sales and marketing  expenses  decreased  $99,000 (or 8%) to $1,085,000 for
the three  months  ended June 30,  2002 as  compared to the same period in 2001.
Costs  also  decreased  as a  percentage  of total  sales to 35% for the  second
quarter  of 2002 as  compared  to 49% for the  same  period  in  2001.  This was
primarily due to a reduction of travel and  advertising  as compared to the same
period in 2001.

     General and administrative  expenses decreased $63,000 (or 12%) to $461,000
for the three months ended June 30, 2002 as compared to the same period in 2001.
This was primarily due to a decrease in foreign  exchange  losses of $118,000 as
the Euro  strengthened  against  the dollar  partially  offset by an increase in
business insurance and travel costs.  Overall costs decreased as a percentage of
total  sales to 15% for the second  quarter of 2002 as  compared  to 22% for the
same period in 2001.

     Research and development  expenses  increased $180,000 (or 28%) to $832,000
for the three months ended June 30, 2002 as compared to the same period in 2001.
This was primarily due to  professional  fees related to our latest  development
initiatives  around the  ALERT(R)  System and  ViewMate(TM)  ultrasound  imaging
console and  intracardiac  imaging  catheters  and costs  relating to addressing
regulatory  and  submission  requirements.  EP Med  expects  that  research  and
development  expenses are likely to increase in future periods,  in part, due to
ongoing expenses related to the ALERT(R) and  ViewMate(TM)  Ultrasound  Systems,
new product  development  activities  and continued  costs  associated  with the
regulatory approval process.

     Interest expense decreased $27,000 for the three months ended June 30, 2002
as compared to the same  period in 2001.  This was the result of a reduction  in
the prime  interest  rate in the  second  quarter of 2002 as  compared  with the
second  quarter of 2001 and the pay down of long-term  debt in the first quarter
of 2002.

LIQUIDITY AND CAPITAL RESOURCES.

     Since EP Med's incorporation in January 1993, EP financial  performance has
resulted in an accumulated  deficit of  approximately  $26.2 million at December
31, 2001 and approximately $27.5 million at June 30, 2002.

     In November 2000, EP Med Systems  completed a debt financing with Medtronic
Asset  Management,  Inc.,  an  affiliate  of  Medtronic,  Inc.,  one of EP Med's
shareholders,  which  provided  an  aggregate  of $3.2  million.  The  financing
transaction,  evidenced by a note purchase agreement and secured promissory note
bearing  interest at two  percentage  points over the prime rate,  provides that
principal and all accrued  interest on the note are to be repaid on November 15,
2003 and that the note is  secured  by a  pledge  by David  Jenkins,  EP  Med's,
Chairman of the Board and Chief Executive  Officer,  of 300,000

                                       18
<PAGE>

shares of common  stock of  Transneuronix,  Inc., a  privately-held  corporation
engaged in the development of  neuro-muscular  stimulation  devices.  The shares
pledged amounted to approximately  5% of the total  outstanding  common stock of
Transneuronix, Inc.

     On June 11, 2001, we entered into a common stock  purchase  agreement  with
Fusion Capital Fund II, LLC ("Fusion Capital"); the related shares of which were
registered  on Form SB-2 and  declared  effective  by the SEC in  October  2001.
During June 2002, we amended the common stock purchase agreement to, among other
things, extend the term of the agreement,  establish a minimum selling price and
revise the daily purchase amounts. Because of the amendment made to the original
agreement,  we were required to withdraw the registration  statement  previously
filed with respect to the Fusion Capital shares, and in lieu thereof, we filed a
new  registration  statement  on Form  SB-2  with the  Securities  and  Exchange
Commission  on July 30, 2002.  We then further  amended the agreement to fix the
purchase  price floor at $1.00 per share,  and we then filed an amendment to the
July 30, 2002 filing on Form SB-2. This new registration  statement was declared
effective on August 13, 2002. Under the registration  statement,  Fusion Capital
is offering for sale up to 2,700,000  shares of our common stock which it has or
may in the future acquire from us under the common stock purchase agreement. The
shares being  offered by Fusion  Capital  consist of up to  2,475,000  shares of
common stock that Fusion  Capital may purchase from us at a purchase price based
on the future  market  price of our common  stock and  225,000  shares of common
stock issued to Fusion Capital as compensation for its purchase commitment under
the common stock purchase  agreement.  Under the common stock purchase agreement
we generally have the right,  but not the obligation,  to sell to Fusion Capital
on each  trading  day  $25,000 of our  common  stock up to an  aggregate  of $10
million  worth of our common  stock.  Fusion  Capital is only  obligated  to buy
$25,000  per trading  day unless the market  price of our common  stock is at or
above  $3.00 for a specified  period,  in which case we may  increase  the daily
purchase  amount in our sole  option by $5,000  for every $.50  increase  in the
threshold  price of our common  stock  above  $2.50.  If on any  trading day the
purchase  price of the common stock is less than $1.00 per share,  no shares can
be sold to Fusion  Capital on such day.  The term of our  agreement  with Fusion
Capital is for 31 months, commencing as of October 2001, subject to our right to
extend the agreement for an additional 6 months.  To date, EP MedSystems has not
sold any of its common stock under the common stock purchase agreement.

     Since  we only  registered  2,475,000  shares  for sale by  Fusion  Capital
(exclusive of the 225,000 shares issued to Fusion Capital as a commitment  fee),
the selling price of our common stock to Fusion  Capital will have to average at
least  $4.04 per share for us to receive  the  maximum  proceeds  of $10 million
without  registering  additional shares of common stock. Also, in the event that
we decide to issue more than 2,716,144  shares (19.9% of our outstanding  shares
of  common  stock  on the  date  we  entered  into  the  common  stock  purchase
agreement),  we would be required to seek shareholder approval in order to be in
compliance with Nasdaq National Market rules.

     In light of the set  number  of  shares  being  registered,  funding  to be
afforded to us in connection  with the agreement with Fusion Capital is directly
correlated to our stock price. The lower the price of our stock, the greater the
number of shares  that will need to be sold for us to obtain  the same  proceeds
and,  since a fixed  number of shares  are being  registered  for sale to Fusion
Capital (the 2,475,000 shares), the price of our stock will determine the amount
of the  proceeds  available  to us  absent  registering  additional  shares

                                       19
<PAGE>

and obtaining shareholder approval to issue more than 2,716,144 shares. Assuming
that we have an adequate  number of shares of common stock to sell, the price of
our common stock stays above the floor price of $1.00 per share and that we stay
in  compliance  with the  agreement,  depending on the price at which shares are
sold,  Fusion  Capital could provide us with  sufficient  funding to sustain our
operations for approximately two years. Alternatively, as described above, a low
stock  price  will  limit  the  amount  of  proceeds  available  to us under the
agreement (absent shareholder approval to issue a greater number of shares) and,
thereby, the amount of time during which our operations will be sustained solely
from funds under the agreement.

     As noted  above,  EP Med issued an  aggregate  of 225,000  shares of common
stock to Fusion  Capital as a  commitment  fee under the common  stock  purchase
agreement and recorded the fair value of such shares of  approximately  $555,000
as a separate  line item  labeled  "Deferred  Offering  Costs" in  Shareholders'
Equity. In addition,  EP Med paid approximately  $480,000 related to the filing,
legal,  and  accounting  expenses  associated  with this  transaction,  which is
recorded in Other Assets on the Balance Sheet.  EP Med intends to reclassify the
balances from Deferred Offering Costs (in Shareholders' Equity and Other Assets)
to  Additional  Paid-In  Capital,  as $1  million  of shares  are sold to Fusion
Capital.  If, at any time, EP Med determines  that it is no longer probable that
it will sell shares of its stock to Fusion  Capital,  any  remaining  amounts of
Deferred  Offering Costs will be expensed.  EP Med currently intends to exercise
its right to sell shares prior to the expiration of the agreement.

     In October  2001,  EP Med  consummated  the  private  sale and  issuance of
newly-designated  Series A convertible  preferred  stock to  Medtronic,  Inc., a
shareholder  and  creditor of EP Med, and Century  Medical,  Inc.  ("CMI"),  its
Japanese  distributor.  An  aggregate  of  1,259,717  shares  was  issued in the
transactions.  The preferred  shares were issued to CMI at a price of $2.048 per
share  as well as an  amendment  to EP Med'  Distribution  Agreement  with  CMI,
including an extension of the original Distribution  Agreement.  The transaction
with Medtronic  involved the sale of the shares of preferred stock at a price of
$1.781 per share. EP Med received  aggregate gross proceeds of $2.4 million from
the two transactions.

     CMI  converted  all of its shares of Series A  Preferred  Stock into common
shares of EP Med in the first quarter of 2002.  Medtronic  converted  300,000 of
its  shares of Series A  Preferred  Stock into  common  stock of EP Med in April
2002. The converted  stock of both CMI and Medtronic were  registered for resale
by EP Med pursuant to a  registration  statement on Form S-3, which was declared
effective by the SEC in May 2002.

     In January 2002, EP Med received  approximately $475,000 in cash related to
the sale of a portion of its unused  cumulative  New Jersey Net  Operating  Loss
carryforwards.

     We currently are negotiating  with an  institutional  lender regarding a $2
million line of credit  facility in order to supplement the amounts which may be
available to us under the Fusion Capital equity line.

     Net cash used in operating activities in the six months ended June 30, 2002
amounted to $189,000 as compared with a net cash usage of $2,148,000 in the same
period in 2001. This  improvement was primarily due to the $1,109,000  reduction
in our net loss and a decrease in accounts  receivable  as compared to the first
quarter of 2001.

                                       20
<PAGE>

Payments  to  related  parties  are  made on  terms  similar  to  those of other
suppliers.  Capital  expenditures,  net  of  disposals,  were  $94,000  for  the
six-month  period ended June 30, 2002 as compared to $205,000 in 2001. We expect
to purchase  capital  equipment  and to expand our  manufacturing  and  assembly
capabilities  as we  continue to grow,  however,  we  currently  do not have any
commitments  for purchases.  We lease office space and certain office  equipment
under operating leases.

     Working capital  decreased  $1,297,000 from December 31, 2001 to $5,518,000
at June 30,  2002.  This is primarily  due to (1) a $723,000  reduction in cash,
primarily  the result of the  repayment  of EP Med's term loan balance to Fleet;
(2) a $739,000 decrease in accounts receivable;  and (3) a $475,000 reduction in
deferred tax assets due to the receipt from the sale of the New Jersey State Net
Operating Loss noted above (4) net of increases in inventory  purchasing for the
six months ended June 30, 2002.

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

     EP Med has 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 research and development,  increased manufacturing activity and expansion of
sales and  marketing  activities.  The amount and timing of future  losses  will
depend upon, among other things,  the volume of sales of our existing  products,
the timing of  regulatory  approval  and market  acceptance  of the ALERT(R) and
ultrasound  systems and of new products  under  development  as well as EP Med's
ability to establish,  preserve and enforce intellectual property rights related
to our products.  There can be no assurance that any of our development projects
will be successful or that if development is successful,  that the products will
generate  any sales.  In  addition,  we will be unable to sell  shares to Fusion
Capital under our common stock purchase agreement with them (i) unless and until
the  Securities  and Exchange  Commission  declares the  registration  statement
relating to the common stock  purchase  agreement  effective and (ii) during any
period when the market  price of our common  stock  decreases to less than $1.00
per share (the minimum price at which Fusion Capital is required to purchase our
common stock under our common stock purchase agreement with them).  Without this
source of financing,  we will have to seek alternative sources of financing.  If
alternative sources of financing are not available, we will have to reduce costs
or reduce our scope of operations. Based upon our current plans and projections,
together with expected  financings or potential  cost  reductions,  however,  we
believe that our  existing  capital  resources  will be  sufficient  to meet our
anticipated capital needs for at least the next twelve months.

ADOPTION OF SFAS NO. 142

     In June 2001, the FASB issued Statement of Financial  Accounting  Standards
No. 142 ("SFAS No. 142"),  "Goodwill and Other Intangible  Assets." SFAS No. 142
supercedes Accounting Principles Board Opinion No. 17, "Intangible Assets." SFAS
No. 142 primarily  addresses the accounting  for goodwill and intangible  assets
subsequent to their  acquisition.  The  provisions of SFAS No. 142 are effective
for fiscal years

                                       21
<PAGE>

beginning after December 15, 2001, therefore, EP MedSystems adopted SFAS No. 142
on January 1, 2002.  The primary  changes made by SFAS No. 142 are: (1) goodwill
and indefinite lived intangible assets will no longer be amortized, (2) goodwill
will be tested for impairment at least annually at the reporting unit level, (3)
intangible  assets  deemed  to have  an  indefinite  life  will  be  tested  for
impairment  at least  annually,  and (4) the  amortization  period of intangible
assets with finite lives will no longer be limited to forty years. In connection
with the adoption of this standard,  EP Med's unamortized goodwill balance is no
longer amortized,  but will continue to be tested for impairment.  EP MedSystems
plans to test  impairment  of  goodwill,  at least  annually,  using a  two-step
impairment  test  consisting of comparing  goodwill fair value and book value of
determined  reporting  units and,  if  applicable,  measuring  the excess of the
recorded  amount of  goodwill  with its implied  fair  value.  During the second
quarter of 2002, EP MedSystems  completed the transitional  goodwill  impairment
test and,  determined  that as of January 1,  2002,  the fair value of  goodwill
exceeds its  carrying  value.  Therefore,  EP  MedSystems  has not  recorded any
goodwill  transitional  impairment loss and step two of the transitional test is
not required.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS No. 143"),  "Accounting for Asset Retirement  Obligations."  This
standard  requires that  obligations  associated with the retirement of tangible
long-lived  assets  be  recorded  as  liabilities  when  those  obligations  are
incurred,  with the amount of the  liability  initially  measured at fair value.
Upon initially  recognizing a liability for an asset retirement  obligation,  an
entity must  capitalize  the cost by  recognizing  an  increase in the  carrying
amount of the related long-lived asset. Over time, this liability is accreted to
its present value,  and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS No. 143 is  effective  for  financial  statements  issued for fiscal  years
beginning after June 15, 2002,  which for EP MedSystems  means the standard will
be adopted on January 1, 2003. EP  MedSystems  does not expect that the adoption
of this  statement  will have a material  impact on its  results of  operations,
financial position or cash flows.

     In  October  2001,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 144 ("SFAS No. 144"),  "Accounting  for the Impairment or Disposal
of  Long-Lived  Assets,"  which  supercedes  Statement of  Financial  Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 applies to all
long-lived assets,  including discontinued  operations,  and consequently amends
Accounting   Principles  Board  Opinion  No.  30,   "Reporting  the  Results  of
Operations-Reporting  the Effects of  Disposal  of a Segment of a Business,  and
Extraordinary,  Unusual and  Infrequently  Occurring  Events and  Transactions."
Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale,  as well as addresses  the  principal
implementation  issues. SFAS No. 144 requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair value less
cost to sell.  Additionally,  SFAS No.  144  expands  the scope of  discontinued
operations to include all components of an entity with  operations  that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing  operations  of the  entity in a

                                       22
<PAGE>

disposal transaction.  SFAS No. 144 is effective for financial statements issued
for fiscal years  beginning  after  December 15, 2001,  therefore EP  MedSystems
adopted  the  standard  on January 1, 2002.  The  adoption  had no impact on its
results of operations, financial position or cash flows.

     On April 30, 2002,  the FASB issued  Statement No. 145,  "Recission of FASB
Statements  No. 4, 44, 64,  Amendment of FASB No. 13 and Technical  Corrections"
("SFAS No. 145").  This  statement  eliminates  the  requirement  that gains and
losses  from the  extinguishment  of debt be  aggregated  and  classified  as an
extraordinary  item,  net of the related  income tax. In addition,  SFAS No. 145
requires  that  capital  leases that are  modified so that the  resulting  lease
agreement  is  classified  as an operating  lease be  accounted  for in the same
manner as sale-lease back transactions.  SFAS No.145 is generally  effective for
transactions  occurring  after May 15, 2002. EP MedSystems  does not expect that
the  adoption of SFAS  No.145 will have a material  impact on its results of its
operations, financial position or cash flows.

     On July 30,  2002,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 146 ("SFAS No. 146"),  "Accounting for Costs  Associated with Exit
or Disposal  Activities."  This  statement  requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 also establishes that fair value is the objective for the
initial measurement of the liability. SFAS No. 146 will be effective for exit or
disposal  activities  that are initiated  after December 31, 2002. EP MedSystems
does not expect the  adoption  of SFAS No. 146 to have a material  impact on its
results of its operations, financial position or cash flows.


                                       23
<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     EP MedSystems is a party to certain proceedings  incidental to the ordinary
course of its business, none of which, in the current opinion of management,  is
likely to have a material adverse effect on EP MedSystems'  business,  financial
condition, or results of operations.

ITEM 2.  CHANGES IN SECURITIES

     (a) Not applicable.

     (b) Not applicable.

     (c) Not applicable.

     (d) Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

     None.

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

     (a) Not applicable.

     (b) Not applicable.

     (c) Not applicable.

     (d) Not applicable.

ITEM 5.  OTHER INFORMATION

     In April 2002, EP  MedSystems  filed a  registration  statement on Form S-3
with the Securities and Exchange Commission to register the shares of certain of
its  shareholders  for  resale.  The  registration  statement  was  filed  by EP
MedSystems pursuant to obligations under certain  registration rights agreements
between  EP  MedSystems  and each of the  shareholders.  Among the  shareholders
participating  in the  registration  statement are Cardiac  Capital,  LLC, which
purchased  shares of common stock of EP MedSystems  in its private  placement in
June  2001,  and  Century  Medical,  Inc.  and  Medtronic,  Inc.,  each of which
purchased  shares of EP  MedSystems'  Series A  convertible  preferred  stock in
October 2001 and converted some or all of their respective  holdings into common
stock  which  was then  registered.  The  registration  statement  was  declared
effective by the Securities and Exchange Commission on May 9, 2002.

     Also in April 2002, EP MedSystems  appointed  Abhijeet Lele to its Board of
Directors to fill the vacancy  created by the demise of Dr.  Nigel  Roberts last
November.  Mr.  Lele is a  general  partner  of each of EGS  Private  Healthcare
Partnership and EGS Private Healthcare Partnership II, both private equity funds
focusing on investments in

                                       24
<PAGE>

private and public  healthcare  companies.  Mr. Lele has  previously  acted as a
consultant  in the  healthcare  practice of McKinsey & Company and prior to that
held operating positions in the pharmaceutical and biotechnology  industries. He
serves on the boards of several other companies,  including  Amarin  Corporation
and  CryoCath  Technologies,  Inc.,  which are public.  In  connection  with his
appointment, Mr. Lele was granted an option under EP MedSystems' Director Option
Plan to purchase  60,000  shares of EP  MedSystems'  common stock at an exercise
price  equal to the  market  value of the  stock  on the  effective  date of his
appointment.  As with all options  granted under the Director  Option Plan,  Mr.
Lele's options vest 1,000 shares per month.

     On July 1,  2002 EP  MedSystems  appointed  Paul  L.  Ray to its  Board  of
Directors.  Mr. Ray is  co-founder  of Konrad  Capital,  LLC a boutique  venture
partnership  focusing on funding early stage medical technology  companies.  Mr.
Ray  currently  serves as a Director for The Colorado  Technology  Incubator and
Colorado Biotechnology Association. In connection with his appointment,  Mr. Ray
was  granted an option  under EP  MedSystems'  Director  Option Plan to purchase
60,000 shares of EP  MedSystems'  common stock at an exercise price equal to the
market value of the stock on the effective date of his appointment.  As with all
options  granted  under the Director  Option Plan,  Mr. Ray's options vest 1,000
shares per month.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     The exhibits are listed in the Exhibit Index appearing at page 26 herein.

(b) Reports on Form 8-K.

     None.



                                       25
<PAGE>

                                   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:  August 14, 2002    By: /s/  David A. Jenkins
       ---------------        ---------------------
                              David A. Jenkins
                              Chairman of the Board and Chief Executive Officer
                              (Principal Executive Officer)

Date:  August 14, 2002    By: /s/  Reinhard Schmidt
       ---------------        ---------------------
                              Reinhard Schmidt
                              President and Chief Operating Officer and Director
                              (Principal Executive Officer)

Date:  August 14, 2002    By: /s/  Joseph M. Turner
       ---------------        ---------------------
                              Joseph M. Turner
                              Vice President and Chief Financial Officer
                              (Principal Financial and Accounting Officer)


                                       26
<PAGE>

                                  EXHIBIT INDEX
                                  -------------


  Exhibit #                    Description                           Location
  ---------                    -----------                           --------

    99.1          Certification pursuant to Section 906 of        Filed herewith
                  Sarbanes-Oxley Act of 2002









                                       27