Cardiac arrhythmias are dysfunctions in the electrical activity of the heart that normally controls and maintains its highly coordinated contractions. Arrhythmias cause the heart to pump blood less efficiently, cause potentially debilitating symptoms, and can result in life threatening events such as stroke. Atrial fibrillation, or AF, and atrial flutter, or AFL, are the two most common and difficult to treat arrhythmias. AF is the most prevalent arrhythmia, and AFL can lead to, and often coexists with, AF.

Approximately 2.3 million people in the United States and six million people worldwide currently have AF, according to Medscape . As reported in the January 2005 issue of Current Opinion in Cardiology, each year, there are approximately 500,000 new cases of AF in the United States. The incidence of AF is expected to double over the next 20 years, according to the Atrial Fibrillation Foundation. AF is the leading cause of stroke among the elderly, and people afflicted with this condition are at six times greater risk of stroke and two times greater risk of death as compared to the normal population.

AFL is the second most common arrhythmia. According to the July 2000 issue of the Journal of the American College of Cardiology, there are estimated to be 200,000 new cases of AFL reported each year in the United States. The Journal of the American College of Cardiology reports that, like AF, AFL becomes more common with age.

The current standard of care for treating AF and AFL is chronic drug therapy, which is costly, often ineffective and can have serious side effects. Other existing treatments for AF include surgical procedures and the off-label use of currently available catheter-based ablation devices. It is believed these procedures have failed to gain broad market adoption because they require major surgery, can cause serious complications including death, or they lack efficacy. According to a May 2003 issue of Circulation, the rate of hospitalization due to AF in patients over the age of 35 years increased between two and three times from 1985 to 1999. Each year, billions of dollars are spent in the United States for healthcare expenditures related to AF, including costs associated with AF-related hospitalizations, AF drug therapy and its complications, life-long clinical follow-up, and AF-related stroke.

The Company’s Cardiac Cryoablation System consists of Model 2020 Console, CryoArm Pre-Cooler and disposable CryoBlator catheters. The Company also offers introducer sheaths to facilitate catheter placement in the atria in both AF and AFL ablation procedures. The Company’s cryoablation system’s components are designed to simplify set up and minimize procedure time. The Company’s cryoablation system utilizes proprietary technology embedded in the console, the pre-cooler and the disposable catheters that allow it to generate, deliver and transfer high levels of cryoenergy enabling selectively large lesion sizes, shorter procedure times and enhanced system versatility. The Company believes these advantages provide better therapeutic efficacy and a greater ability to treat complex arrhythmias than competing cryoablation technologies.

The Company is developing its next generation disposable catheter, Quantum catheter, which envision will enable physicians to create larger lesions in both linear and curvilinear shapes, thereby reducing the total number of lesions required in a procedure. The Company’s Quantum catheter is being designed to permit delivery of therapeutic cryoenergy pursuant to a fixed anatomical pattern rather than complex cardiac electrical activity mapping. The Company believes that this reduction in the number of lesions may reduce the average time for an AF cryoablation procedure to 1.5 hours or less. The Company believes that these features would make its cryoablation system appeal commercially to physicians other than electrophysiologists, such as interventional cardiologists.

Research and development expenses were $4.3 million for the year ended December 31, 2002, $6.4 million for the year ended December 31, 2003 and $8.0 million for the year ended December 31, 2004.

Selling, general and administrative expenses were $2.2 million for the year ended December 31, 2002, $2.3 million for the year ended December 31, 2003 and $5.5 million for the year ended December 31, 2004.

Interest income was $134,000 for the year ended December 31, 2002, $82,000 for the year ended December 31, 2003 and $109,000 for the year ended December 31, 2004.

Interest expense was $99,000 for the year ended December 31, 2002, $300,000 for the year ended December 31, 2003 and $192,000 for the year ended December 31, 2004.