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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                ---------------

                                   FORM 10-K

                       For Annual and Transition Reports
                    Pursuant to Sections 13 or 15(d) of the
                        Securities Exchange Act of 1934
(Mark One)
[X]            Annual Report Pursuant to Section 13 or 15(d) of
                      The Securities Exchange Act of 1934

                  For the fiscal year ended December 31, 1999

                                      or

[_]        Transition Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                     For the Fiscal period from     to

                          Commission File No. 0-20991

                                ---------------

                             CAMBRIDGE HEART, INC.
            (Exact Name of Registrant as Specified in its Charter)

                                ---------------

<TABLE>
<S>                                                <C>
                     DELAWARE                                          13-3679946
         (State or Other Jurisdiction of                            (I.R.S. Employer
          Incorporation or Organization)                          Identification No.)
          1 Oak Park Drive, Bedford, MA                                  01730
     (Address of Principal Executive Offices)                          (Zip Code)
</TABLE>

                                ---------------

                                (781) 271-1200
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:
                                     NONE

          Securities registered pursuant to Section 12(g) of the Act:
                        Common Stock, $0.001 par value
                                Title of class

                                ---------------

  Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]  No [_]

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [_]

  The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was $65,394,970 based on the last reported sale price of the
Common Stock on the Nasdaq National Market on March 21, 2000.

  Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date: 14,529,741 shares
of $0.001 par value Common Stock as of March 21, 2000

                     Documents incorporated by reference:

<TABLE>
<CAPTION>
Document Description                                                 10-K Part
--------------------                                                 ---------
<S>                                                                  <C>
Portions of the Registrant's Proxy Statement for the Annual Meeting
 of Shareholders to be held May 31, 2000                             Part III
</TABLE>

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                                    PART I

Item 1. Business

  Cambridge Heart, Inc. ("Cambridge Heart" or the "Company") is engaged in the
research, development and commercialization of products for the non-invasive
diagnosis of cardiac disease, the leading cause of death in the United States
and many other developed countries. Using innovative technologies, including
proprietary disposable sensors, the Company is addressing such key problems in
cardiac diagnosis as (i) the identification of those at risk of sudden cardiac
arrest, accounting for approximately 50% of all deaths due to heart attack,
(ii) the early detection of coronary artery disease and (iii) the prompt and
accurate diagnosis of heart attack. The Company's lead product, the CH 2000
Alternans System incorporates the Company's proprietary technology to non-
invasively measure low levels of T-wave alternans, a beat-to-beat alternation
in a portion of a patient's electrocardiogram. Clinical research published to
date has demonstrated that by measuring T-wave alternans the CH 2000 Alternans
System can assess vulnerability to the ventricular arrhythmias responsible for
sudden cardiac death to a degree comparable to electrophysiology testing, the
most accurate invasive test. The CH 2000 Alternans System is also able to
perform conventional cardiac stress tests. Sudden cardiac arrest accounts for
approximately one-half of all cardiac related deaths, or about 300,000, in the
United States each year, and is the leading cause of death in people between
the ages of 45 and 65.

  The Company's CH 2000 Alternans System and Hi-Resolution sensors have
received 510(k) clearance from the U.S. Food and Drug Administration for sale
in the United States, have received the CE mark for sale in Europe and have
been approved for sale by the Ministry of Health in Japan. The 510(k)
clearance for the CH 2000 Alternans System includes the claim that the CH 2000
Alternans System can measure T-wave alternans and the presence of T-wave
alternans in patients with known, suspected or at risk of ventricular
tachyarrhythmia predicts increased risk of ventricular tachyarrhythmia or
sudden death.

Company Overview

  Research using the Company's T-wave alternans technology and High-Resolution
sensors to predict increased risk of ventricular tachyarrhythmias, indicates
that the Company's CH 2000 Alternans System has the following advantages:

 .  Accuracy--Clinical studies to date indicate that the presence of T-wave
    alternans in patients with known, suspected or at risk of ventricular
    tachyarrhythmia predicts increased risk of a cardiac event (ventricular
    tachyarrhythmia or sudden death). The predictive capabilities of the
    Company's technology exceed those of other non-invasive tests and is
    comparable to the results of an invasive electrophysiology study.

 .  Non-invasive--Unlike electrophysiology studies which require the insertion
    of electrical catheters into the patient's heart and the administration of
    local anesthesia, the CH 2000 Alternans System requires only the placement
    of High-Resolution sensors on the patient's chest.

 .  Broad Applicability--Approximately six million standard stress tests and
    three million imaging stress tests are performed in the United States each
    year. The CH 2000 Alternans System is able to perform both of these tests
    and to simultaneously assess the risk of sudden cardiac death due to
    ventricular arrhythmias and with only a modest increase in the total cost
    of the procedure.

 .  Non-Hospital Setting--Unlike electrophysiology studies and other tests
    which require a hospital setting, the CH 2000 Alternans System can be used
    in a physician's office.

 .  Procedure Cost Advantages--An alternans test with the CH 2000 Alternans
    System cost approximately $400 per procedure, compared with approximately
    $3,000 to $4,000 for an electrophysiology study.

 .  System Affordability--A fully equipped CH 2000 alternans System is priced
    in the United States starting at approximately $29,000, The Company has
    established several financing programs available to customers aimed at
    minimizing the amount of initial upfront capital investment required to
    acquire a CH 2000 Alternans System in return for a commitment to purchase
    Hi-Resolution sensors at a fixed price.

                                       1
<PAGE>

  The Company is also conducting research into the detection of ischemic heart
disease using its cardiac electrical imaging technology. Cardiac electrical
imaging provides an image of the electrical activity of the heart that is
highly sensitive to changes resulting from ischemia, the lack of oxygen caused
by coronary artery disease or acute myocardial infarction. The Company is
conducting research to determine the extent to which this technology provides
for enhanced detection and localization of coronary artery disease during a
standard exercise stress test.

  The Company was incorporated in Delaware in 1990. The Company's executive
offices are located at 1 Oak Park Drive, Bedford, Massachusetts 01730.

Principal Products and Applications

 The CH 2000 Alternans System

  The CH 2000 Alternans System is designed to perform a broad range of
standard cardiac stress tests, as well as to measure T-wave alternans. The
Company's proprietary T-wave alternans technology permits evaluation,
computation and recording of T-wave alternans during exercise, atrial pacing
or pharmacological stress. Because of the need to record very small variations
in electric signals for precise T-wave alternans measurement, the CH 2000
Alternans System incorporates the Company's proprietary Hi-Resolution sensors
and proprietary signal processing algorithms to minimize noise levels
resulting from patient movement.

  The Company's CH 2000 Alternans System is a fully-featured diagnostic system
which includes a cart-mounted computer with proprietary software, integral
electrocardiogram system display, keyboard and output devices which can be
configured for both hospital and office settings. This system is designed to
support a broad range of standard and physician-customized protocols for the
conduct and measurement of cardiac stress tests and is compatible with both
standard electrodes and with the Company's Hi-Resolution sensors for T-wave
alternans measurement. The CH 2000 Alternans System is capable of controlling
both treadmill and bicycle ergometers and is well suited for standard, nuclear
or echocardiogram stress tests. During the Fiscal years ended December 31,
1997, 1998, and 1999 revenues from the sale of the CH 2000 Alternans System
have accounted for 94%, 96% and 86% of total Company revenues, respectively.

  The CH 2000 Alternans System provides a broad range of special features,
including:

 .  Expandable, Pentium-based computer architecture that simplifies operation,
    facilitates serviceability and provides a clear software and hardware
    upgrade path.

 .  Exclusive pre-test impedance lead check and optimizing signal processing
    that identifies problematic leads and minimizes noisy ECG waveforms to
    ensure a good test before it starts.

 .  Patented diagnostic screen displays that provide the ability to view all
    12 leads simultaneously throughout a test and make immediate on-screen
    interpretations.

 .  Unique ST segment displays that superimpose waveforms for all 12 leads
    over median beats for clear identification of dangerous ST depression or
    elevation.

 .  Comprehensive review capability of every test, reducing the physician's
    risk of missing a critical arrhythmia or losing an important record and
    thereby freeing them to focus on the patient.

                                       2
<PAGE>

 T-wave Alternans and Ventricular Arrhythmias: Clinical Studies

  The association between ventricular arrhythmia and the presence of extremely
low levels of T-wave alternans not detectable by visual inspection of the ECG
was unknown until the early 1980s. Research conducted in Dr. Richard Cohen's
laboratory at The Massachusetts Institute of Technology indicated that the
presence of microvolt (one-millionth of a volt) levels of T-wave alternans was
predictive of vulnerability to ventricular arrhythmias responsible for sudden
cardiac arrest. Dr. Cohen, a founder, director of, and consultant to, the
Company, and his associates developed the technology to quantify this
electrical conduction pattern which has been exclusively licensed to the
Company and which forms the basis of the Company's proprietary technology.

  In a study of 83 patients conducted at Massachusetts General Hospital in
collaboration with Dr. Cohen's laboratory at The Massachusetts Institute of
Technology, published in the New England Journal of Medicine in December 1994,
the detection of T-wave alternans at certain levels in patients referred for
electrophysiology studies was shown to be as accurate as invasive
electrophysiology testing in predicting sudden cardiac arrest and life-
threatening ventricular arrhythmias. In the high risk population studied for
up to 20 months following the procedure, an actuarial analysis involving 66
patients indicated that 81% of those testing positive for T-wave alternans
died or suffered a life-threatening arrhythmia within 20 months of the test;
only 6% of the patients testing negative for T-wave alternans did so. These
results were comparable to those obtained with invasive electrophysiology
testing and were more predictive than those that have been reported using
other non-invasive methods.

  Another study was conducted by Professor Stefan Hohnloser of J.W. Goethe
University, Frankfurt, Germany, the results of which, were published in
December 1998 in the Journal of Cardiovascular Electrophysiology In this
study, 95 patients receiving an implantable cardioverter-defibrillator
underwent electrophysiology testing and most of the other accepted non-
invasive risk stratification tests, including T-wave alternans testing
utilizing the CH 2000 Alternans System. Professor Hohnloser reported that the
detection of the presence of T-wave alternans was found to be the more
accurate than all other invasive and non-invasive tests in predicting
recurrences of ventricular tachycardia and ventricular fibrillation, the
abnormal heart rhythms associated with sudden cardiac arrest.

  During 1998, the Company completed a multi center study that was included in
the 510(k) application submitted to the U.S. Food and Drug Administration in
August 1998 to obtain expansion of the Company's labeling claim. The primary
endpoint was a ventricular tachyarrhythmic event which was defined as sudden
cardiac death, appropriate firing of an implantable cardioverter-defibrilator
or resuscitated sustained ventricular tachycardia or fibrillation. In 337
consecutive patients referred for electrophysiology study to evaluate known,
suspected or risk of arrhythmias, T-wave alternans was a highly significant
predictor of a ventricular tachyarrhythmic event and was somewhat more
predictive than electrophysiology, with a relative risk of 10.92 for T-wave
alternans versus 7.07 for electrophysiology. The secondary endpoint was a
ventricualr tachyarrhythmic event plus all death due to any cause. T-wave
alternans was a highly significant predictor of this endpoint and was also
more predictive of than electrophysiology, with a relative risk of 13.93
versus 4.69 for electrophysiology. Relative risk is the chance of having a
cardiac event if the test is positive divided by the chance of having a
cardiac event if the test is negative. The greater the number, the more
predictive the test.

  T-wave alternans was also evaluated as a predictor of electrophsyiology
study in a protocol that enrolled a subset of 242 patients. There were no
material differences in patient characteristics between this subset and the
total 337 patients. In 140 patients who completed all study procedures in
accordance with the protocol and had determinate results for both T-wave
alternans and electrophysiology, T-wave alternans predicted the results of
electropysiology with a sensitivity of 76%, a specificity of 65% and a
relative risk of 3.93.

                                       3
<PAGE>

Marketing and Sales

  Prior to 1999, the Company had been engaged in selling and marketing its CH
2000 Alternans System as a standard stress test system in the U.S. and, as a
result, the Company was primarily dependent on the sale of standard stress
test systems for the majority of its U.S. revenue. The standard stress market
is currently a capital equipment market with limited annual unit growth, small
gross profits and selling prices that are subject to significant competitive
pressure. During 1999, the Company received clearance from FDA of its 510(k)
application for expansion of its labeling claims. This provided the Company
with the opportunity to focus its U.S. marketing and sales efforts on
potential customers interested in the clinical use of its Alternans test and
proprietary disposable sensors. The Company anticipates that the percentage of
revenue generated by the sale of Alternans products will continue to increase
while the percentage of revenue generated from the sale of standard stress
test equipment will decline.

  During 2000, the Company intends to expand its product offerings with two
new products. The first is an OEM product that will allow major manufacturers
of stress test systems to incorporate the Company's alternans technology into
their new systems . The second is an add-on product that will allow existing
installed stress test systems to be used to measure T-wave alternans. Both
products are intended to increase the installed base of systems capable of
using the Company's disposable sensors.

  The Company believes that the keys to the adoption of its proprietary T-wave
alternans technology as the standard of care for the diagnosis of heart
disease are reimbursement by third party insurers to healthcare providers for
performance of the test, publication of clinical study results in medical
journals and continued positive clinical experience with the CH 2000 Alternans
System. The Company believes that the trend toward management of health care
costs in the United States will lead to increased awareness of and emphasis on
early detection and prevention of heart disease, and as a result, will
increase demand for cost-effective diagnostic tests. The commercial success of
the Company's proprietary technologies will require marketing, educational and
sales efforts to encourage cardiologists and other medical professionals to
utilize the test for the measurement of T-wave alternans in their medical
practices. The Company has trained and expects to continue to train well-
respected clinicians and their professional staff in the use of T-wave
alternans testing as a means of identifying patients at risk of sudden cardiac
arrest. The Company has funded studies to further demonstrate the efficiency
of its technologies and intends to continue to encourage the presentation of
the results of these studies at major national and international medical
symposia and the publication of clinical and scientific reports of such
results in major peer-reviewed publications. The Company also supports
educational seminars regarding the benefits of T-wave alternans testing and
will continue to participate in industry trade shows and academic conferences.

  In May 1999, the Company entered into cooperative marketing agreements with
both Guidant Corporation and Medtronic, Inc. The agreements provide for the
inclusion of T-wave alternans experts to speak at national and regional
seminars and symposia in the U.S. sponsored by Guidant and Medtronic aimed at
providing additional education to cardiologists about the benefits of
alternans testing.

  The Company markets its products and services to customers in the United
States through a combination of in-house marketing, sales and clinical
education support staff and independent manufacturers representatives.
The Company is currently represented by 14 independent manufacturers
representatives organizations with 39 representatives. The Company maintains a
small but experienced in-house Service Department to answer customer questions
and provide guidance, advice and troubleshooting regarding use of the CH 2000
Alternans System. The Company also employs three clinical specialist who work
with customers to assist with installation of the CH 2000 Alternans System and
to train health care professionals in its use.

  The Company markets its products internationally through independent
distributors. The Company has entered into distribution agreements with
distributors for the sale of its products in Europe, the Middle East, Japan
and Australia. During the years ended December 31, 1997, 1998 and 1999, sales
to international distributors comprised 62%, 46% and 49%, respectively, of the
Company's revenue. The Company's international independent distributors
provide comprehensive marketing and sales services including

                                       4
<PAGE>

identification of potential purchasers, consummating sales and providing
ongoing educational and support services to customers. The exclusive
distribution agreement between the Company and its distributor in Japan,
Fukuda Denshi Co., Ltd. expires March 31, 2001 and the agreements with the
Company's distributor in Germany and England, Reynolds Medical, Ltd. and
distributor in Italy, Oxford Instruments, expire March 31, 2000 and the
agreement with the Company's distributor in Australia, APS, expires June 30,
2000. The Company expects that it will be able to negotiate new agreements
with these distributors as they expire.

Manufacturing

  The Company performs final assembly of hardware and software components, and
testing of its products, at its corporate headquarters in Bedford,
Massachusetts. The Company believes its facility will be adequate to meet its
needs through the end of 2000. The Company is required to meet and adhere to
all applicable requirements of U.S. and international regulatory agencies,
including Good Manufacturing Practices and Quality System Regulation
requirements. The Company's manufacturing facilities are subject to periodic
inspection by both U.S. and international regulatory agencies.

  The Company underwent a Quality System Regulation audit, conducted by the
U.S. Food and Drug Administration, in January 1999. A response to the FDA's
observations was submitted and accepted by the Agency in February 1999. No
regulatory action was required.

  The manufacturing process consists primarily of final assembly of purchased
components, testing operations and packaging. Components are purchased
according to the Company's specifications and are subject to inspection and
testing. The Company relies on outside vendors to manufacture certain major
components used in the CH 2000 System, including its Hi-Resolution sensors. A
number of components are currently supplied by sole source vendors, although
the Company believes that it could locate additional sources of these
components in a timely fashion, if necessary.

Research and Development

  A substantial portion of the Company's research and development investment
is focused on its efforts in the areas of clinical research and the
development of enhancements to its T-wave alternans technology. The Company's
clinical research is focused on gathering substantial clinical data
demonstrating the efficacy of the T-wave alternans technology and its results
as a predictor of patient risk of ventricular tachyarrhythmia or sudden death.

  The Company is currently developing a new product that may be combined with
any standard stress test system and will allow such system to measure T-wave
alternans when utilizing the Company's Hi-Resolution sensors. The Company
believes that this product will provide it with increased access to the entire
installed base of standard stress test systems and increase the utilization of
the Company's disposable, higher margin sensors. The new product is expected
to have a lower cost of manufacture than the Company's CH 2000 Alternans
System and is expected to carry a selling price below the current price of a
standard stress test system. The Company expects the product to be available
during the year 2000.

  On March 31, 2000, the Company submitted a 510(K) to the Food and Drug
Administration seeking clearance to market its new Alternans Add-on Module.
This device utilizes the Company's previously cleared proprietary T-wave
Alternans technology and Hi-Resolution disposable sensors to allow
cardiologists to conduct an Alternans tests using already installed standard
stress test systems.

  When cleared, this product will open up the market to potential customers
who are interested in performing alternans tests but who are not in the market
for a new stress test system. There are approximately 23,000 stress test
systems installed in the U.S. but only fewer than 2,300 new systems sold new
each year. The Company anticipates that the availability of this product will
have a positive impact on its efforts to accelerate the rate of clinical use
of its alternans technology.

  The Company is also conducting research into systems to detect ischemic
heart disease based upon its cardiac electrical imaging technology, which
provides an image of the electrical activity of the heart. Animal studies and
initial human studies indicate that Cardiac Electrical Imaging ("CEI") is
highly sensitive to changes

                                       5
<PAGE>

resulting from ischemia, the lack of oxygen caused by coronary artery disease
or acute myocardial infarction. The Company is conducting research to
determine the extent to which this technology provides for enhanced detection
and localization of coronary artery disease during a standard exercise stress
test. The Company is evaluating the incorporation of its CEI technology into
the CH 2000 Alternans System, and is continuing to conduct clinical studies of
this technology.

  The Company's research and development expenses were $3,587,000 in 1997,
$3,595,000 in 1998, and $2,850,400 in 1999. The Company expects research and
development expenses in 2000 to be comparable to 1999, they are expected to
increase in the future as it develops additional products and funds clinical
trials on its products. As of December 31, 1999 the Company had 10 employees
engaged in research and development activities.

Patents, Trade Secrets and Proprietary Rights

  The computer algorithms that allow the CH 2000 Alternans System to measure
T-wave alternans and certain aspects of the Company's cardiac electrical
imaging technology, including the cardiac electrical imaging sensors, are
covered by U.S. patents issued to The Massachusetts Institute of Technology
that are licensed exclusively to the Company. The Company holds a U.S. patent
covering the use of exercise or any other non-invasive means in the
measurement of T-wave alternans. During 1998, the Company was issued a U.S.
patent covering additional proprietary signal processing algorithms and its
Hi-Resolution sensors for use in the measurement of T-wave alternans.
Corresponding foreign patents are pending in both cases. The failure to obtain
such patents could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company owns or is the
exclusive licensee of fourteen issued or allowed and six patents pending in
the United States, with 17 corresponding foreign patents issued or pending
with respect to its technology.

  The Company and MIT have entered into three license agreements (the "MIT
License Agreements"), pursuant to which the Company is the exclusive licensee
of certain technologies upon which the Company's current and future products
are based, including certain patents associated therewith. Two of the MIT
License Agreements that cover the T-wave alternans measurement technology
incorporated in the Company's CH 2000 Alternans System and that relate to
cardiac electrical imaging are of material importance to the Company. These
licenses are exclusive until 2007; thereafter, each license will convert to a
nonexclusive license, and will last for the life of the applicable patents,
unless extension of exclusivity is agreed to by MIT. These license agreements
impose various commercialization, sublicensing, insurance, royalty, product
liability indemnification and other obligations on the Company. Failure of the
Company to comply with these requirements could result in conversion of the
licenses from being exclusive to nonexclusive in nature or, in some cases,
termination of the license. The loss of the Company's exclusive rights to the
T-wave alternans and cardiac electrical imaging technologies, licensed under
two of the MIT License Agreements or the termination of either or both of such
agreements would have a material adverse effect on the Company's business,
financial condition and results of operations.

  The Company believes that its intellectual property and expertise, as
originally licensed from MIT and thereafter developed at the Company,
constitute an important competitive resource, and the Company continues to
evaluate markets and products which are most appropriate to exploit the
expertise licensed by, and developed at, the Company. In addition, the Company
maintains an active program of intellectual property protection, both to
assure that the proprietary technology developed by the Company is
appropriately protected, and, where necessary, to assure that there is no
infringement of the Company's proprietary technology by competitive
technologies.

  The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain patent
protection for its products both in the United States and in other countries.
However, the patent positions of medical device companies, including the
Company, are generally uncertain and involve complex legal and factual
questions. No assurance can be given that patents will issue from any patent
applications owned by or licensed to the Company or that, if patents do issue,
the claims allowed will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any issued patents
owned by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.

                                       6
<PAGE>

  The commercial success of the Company will also depend in part on its
neither infringing patents issued to others nor breaching the licenses upon
which the Company's products are based. The Company has licensed significant
technology and patents from third parties, including patents and technology
relating to T-wave alternans and cardiac electrical imaging licensed from MIT.
The Company's licenses of patents and patent applications impose various
commercialization, sublicensing, insurance, royalty and other obligations on
the Company. Failure of the Company to comply with these requirements could
result in conversion of the licenses from being exclusive to nonexclusive in
nature or, in some cases, termination of the license.

  The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology
or disclose such technology or that the Company can ultimately protect
meaningful rights to such unpatented proprietary technology. The Company
relies on confidentiality agreements with its collaborators, employees,
advisors, vendors and consultants to protect its trade secrets. There can be
no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. Failure to obtain or maintain patent and trade secret protection
for the Company's products, for any reason, would have a material adverse
effect on the Company's business, financial condition and results of
operations.

  Although the Company is not currently aware of any potential litigation
regarding its intellectual property rights, the medical device industry has
been characterized by extensive litigation regarding patents and other
intellectual property rights. Litigation, which would likely result in
substantial cost to Cambridge Heart, may be necessary to enforce any patents
issued or licensed to the Company and/or to determine the scope and validity
of others' proprietary rights. The Company also may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office, which could result in substantial cost, to determine the priority of
inventions. Furthermore, the Company may have to participate at substantial
cost in International Trade Commission proceedings to abate importation of
products which would compete unfairly with our products.

Competition

  The cardiac diagnostic medical device market is characterized by intensive
development efforts and rapidly advancing technology. The future success of
the Company will depend, in large part, upon its ability to anticipate and
keep pace with advancing technology and competitive innovations. However,
there can be no assurance that the Company will be successful in identifying,
developing and marketing new products or enhancing its existing products. In
addition, there can be no assurance that new products or alternative
diagnostic techniques will not be developed that will render the Company's
current or planned products obsolete or inferior. Rapid technological
development by competitors may result in the Company's products becoming
obsolete before the Company recovers a significant portion of the research,
development and commercialization expenses incurred with respect to such
products. Alternative technologies exist today in each of the areas being
addressed by the Company, including electrocardiograms, Holter monitors,
ultrasound tests and systems for measuring cardiac late potentials. However,
the Company's CH 2000 Alternans System and Hi-Resolution sensors is currently
the only FDA cleared system for the non-invasive measurement of T-wave
alternans.

  Competition from medical devices which help to diagnose cardiac disease is
intense and likely to increase. The Company's competitors include
manufacturers of ECG stress test equipment, including major multinational
companies. Many of the Company's competitors and potential competitors have
substantially greater capital resources, name recognition, research and
development experience and regulatory, manufacturing and marketing
capabilities. Many of these competitors offer well established, broad product
lines and ancillary services not offered by the Company. Some of the Company's
competitors have long-term or preferential supply arrangements with hospitals
that may act as a barrier to market entry. Other large health care companies
may enter the non-invasive cardiac diagnostic product market in the future.
Competing companies may succeed in developing products that are more
efficacious or less costly than any that may be developed by the Company, and
such companies also may be more successful than the Company in producing and
marketing such products. There can be no assurance that the Company will be
able to compete successfully with existing or new competitors.

                                       7
<PAGE>

Government Regulation

  The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation in the United
States. Medical devices are regulated in the United States by the FDA and
generally require pre-market clearance or pre-market approval prior to
commercial distribution. In addition, certain material changes or
modifications to medical devices also are subject to FDA review and clearance
or approval. The FDA regulates the research, testing, manufacture, safety,
labeling, storage, record keeping, advertising and distribution of medical
devices in the United States. Noncompliance with applicable requirements can
result in failure of the government to grant pre-market clearance or approval
for devices, withdrawal of approval, total or partial suspension of
production, fines, injunctions, civil penalties, recall or seizure of
products, and criminal prosecution.

  Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject
to general controls (e.g., labeling, pre-market notification and adherence to
GMP standards). Class II devices are subject to general controls and special
controls (e.g., performance standards, post-market surveillance, patient
registries and FDA guidelines). Generally, Class III devices are those that
must receive pre-market approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable or new
devices which have not been found to be substantially equivalent to legally
marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA
also has the authority to require clinical testing of Class I and Class II
devices. A Pre Market Approval ("PMA") application must be filed if a proposed
device is not substantially equivalent to a legally marketed predicate device
or if it is a Class III device for which the FDA has called for such
application.

  Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
510(k) notification submission or approval of a PMA application. If a medical
device manufacturer or distributor can establish that a device is
"substantially equivalent" to a legally marketed Class I or Class II device,
or to a Class III device for which the FDA has not called for PMAs, the
manufacturer or distributor may seek clearance from the FDA to market the
device by filing a 510(k) notification. The 510(k) notification may need to be
supported by appropriate data establishing the claim of substantial
equivalence to the FDA. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence.

  Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an
order clearing the 510(k) is issued by the FDA. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA order may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or requires further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information generally delays market
introduction of the product that is the subject of the 510(k) notification.

  Any products manufactured or distributed by the Company are subject to
pervasive and continuing regulation by the FDA including record keeping
requirements, reporting of adverse experience with the use of the device,
post-market surveillance, post-market registry and other actions deemed
necessary by the FDA. A 510(k) submission is also required when a medical
device manufacturer makes a change or modification to a legally marketed
device that could significantly affect the safety or effectiveness of the
device, or where there is a major change or modification in the intended use
of the device. When any change or modification is made to a device or its
intended use, the manufacturer is expected to make the initial determination
as to whether the change or modification is of a kind that would necessitate
the filing of a new 510(k) application. The FDA's regulations provide only
limited guidance for making this determination. The FDA's regulations also
require agency approval of a 510(k) supplement for certain changes to a device
if they affect the safety and effectiveness of the device, including, but not
limited to, new indications for use, labeling changes, the use of a different
facility to manufacture, process or package the device, changes in
manufacturing methods or quality control

                                       8
<PAGE>

systems and changes in performance or design specifications. Failure by the
Company to receive approval of a supplement regarding the use of a different
manufacturing facility or any other change affecting the safety or
effectiveness of an approved or cleared device on a timely basis, or at all,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

  Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing
may differ from FDA requirements. Failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. The current regulatory
environment in Europe for medical devices differs significantly from that in
the United States. There is currently no universally accepted definition of a
medical device in Europe and there is no common approach to medical device
regulation among the various countries. There are several different regulatory
regimes operating within the different European countries. Regulatory
requirements for medical devices range from no regulations in some countries
to rigorous regulations approaching the requirements of the FDA's regulations
for Class III medical devices. Several countries require that device safety be
demonstrated prior to approval for commercialization. The regulatory
environment in certain European countries is expected to undergo major changes
as a result of the creation of medical directives by the European Union.

  The CH 2000 Alternans System and the Hi-Resolution sensors have received
510(k) clearance from the FDA for sale in the United States. The 510(k)
clearance for the CH 2000 System includes the claim that the CH 2000 System
can measure T-wave alternans, and the presence of T-wave alternans in patients
with known, suspected or at risk of ventricular tachyarrhythmia predicts
increased risk of ventricular tachyarrhythmmia or sudden death.

  Internationally, the CH 2000 Alternans System has received the CE mark for
sale in Europe and is approved for sale by the Ministry of Health in Japan.

Employees

  As of December 31, 1999, the Company had 34 full-time employees, of whom one
holds a Ph.D. degree and six others hold other advanced degrees. None of the
Company's employees are represented by a collective bargaining agreement, nor
has the Company experienced work stoppages. The Company believes that its
relations with its employees are good.

Reimbursement

  The Company believes that the availability and level of third party
reimbursement will influence the decision of physicians, clinics, and
hospitals to purchase and use the Company's products and thereby affect
pricing of the Company's products. The Company has initiated efforts to
address the issue of reimbursement from third party payers for the performance
of an alternans test by healthcare providers. Obtaining reimbursement for a
new medical procedure is a multi-year process that will be pursued at both the
local and national levels. The Company will pursue both fronts:

  .  Seek coverage and reimbursement from individual public and private third
     party payers for the alternans test through provider advocacy and top-
     down payer lobbying, and

  .  Obtain a unique national procedure code and payment amount from the
     American Medical Association for the alternans test and a national
     coverage policy from the Health Care Financing Administration.

  At the local level, the Company has developed a strategy for seeking third-
party payer coverage and reimbursement for alternans testing. The Company will
target regional Medicare policymakers where concentrations of alternans users
exist and seek coverage through the development of local advocates. Private

                                       9
<PAGE>

payers also will be approached both at national and local levels with requests
for review of the alternans technology for coverage. As of December, the
company already has seen evidence of paid claims for alternans testing at
multiple insurers.

  At the national level, the Company is pursuing a unique national procedure
code and payment level with the American Medical Association with a submission
of a coding application in October 2000. The Company will seek support from
the American College of Cardiology and North American Society of Pacing and
Electrophysiology's Coding and Nomenclature Committees this fall. The earliest
possible date that the Company could receive a unique national code for the
alternans test is January 2002. There can be no assurance that these efforts
will be successful.

  The Company continues to support providers with claims submissions and
appeals through the development of billing guidelines and a reimbursement
guarantee program that provides for the possible payment of $90.00 for each
alternans test performed, up to a maximum of 50 per calendar quarter, in which
a claim for reimbursement is submitted to a third party payer within
prescribed guidelines and is ultimately denied coverage after appeal.
Providers who accept the $90.00 payment from the Company may not accept
duplicate payment from the third party payer under any circumstances. Once the
third party payer has initiated coverage for the alternans test, the $90.00
reimbursement assistance is no longer available. This program is effective
through June 30, 2001 or until a national code has been established for the
alternans test, whichever comes first. There can be no assurance that any of
these efforts will gain reimbursement for the alternans test or increase the
number of alternans test performed.

Item 2. Properties

  The Company's facilities consist of approximately 11,000 square feet of
office, research and manufacturing space located at 1 Oak Park Drive, Bedford,
Massachusetts. The Company has a lease for a total of 22,000 square feet which
expires in November 2000. The Company believes that suitable additional space
will be available to it, when needed, on commercially reasonable terms.

Item 3. Legal Proceedings

  The Company is not party to any material legal proceedings.

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

  The Company held a special meeting of stockholders on December 21, 1999. At
that meeting, the Company's stockholders approved (i) an amendment to the
Company's 1996 Equity Incentive Plan increasing the number of shares of the
Company's common stock reserved for issuance from 1,000,000 to 1,300,000, and
(ii) the continuation of the Company's 1996 Equity Incentive Plan. Holders of
9,463,223 shares of the Company's common stock voted in favor of the proposal,
holders of 584,740 shares voted against the proposal and holders of 51,767
shares abstained.

Executive Officers of the Registrant

  The following table sets forth (i) the names and ages of the current
executive officers of the Company; (ii) the position(s) presently held by each
person named; and (iii) the principal occupations held by each person named
for at least the past five years.

<TABLE>
<CAPTION>
              Name                Age                  Position
              ----                ---                  --------
<S>                               <C> <C>
Jeffrey M. Arnold................  50 President, Chief Executive Officer and
                                       Director
Robert B. Palardy................  51 Vice President, Finance and Administration
                                       and Chief Financial Officer
Eric Dufford.....................  41 Vice President, Sales and Marketing and
                                       Secretary
James Sheppard...................  40 Vice President, Operations
</TABLE>

                                      10
<PAGE>

  Jeffrey M. Arnold. Mr. Arnold has served as President and Chief Executive
Officer of the Company since September 1993. Mr. Arnold was appointed Chairman
of the Board of Directors in August 1997. Mr. Arnold was formerly the
President and Chief Executive Officer and a director of Molecular Simulations
Inc., a supplier of software for rational drug design. Mr. Arnold has also
served as a Vice President of Operations for Datascope Corporation and has
held senior marketing and research and development positions for Becton
Dickinson and Co. Mr. Arnold holds a B.S. in Electrical Engineering from MIT.

  Robert B. Palardy. Mr. Palardy became Vice President, Finance and
Administration and Chief Financial Officer of the Company in November 1997.
From 1990 to February 1997, Mr. Palardy was Vice President, Finance and
Information Services of Smith & Nephew Endoscopy, a company involved in the
development, manufacture and sale of medical devices for arthroscopy. From
February 1997 through October 1997, Mr. Palardy was an independent financial
consultant. Mr. Palardy is a Certified Public Accountant and holds a B.S.
degree in Accounting from LaSalle University.

  Eric Dufford. Mr. Dufford became Vice President, Sales and Marketing and
Secretary of the Company in August 1997. From January 1990 to May 1994, Mr.
Dufford was Director of International Sales for St. Jude Medical, Inc. From
May 1994 to August 1997, Mr. Dufford was Division President of Quest Medical
Inc.'s Cardiovascular Systems Division. Mr. Dufford earned a B.A. in
International Business/Marketing from the University of Colorado and an MBA
from Emory University.

  James Sheppard. Mr. Sheppard became Vice President, Operations of the
Company in August 1999. From 1996 to 1998, Mr. Sheppard was Vice President,
Operations for Nitinol Medical Technology, Inc. From 1995 to 1996, Mr.
Sheppard served as Director of Manufacturing for Summit Technology and from
1982 to 1994 he served in several senior management positions at C.R. Bard,
Inc. Mr. Sheppard holds a BS in Industrial Engineering from Virginia Tech.

  Executive officers of the Company are elected by and serve at the discretion
of the Board of Directors. There are no family relationships among any
executive officers or directors of the Company.

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters

Market Information and Holders

  Shares of the Company's Common Stock have been traded on the Nasdaq National
Market under the symbol "CAMH" since August 2, 1996. Prior to August 2, 1996,
the Shares were not publicly traded. The Common Stock is not traded on any
market, foreign or domestic, other than the Nasdaq National Market. The
following table sets forth, for the periods indicated, the high and low sales
prices of the Common Stock as reported on the Nasdaq National Market during
the two most recent fiscal years.

<TABLE>
<CAPTION>
                                                        Fiscal 1998  Fiscal 1999
                                                        ------------ -----------
                          Period                         High   Low  High   Low
                          ------                        ------ ----- ----- -----
   <S>                                                  <C>    <C>   <C>   <C>
   First Quarter ...................................... $ 9.25 $6.38 $9.06 $7.75
   Second Quarter...................................... $11.88 $7.50 $8.50 $5.88
   Third Quarter....................................... $ 9.63 $5.00 $6.81 $3.44
   Fourth Quarter...................................... $ 8.38 $3.50 $3.69 $2.44
</TABLE>

  The depositary for the Common Stock is American Stock Transfer and Trust
Company, 40 Wall Street, New York, New York 10005. On March 15, 2000, the
closing price of the Company's Common Stock on the Nasdaq National Market was
$5.00. On March 15, 2000, the Company had approximately 100 holders of Common
Stock of record. This number does not include shareholders for whom shares are
held in a "nominee" or "street" name.

                                      11
<PAGE>

Dividends

  The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, restrictions
imposed by financing arrangements, if any, legal and regulatory restrictions
on the payment of dividends, current and anticipated cash needs and other
factors the Board of Directors deem relevant.

Item 6. Selected Financial Data

  The following data, insofar as it relates to the years 1995, 1996, 1997,
1998 and 1999, have been derived from the Company's audited financial
statements, including the balance sheet as of December 31, 1998 and 1999 and
the related statements of operations and of cash flows for the three years
ended December 31, 1999 and notes thereto appearing elsewhere in this Annual
Report on Form 10-K. This data should be read in conjunction with the
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Annual Report on Form 10-K. The historical results are not necessarily
indicative of the results of operations to be expected in the future. This
data is in thousands, except per share data.

<TABLE>
<CAPTION>
                                       Year Ended December 31,
                         --------------------------------------------------------
                           1995       1996        1997        1998        1999
                         ---------  ---------  ----------  ----------  ----------
                                (in thousands, except per share data)
<S>                      <C>        <C>        <C>         <C>         <C>
Statement of Operations
 Data:
Revenue................. $      68  $     867  $    1,448  $    2,097  $    2,136
Cost of goods sold......       141        884       1,386       1,848       2,007
                         ---------  ---------  ----------  ----------  ----------
Gross profit (loss).....       (73)       (17)         62         249         129
                         ---------  ---------  ----------  ----------  ----------
Costs and expenses:
  Research and
   development..........     1,709      2,433       3,587       3,595       2,850
  Selling, general and
   administrative.......       961      2,092       3,392       3,753       4,945
                         ---------  ---------  ----------  ----------  ----------
    Total costs and
     expenses...........     2,670      4,525       6,979       7,348       7,795
                         ---------  ---------  ----------  ----------  ----------
Loss from operations....    (2,743)    (4,542)     (6,917)     (7,099)     (7,666)
Interest income, net....       246        507         869         562         331
                         ---------  ---------  ----------  ----------  ----------
    Net loss............ $  (2,497) $  (4,035) $   (6,048) $   (6,537) $   (7,335)
                         =========  =========  ==========  ==========  ==========
Net loss per share--
 basic and diluted...... $   (0.80) $   (0.66) $    (0.58) $    (0.61) $    (0.61)
                         =========  =========  ==========  ==========  ==========
Weighted average shares
 outstanding--basic and
 diluted(1)............. 3,126,569  6,073,865  10,451,560  10,746,844  11,933,261
                         =========  =========  ==========  ==========  ==========
<CAPTION>
                                             December 31,
                         --------------------------------------------------------
                           1995       1996        1997        1998        1999
                         ---------  ---------  ----------  ----------  ----------
<S>                      <C>        <C>        <C>         <C>         <C>
Balance Sheet Data:
Cash, cash equivalents
 and marketable
 securities............. $   3,948  $  18,589  $   12,756  $    6,490  $    9,176
Working capital.........     3,849     19,146      13,456       6,761       8,950
Total assets............     4,277     20,229      14,748       8,715      11,454
Total liabilities.......       266        500         527         902       1,404
Accumulated deficit.....    (5,081)    (9,116)    (15,163)    (21,700)    (29,036)
Stockholders' equity....     4,011     19,730      14,221       7,813      10,049
</TABLE>
--------
(1)  All potential Common Stock (including options, warrants and convertible
     preferred stock) has been excluded from the calculation of diluted
     earnings per share as it is anti-dilutive for all periods presented.


                                      12
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

  The Company is engaged in the research, development and commercialization of
products for the non-invasive diagnosis of cardiac disease. Using innovative
technologies, the Company is addressing such key problems in cardiac diagnosis
as the identification of those at risk of sudden cardiac arrest, the early
detection of coronary artery disease, and the prompt and accurate diagnosis of
heart attack. Clinical research conducted to date has demonstrated that the
presence of T-wave alternans in patients with known, suspected or at risk of
ventricular tachyarrhythmia predicts increased risk of a cardiac event
(ventricular tachyarrhythmia or sudden death). Sudden cardiac death accounts
for approximately one-half of all cardiac related deaths, or about 300,000, in
the United States each year.

Results of Operations

  The Company's principal products are the CH 2000 Alternans System and Hi-
Resolution sensors. Both products have received 510(k) clearance from the Food
and Drug Administration ("FDA") for sale in the United States.
Internationally, the CH 2000 System has received the CE mark for sale in
Europe and has been approved for sale by the Ministry of Health in Japan.

  In April 1999, the Company was successful in obtaining clearance from the
FDA of its 510(k) submission for expansion of its labeling allowing for claims
stating that "The presence of T-wave alternans in patients with known,
suspected or at risk of ventricular tachyarrhythmia predicts increased risk of
a cardiac event (ventricular tachyarrhythmia or sudden death)".

  During September 1999 the Company was able to address a major impediment to
the widespread clinical use of its Alternans test, when it introduced a new
version of its Alternans technology allowing the physician to use a treadmill
to exercise patients during an Alternans test. Prior to this innovation,
exercise with a bicycle was the recommended method for testing patients for
Alternans. Most physicians in the U.S. utilize a treadmill to exercise
patients during a standard stress test.

  In December 1999, the first clinical T-wave alternans test was reimbursed by
a third party payor, Blue Shield of California and Delta Health Systems. The
total test reimbursement was $453.30. Earlier in the year, the Company had
engaged Peer Review Network, a provider of services to insurers to assist in
the adjudication of claims for new technologies, to perform an independent
review of the Company's Alternans technology and report its findings to its
insurance company clients as well as a list of national subscribers. The
report, published in the October 1999 edition of "PRN Newsletter," recommended
reimbursement of the Company's T-wave Alternans Test by third party payors.
The availability of adequate reimbursement by insurers to physicians is
critical to broad acceptance of the Alternans Test as a standard of care.

  During the second quarter of 1999, the Company initiated a planned strategic
transition away from its previous sales focus on standard stress systems to
one primarily focused on potential customers interested in the clinical use of
its Alternans test and proprietary disposable sensors. The result of this
change in focus was a 71% reduction in sales of standard stress systems in the
U.S. during the second half of Fiscal 1999 when compared to the same period of
Fiscal 1998. During the same period, sales of Alternans systems and disposable
sensors in the U.S. increased 31%.

  During Fiscal 1999 the Company raised gross proceeds totaling $10.4 million
($9.5 million net of issuance costs) from the sale of 2,998,576 shares of
Common Stock in two separate private placement transactions. In addition
warrants for the purchase of 504,651 shares of Common Stock were issued. As a
result of this activity, the Company ended Fiscal 1999 with $9.2 million of
cash, equivalents and marketable securities on the balance sheet. A third
closing on $2.1 million of Common Stock ($2.075 million net of issuance costs)
was completed in January 2000. A total of 600,000 shares of Common Stock and
warrants to purchase 120,000 shares of Common Stock were issued in this
transaction. All proceeds will be used to fund the Company's operating costs.

                                      13
<PAGE>

 Fiscal 1999 Compared to Fiscal 1998

  Revenues were $2,136,000 during the twelve month period ended December 31,
1999 ("Fiscal 1999") and $2,096,900 during the twelve month period ended
December 31, 1998 ("Fiscal 1998"), an increase of 2%. Revenue from the sale of
capital equipment and other miscellaneous products was $2,017,000 and
$2,032,100 for Fiscal 1999 and Fiscal 1998 respectively, a decline of 1%.
Revenue from the sale of disposable sensors was $119,400 and $64,600 for
Fiscal 1999 and Fiscal 1998 respectively, an increase of 85% due primarily to
increase in unit sales in the United States.

  Revenue from the sale of the CH 2000 Alternans System and the Company's
proprietary disposable sensors increased 12% during Fiscal 1999 while revenue
from the sale of standard stress systems declined 28% during the same period.
These results reflect the Company's planned transition away from its previous
sales focus on standard stress systems to one primarily focused on potential
customers interested in the clinical use of its Alternans test and proprietary
disposable sensors.

  U.S. revenue from the sale of the CH 2000 Alternans System and disposable
sensors increased 46% during Fiscal 1999 while revenue from the sale of
standard stress test systems declined 47%.

  International revenue from the sale of the CH 2000 Alternans System and
disposable sensors declined by 2% during Fiscal 1999. Sales of Alternans
product to Japan declined 13%. The Company's Japanese distributor Fukuda
Denshi, Ltd reduced their purchases during the year in an effort to reduce on
hand inventories. Sales to all other international customers increased 116%
during Fiscal 1999. Sales of standard stress test systems increased 211%,
while revenue from the sale of the CH 2000 System with the Alternans Option
and disposable sensors increased 109% during the same period. The Company
believes that its decision to change distribution partners in Europe during
Fiscal 1998 has resulted in an improved focus and commitment to sale of the
Company's standard stress test and T-wave alternans products.

  Gross profits declined to 6% of total revenue in Fiscal 1999 from 12% for
Fiscal 1998. The decrease is due to the effect of the strong increase in the
sale of product to the Company's European distributors at industry standard
distributor pricing, which is lower than commercial pricing, had a major
effect on the gross profit percentage.

  Research and development costs were $2,850,400 in Fiscal 1999 compared to
$3,594,900 in Fiscal 1998, a decrease of 21%. Fiscal 1998 included
approximately $900,000 of costs associated with the Company's 337 patient
multi center clinical study supporting the 510(k) filed with FDA in August
1998 and cleared in April 1999, for expansion of its labeling claims for T-
wave alternans. These costs are partially offset by an increase in development
costs associated with the Company's new add-on module scheduled for
introduction in 2000.

  Selling and marketing costs were $3,211,500 in Fiscal 1999 compared to
$2,178,100 in Fiscal 1998, an increase of 47%. The growth in Fiscal 1999
expenditures reflects spending on initiatives targeted at increased awareness
of the Company's proprietary T-wave alternans technology and the clinical use
of its Alternans test, as well as, programs supporting obtaining reimbursement
from third-party payors for clinicians performing Alternans tests

  Administrative costs were $1,734,000 in Fiscal 1999 compared to $1,575,200
in Fiscal 1998, an increase of 10% reflecting increased cost in support of the
Company's expanded information systems infrastructure and employee education
and training programs.

  Interest income was $331,100 in Fiscal 1999 compared to $562,500 in Fiscal
1998, a decrease of 59%. The reduction primarily reflects the impact of lower
interest rates during Fiscal 1999 on the Company's short-term cash investments
partially offset by increased cash and marketable securities balances from the
private placement of Common stock in June 1999 and October 1999.


                                      14
<PAGE>

 Fiscal 1998 Compared to Fiscal 1997

  Revenues were $2,096,900 in Fiscal 1998 and $1,448,300 for the fiscal year
ended December 31, 1997 ("Fiscal 1997"), an increase of 45%. Sales of the
Company's CH 2000 System and accessories accounted for 97% of total revenues
in Fiscal 1998 compared to 94% in Fiscal 1997. The remainder of the revenues
were from the sale of the Company's proprietary, disposable sensors.

  Revenues from products sold outside the United States were $967,600 in
Fiscal 1998, an increase of $66,700 or 7% over the previous fiscal year.
Revenues from products sold to Japan were $744,100 in Fiscal 1998 compared to
$674,600 in Fiscal 1997, an increase of 10%. Revenues from products sold to
the remaining international customers were $223,500 in Fiscal 1998 compared to
$242,600 in Fiscal 1997, a decrease of 8%. At the end of Fiscal 1997, the
Company changed distribution partners in Europe due to the former distribution
partners' failure to meet contract terms. A new distributor was appointed,
effective April 1, 1998. The Company believes this transition accounted for
the decline in revenues during Fiscal 1998. Sales to all international
customers accounted for 46% of the Company's total revenues in Fiscal 1998
compared to 67% in Fiscal 1997. Sales to U.S. customers were $1,129,200 in
Fiscal 1998 compared to $547,400 in Fiscal 1997, an increase of 106%. The
increase in U.S. revenues results from improvement in the efficiency and
effectiveness of the Company's sales organization, which was expanded during
1997. The Company employs 5 direct sales managers in the U.S. and had 35
independent manufacturers' sales representatives under contract at the end of
Fiscal 1998.

  Cost of goods sold was $1,848,200, or 88% of total revenues, in Fiscal 1998
and $1,386,600, or 96% of total revenues, in Fiscal 1997. The improved ratio
of costs to product sales during Fiscal 1998 is the result of the Company's
product cost reduction programs targeted at reducing the cost of direct
materials and the impact of increases in production volumes on the allocation
of fixed overhead costs. The continued increase in percentage of revenues from
U.S. customers, which have a higher margin, has favorably affected the overall
cost of sales ratio. The Company anticipates that these factors together with
increases in revenues of its Hi-Resolution disposable sensors will continue to
favorably effect the overall gross margin.

  Research and development costs were $3,594,900 in Fiscal 1998 compared to
$3,587,000 in Fiscal 1997. The Company incurred incremental costs totaling
$266,700 during Fiscal 1998 to complete its clinical studies supporting the
510(k) filed with FDA for expansion of its labeling claims for its T-wave
alternans technology. These costs were partially offset by a reduction in 1998
of $84,700 in the amount of compensation expense recorded relating to stock
options granted to non-employees for services rendered and an increase during
Fiscal 1998 over Fiscal 1997 of $200,100 in the amount of software development
costs capitalized under Statement of Financial Accounting Standards No. 86
"Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed."

  Selling, general and administrative expenses were $3,753,300 in Fiscal 1998
compared to $3,391,700 in Fiscal 1997, an increase of 11%. The increase is
primarily the result of the costs associated with compensation paid to U.S.
sales representatives' associated with the increase in revenues during Fiscal
1998.The Company continues to increase its marketing efforts targeted at the
rapid adoption of T-wave alternans testing by clinical cardiologists and other
medical professionals. Additionally, during Fiscal 1997, the Company
experienced several changes in management personnel. As a result, the Company
recorded $230,500 of termination costs associated with these changes.

  Interest income for Fiscal 1998 was $562,500 compared to $869,300 for Fiscal
1997. The decrease is primarily the result of the net reduction in the
Company's cash and marketable securities balances by $6,265,900 during Fiscal
1998.

 Inflation and Income Taxes

  Inflation did not have a significant effect on the Company's results of
operations for any of the years in the period ended December 31, 1999.


                                      15
<PAGE>

  The Company has not recorded a provision for income taxes for the years
1995, 1996, 1997, 1998 and 1999 because it incurred net losses in each of such
years. At December 31, 1999, the Company had net operating loss carryforwards
of $30,500,000 as well as $910,000 and $540,000 of federal and state tax
credit carryforwards, respectively, available to offset future taxable income
and income tax liabilities, respectively. These carryforwards generally expire
in the years 2007 through 2019 and may be subject to annual limitations as a
result of changes in the Company's ownership. There can be no assurance that
changes in ownership in future periods or continuing losses will not
significantly limit the Company's use of net operating loss and tax credit
carryforwards.

  The Company has generated taxable losses from operations since inception
and, accordingly, has no taxable income available to offset the carryback of
net operating losses. In addition, although management's operating plans
anticipate taxable income in future periods, such plans provide for taxable
losses over the near term and make significant assumptions which cannot be
reasonably assured including approval of the Company's products by the FDA and
market acceptance of these products by customers. The Company has provided a
full valuation allowance ($30,500,000 at December 31, 1999) for its deferred
tax assets since, in the opinion of management, realization of these future
benefits is not sufficiently assured (defined as a likelihood of slightly more
than 50 percent).

Liquidity and Capital Resources

  During Fiscal 1999, the Company raised gross proceeds of $10,333,000
($9,472,800 net of issuance costs) from the sale of common stock. In addition,
the Company utilized $206,700 of a $500,000 line of credit secured by selected
customer accounts receivable at the end of Fiscal 1999. These financing
activities offset cash used to fund the increased level of operations, with
corresponding increases in most balance sheet accounts. Cash, cash equivalents
and marketable securities increased by $2,686,000 from December 31, 1998 to
December 31, 1999, consistent with the Company's net loss for Fiscal 1999 net
of total financing activities. Accounts receivable, net, increased slightly by
$21,165 during the year, reflecting increased sales activity and the
broadening of the Company's customer base. Inventory levels have increased
slightly from $426,500 to $460,900 during the year. Fixed asset additions
during the year primarily represent increased sales demonstration, clinical
research units and additional information systems infrastructure.

  The proceeds of the equity offerings have been used primarily to fund
operating losses of $29,035,800 reflecting expenditures to support research,
new product development and clinical trials activities, to support a marketing
and sales organization, and to support an administrative infrastructure and
the investment of approximately $1,332,400 in property and equipment through
December 31, 1999. As of December 31, 1999, the Company had cash, cash
equivalents and marketable securities of $9,176,300.

  In January 2000, the Company raised and additional $2.075 million (net of
issuance costs) from the sale of 600,000 shares of common stock. This amount
is not included in the above amounts.

  The Company expects its capital expenditures to increase as it continues to
commercialize its products, particularly in connection with the introduction
of its "add-on" module during Fiscal 2000. The Company does not expect capital
expenditures to exceed an aggregate of $2,000,000 over the next two years.

  Under the terms of various license, consulting and technology agreements,
the Company is required to pay royalties on sales of its products. Minimum
license maintenance fees under these license agreements, which are creditable
against royalties otherwise payable for each year, range from $20,000 to
$40,000 per year in total through 2008. The Company is committed to pay an
aggregate of $360,000 of such minimum license maintenance fees subsequent to
December 31, 1999. As part of these agreements, the Company is also committed
to meet certain development and sales milestones, including a requirement to
spend a minimum of $200,000 in any two-year period for research and
development, clinical trials, marketing, sales and/or manufacturing of
products related to certain technology covered by the consulting and
technology agreements.

  The Company anticipates that its existing capital resources will be adequate
to satisfy its capital requirements through 2000.

                                      16
<PAGE>

Factors Which May Affect Future Results

  This Annual Report on Form 10-K (the "Annual Report") contains forward-
looking statements. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," "intends" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below and elsewhere in
this Annual Report. In this section, "we", "us" and "our" refer to Cambridge
Heart, Inc. (unless the context otherwise requires).

                        Risks Related to Our Operations

 We may never generate substantial revenues

  We are engaged primarily in the commercialization, manufacture, research and
development of products for the non-invasive diagnosis of heart disease. We
have incurred substantial and increasing net losses through December 31, 1999.
We may never generate substantial revenues or achieve profitability on a
quarterly or annual basis. We believe that our research and development
expenses will increase in the future as we develop additional products and
fund clinical trials of our product candidates. Our research and development
expenses may also increase in the future as we supplement our internal
research and development with additional third party technology licenses and
potential acquisition of complementary products and technologies. We also
expect that our selling, general and administrative expenses will increase
significantly in connection with the continued expansion of our sales and
marketing activities. Revenues generated from the sale of our products will
depend upon numerous factors, including:

 .  the timing of regulatory actions;

 .  progress of product development;

 .  the extent to which our products gain market acceptance;

 .  varying pricing promotions and volume discounts to customers;

 .  competition; and

 .  the availability of third-party reimbursement.

 Our technology may never achieve market acceptance

  We believe that our future success will depend, in large part, upon the
successful commercialization and market acceptance of our T-wave alternans
technology. Market acceptance will depend upon our ability to demonstrate the
diagnostic advantages and cost-effectiveness of this technology and upon our
ability to obtain third party reimbursement for users of our technology. We
can give no assurance that we will be able to successfully commercialize or
achieve market acceptance of our T-wave alternans technology or that our
competitors will not develop competing technologies that are superior to our
technology.

                                      17
<PAGE>

 The results of future clinical studies may not support the usefulness of our
technology

  We have sponsored and are continuing to sponsor clinical studies relating to
our T-wave alternans technology and Hi-Resolution sensors to establish the
predictive value of such technology. Although studies on high risk patients to
date have indicated that the measurement of T-wave alternans to predict the
vulnerability to ventricular arrhythmia is comparable to electrophysiology
testing, we do not know whether the results of such studies, particularly
studies involving patients who are not high risk, will continue to be
favorable. Any clinical studies or trials which fail to demonstrate that the
measurement of T-wave alternans is at least comparable in accuracy to
alternative diagnostic tests, or which otherwise call into question the cost-
effectiveness, efficacy or safety of our technology, would have a material
adverse effect on our business, financial condition and results of operations.

 We may have difficulty responding to changing technology

  The medical device market is characterized by rapidly advancing technology.
Our future success will depend, in large part, upon our ability to anticipate
and keep pace with advancing technology and competitive innovations. However,
we may not be successful in identifying, developing and marketing new products
or enhancing our existing products. In addition, there can be no assurance
that new products or alternative diagnostic techniques may be developed that
will render our current or planned products obsolete or inferior. Rapid
technological development by competitors may result in our products becoming
obsolete before we recover a significant portion of the research, development
and commercialization expenses incurred with respect to such products.

 We have significant competition from a variety of sources

  Competition from competitors' medical devices that diagnose cardiac disease
is intense and likely to increase. We compete with manufacturers of
electrocardiogram stress tests, the conventional method of diagnosing ischemic
heart disease, as well as with manufacturers of other invasive and non-
invasive tests, including EP testing, electrocardiograms, Holter monitors,
ultrasound tests and systems of measuring cardiac late potentials. Many of our
competitors and prospective competitors have substantially greater capital
resources, name recognition, research and development experience and
regulatory, manufacturing and marketing capabilities. Many of these
competitors offer broad, well-established product lines and ancillary services
not offered by Cambridge Heart. Some of our competitors have long-term or
preferential supply arrangements with physicians and hospitals which may act
as a barrier to market entry.

 We depend heavily on independent manufacturers' representatives and foreign
distributors

  We currently market our products in the United States through a small direct
sales force and independent manufacturers' representatives. We may not be able
to continue to recruit and retain skilled sales management, direct sales
persons or independent manufacturers' representatives. We market our products
internationally through independent distributors. These distributors also
distribute competing products under certain circumstances. The loss of a
significant international distributor could have a material adverse effect on
our business if a new distributor, sales representative or other suitable
sales organization could not be found on a timely basis in the relevant
geographic market. To the extent that we rely on sales in certain territories
through distributors, any revenues we receive in those territories will depend
upon the efforts of our distributors. Furthermore, there can be no assurance
that a distributor will market our products successfully or that the terms of
any future distribution arrangements will be acceptable to us.


                                      18
<PAGE>

         Risks Related to the Market for Cardiac Diagnostic Equipment

 Our business could be subject to product liability claims

  The testing, manufacture, marketing and sale of medical devices entails the
inherent risk of liability claims or product recalls. Although we maintain
product liability insurance in the United States and in other countries in
which we conduct business, including clinical trials and product marketing and
sales, such coverage may not be adequate. Product liability insurance is
expensive and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or product recall could inhibit or
prevent commercialization of the CH 2000 Alternans System or cause a
significant financial burden on Cambridge Heart, or both, and could have a
material adverse effect on our business, financial condition and ability to
market the CH 2000 Alternans System as currently contemplated.

 Our business could be adversely affected if we are unable to protect our
proprietary technology

  Our success will depend, in large part, on our ability to develop patentable
products, enforce our patents and obtain patent protection for our products
both in the United States and in other countries. However, the patent
positions of medical device companies, including Cambridge Heart, are
generally uncertain and involve complex legal and factual questions. We can
give no assurance that patents will issue from any patent applications we own
or license or that, if patents do issue, the claims allowed will be
sufficiently broad to protect our proprietary technology. In addition, any
issued patents we own or license may be challenged, invalidated or
circumvented, and the rights granted under issued patents may not provide us
with competitive advantages. We also rely on unpatented trade secrets to
protect our proprietary technology, and we can give no assurance that others
will not independently develop or otherwise acquire substantially equivalent
techniques, or otherwise gain access to our proprietary technology, or
disclose such technology or that we can ultimately protect meaningful rights
to such
unpatented proprietary technology.

 Others could claim that we infringe their intellectual property rights

  Our commercial success will depend in part on our neither infringing patents
issued to others nor breaching the licenses upon which our products might be
based. Our licenses of patents and patent applications impose various
commercialization, sublicensing, insurance, royalty and other obligations on
our part. If we fail to comply with these requirements, licenses could convert
from being exclusive to nonexclusive in nature or could terminate.

 We could become involved in litigation over intellectual property rights

  The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation, which
would likely result in substantial cost to us, may be necessary to enforce any
patents issued or licensed to us and/or to determine the scope and validity of
others' proprietary rights. In particular, our competitors and other third
parties hold issued patents and are assumed to hold pending patent
applications which may result in claims of infringement against us or other
patent litigation. We also may have to participate in interference proceedings
declared by the United States Patent and Trademark Office, which could result
in substantial cost, to determine the priority of inventions. Furthermore, we
may have to participate at substantial cost in International Trade Commission
proceedings to abate importation of products which would compete unfairly with
our products.

 We may not be able to protect our trade secrets

  We rely on confidentiality agreements with our collaborators, employees,
advisors, vendors and consultants. We can give no assurance that these
agreements will not be breached, that we would have adequate remedies for any,
breach or that our trade secrets will not otherwise become known or be
independently developed by competitors. Failure to obtain or maintain patent
and trade secret protection, for any reason, could have a material adverse
effect on Cambridge Heart.

                                      19
<PAGE>

 We may not be able to obtain third-party reimbursement

  Our revenues currently depend and will continue to depend, to a significant
extent, on sales of the CH 2000 Alternans System. Our ability to successfully
commercialize the CH 2000 Alternans System depends in part on the availability
of, and our ability to obtain, adequate levels of third-party reimbursement
for use of the CH 2000 Alternans System. Reimbursement is not currently
available for the use of the CH 2000 Alternans System for measuring T-wave
alternans.

  The amount of reimbursement in the United States that will be available for
clinical use of the CH 2000 Alternans System, if any, is uncertain and may
vary. In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device has not received
appropriate FDA or other governmental regulatory clearances, is not used in
accordance with cost-effective treatment methods as determined by the payor,
or is experimental, unnecessary or inappropriate. Our ability to commercialize
the CH 2000 Alternans System successfully will depend, in large part, on the
extent to which appropriate reimbursement levels for the cost of the use of
the CH 2000 Alternans System and associated sensors are obtained from
government authorities, private health insurers and other organizations, such
as health maintenance organizations.

  We do not know whether reimbursement in the United States or foreign
countries will be available for the CH 2000 Alternans System, or if available,
will not be decreased in the future or that reimbursement amounts will not
reduce the demand for, or the price of, the CH 2000 Alternans System. The
unavailability of third-party reimbursement or the inadequacy of the
reimbursement for medical tests using the CH 2000 Alternans System would have
a material adverse effect on Cambridge Heart.

Item 7A. Qualitative and Quantitative Disclosures about Market Risk

  In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48, which expands the disclosure requirements for
certain derivatives and other financial instruments. The Company does not
utilize derivative financial instruments.

  See Notes 1 and 2 to the Financials Statements for a description of the
Company's use of other financial instruments. The carrying amounts reflected
in the balance sheet of cash and cash equivalents, trade receivables, and
trade payables approximates fair value at December 31, 1999 due to the short
maturities of these instruments.

Item 8. Financial Statements and Supplementary Data

                                      20
<PAGE>

                             CAMBRIDGE HEART, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................  22
Balance Sheet at December 31, 1998 and 1999..............................  23
Statement of Operations for the three years ended December 31, 1999......  24
Statement of Changes in Stockholders' Equity for the three years ended
 December 31, 1999.......................................................  25
Statement of Cash Flows for the three years ended December 31, 1999......  26
Notes to Financial Statements............................................  27
</TABLE>

                                       21
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Cambridge Heart, Inc.

  In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Cambridge Heart,
Inc. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Boston, Massachusetts
February 14, 2000

                                      22
<PAGE>

                             CAMBRIDGE HEART, INC.

                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                          December 31,
                                                    --------------------------
                                                        1998          1999
                                                    ------------  ------------
<S>                                                 <C>           <C>
                      Assets
Current assets:
Cash and cash equivalents.......................... $  2,426,032  $  2,657,392
  Marketable securities............................    4,064,321     6,518,924
  Accounts receivable, net of allowance for
   doubtful accounts of $32,000
   and $7,725 at December 31, 1998 and 1999
   respectively....................................      555,991       577,156
  Inventory........................................      426,489       460,913
  Prepaid expenses and other current assets........      190,667       140,197
                                                    ------------  ------------
    Total current assets...........................    7,663,500    10,354,582
Fixed assets, net..................................      647,629       645,931
Other assets.......................................      403,000       453,097
                                                    ------------  ------------
                                                    $  8,714,733  $ 11,453,610
                                                    ============  ============
       Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable................................. $    415,842  $    679,660
  Accrued expenses.................................      485,949       517,936
  Short term debt..................................                    206,727
                                                    ------------  ------------
    Total current liabilities......................      901,791     1,404,323
Commitments and contingencies (Note 11)
Stockholders' equity:
  Preferred Stock, $0.001 par value; 3,000,000
   shares authorized; 0 shares issued and
   outstanding at December 31, 1998 and 1999.......          --            --
  Common Stock, $0.001 par value; 25,000,000 shares
   authorized; 10,906,174 and 13,921,357 shares
   issued and outstanding at
   December 31, 1998 and 1999, respectively........       10,906        13,921
  Additional paid-in capital.......................   29,603,435    39,120,605
  Accumulated deficit..............................  (21,700,389)  (29,035,803)
                                                    ------------  ------------
                                                       7,913,952    10,098,723
Less: deferred compensation........................     (101,010)      (49,436)
                                                    ------------  ------------
                                                       7,812,942    10,049,287
                                                    ------------  ------------
                                                    $  8,714,733  $ 11,453,610
                                                    ============  ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       23
<PAGE>

                             CAMBRIDGE HEART, INC.

                            STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                         -------------------------------------
                                            1997         1998         1999
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Revenue................................  $ 1,448,319  $ 2,096,853  $ 2,135,981
Cost of goods sold.....................    1,386,627    1,848,155    2,006,567
                                         -----------  -----------  -----------
Gross Profit ..........................       61,692      248,698      129,424
Costs and expenses:
  Research and development.............    3,586,965    3,594,941    2,850,423
  Selling general and administrative...    3,391,664    3,753,296    4,945,499
                                         -----------  -----------  -----------
    Loss from operations...............   (6,916,937)  (7,099,539)  (7,666,498)
Interest income........................      869,318      562,454      331,084
                                         -----------  -----------  -----------
Net loss...............................  $(6,047,619) $(6,537,085) $(7,335,414)
                                         ===========  ===========  ===========
Net loss per share--basic and diluted..  $    (.0.58) $     (0.61) $     (0.61)
                                         ===========  ===========  ===========
Weighted average shares outstanding--
 basic and diluted.....................   10,451,560   10,746,844   11,933,261
                                         ===========  ===========  ===========
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       24
<PAGE>

                                CAMBRIDGE HEART

                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                             Common Stock
                          ------------------
                                             Additional                                  Total
                          Number of    Par     paid-in    Accumulated     Deferred   stockholders'
                            Shares    value    capital      deficit     compensation    equity
                          ---------- ------- -----------  ------------  ------------ -------------
<S>                       <C>        <C>     <C>          <C>           <C>          <C>
Balance at December 31,
 1996...................  10,214,783 $10,215 $29,216,646  $(9,115,685)   $(381,438)   $19,729,738
Issuance of common stock
 through exercise of
 stock options, warrants
 and employee stock
 purchase plan..........     391,258     391     280,914                                  281,305
Compensation related to
 cashless exercise of
 certain common stock
 options................                          91,875                                   91,875
Compensation related to
 non-employee stock
 options granted........                         100,000                                  100,000
Amortization of deferred
 compensation...........                                                     66,001        66,001
Reversal of deferred
 compensation related to
 common stock options
 forfeited..............                        (283,750)                   283,750           --
Net loss................                                    (6,047,619)                (6,047,619)
                          ---------- ------- -----------  ------------   ----------   -----------
Balance at December 31,
 1997...................  10,606,041  10,606  29,405,685   (15,163,304)     (31,687)   14,221,300
Issuance of common stock
 through exercise of
 stock options, warrants
 and employee stock
 purchase plan..........     300,133     300     101,479                                  101,779
Compensation related to
 non-employee stock
 options granted........                          15,719                                   15,719
Deferred compensation
 related to common stock
 options granted in
 connection with
 repricing of common
 stock options..........                         105,344                   (105,344)
Amortization of deferred
 compensation...........                         (24,792)                    36,021        11,229
Net loss................                                    (6,537,085)                (6,537,085)
                          ---------- ------- -----------  ------------   ----------   -----------
Balance at December 31,
 1998...................  10,906,174 $10,906 $29,603,435  $(21,700,389)   $(101,010)  $ 7,812,942
Issuance of common stock
 through exercise of
 stock options, and
 employee stock purchase
 plan...................      16,707      17      56,770                                   56,787
Compensation related to
 non-employee stock
 options granted........                          20,428                                   20,428
Amortization of deferred
 compensation...........                        (29,800)                     51,574        21,774
Sale of common stock
 through a private
 placement net of fees..   2,998,476   2,998   9,469,772                                9,472,770
Net loss................                                    (7,335,414)                (7,335,414)
                          ---------- ------- -----------  ------------   ----------   -----------
Balance at December 31,
 1999...................  13,921,357 $13,921 $39,120,605  $(29,035,803)   $ (49,436)  $10,049,287
                          ========== ======= ===========  ============   ==========   ===========
</TABLE>



   The accompanying notes are an integral part of these financial statements.

                                       25
<PAGE>

                             CAMBRIDGE HEART, INC.

                            STATEMENT OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                               Year ended December 31,
                                         --------------------------------------
                                             1997         1998         1999
                                         ------------  -----------  -----------
<S>                                      <C>           <C>          <C>
Cash flows from operating activities:
 Net loss..............................   $(6,047,619) $(6,537,085) $(7,335,414)
 Adjustments to reconcile net loss to
  net cash used for operating
  activities:..........................
  Depreciation and amortization........       226,074      297,575      573,518
  Loss on disposal of fixed assets.....        20,241          --         9,518
  Compensation expense on stock
   options.............................       257,876       26,220       51,574
  Changes in operating assets and
   liabilities:
   Accounts receivable.................       (88,934)     (46,073)     (21,165)
   Inventory...........................      (164,436)     (10,265)     (34,424)
   Prepaid expenses and other current
    assets.............................        83,296      110,460       50,470
   Other assets........................        40,964       97,360        2,037
   Accounts payable and accrued
    expenses...........................        27,416      374,654      295,804
                                         ------------  -----------  -----------
    Net cash used for operating
     activities........................    (5,645,122)  (5,687,154)  (6,408,082)
                                         ------------  -----------  -----------
Cash flows from investing activities:
 Purchases of fixed assets.............      (357,698)    (369,817)    (376,659)
 Capitalization of software development
  costs................................      (110,727)    (310,796)    (256,208)
 Purchases of marketable securities....    (7,090,605)         --    (2,454,603)
 Liquidation of marketable securities..           --     3,026,284          --
                                         ------------  -----------  -----------
    Net cash (used in)/provided by
     investing activities..............    (7,559,030)   2,345,671   (3,087,470)
                                         ------------  -----------  -----------
Cash flows from financing activities:
 Proceeds from issuance of common
  stock, net of issuance costs.........       281,305      101,779    9,520,185
 Proceeds from utilization of bank
  credit line                                     --           --       206,727
                                         ------------  -----------  -----------
    Net cash provided by financing
     activities........................       281,305      101,779    9,726,912
                                         ------------  -----------  -----------
Net increase (decrease) in cash and
 cash equivalents......................   (12,922,847)  (3,239,704)     231,360
Cash and cash equivalents, beginning of
 year..................................    18,588,583    5,665,736    2,426,032
                                         ------------  -----------  -----------
Cash and cash equivalents, end of
 year..................................  $  5,665,736  $ 2,426,032  $ 2,657,392
                                         ============  ===========  ===========
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       26
<PAGE>

                             CAMBRIDGE HEART, INC.

                         NOTES TO FINANCIAL STATEMENTS

1. The Company

  Cambridge Heart, Inc. (the "Company") was incorporated in Delaware on
January 16, 1990 and is engaged in the research, development and
commercialization of products for the non-invasive diagnosis of cardiac
disease. The Company sells its products primarily to hospitals, research
institutions and cardiovascular specialists.

  The Company anticipates that its existing capital resources, including the
amounts raised in the January financing offering, will be adequate to satisfy
its capital requirements through December 2000. Thereafter, the Company may
require additional funds to support its operating requirements or for other
purposes and may seek to raise such additional funds through public or private
equity financing or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing would be obtainable on acceptable terms to the Company.

2. Summary of Significant Accounting Policies

  Significant accounting policies followed by the Company are as follows:

 Cash Equivalents and Marketable Securities

  The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash primarily in money market accounts, securities of
state government agencies and short-term commercial paper of companies with
strong credit ratings and in diversified industries. The securities of state
government agencies are redeemable at their face value, and bear interest at
variable rates which are adjusted on a frequent basis. Accordingly, these
investments are subject to minimal credit and market risk. The money market
accounts and short-term commercial paper, totaling $4,064,300 and $6,518,924
at December 31, 1998 and 1999, respectively, are classified as held to
maturity, and mature within one year. The securities of state government
agencies, totaling $2,447,700 and $2,150,000 at December 31, 1998 and 1999,
respectively, are classified as available for sale. All of these investments
have been recorded at amortized cost, which approximates fair market value. No
realized or unrealized gains or losses have been recognized.

 Financial Instruments

  The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, marketable securities, accounts receivable,
accounts payable, and accrued expenses approximate their fair values at
December 31, 1998 and 1999.

 Inventories

  Inventories, consisting primarily of purchased components, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out
method.

 Fixed Assets

  Fixed assets are stated at cost, less accumulated depreciation. Depreciation
is provided using the straight-line method based on estimated useful lives.
Repair and maintenance costs are expensed as incurred.

 Segment

  The Company is engaged principally in one industry segment that represents
all of the revenues. See Note 11 with respect to significant customers and
with respect to sales in other geographic areas.

                                      27
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


 Revenue Recognition

  Revenue is recognized upon shipment of goods, provided that all obligations
of the Company have been fulfilled and collection of the related receivable is
probable.

 Research and Development and Capitalized Software Development Costs

  Research, engineering and product development costs, except for certain
software development costs, are expensed as incurred. Capitalization of
software development costs begins upon the establishment of technological
feasibility of both the software and related hardware as defined by Statement
of Financial Accounting Standards No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed," and ceases upon the
general release of the products to the public. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not
limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.

  The Company amortizes software development costs on a straight-line basis
over the estimated economic life of the product.

  Costs capitalized at December 31, 1999, which are included in other assets
in the accompanying balance sheet, totaled $395,000 ($343,000 at December 31,
1998), net of $283,000 of accumulated amortization ($78,500 at December 31,
1998).

 Licensing Fees and Patent Costs

  The Company has entered into licensing agreements which give the Company the
exclusive rights to certain patents and technologies and the right to market
and distribute any products developed, subject to certain covenants. Payments
made under these licensing agreements and costs associated with patent
applications have generally been expensed as incurred, because recovery of
these costs is uncertain. However, certain costs associated with patent
applications for products and processes which have received regulatory
approval and are available for commercial sale have been capitalized and are
being amortized over their estimated economic life of 5 years. Amounts
capitalized at December 31, 1999 totaled $110,000 ($100,000 at December 31,
1998), net of $58,000 of accumulated amortization ($39,000 at December 31,
1998), which are included in other assets in the accompanying balance sheet.

 Stock-Based Compensation

  The Company accounts for employee awards under its stock plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. The Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), for disclosure purposes only (Note 6).

 Use of Estimates

  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingencies at December 31, 1998 and 1999, and the reported
amounts of revenues and expenses during the three years in the period ended
December 31, 1999. Actual results could differ from these estimates.


                                      28
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

 Net Loss Per Share

  Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," requires dual presentation of basic and diluted earnings per share
on the face of the statement of operations for all entities with complex
capital structures. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
includes dilutive potential common stock (such as options, warrants and
convertible preferred stock).

  As a result of the Company's net loss both basic and diluted earnings per
share are computed by dividing the net loss available to common shareholders
by the weighted average number of shares of common stock outstanding.

 New Accounting Pronouncements

  In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. We are required to
adopt SFAS No.133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Dates of FASB
Statement 133," on a prospective basis for interim periods and fiscal years
beginning January 1, 2001. Had we implemented SFAS No. 133 in the current
period, financial position and results of operations would not have been
affected.

SEC Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges,"
issued in November 1999, expresses views of the Staff regarding the accounting
for and disclosure of certain expenses commonly reported in connection with
exit activities and business combinations. This includes accrual of exit and
employee termination costs pursuant to Emerging Issues Task Force (EITF)
Issues No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring), and No. 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination, and the recognition of impairment
charges pursuant to Accounting Principles Board (APB) Opinion No. 17,
Intangible Assets and Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.

  In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues.

3. Fixed Assets

  Fixed assets consist of the following:

<TABLE>
<CAPTION>
                                                              December 31,
                                                          ---------------------
                                                Estimated
                                                 useful
                                                  lives
                                                 (years)     1998       1999
                                                --------- ---------- ----------
   <S>                                          <C>       <C>        <C>
   Computer equipment..........................    3-5    $  333,177 $  549,731
   Manufacturing equipment.....................      5       158,544    157,888
   Office furniture............................      7        81,444     85,552
   Sales display and clinical equipment........      3       588,126    728,914
   Leasehold Improvements......................               17,275     17,275
                                                          ---------- ----------
                                                           1,178,566  1,539,360
   Less--accumulated depreciation..............              530,937    893,429
                                                          ---------- ----------
                                                          $  647,629 $  645,931
                                                          ========== ==========
</TABLE>

                                      29
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


4. Accrued Expenses

  Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                1998     1999
                                                              -------- --------
   <S>                                                        <C>      <C>
   Accrued bonus............................................. $149,900 $148,684
   Accrued clinical trial costs..............................    5,950   72,850
   Accrued employee severance................................      --    67,555
   Accrued professional fees.................................   99,425   64,000
   Accrued vacation..........................................   53,931   29,921
   Accrued other.............................................  176,743  134.924
                                                              -------- --------
                                                              $485,949 $517,934
                                                              ======== ========
</TABLE>

5. Line of Credit

  The Company has a line of credit facility in place which provides a
borrowing base of 80% of eligible accounts receivable as defined, up to a
maximum borrowing of $500,000, payable on demand. Interest is payable monthly
in arrears at the bank's prime rate plus .5% (9% at December 31, 1999). The
line of credit is collateralized by all of the eligible accounts receivable as
defined. This line of credit is scheduled to expire on March 31, 2000. The
Company is negotiating an extension.

6. Stockholders' Equity

 Preferred Stock

  The Company's Board of Directors has authorized 3,000,000 shares of the
Company's $0.001 par value preferred stock. The preferred stock may be issued
at the discretion of the Board of Directors of the Company (without
stockholder approval) with such designations, rights and preferences as the
Board of Directors may determine from time to time. This preferred stock may
have dividend, liquidation, redemption, conversion, voting or other rights
which may be more expansive than the rights of the holders of the common
stock.

 Common Stock

  In private placement transactions completed in June 1999 and October 1999,
the Company raised gross proceeds totaling $10.4 million ($9.5 million net of
issuance costs) from the sale of 2,468,759 shares of Common Stock. Both
transactions include provisions stipulating that if the Company sells Common
Stock in a capital raising transaction at a lower price per share over the
next 24 months and 12 months respectively, the investors have the right to
receive additional shares to adjust the price of their transaction. As a
result of the October 1999 transaction, the Company issued 529,817 of
additional shares of Common Stock to investors that participated in the June
1999 sale of Common Stock. These shares are in addition to the total number of
shares above. In January 2000, the Company completed an additional private
placement transaction in which it raised an additional $2.1 million from the
sale of 600,000 shares of Common Stock. This transaction contained all of the
same terms included in the October 1999 transaction.

 Warrants

  During 1999, warrants to purchase a total of 504,652 shares of common stock
were issued in connection with the sale of 2,998,576 of common stock.
Investors received warrants to purchase 95,238 shares of common stock at $3.71
per share, and warrants to purchase 303,269 shares of common stock at $3.50
per share. In addition, the Company's selling agent received warrants to
purchase 106,144 shares of common stock at $4.20 per share.

                                      30
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


  The value of the above warrants was estimated by management and determined
not to be material to the Company's results of operations and financial
position.

  Warrants outstanding at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                       Exercise
                                               Number   Price
                                                 of      Per
                                               Shares   Share   Expiration Date
                                               ------- -------- ----------------
   <S>                                         <C>     <C>      <C>
   Common stock...............................  95,238  $3.373  June 9, 2003
   Common stock............................... 290,412  $3.500  October 5, 2004
   Common stock...............................  12,857  $3.500  October 25, 2004
   Common stock............................... 101,644  $4.200  October 5, 2004
   Common stock...............................   4,500  $4.200  October 25, 2004
</TABLE>


7. Stock Plans

 1993 Incentive and Non-Qualified Stock Option Plan

  During 1993, the Company adopted the 1993 Incentive and Non-Qualified Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for the granting of
incentive and non-qualified stock options to management, other key employees,
consultants and directors of the Company. The total number of shares of common
stock that may be issued pursuant to the exercise of options granted under the
1993 Plan is 1,688,663. Incentive stock options may not be granted at less
than fair market value of the Company's common stock at the date of grant and
for a term not to exceed ten years. For holders of more than 10% of the
Company's total combined voting power of all classes of stock, incentive stock
options may not be granted at less than 110% of the fair market value of the
Company's common stock at the date of grant and for a term not to exceed five
years. The exercise price under each non-qualified stock option shall be
specified by the stock option committee, but shall in no case be less than the
par value of the common stock subject to the non-qualified stock option.

 1996 Equity Incentive Plan

  During 1996, the Board of Directors authorized the 1996 Equity Incentive
Plan (the "Incentive Plan"), providing for the issuance of up to 1,000,000
shares of the Company's common stock to eligible employees, officers,
directors, consultants and advisors of the Company. Under the Incentive Plan,
the Board of Directors may award incentive and non-qualified stock options,
stock appreciation rights, performance shares and restricted and unrestricted
stock with terms to be defined therein except that the exercise and transfer
of stock appreciation rights granted in tandem with stock options is limited
by the terms of the related options.

  In December 1999, at a Special Shareholders' Meeting, the Stockholders voted
to increase the number of shares authorized under the plan to 1,300,000
shares.

 1996 Director Option Plan

  During 1996, the Board of Directors authorized the issuance of up to 100,000
shares of the Company's common stock pursuant to its 1996 Director Option Plan
(the "Director Plan"). Under the Director Plan, outside directors of the
Company who are not otherwise affiliated with the Company are entitled to
receive options to purchase 10,000 shares of common stock upon their initial
election to the Board of Directors. All option grants made under the Director
Plan have exercise prices equal to the fair market value of the Company's
common stock on the date of grant, and will vest in three annual installments
on the anniversary date of the grant. Director options will become immediately
exercisable upon the occurrence of a change in control (as defined in the
Director Plan).

                                      31
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


  All options granted during 1997, 1998 and 1999 have exercise prices equal to
the fair market value of the common stock at the date of grant. Transactions
under the Company's stock option plans during the years ended December 31,
1997, 1998 and 1999 are summarized as follows:

<TABLE>
<CAPTION>
                          December 31, 1997   December 31, 1998   December 31, 1999
                          ------------------- ------------------- -------------------
                                     Weighted            Weighted            Weighted
                                     Average             Average             Average
                          Number of  Exercise Number of  Exercise Number of  Exercise
                           Options    Price    Options    Price    Options    Price
                          ---------  -------- ---------  -------- ---------  --------
<S>                       <C>        <C>      <C>        <C>      <C>        <C>
Outstanding at beginning
 of year................  1,354,249   $1.54   1,372,750   $3.57   1,341,500   $3.55
Granted.................    514,700    7.85     653,000    5.92     616,700    3.47
Exercised...............   (218,549)   0.42    (147,750)   0.23      (1,750)   1.20
Canceled................   (277,650)   3.83    (536,500)   7.80    (252,250)   6.22
                          ---------           ---------           ---------   -----
Outstanding at end of
 year...................  1,372,750   $3.57   1,341,500   $3.55   1,705,450   $3.53
                          =========   =====   =========   =====   =========   =====
Exercisable at end of
 year...................    539,034   $0.49     560,467   $0.74     785,128   $2.07
                          =========   =====   =========   =====   =========   =====
Weighted average fair
 value of options
 granted during the
 year...................              $5.29               $1.71               $0.96
                                      =====               =====               =====
</TABLE>

  In October 1998, the Company repriced unexercised options to purchase a
total of 396,250 shares of Common stock previously granted to employees and
options to purchase a total of 40,000 shares of Common stock previously
granted to members of the Company's Scientific Advisory Board ("SAB"). All
vesting in the surrendered options was forfeited. The new employee options
vest at a rate of 25% per year and the SAB options vest at a rate of 33% per
year. The Company recorded $6,584 and $21,775 of deferred compensation in 1998
and 1999 respectively relating to this repricing.

  During 1999, the Board of Directors granted non qualified options to
purchase a total of 85,000 shares of Common stock to advisors to the Company
not covered by an existing plan (50,000 shares and 35,000 shares). These
options have exercise prices equal to the fair market value of the common
stock at the date of grant. They are not included in the chart above.

  The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1999:

<TABLE>
<CAPTION>
                                      Weighted Average Weighted             Weighed Average
                                         Remaining     Average   Number of  Exercise Price
                            Number    Contractual Life Exercise   Options     of Options
Range of exercise prices  Outstanding     in Years      Price   Exercisable   Exercisable
------------------------  ----------- ---------------- -------- ----------- ---------------
<S>                       <C>         <C>              <C>      <C>         <C>
$.002-$.019.............      32,070        4.33        $0.02      32,070        $0.02
$.20-$.50...............     503,267        6.29         0.32     462,968         0.30
$1.00-$2.00.............      97,663        8.15         1.93      96,563         1.94
$2.56-$3.13.............     488,700        9.84         2.75         --           --
$4.00-$5.00.............     364,000        8.83         4.97      91,000         4.97
$7.00-$9.38.............     219,750        8.21         8.19     102,528         8.26
                           ---------                              -------
                           1,705,450        8.17        $3.11     785,128        $2.07
                           =========                              =======
</TABLE>

  At December 31, 1999, 1,705,450 shares of common stock are reserved for
issuance upon exercise of the options issued under the Company's stock option
plans and there are 327,550 options available for future grant. Outstanding
options generally vest on a pro rata basis over a period of two to five years.

                                      32
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


  The Company has recorded compensation expense related to options granted to
non-employee consultants for services rendered totalling $100,000 in 1997,
$6,584 in 1998 and $20,428 in 1999. In addition, the Company recorded
compensation expense of $91,875 related to the cashless exercise of 15,000
options by an employee in 1997.

 1996 Employee Stock Purchase Plan

  During 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan provides for the
issuance of up to 100,000 shares of the Company's common stock to eligible
employees. Under the Purchase Plan, the Company is authorized to make one or
more offerings during which employees may purchase shares of common stock
through payroll deductions made over the term of the offering. The term of
individual offerings, which are set by the Board of Directors, may be for
periods of twelve months or less and may be different for each offering. The
per-share purchase price at the end of each offering is equal to 85% of the
fair market value of the common stock at the beginning or end of the offering
period (as defined by the Purchase Plan), whichever is lower. The Company
issued 8,560, 11,929 and 14,857 shares of common stock at an average price of
$8.02, $5.72 and $3.68 during 1997, 1998 and 1999 respectively. At December
31, 1999, the Company had 64,654 shares of common stock reserved for issuance
under the Purchase Plan.

 Fair Value Disclosures

  As discussed in Note 2, the Company has elected to adopt SFAS 123 through
disclosure only. Had compensation cost for the Company's option plans and
employee stock purchase plan been determined based on the fair value of the
options at the grant dates, as prescribed in SFAS 123, for options granted in
1997, 1998 and 1999 the Company's net loss and net loss per share would have
been as follows:

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                               --------------------------------
                                                  1997       1998       1999
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Net loss:
     As reported.............................. $6,047,619 $6,537,085 $7,335,414
     Pro forma................................ $6,511,042 $6,900,661 $7,537,124
   Net loss per share:
     As reported--basic and diluted........... $     0.58 $     0.61 $     0.61
     Pro forma--basic and diluted............. $     0.62 $     0.65 $     0.63
</TABLE>

  The fair value of each option grant under SFAS 123 was estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1997, 1998 and 1999, respectively: (i) dividend
yield of 0% for all periods; (ii) expected volatility of 0%, 0%-50%; and 60%;
(iii) risk free interest rates of 5.8%-6.8%, 6.1%-6.9% and 4.58%; and (iv)
expected option terms of 4 to 7 years for 1997, 5 years for 1998 and xxxxxx
for 1999. SFAS 123 requires that volatility be considered in the calculation
of the fair value of an option grant only for grants made when an entity has
publicly traded securities or has filed a registration statement to do so.
Accordingly, a volatility of 0% was utilized for options granted by the
Company prior to the initial filing of its Registration Statement on Form S-1.

  The above pro forma disclosures reflect options granted during 1996, 1997
and 1998 only. Because additional option grants are expected to be made each
year and options vest over several years, the above pro forma disclosures are
not necessarily representative of the pro forma effects of reported net income
(loss) for future years.

                                      33
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


7. Income Taxes

  The income tax benefit consists of the following:

<TABLE>
<CAPTION>
                                              Year ended December 31,
                                        -------------------------------------
                                           1997         1998         1999
                                        -----------  -----------  -----------
   <S>                                  <C>          <C>          <C>
   Income tax benefit:
     Federal........................... $ 2,146,000  $ 2,344,000  $ 2,272,772
     State.............................     402,000      513,000      796,063
                                        -----------  -----------  -----------
                                          2,548,000    2,857,000    3,523,835
   Deferred tax asset valuation
    allowance..........................  (2,548,000)  (2,857,000)  (3,523,835)
                                        -----------  -----------  -----------
                                        $       --   $       --   $       --
                                        ===========  ===========  ===========
</TABLE>

  Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                    December 31,
                                        --------------------------------------
                                           1997         1998          1999
                                        -----------  -----------  ------------
   <S>                                  <C>          <C>          <C>
   Net operating loss carryforwards...  $ 6,435,000  $ 9,164,000  $ 12,307,604
   Research and development tax credit
    carryforwards.....................      598,000      856,000     1,451,927
   Deferred start up and organization
    expenses..........................        9,000          --            --
   Other..............................       11,000       43,000        58,292
                                        -----------  -----------  ------------
     Gross deferred tax assets........    7,053,000   10,063,000    13,817,823
   Capitalized software...............          --      (137,000)     (138,142)
   Fixed assets.......................      (29,000)     (48,000)      (46,261)
   Patent costs.......................      (23,000)     (16,000)      (24,453)
                                        -----------  -----------  ------------
     Net deferred tax assets..........    7,001,000    9,862,000    13,608,967
     Deferred tax asset valuation
      allowance.......................   (7,001,000)  (9,862,000)  (13,608,967)
                                        -----------  -----------  ------------
                                        $       --   $       --   $        --
                                        ===========  ===========  ============
</TABLE>

  The Company has generated taxable losses from operations since inception
and, accordingly, has no taxable income available to offset the carryback of
net operating losses. In addition, although management's operating plans
anticipate taxable income in future periods, such plans provide for taxable
losses over the near term and make significant assumptions which cannot be
reasonably assured including approval of the Company's products and labeling
claims by the U.S. Food and Drug Administration and market acceptance of the
Company's products by customers. Based upon the weight of all available
evidence, the Company has provided a full valuation allowance for its deferred
tax assets since, in the opinion of management, realization of these future
benefits is not sufficiently assured (defined as a likelihood of slightly more
than 50 percent).

  Approximately $1,080,000 of the deferred tax asset attributable to net
operating loss carryforwards was generated by the exercise of certain non-
qualified stock options. Any future utilization of this amount will be
credited directly to additional paid-in-capital, and not the income tax
provision.

                                      34
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


  Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax rate primarily due to the following:

<TABLE>
<CAPTION>
                            Year ended December 31,
                            ----------------------------
                             1997      1998       1999
                            -------   -------   --------
   <S>                      <C>       <C>       <C>
   Statutory U.S. federal
    tax rate...............   (35.0)%   (35.0)%    (35.0)%
   State taxes, net of
    federal tax benefit....    (6.7)     (6.4)    (10.85)
   Non-deductible
    expenses...............     1.6       0.2       0.24
   Federal research and
    development credits....    (2.6)     (2.7)     (3.37)
   Other...................     0.6       0.2      (0.94)
   Valuation allowance on
    deferred tax assets....    42.1      43.7      48.04
                            -------   -------   --------
                                 -- %      -- %       -- %
                            =======   =======   ========
</TABLE>

  As of December 31, 1999, the Company has approximately $30,500,000 of net
operating loss carryforwards and $910,000 and $540,000 of federal and state
research and development credits, respectively, which may be used to offset
future federal and state taxable income and tax liabilities, respectively. The
credits and carryforwards expire in various years ranging from 2007 to 2019.

  An ownership change, as defined in the Internal Revenue Code, resulting from
the Company's issuance of additional stock may limit the amount of net
operating loss and tax credit carryforwards that can be utilized annually to
offset future taxable income and tax liabilities. The amount of the annual
limitation is determined based upon the Company's value immediately prior to
the ownership change. The Company has determined that ownership changes have
occurred at the time of the Series A Preferred Stock issuance in 1993 and the
Series B Preferred Stock issuance in 1995, but has not yet determined the
amount of the annual limitations. However, management does not believe that
such limitations would materially impact the Company's ability to ultimately
utilize its carryforwards, provided sufficient taxable income is generated in
future years, although the limitations may impact the timing of such
utilization. Subsequent significant changes in ownership could further affect
the limitations in future years.

8. Savings Plan

  In January 1995, Cambridge Heart adopted a retirement savings plan for all
employees pursuant to Section 401(k) of the Internal Revenue Code. Employees
become eligible to participate on the first day of the calendar quarter
following their hire date. Employees may contribute any whole percentage of
their salary, up to a maximum annual statutory limit. The Company is not
required to contribute to this plan. The Company made no contributions to this
plan in 1997, 1998 or 1999.

9. Commitments

 Operating Leases

  The Company has various noncancelable operating leases for office space,
equipment and furniture which expire through 2001. Certain of these leases
provide the Company with various renewal options. Total rent expense under all
operating leases was approximately $159,700, $178,600 and $202,500 for the
years ended December 31, 1997, 1998 and 1999, respectively.

  At December 31, 1999, future minimum rental payments under the noncancelable
leases are as follows:

<TABLE>
   <S>                                                                  <C>
   2000................................................................ $263,230
   2001 ...............................................................  33,117
                                                                        --------
                                                                        $296,347
</TABLE>

                                      35
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


 License Maintenance Fees

  Pursuant to certain license arrangements, the Company must pay license
maintenance fees ranging from $5,000 to $20,000 per year through 2008 to
maintain its license rights. The Company is also required to meet certain
development and sales milestones as specified in the agreements. Should the
Company fail to meet such milestones, the license arrangements may be
terminated at the sole option of the licensor. License maintenance fees paid
during 1997, 1998 and 1999 amounted to $20,000 in each year. The future
minimum license maintenance fee commitments at December 31, 1999 are
approximately as follows:

<TABLE>
   <S>                                                                  <C>
   2000................................................................ $ 40,000
   2001................................................................   40,000
   2002................................................................   40,000
   2003................................................................   40,000
   Thereafter..........................................................  200,000
                                                                        --------
                                                                        $360,000
</TABLE>

During the term of these license agreements, the Company is obligated to pay a
royalty (ranging from 1.5% to 2.0%) based on net sales of any products
developed from the licensed technologies. The license maintenance fees
described above are creditable against royalties otherwise payable for such
year.

10. Related Party Transactions, Including Royalty Obligations

 License Agreement/Consulting and Technology Agreement

  In February 1993, the Company entered into a license agreement with a member
of the Company's Board of Directors. This individual is also Chairman of the
Company's Scientific Advisory Board and a faculty member at the institution
with which the Company has entered into certain other license agreements. In
exchange for exclusive patented technology licensing rights, the Company is
required to pay this individual a royalty based on 3% of net sales of products
developed from such technology. If the Company chooses to sublicense this
product to an unrelated party, the royalty will be based on 20% of the gross
revenue two-year period for research and development, clinical trials,
marketing, sales and/or manufacturing of products related to this technology.
Because the Company has chosen not to invest in this technology as required by
the license agreement, the license agreement may be canceled at the sole
option of the licensor at any time.

  Also in February 1993, the Company entered into a consulting and technology
agreement with this individual. This agreement, which has been extended to May
31, 2000, requires the Company to pay a monthly consulting fee of $10,000, as
stipulated in the agreement. Total payments made during 1997, 1998 and 1999
were approximately $112,600, $118,000 and $121,300 respectively, and are
included in research and development expense. The Company is also required to
remit to this individual a royalty of 1% of net sales of products developed
from certain other technology licensed from the institution described above.
If the Company chooses to sublicense such products to an unrelated party, the
royalty will be based on 7% of the gross revenue received from the unrelated
party for products developed from such technology. In connection with this
consulting and technology agreement, a warrant to purchase 109,634 shares of
common stock was issued to this individual. This warrant was exercised during
1998, and 85,510 shares of common stock were issued.

  Operations through December 31, 1999 did not result in the recognition of
any material royalty expense in connection with these agreements.

                                      36
<PAGE>

                             CAMBRIDGE HEART, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


12.  Major Customers, Export Sales and Concentration of Credit Risk

  Revenues from the Company's Japanse distributor accounted for 47%, 36% and
27% of total revenues during 1997, 1998 and 1999 respectively and 40%, 37% and
16% of the accounts receivable balance at December 31, 1997, 1998 and 1999
respectively. Company policy does not require collateral on accounts
receivable balances.

                                      37
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

  Not applicable.

                                   PART III

Item 10. Directors and Executive Officers of the Registrant

  The response to this item is contained in part under the caption "EXECUTIVE
OFFICERS OF THE REGISTRANT" in Part I hereof, and the remainder is contained
in the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 31, 2000 (the "2000 Proxy Statement") under the caption "Election
of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance"
and is incorporated herein by reference.

Item 11. Executive Compensation

  The response to this item is contained in the 2000 Proxy Statement under the
captions "Compensation of Directors," "Executive Compensation," and "Severance
and Other Agreements," and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The response to this item is contained in the 2000 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

  The response to this item is contained in the 2000 Proxy Statement under the
caption "Transactions with Directors," and is incorporated herein by
reference.

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  (a)1. Financial Statements

  The Company's financial statements listed in the Index to Financial
Statements in Item 8 hereof are filed as part of this Annual Report on Form
10-K.

  (a)2. Financial Statement Schedules

  All applicable information is readily determinable from the notes to the
Company's financial statements.

                                      38
<PAGE>

  (a)3. Listing of Exhibits

<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
   (1)3.1    Restated Certificate of Incorporation of the Registrant.
   (1)3.2    By-Laws of the Registrant, as amended.
   (1)4.1    Specimen Certificate for shares of Common Stock, $.001 par value,
             of the Registrant.
  (1)10.1#   1993 Incentive and Non-Qualified Stock Option Plan, as amended.
  (1)10.2#   1996 Equity Incentive Plan, as amended.
  (1)10.3#   1996 Employee Stock Purchase Plan.
  (1)10.4#   1996 Director Stock Option Plan.
  (1)10.5#   Consulting and Technology Agreement between the Registrant and Dr.
             Richard J. Cohen, dated February 8, 1993.
  (1)10.6#   Employment Agreement between the Registrant and Jeffrey M. Arnold,
             dated September 1, 1993, as amended.
  (1)10.7#   License Agreement By and Between the Registrant and Dr. Richard J.
             Cohen, dated February 8, 1993.
  (1)10.8*   Exclusive Distributorship Agreement by and between the Registrant
             and Fukuda Denshi Co., Ltd.
  (1)10.9    License Agreement by and between the Registrant and the
             Massachusetts Institute of Technology, dated September 28, 1993,
             relating to the technology of "Assessing Myocardial Electrical
             Stability".
  (1)10.10   License Agreement by and between the Registrants and the
             Massachusetts Institute of Technology, dated September 28, 1993,
             relating to the technology of "Cardiac Electrical Imaging".
  (1)10.11   License Agreement by and between the Registrant and the
             Massachusetts Institute of Technology, dated September 28, 1993,
             relating to the technology of "Cardiovascular System
             Identification", as amended on July 9, 1996.
  (2)10.12   Amended and Restated Lease By and Between the Registrant and R.W.
             Connelly, dated October 22, 1997.
  (2)10.13#  Agreement to Extend the Consulting and Technology Agreement
             between the Registrant and Dr. Richard J. Cohen, dated January 23,
             1998.
  (3)10.14   First Amendment to the License Agreement by and between the
             Registrant and the Massachusetts Institute of Technology dated May
             21, 1998, relating to the technology of "Cardiovascular System
             Identification".
  (3)10.15   First Amendment to the License Agreement by and between the
             Registrant and the Massachusetts Institute of Technology dated May
             21, 1998, relating to the technology of "Cardiac Electrical
             Imaging".
  (3)10.16   First Amendment to the License Agreement by and between the
             Registrant and the Massachusetts Institute of Technology dated May
             21, 1998, relating to the technology of "Assessing Myocardial
             Electrical Stability".
</TABLE>

                                       39
<PAGE>

<TABLE>
<CAPTION>
 Exhibit No.                            Description
 -----------                            -----------
 <C>         <S>
  (3)10.17*  First Amendment to the Exclusive Distributorship Agreement by and
             between the Registrant and Fukuda Denshi Co., Ltd.
  (3)10.18*  Distributor Agreement, dated as of April 1, 1998, by and between
             the Registrant and Reynolds Medical Ltd.
  (3)10.19*  Distributor Agreement, dated as of March 1, 1998, by and between
             the Registrant and Image. Monitoring, Inc
  (4)10.20   Cooperative Marketing Agreement between the Registrant and
             Guidant Corporation dated May 7, 1999.
  (4)10.21   Cooperative Marketing Agreement between the Registrant and
             Medtronic, Inc. dated May 20, 1999.
  (4)10.22   Purchase Agreement among the Registrant, The Tail Wind Fund Ltd.,
             Special Situations Private Equity Fund, L.P., Special Situations
             Fund III, L.P., and Geoffrey H. Galley dated June 8, 1999.
  (4)10.23   Registration Rights Agreement among the Registrant, The Tail Wind
             Fund Ltd., Special Situations Private Equity Fund, L.P., Special
             Situations Fund III, L.P. and Geoffrey H. Galley dated June 8,
             1999.
  (4)10.24   Warrant to purchase common stock of the Registrant in favor of
             Geoffrey H. Galley.
  (4)10.25   Warrant to purchase common stock of the Registrant in favor of
             Special Situations Fund III, L.P.
  (4)10.26   Warrant to purchase common stock of the Registrant in favor of
             Special Situations Private Equity Fund, L.P.
  (4)10.27   Warrant to purchase common stock of the Registrant in favor of
             The Tail Wind Fund Ltd.
  (5)10.28   Sales Agency Agreement between the Registrant and Sunrise
             Securities Corp. dated August 16, 1999.
  (5)10.29   Form of Subscription Agreement entered into between the
             Registrant and each of the persons listed below, for the number
             of shares of Registrant's common stock listed opposite each name:
             Cambridge Options........................................ 150,000
             Jerry Heymann............................................  14,286
             Little Wing L.P. ........................................ 225,700
             Little Wing L.P. Too.....................................  82,860
             Nathan A. Low............................................ 140,000
             Amy Newmark..............................................  20,000
             Rebel Investments & Co. ................................. 150,000
             Matthew Rebold...........................................  25,000
             Judy W. Stone, M.D. .....................................   8,500
             Robert L. Swisher, Jr. .................................. 100,000
             Tradewinds Fund Ltd. .................................... 120,000
             Yale University.......................................... 285,714
             Richard B. Stone.........................................  30,000
             Paul Scharfer............................................ 100,000
             Cheryl Halpern...........................................  14,286
             David S. Hannes..........................................  14,286
             Norwest Bank North Dakota, N.A. .........................  21,429
             RLH Options, Inc.........................................  14,286
             Robert P. Khederian...................................... 600,000
</TABLE>

                                       40
<PAGE>

<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
     10.30#  Amendment dated September 8, 1999 to the Employment Agreement
             between the Registrant and Jeffrey M. Arnold dated September 1,
             1993.
     10.31#  Amendment dated October 25, 1999 to the Employment Agreement
             between the Registrant and Jeffrey Arnold dated September 1, 1993.
     10.32#  Severance Agreement dated November 18, 1999 between the Registrant
             and Robert Palardy.
     10.33#  Severance Agreement dated November 18, 1999 between the Registrant
             and Eric Dufford.
     10.34#  Severance Agreement dated November 18, 1999 between the Registrant
             and James Sheppard.
     10.35#  Severance Agreement dated November 18, 1999 between the Registrant
             and Andra Thomas.
     11.1    Computation of Net Loss Per Share.
     23.1    Consent of PricewaterhouseCoopers LLP.
     27      Financial Data Schedule.
  (6)99.1    Integrated Clinical Statistical Report--A Prospective Multi-Center
             Study to Determine the Effectiveness of T-Ware Alternans in
             Predicting Susceptibility to Ventricular Arrhythmias.
  (7)99.2    Integrated Clinical Statistical Report (Interim Report)--A 12
             Month Follow-Up Study of Patients Enrolled in a Prospective Multi-
             Center Study to Determine the Effectiveness of T-Wave Alternans in
             Predicting Susceptibility to Ventricular Arrhythmias.
</TABLE>
--------
(1) Incorporated herein by reference to the Company's Registration Statement
    on Form S-1, as amended (File No. 333-04879).
(2) Incorporated herein by reference to the Company's Form 10-K, as amended,
    for the fiscal year ended December 31, 1997.
(3) Incorporated herein by reference to the Company's Form 10-Q, as amended,
    for the quarter ended June 30, 1998.
(4) Incorporated herein by reference to the Registrant's Form 10-Q, as
    amended, for the quarter ended June 30, 1999.
(5) Incorporated herein by reference to the Registrant's Form 10-Q, as
    amended, for the quarter ended September 30, 1999
(6) Incorporated herein by reference to the Registrant's Current Report on
    Form 8-K filed August 19, 1998.
(7) Incorporated herein by reference to the Registrant's Amendment No. 1 to
    Current Report on Form 8-K/A filed September 4, 1998.
 *Confidential treatment has been granted as to certain portions.
 # Management contract or compensatory plan or arrangement filed as an exhibit
   to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.

  (b) No Current Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.

                                      41
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 30,
2000.

                                          CAMBRIDGE HEART, INC.

                                                   /s/ Jeffrey M. Arnold
                                          By:__________________________________
                                                     Jeffrey M. Arnold
                                                  Chief Executive Officer

  Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ Jeffrey M. Arnold          President, Chief Executive   March 30, 2000
______________________________________  Officer and Director
          Jeffrey M. Arnold             (Principal Executive
                                        Officer)

        /s/ Robert B. Palardy          Chief Financial Officer      March 30, 2000
______________________________________  (Principal Financial and
          Robert B. Palardy             Accounting Officer)

        /s/ Maren D. Anderson          Director                     March 30, 2000
______________________________________
          Maren D. Anderson

         /s/ Harris A. Berman          Director                     March 30, 2000
______________________________________
           Harris A. Berman

         /s/ Richard J. Cohen          Director                     March 30, 2000
______________________________________
           Richard J. Cohen

                                       Director                     March 30, 2000
______________________________________
          Jeffrey J. Langan

        /s/ Daniel M. Mulvena          Director                     March 30, 2000
______________________________________
          Daniel M. Mulvena
</TABLE>

                                      42