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                      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)     Annual Report Pursuant to Section 13 or 15(d) of
[X]                   The Securities Exchange Act of 1934
 
                  For the fiscal year ended December 31, 1998
 
                                      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)
 
                                ---------------
 
              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                     (Zip Code)
              Offices)
 
                                ---------------
 
                                (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 $92,713,461 based on the last reported sale price of the
Common Stock on the Nasdaq National Market on March 15, 1999.
 
  Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date: 10,907,466 shares
of $0.001 par value Common Stock as of March 15, 1999.
 
                     Documents incorporated by reference:
 
<TABLE>
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                                                                       10-K
  Document Description                                                 Part
  --------------------                                               --------
<S>                                                                  <C>
Portions of the Registrant's Proxy Statement for the Annual Meeting
 of Shareholders to be held June 15, 1999                            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. Using innovative technologies, including
proprietary disposable electrodes, 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 CH 2000 System is
designed to perform a broad range of standard cardiac stress tests as well as
detect the presence 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 the presence of T-wave alternans is associated with an
increased vulnerability to ventricular arrhythmias and sudden cardiac arrest.
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.
 
Company Overview
 
  The Company's CH 2000 System is designed to perform a broad range of cardiac
stress tests as well as detect the presence of T-wave alternans. The Company's
research on its CH 2000 System, using T-wave alternans technology and High-
Resolution electrodes to diagnose vulnerability to ventricular arrhythmias,
indicates that the Company's system has the following potential advantages:
 
 .  Accuracy--Clinical studies to date indicate that the presence of T-wave
    alternans can identify vulnerability to ventricular arrhythmias and sudden
    cardiac arrest more accurately than other non-invasive tests and with
    results comparable to those of invasive electrophysiology study ("EP").
 
 .  Non-invasive--Unlike EP studies which require the insertion of electrical
    catheters into the patient's heart and the administration of local
    anesthesia, the CH 2000 System requires only the placement of electrodes
    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 System is designed to simultaneously detect coronary
    artery disease and assess the risk of sudden cardiac death due to
    ventricular arrhythmias and with only a modest increase--less than $100--
    in the total cost of the procedure.
 
 .  Non-Hospital Setting--Unlike EP studies and other tests which require a
    hospital setting, the CH 2000 System can be used in a physician's office.
 
 .  Procedure Cost Advantages--A stress test with the CH 2000 System utilizing
    T-wave alternans technology is expected to cost approximately $400 per
    procedure, compared with approximately $3,000 to $4,000 for an EP study.
 
 .  System Affordability--A fully equipped T-wave alternans capable system is
    priced in the United States starting at approximately $26,000. The CH 2000
    System equipped as a standard stress test system is only moderately more
    expensive than other stress test systems in the market today and only 10%
    to 30% the cost of certain other cardiac diagnostic equipment, such as
    ultrasound or nuclear imaging equipment.
 
  The Company's principal products are the CH 2000 System and Hi-Resolution
electrodes. Both products have received 510(k) clearance from the FDA for sale
in the United States. The 510(k) clearance for the CH 2000 System allows the
claim that the CH 2000 System can measure the presence of T-wave alternans but
does not allow a claim about the applicability or prognostic use of the
measurement of T-wave alternans. The Company completed a 337 patient multi-
center clinical study in support of these claims during 1998. In August 1998,
the results of the multi-center labeling study and preliminary results of the
events follow-up study were included in the Company's 510(k) application
submitted to the FDA for expansion of its labeling claims regarding the
predictive accuracy of the measurement of T-wave alternans. In March 1999 the
Company provided
 
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an update to the events follow-up study data previously included in their
510(k) submission to the FDA. The Company is not able to predict the timing or
final result of this regulatory review process.
 
  Internationally, the CH 2000 System has received the CE mark for sale in
Europe and is approved for sale by the Ministry of Health in Japan, without
labeling restrictions.
 
  The Company is also conducting research into the detection of ischemic heart
disease using its cardiac electrical imaging technology ("CEI"). CEI 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 and intends to pursue research to determine the extent to which this
technology provides faster and more accurate diagnosis of acute myocardial
infarction in patients who arrive at hospital emergency rooms with acute chest
pain.
 
  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 System
 
  The CH 2000 System is designed to perform a broad range of standard cardiac
stress tests, as well as to detect the presence of 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
System incorporates the Company's proprietary Hi-Resolution electrodes and
proprietary signal processing algorithms to minimize noise levels resulting
from patient movement.
 
  The Company's CH 2000 System is a fully-featured diagnostic system which
includes a cart-mounted computer with proprietary software, integral ECG
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 electrodes for T-wave alternans measurement.
The CH 2000 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, 1996, 1997 and 1998,
revenues from the sale of the CH 2000 have accounted for 94%, 94% and 96% of
total Company revenues, respectively.
 
  The CH 2000 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.
 
                                       3
<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 ("MIT") 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 at MIT 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 MIT, published in the New England
Journal of Medicine in December 1994, the detection of T-wave alternans at
certain levels in patients referred for EP studies was shown to be as accurate
as invasive EP 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 EP testing and were
more predictive than those that have been reported using other non-invasive
methods.
 
  The Company has sponsored and continues to sponsor a number of clinical
studies to confirm and expand upon this original landmark study. One such
study published in November 1997 in the American Journal of Cardiology
demonstrated a high connection between T-wave alternans detected during
exercise with the Company's CH 2000 System and the results of invasive EP
testing in 27 patients.
 
  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 ("ICD")
underwent EP testing and most of the other accepted non-invasive risk
stratification tests, including T-wave alternans testing utilizing the CH 2000
System. Professor Hohnloser reported that the detection of the presence of T-
wave alternans was found to be the more accurate than all 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 FDA in August to obtain expansion of
the Company's labeling claim. In 337 consecutive patients referred for EP
study to evaluate known, suspected or risk of arrhythmias, T-wave alternans
was measured during bicycle exercise with the CH 2000 and examined as a
predictor of subsequent cardiac events. 313 patients completed study
procedures and follow-up averaging 9.8 months was obtained in 290 patients.
The primary endpoint was a ventricular tachyarrhythmic event ("VTE") defined
as sudden cardiac death, appropriate firing of an implantable cardioverter-
defibrillator or resuscitated sustained ventricular tachycardia or
fibrillation. The secondary endpoint was a VTE plus all death due to any cause
("VTE Plus Death"). T-wave alternans was a highly significant predictor of a
VTE (p=0.002) as was EP (p<0.001). It was somewhat more predictive than EP,
with a relative risk of 10.92 for T-wave alternans versus 7.07 for EP. T-wave
alternans was also a highly significant predictor of a VTE Plus Death
(p<0.001) as was EP (p=0.001). It was also more predictive of this endpoint
than EP, with a relative risk of 13.93 for T-wave alternans versus 4.69 for
EP. Relative risk is 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 EP 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
 
                                       4
<PAGE>
 
results for both T-wave alternans and EP, T-wave alternans predicted the
results of EP with a sensitivity of 76%, a specificity of 65% and a relative
risk of 3.93 (p<0.001).
 
Marketing and Sales
 
  The Company is targeting the market for cardiac stress systems with its CH
2000 System. In 1998, approximately 3,000 cardiac stress systems were sold in
the United States, and the Company believes that the total installed base of
cardiac stress systems in the United States is approximately 23,000 units.
 
  The Company believes that the keys to the adoption of its proprietary
technologies to diagnose heart disease continue to be additional publication
of clinical study results in medical journals and positive clinical experience
with the CH 2000 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 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.
 
  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 a growing number of independent manufacturers
representatives. During 1998, the Company completed an aggressive recruitment
program to increase the number of well qualified manufacturers representatives
with expertise in selling cardiac diagnostic equipment. Nine independent
manufacturers representatives organizations with 35 representatives now
represent the Company. The Company compensates its manufacturers
representatives with a sales commission. 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
System. The Company also employs a clinical specialist who works with
customers to help install the CH 2000 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, 1996, 1997 and 1998, sales
to international distributors comprised 78%, 62% and 46%, respectively, of the
Company's revenue. The Company's international independent distributors
provide comprehensive marketing and sales services including identification of
potential purchasers, consummating sales and providing ongoing educational and
support services to customers. Effective January 1, 1998, the Company
terminated its exclusive distribution agreement with Kontron Instruments Ltd.
in Germany, Italy and the United Kingdom. Effective April 1, 1998, the Company
entered into a one year exclusive distribution agreement with Reynolds
Medical, Ltd. for distribution of its products in Germany and the United
Kingdom. The agreement between the Company and its Japanese distributor,
Fukuda Denshi Co., Ltd. ("Fukuda") expires March 31, 1999. The Company is
currently in the process of renegotiating the terms of a new one year
agreement with Fukuda.
 
  The commercial success of the Company's products will be dependent upon
their acceptance by the medical community and third party payors as to their
clinical usefulness and cost-effectiveness. The measurement of T-wave
alternans to predict vulnerability to ventricular arrhythmias is a relatively
new technology. Expanded market acceptance of the Company's technologies will
be dependent on the continued increase in the amount of published clinical
data supporting the benefits of T-wave alternans measurement as a predictive
tool in the identification of
 
                                       5
<PAGE>
 
patients at risk of sudden cardiac arrest. Market acceptance will also be
impacted by the availability of third-party reimbursement and extensive
physician and patient education. There can be no assurance that the Company's
products will gain broad market acceptance. Failure to achieve broad market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operation.
 
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 1999. The Company is required to meet and adhere to all
applicable requirements of U.S. and international regulatory agencies,
including Good Manufacturing Practices ("GMP") and Quality System Regulation
("QSR") requirements. The Company's manufacturing facilities are subject to
periodic inspection by both U.S. and international regulatory agencies.
 
  The Company underwent a QSR audit, conducted by the FDA, during 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 electrodes.
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 continuing
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 sudden cardiac arrest.
 
  The Company is currently developing a new product that will allow the PC
based stress test system of any manufacturer to measure T-wave alternans when
utilizing the Company's Hi-Resolution electrodes. The Company believes that
this product will provide it with increased access to that portion of the
installed base of stress test systems that is replaced each year and increase
the utilization of the Company's disposable, higher margin electrodes. The new
product is expected to have a lower cost of manufacture than the Company's CH
2000 system and is expected to carry a selling price below the current price
of a conventional stress test system. The Company expects the product to be
available sometime during the year 2000.
 
  The Company is also conducting research into systems to detect ischemic
heart disease based upon its CEI technology, which provides an image of the
electrical activity of the heart. Animal studies and initial human studies
indicate that CEI 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 and intends to
pursue research to determine the extent to which this technology provides
faster and more accurate diagnosis of patients with acute myocardial
infarction.
 
  The Company is evaluating the incorporation of its CEI technology into the
CH 2000 System, and is continuing to conduct clinical studies of this
technology. In addition, the Company plans to evaluate the commercial
feasibility of a portable system incorporating CEI technology for hospital
emergency room use to detect acute myocardial infarction.
 
                                       6
<PAGE>
 
  The Company's research and development expenses were $2,433,000 in 1996,
$3,587,000 in 1997 and $3,595,000 in 1998. The Company expects research and
development expenses to increase in the future as it develops additional
products and funds clinical trials on its products. As of December 31, 1998
the Company had 16 employees engaged in research and development activities.
 
Patents, Trade Secrets and Proprietary Rights
 
  The computer algorithms that allow the CH 2000 System to measure T-wave
alternans and certain aspects of the Company's CEI technology, including the
CEI electrodes, are covered by U.S. patents issued to MIT that are licensed
exclusively to the Company. The Company was issued 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
electrodes 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 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. In addition, the Company
has entered into a license agreement with Dr. Richard Cohen, a founder,
director of, and consultant to, the Company (the "Cohen License Agreement"),
pursuant to which the Company is the exclusive licensee of certain technology
developed by Dr. Cohen which the Company may include in its future products.
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.
 
                                       7
<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 CEI 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 ECGs, Holter monitors, ultrasound tests
and systems for measuring cardiac late potentials.
 
  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 or their existing products. Competing companies may
also introduce competitive pricing pressures that may
 
                                       8
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adversely affect the Company's sales levels and margins. There can be no
assurance that the Company will be able to compete successfully with existing
or new competitors.
 
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.
 
  All 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
 
                                       9
<PAGE>
 
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 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 System and the Hi-Resolution electrodes 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, but no claim about the applicability or prognostic use of the
alternans measurement. The Company completed a 337 patient multi-center study
during 1998 that was included in the 510(k) submitted to FDA in August 1998 to
obtain an expansion of its labeling claims. The Company anticipates clearance
by mid-1999, but there can be no assurance that such clearance will be
obtained on a timely basis, if at all. Until clearance or approval of the
broader prognostic claims is obtained, the Company may not publicize the
prognostic capabilities of its T-wave alternans technology.
 
  Internationally, the CH 2000 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, 1998, the Company had 35 full-time employees, of whom
five hold Ph.D. degrees 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
 
  Suppliers of medical devices and services are greatly affected by Medicare,
Medicaid and other government insurance programs, as well as by private
insurance reimbursement programs. Third party payors (Medicare, Medicaid,
private health insurance, health administration authorities in foreign
countries and other organizations) may affect the pricing or relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided for by such payors to the physicians and clinics
performing T-wave alternans testing by taking the position that such
reimbursement is not available at all.
 
  The Company plans to add the capability of generating a SAECG report,
utilizing the data collected during the performance of a T-wave alternans
test, to its CH 2000 system during 1999. SAECG testing and standard
 
                                      10
<PAGE>
 
stress testing are both currently reimbursed through unique codes under
Medicare and Medicaid. Physicians conducting a T-wave alternans test should
receive sufficient reimbursement using these two previously approved codes to
cover the cost of the test and the high-resolution electrodes. There can be no
assurance that these efforts will be successful.
 
  The Company believes that the availability and level of third party
reimbursement will influence the decisions of physicians, clinics and
hospitals to purchase and use the Company's products and thereby affect the
pricing of the Company's products. If FDA clearance for expansion of the
Company's labeling claims for the CH 2000 System is received during 1999, the
Company intends to initiate efforts toward obtaining approval for a specific
code for reimbursement of physicians performing a T-wave alternans
measurement. The time required to justify and obtain a specific reimbursement
code is substantial and there can be no assurance that these efforts will be
successful.
 
  Several states and the federal government are investigating a variety of
alternatives to reform the health care delivery system and reduce and control
health care spending. These reform efforts include proposals to limit spending
on health care items and services, limit coverage for new technology and limit
or control directly the price health care providers and drug and device
manufacturers may charge for their services and products. The scope and timing
of such reforms cannot be predicted, but if adopted and implemented, such
reforms could have a material adverse effect on the Company.
 
Item 2. Properties
 
  The Company's facilities consist of approximately 14,500 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, of
which it currently subleases 7,500 square feet. The Company's lease expires in
November 1999 with an option to extend the lease for one additional year. 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
 
  No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1998.
 
Executive Officers of the Registrant
 
  The following table sets forth (i) the names, ages and positions 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........  49 President, Chief Executive Officer and Director
Robert B. Palardy........  50 Vice President, Finance and Administration and
                              Chief Financial Officer
Eric Dufford.............  39 Vice President, Sales and Marketing and Secretary
Andra Thomas.............  50 Vice President, Clinical Affairs
</TABLE>
 
  Jeffrey M. Arnold. Mr. Arnold has been 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 received 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.
 
                                      11
<PAGE>
 
  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.
 
  Andra Thomas. Ms. Thomas became Vice President, Clinical Affairs of the
Company in August 1998. From January 1988 to February 1993, Ms. Thomas was
Manager of Scientific Studies at Cardial Pacemakers, Inc. From February 1993
to August 1998, Ms. Thomas was Senior Fellow and Director of Medical Sciences
for Guidant CPI. Ms. Thomas earned an R.N. from Barnes Hospital School of
Nursing, Washington University and an executive MBA from the University of
Minnesota.
 
  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 1997    Fiscal 1998
                                                   -------------- --------------
   Period                                           High    Low    High    Low
   ------                                          ------- ------ ------- ------
   <S>                                             <C>     <C>    <C>     <C>
   First Quarter.................................. $ 15.50 $9.875 $  9.25 $6.375
   Second Quarter................................. $11.625 $ 6.50 $11.875 $ 7.50
   Third Quarter.................................. $ 8.375 $ 6.75 $ 9.625 $ 5.00
   Fourth Quarter................................. $ 10.50 $7.375 $ 8.375 $ 3.50
</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, 1999, the
closing price of the Company's Common Stock on the Nasdaq National Market was
$8.50. On March 15, 1999, the Company had approximately 90 holders of Common
Stock of record. This number does not include shareholders for whom shares are
held in a "nominee" or "street" name.
 
Use of Proceeds
 
  The Company's Securities Act Registration Statement on Form S-1 (SEC File
No. 333-04879) became effective on August 2, 1996. To date, the Company has
used approximately $971,600 of the offering proceeds for the purchase and
installation of machinery and equipment and approximately $7,600,000 of the
offering proceeds for working capital.
 
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
 
                                      12
<PAGE>
 
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
 
<TABLE>
<CAPTION>
                                       Year Ended December 31,
                         -------------------------------------------------------
                           1994       1995       1996        1997        1998
                         ---------  ---------  ---------  ----------  ----------
                                (in thousands, except per share data)
<S>                      <C>        <C>        <C>        <C>         <C>
Statement of Operations
 Data:
Revenue................. $      25  $      68  $     867  $    1,448  $    2,097
Cost of goods sold......       --         141        884       1,386       1,848
                         ---------  ---------  ---------  ----------  ----------
Gross profit (loss).....        25        (73)       (17)         62         249
                         ---------  ---------  ---------  ----------  ----------
Costs and expenses:
  Research and
   development..........     1,124      1,709      2,433       3,587       3,595
  Selling, general and
   administrative.......       724        961      2,092       3,392       3,753
                         ---------  ---------  ---------  ----------  ----------
    Total costs and
     expenses...........     1,848      2,670      4,525       6,979       7,348
                         ---------  ---------  ---------  ----------  ----------
Loss from operations....    (1,823)    (2,743)    (4,542)     (6,917)     (7,099)
Interest income, net....       164        246        507         869         562
                         ---------  ---------  ---------  ----------  ----------
    Net loss............ $  (1,659) $  (2,497) $  (4,035) $   (6,048) $   (6,537)
                         =========  =========  =========  ==========  ==========
Net loss per share--
 basic and diluted...... $   (0.55) $   (0.80) $   (0.66) $    (0.58) $    (0.61)
                         =========  =========  =========  ==========  ==========
Weighted average shares
 outstanding--basic and
 diluted(1)............. 3,010,030  3,126,569  6,073,865  10,451,560  10,746,844
                         =========  =========  =========  ==========  ==========
 
<CAPTION>
                                            December 31,
                         -------------------------------------------------------
                           1994       1995       1996        1997        1998
                         ---------  ---------  ---------  ----------  ----------
<S>                      <C>        <C>        <C>        <C>         <C>
Balance Sheet Data:
Cash, cash equivalents
 and marketable
 securities............. $   3,329  $   3,948  $  18,589  $   12,756  $    6,490
Working capital.........     3,081      3,849     19,146      13,456       6,761
Total assets............     3,421      4,277     20,229      14,748       8,715
Total liabilities.......       266        266        500         527         902
Accumulated deficit.....    (2,584)    (5,081)    (9,116)    (15,163)    (21,700)
Stockholders' equity....     3,155      4,011     19,730      14,221       7,813
</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.
 
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 published to date has demonstrated that the
presence of T-wave alternans is associated with an increased vulnerability to
ventricular arrhythmias and sudden cardiac arrest. Sudden cardiac arrest
accounts for approximately one-half of all cardiac related deaths, or about
350,000, in the United States each year.
 
                                      13
<PAGE>
 
  The Company's principal products are the CH 2000 System and Hi-Resolution
electrodes. Both products have received 510(k) clearance from the FDA for sale
in the United States. The 510(k) clearance allows the claim that the CH 2000
can measure the presence of T-wave alternans but does not allow a claim about
the applicability or prognostic use of the measurement. The Company has
submitted a 510(k) application to the FDA for expansion of its labeling claims
regarding the predictive accuracy of the measurement of T-wave alternans.
These labeling restrictions have limited the Company's ability to aggressively
market its CH 2000 System in the United States. The CH 2000 System has
received the CE mark for sale in Europe and is approved for sale by the
Ministry of Health in Japan.
 
  The Company has experienced substantial net losses since its inception in
1993 and expects net losses to continue for the foreseeable future. The
Company believes that its research and development expenses will increase in
the future in support of its efforts to develop additional products and also
to fund clinical trials directed at expanding the indications for use of its
T-wave alternans technology. The Company's research and development expenses
may also increase in the future as it supplements its internal research and
development with third party technology licenses and potential product
acquisitions. The Company also expects that its selling, general and
administrative expenses will increase in connection with the expansion of
efforts targeted at acceleration of the rate of adoption of its technology as
diagnostic tool for the identification of those at risk of sudden cardiac
arrest. The future growth of the Company's revenues will depend upon the
success of these strategies, as well as numerous factors including competition
and the availability of third party reimbursement for T-wave alternans
measurement. The Company has incurred cumulative net losses since inception
through December 31, 1998 of approximately $21,700,000.
 
Results of Operations
 
 Fiscal 1997 Compared to Fiscal 1998
 
  Revenues were $1,448,300 in the fiscal year ended December 31, 1997 ("Fiscal
1997") and $2,096,900 for the fiscal year ended December 31, 1998 ("Fiscal
1998"), an increase of $648,500, or 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 in each year were from the
sale of the Company's proprietary, disposable Hi-Resolution electrodes.
 
  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 their 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. The Company expects European revenues to return to previous
levels during 1999. 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 $1,386,600, or 96% of total revenues, in Fiscal 1997
and $1,848,200, 88% of total revenues, in Fiscal 1998. 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 electrodes will continue
to favorably effect the overall gross margin.
 
                                      14
<PAGE>
 
  Research and development costs were $3,587,000 in Fiscal 1997 compared to
$3,594,900 in Fiscal 1998. 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 $3,391,700 in Fiscal 1997
compared to $3,753,300 in Fiscal 1998, an increase of $361,600, or 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 1997 was $869,300 compared to $562,500 for Fiscal
1998. 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.
 
 Fiscal 1996 Compared to Fiscal 1997
 
  Revenues were $866,900 in the fiscal year ended December 31, 1996 ("Fiscal
1996") and $1,448,300 for Fiscal 1997, an increase of $581,400 or 67%. Sales
of the Company's CH 2000 System and accessories accounted for 94% of total
revenues in Fiscal 1997 compared to 95% in Fiscal 1996. The remainder of the
revenues were from the sale of the Company's proprietary, disposable Hi-
Resolution electrodes.
 
  Revenues from products sold outside the United States were $901,000 in
Fiscal 1997, an increase of $228,900 or 34%, over Fiscal 1996. Revenues from
products sold outside the United States accounted for 62% of the Company's
total revenues in Fiscal 1997 compared to 78% in Fiscal 1996. Sales to United
States customers were $547,400 in Fiscal 1997 compared to $169,900 in Fiscal
1996, an increase of 322%. The United States increase reflects the impact of
the expansion of the number of trained sales representatives during Fiscal
1997. The Company employed five direct sales managers for most of Fiscal 1997
compared to two for most of Fiscal 1996. At the end of Fiscal 1997, the
Company had over 35 independent manufacturers' sales representatives under
contract compared to 11 at the end of Fiscal 1996.
 
  Cost of goods sold was $884,200, 105% of product sales, in Fiscal 1996 and
$1,386,600, 96% of product sales, in Fiscal 1997. The improved ratio of costs
to product sales during Fiscal 1997 primarily reflects the impact of increased
volumes on the allocation of fixed manufacturing overheads.
 
  Research and development costs were $2,432,300 in Fiscal 1996 compared to
$3,587,000 in Fiscal 1997, an increase of $1,154,700, or 47%. This increase
reflects the expansion in the Company's clinical trial activities to support
the filing of a 510(k) with the FDA in 1998 for expansion of product labeling
claims for its T-wave alternans technology. The Company recorded a charge of
$100,000 in Fiscal 1997 to recognize costs associated with non-qualified stock
options issued under the 1996 Equity Incentive Plan to scientific advisors.
 
  Selling, general and administrative expenses were $2,902,100 in Fiscal 1996
compared to $3,391,700 in Fiscal 1997 an increase of $489,600, or 17%. The
increase was primarily the result of the costs associated with the expansion
of the Company's U.S. field sales organization during Fiscal 1997 and
increases in the cost of marketing efforts targeted at the 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.
 
 
                                      15
<PAGE>
 
  Interest income for Fiscal 1996 was $506,800 compared to $869,300 for Fiscal
1997. The increase reflects a full year of interest earned on the investment
of the remaining proceeds associated with the Company's initial public
offering of common stock in August 1996.
 
 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, 1998.
 
  The Company has not recorded a provision for income taxes for the years
1995, 1996, 1997 and 1998 because it incurred net losses in each of such
years. At December 31, 1998, the Company had net operating loss carryforwards
of $9,164,000 as well as $856,000 research and development credit
carryforwards, respectively, available to offset future taxable income and
income tax liabilities, respectively. These carryforwards generally expire in
the years 2007 through 2018 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 ($9,682,000 at December 31, 1998) 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
 
  The Company has historically financed its operations from the sale of equity
securities. Through June 30, 1996, the Company had raised $9,065,000 (net of
stock issuance costs) from the sales of equity securities. On August 2, 1996,
the Company raised approximately $19,650,000 (net of stock issuance costs)
from the sale of 2,437,750 shares of common stock in the Company's initial
public offering. In conjunction with the initial public offering, 4,455,708
shares of preferred stock were converted to shares of common stock.
 
  The proceeds of the equity offerings have been used primarily to fund
operating losses of $21,700,400 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 $1,178,600 in property and equipment through
December 31, 1998. As of December 31, 1998, the Company had cash, cash
equivalents and marketable securities of $6,490,400.
 
  During Fiscal 1998, the Company increased its level of operations, with
corresponding increases in most balance sheet accounts. Cash, cash equivalents
and marketable securities decreased by $6,266,000 from December 31, 1997 to
December 31, 1998, consistent with the Company's net loss for Fiscal 1998.
Accounts receivable, net, increased by $46,100 during the year, reflecting
increased sales activity and the broadening of the Company's customer base.
Inventory levels have increased slightly from $416,200 to $426,500 during the
year. Fixed asset additions during the year primarily represent increased
sales demonstration and clinical research units as the Company has expanded
activities in both of these areas.
 
  The Company expects its capital expenditures to increase as it continues to
commercialize its products, particularly in connection with the manufacture of
its proprietary Hi-Resolution electrodes. 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
$45,000 per year in total
 
                                      16
<PAGE>
 
through 2008. The Company is committed to pay an aggregate of $380,000 of such
minimum license maintenance fees subsequent to December 31, 1998. 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, including the
amounts raised in the initial public offering, will be adequate to satisfy its
capital requirements until the end of 1999. Thereafter, the Company will
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 terms acceptable to the Company.
 
Year 2000 Issues
 
  Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
government agencies may need to be upgraded to comply with year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
 
  The Company is currently in the process of assessing its exposure to the
year 2000 issue and has established a response to that exposure. Generally,
the Company has year 2000 exposure in three areas: (i) the Company's business
information systems, including computer operating systems and applications,
(ii) the hardware and software included in the CH 2000 System, and (iii)
computer systems used by third parties, including suppliers of the Company.
The Company has completed its assessment of each of these areas.
 
  The Company has upgraded its existing software to versions that are year
2000 compliant and is in the process of installing a new business information
system for functionality reasons. The new business information system is
expected to be in place by Mid-1999. All business information system changes
would be performed regardless of the year 2000 issue from both a timing and
cost perspective. The Company therefore believes that it has spent and is
spending an immaterial incremental amount on year 2000 remediation over what
it would spend to implement its planned business information system
improvements.
 
  The Company believes that its CH 2000 System is year 2000 compliant.
Software used in the CH 2000 System has been upgraded to year 2000 compliant
versions and the Company has successfully tested hardware, operating system
and applications software simulating post year 2000 systems clock dates.
 
  The Company has sent written requests for year 2000 information to all
suppliers. The Company has been informed by all suppliers of material hardware
and software components of the CH 2000 System, and substantially all other
suppliers, that the products used by the Company are currently year 2000
compliant.
 
  Management continues to support the compliance efforts through allocation of
the resources necessary to complete the project. Based on the completed
initial assessment, management does not expect the costs of bringing the
Company's systems into compliance with Year 2000 to have a material adverse
effect on the Company's financial position, results of operations or
liquidity. The Company does not believe that it is subject to significant
business risks related to its customers' and suppliers' Year 2000 efforts.
 
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,"
 
                                      17
<PAGE>
 
"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).
 
 We may never generate substantial revenues
 
  We are engaged primarily in the commercialization, manufacture, research and
development of our products for the non-invasive diagnosis of cardiac disease.
We have incurred substantial and increasing net losses through December 31,
1998. There can be no assurance that we will ever generate substantial
revenues or achieve profitability on a quarterly or annual basis. 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,
 
 .  competition, and
 
 .  the availability of third party reimbursement.
 
 We may not receive timely regulatory approval of important labeling claims
 
  The measurement of T-wave alternans to diagnose vulnerability to ventricular
arrhythmia is a new diagnostic approach that is currently investigational. We
have submitted a 510(k) application for clearance from the FDA for a labeling
claim covering the applicability or prognostic use of our T-wave alternans
technology. There can be no assurance that the FDA will concur with our 510(k)
request for clearance. The failure to obtain 510(k) clearance for additional
labeling claims for the CH 2000 System would have a material adverse effect on
our business, financial condition and results of operations.
 
 Our technology may never achieve market acceptance
 
  We believe that our future success will substantially depend upon the
successful commercialization and market acceptance of our T-wave alternans
technology. Market acceptance will depend upon our ability to obtain
regulatory clearance or approval for claims covering the applicability or
prognostic use of T-wave alternans measurement, as well as our ability to
demonstrate the diagnostic advantages and cost-effectiveness of the
technology. There can be no assurance that regulatory approval for such claims
will ever be received or 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.
 
 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 electrodes to establish the
prognostic value of such technology. While studies on high risk patients to
date have indicated that the measurement of T-wave alternans to predict
vulnerability to ventricular arrhythmia is at least comparable to
electrophysiology testing, there can be no assurances that the results of such
studies, particularly studies involving patients who are not high risk, will
produce similar results. Any clinical studies or trials which fail to
demonstrate that 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, or our other
technologies, would have a material adverse effect on our business, financial
condition and results of operations.
 
                                      18
<PAGE>
 
 We may never receive necessary foreign regulatory approvals
 
  A significant portion of our current revenues is dependent upon sales of our
products outside the United States. Foreign regulatory bodies have established
varying regulations, duties and tax requirements. Specifically, the European
Union has promulgated rules which require that medical products receive the
right to affix the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. There is no assurance that we will be able to obtain European
Union approval for any future products. The inability or failure of Cambridge
Heart or its international distributors to comply with varying foreign
regulations or the imposition of new regulations could restrict or, in certain
countries, result in the prohibition of the sale of our products, and thereby
adversely affect 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,
there can be no assurance that we will 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 will not 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 help to 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, and may compete with manufacturers of other non-invasive tests,
including electrocardiogram's, Holter monitors, ultrasound tests and systems
of measuring cardiac late potentials. Many of our 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 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 our ability to identify and retain effective 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. There can be no
assurance that we will 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 may 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 cannot 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 its distribution arrangements will
be acceptable to us.
 
 Our business could be subject to product liability claims
 
  The testing, manufacture, marketing and sale of medical devices entail the
inherent risk of liability claims or product recalls. Although we maintain
product liability insurance in the United States and in other countries
 
                                      19
<PAGE>
 
in which we intend to conduct business, including clinical trials and product
marketing and sales, there can be no assurance that such coverage is adequate
or will continue to be available. 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 200 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 System as
currently contemplated.
 
 The cost of our products may not be covered by third party payors
 
  Our ability to successfully market our products is likely to depend in part
on the extent to which reimbursement for the cost of such products and the
procedures in which such products are used will be available from third party
payors, including:
 
  . government third party payors (including the Medicare and Medicaid
    programs),
 
  . government health administration authorities, and
 
  . private health insurers.
 
  These third party payors may deny coverage if they determine that a
procedure was not reasonable or necessary as determined by the payor, was
experimental or was used for an unapproved indication. In addition, certain
healthcare providers are moving towards a managed care system in which such
providers contract to provide comprehensive healthcare for a fixed cost per
person, irrespective of the amount of care actually provided. Such providers,
in an effort to control healthcare costs are increasingly challenging the
prices charged for medical products and services and, in some instances, have
pressured medical suppliers to lower their prices. We are unable to predict
what changes will be made in the reimbursement methods utilized by third party
healthcare payors. Furthermore, we could be adversely affected by changes in
reimbursement policies of governmental or private healthcare payors,
particularly to the extent any such changes affect reimbursement for
procedures in which our products are used. If coverage and adequate
reimbursement levels are not provided by government or third party payors for
uses on our technologies or products, our business, financial position and
ability to market our technologies or products may be adversely affected.
 
 We may not be able to commercialize the CH 2000 System
 
  We expect to derive a substantial majority of our future revenues from sales
of our CH 2000 System and High-Resolution electrodes. If we are unable to
commercialize these products successfully, the period during which we are in
the development stage would be extended significantly. This would have a
material adverse effect on our business, financial condition and results of
operations.
 
 We have a number of risks associated with the year 2000
 
  Although we do not believe that year 2000 issues will have a significant
impact on our internal operations or on our products, there can be no
assurance that we will not experience interruptions of operations because of
year 2000 problems. Year 2000 problems could require us to incur unanticipated
expenses, and such expenses could have a material adverse effect on our
business, financial condition and results of operations. Furthermore, the
purchasing patterns of customers or potential customers may be affected by
year 2000 issues as companies expend significant resources to correct their
current systems for year 2000 compliance. These expenditures may result in
reduced funds being available to purchase products offered by 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, 1998 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, 1997 and 1998..............................  23
Statement of Operations for the three years ended December 31, 1998......  24
Statement of Changes in Stockholders' Equity for the three years ended
 December 31, 1998.......................................................  25
Statement of Cash Flows for the three years ended December 31, 1998......  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 sheet 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, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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 10, 1999
 
                                      22
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                                 BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                          December 31,
                                                    --------------------------
                                                        1997          1998
                                                    ------------  ------------
<S>                                                 <C>           <C>
                      Assets
Current assets:
  Cash and cash equivalents........................ $  5,665,736  $  2,426,032
  Marketable securities............................    7,090,605     4,064,321
  Accounts receivable, net of allowance for
   doubtful accounts of $20,800 and $32,000 at
   December 31, 1997 and 1998, respectively........      509,918       555,991
  Inventory........................................      416,224       426,489
  Prepaid expenses and other current assets........      301,127       190,667
                                                    ------------  ------------
    Total current assets...........................   13,983,610     7,663,500
Fixed assets, net..................................      574,660       647,629
Other assets.......................................      190,167       403,604
                                                    ------------  ------------
                                                    $ 14,748,437  $  8,714,733
                                                    ============  ============
       Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable................................. $    170,531  $    415,842
  Accrued expenses.................................      346,770       471,003
  License fees payable.............................        9,836        14,946
                                                    ------------  ------------
    Total current liabilities......................      527,137       901,791
                                                    ------------  ------------
Commitments (Notes 9 and 10)
Stockholders' equity:
  Preferred Stock, $0.001 par value; 2,000,000
   shares authorized, no shares issued and
   outstanding.....................................          --            --
  Common Stock, $0.001 par value; 25,000,000 shares
   authorized; 10,606,041 and 10,906,174 shares
   issued and outstanding at December 31, 1997 and
   1998, respectively..............................       10,606        10,906
  Additional paid-in capital.......................   29,405,685    29,603,435
  Accumulated deficit..............................  (15,163,304)  (21,700,389)
                                                    ------------  ------------
                                                      14,252,987     7,913,952
Less: deferred compensation........................      (31,687)     (101,010)
                                                    ------------  ------------
                                                      14,221,300     7,812,942
                                                    ------------  ------------
                                                    $ 14,748,437  $  8,714,733
                                                    ============  ============
</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,
                                         -------------------------------------
                                            1996         1997         1998
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Revenue................................  $   866,942  $ 1,448,319  $ 2,096,853
Cost of goods sold.....................      884,229    1,386,627    1,848,155
                                         -----------  -----------  -----------
                                             (17,287)      61,692      248,698
Costs and expenses:
  Research and development.............    2,432,284    3,586,965    3,594,941
  Selling, general and administrative..    2,092,132    3,391,664    3,753,296
                                         -----------  -----------  -----------
    Loss from operations...............   (4,541,703)  (6,916,937)  (7,099,539)
Interest income........................      506,824      869,318      562,454
                                         -----------  -----------  -----------
Net loss...............................  $(4,034,879) $(6,047,619) $(6,537,085)
                                         ===========  ===========  ===========
Net loss per share--basic and diluted..  $     (0.66) $     (0.58) $     (0.61)
                                         ===========  ===========  ===========
Weighted average shares outstanding--
 basic and diluted.....................    6,073,865   10,451,560   10,746,844
                                         ===========  ===========  ===========
</TABLE>
 
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                       24
<PAGE>
 
                                CAMBRIDGE HEART
 
                 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                      Series B            Series A
                     convertible         convertible
                   preferred stock     preferred stock       Common Stock
                  ------------------  ------------------  ------------------ Additional                                  Total
                  Number of    Par    Number of    Par    Number of    Par     paid-in    Accumulated     Deferred   stockholders'
                    Shares    value     Shares    value     Shares    value    capital      deficit     compensation    equity
                  ----------  ------  ----------  ------  ---------- ------- -----------  ------------  ------------ -------------
<S>               <C>         <C>     <C>         <C>     <C>        <C>     <C>          <C>           <C>          <C>
Balance at
December 31,
1995............   2,333,333   2,333   6,578,083   6,578   3,163,163   3,163   9,079,671    (5,080,806)        --      4,010,939
Issuance of
common stock in
initial public
offering........                                           2,437,750   2,438  19,651,447                              19,653,885
Conversion of
preferred stock
into common
stock...........  (2,333,333) (2,333) (6,578,083) (6,578)  4,455,708   4,456       4,455                                     --
Issuance of
common stock
through exercise
of stock options
and warrants....                                             158,162     158      32,323                                  32,481
Deferred
compensation
related to
common stock
options
granted.........                                                                 448,750                  (448,750)          --
Amortization of
deferred
compensation....                                                                                            67,312        67,312
Net loss........                                                                            (4,034,879)               (4,034,879)
                  ----------  ------  ----------  ------  ---------- ------- -----------  ------------   ---------    ----------
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)          --
Reversal of
deferred
compensation
related to
common stock
options
forfeited.......                                                                 (24,792)                   24,792           --
Amortization of
deferred
compensation....                                                                                            11,229        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
                  ==========  ======  ==========  ======  ========== ======= ===========  ============   =========    ==========
</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,
                                         --------------------------------------
                                            1996          1997         1998
                                         -----------  ------------  -----------
<S>                                      <C>          <C>           <C>
Cash flows from operating activities:
 Net loss..............................  $(4,034,879) $ (6,047,619) $(6,537,085)
 Adjustments to reconcile net loss to
  net cash used for operating
  activities:
  Depreciation and amortization........      104,319       226,074      297,575
  Loss on disposal of fixed assets.....       12,178        20,241          --
  Compensation expense on stock
   options.............................       67,312       257,876       26,220
  Changes in assets and liabilities:
   Increase in accounts receivable.....     (420,984)      (88,934)     (46,073)
   Increase in inventory...............     (132,923)     (164,436)     (10,265)
   (Increase) decrease in prepaid
    expenses and other current assets..     (336,053)       83,296      110,460
   (Increase) decrease in other
    assets.............................     (166,514)       40,964       97,360
   Increase in accounts payable and
    accrued expenses...................      250,501        31,591      369,544
   Increase (decrease) in license fees
    payable............................      (17,201)       (4,175)       5,110
                                         -----------  ------------  -----------
    Net cash used for operating
     activities........................   (4,674,244)   (5,645,122)  (5,687,154)
                                         -----------  ------------  -----------
Cash flows from investing activities:
 Purchases of fixed assets.............     (371,686)     (357,698)    (369,817)
 Capitalization of software development
  costs................................          --       (110,727)    (310,796)
 Purchases of marketable securities....          --     (7,090,605)         --
 Liquidation of marketable securities..          --            --     3,026,284
                                         -----------  ------------  -----------
    Net cash (used for)/provided by
     investing activities..............     (371,686)   (7,559,030)   2,345,671
                                         -----------  ------------  -----------
Cash flows from financing activities:
 Proceeds from issuance of common
  stock, net of issuance costs.........   19,686,366       281,305      101,779
                                         -----------  ------------  -----------
    Net cash provided by financing
     activities........................   19,686,366       281,305      101,779
                                         -----------  ------------  -----------
Net increase (decrease) in cash and
 cash equivalents......................   14,640,436   (12,922,847)  (3,239,704)
Cash and cash equivalents, beginning of
 year..................................    3,948,147    18,588,583    5,665,736
                                         -----------  ------------  -----------
Cash and cash equivalents, end of
 year..................................  $18,588,583  $  5,665,736  $ 2,426,032
                                         ===========  ============  ===========
</TABLE>
 
See supplemental disclosure of non-cash financing activity in Note 5.
 
   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 has also experienced substantial net losses in each fiscal
period since its inception and, as of December 31, 1998, had an accumulated
deficit of $21,700,400. Such losses and accumulated deficit resulted from the
Company's lack of substantial revenue and significantly increased costs
incurred in the development of the Company's products and in the preliminary
establishment of the Company's infrastructure. The Company anticipates that
its existing capital resources, including the amounts raised in the initial
public offering, will be adequate to fund operations through 1999. 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 $7,090,600 and $4,064,300
at December 31, 1997 and 1998, respectively, are classified as held to
maturity, and mature within one year. The securities of state government
agencies, totaling $5,879,700 and $2,447,700 at December 31, 1997 and 1998,
respectively, are classified as available for sale. All of these investments
have been recorded at amortized cost, which approximates fair market value.
 
 Financial Instruments
 
  The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, marketable securities, accounts receivable,
accounts payable, accrued expenses and license fees payable, approximate their
fair values at December 31, 1997 and 1998.
 
 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.
 
                                      27
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
 Segment
 
  The Company is engaged principally in one industry segment that represents
100% of revenues. The Company also operates principally in one geographic
area. See Note 11 with respect to significant customers and with respect to
sales in other geographic areas.
 
 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. Revenue from a research and option arrangement was recognized
pursuant to the agreement as the work was performed.
 
 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 SFAS 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, generally two
years.
 
  Costs capitalized at December 31, 1998, which are included in other assets
in the accompanying balance sheet, totaled $343,000 ($85,000 at December 31,
1997), net of $78,500 of accumulated amortization ($26,000 at December 31,
1997).
 
 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, 1998 totaled $61,000 ($58,000 at December 31,
1997), net of $39,000 of accumulated amortization ($20,000 at December 31,
1997), 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
 
                                      28
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
disclosure of contingencies at December 31, 1997 and 1998, and the reported
amounts of revenues and expenses during the three years in the period ended
December 31, 1998. Actual results could differ from these estimates.
 
 Net Loss Per Share
 
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share," which establishes new standards for computing and presenting
earnings per share. The new standard replaces the presentation of primary
earnings per share prescribed by Accounting Principles Board Opinion No. 15
("APB 15"), "Earnings per Share," with a presentation of basic earnings per
share and also 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) and is computed similarly to fully-diluted
earnings per share pursuant to APB 15.
 
  Consistent with SFAS 128, basic loss per share amounts are based on the
weighted average number of shares of common stock outstanding during the
period. Diluted loss per share amounts are based on the weighted average
number of shares of common stock and potential common stock outstanding during
the period. The Company has excluded potential common stock from the
calculation of diluted weighted average share amounts for 1996, 1997 and 1998,
as its inclusion would have been anti-dilutive.
 
3. Fixed Assets
 
  Fixed assets consist of the following:
<TABLE>
<CAPTION>
                                                  Estimated
                                                   useful      December 31,
                                                    lives   -------------------
                                                   (years)    1997      1998
                                                  --------- -------- ----------
   <S>                                            <C>       <C>      <C>
   Computer equipment............................    3-5    $271,661 $  333,177
   Manufacturing equipment.......................      5      87,183    158,544
   Office furniture..............................      7      69,781     81,444
   Sales display and clinical equipment..........      3     406,810    588,126
   Leasehold Improvements........................                --      17,275
                                                            -------- ----------
                                                             835,435  1,178,566
   Less-accumulated depreciation...........................  260,775    530,937
                                                            -------- ----------
                                                            $574,660 $  647,629
                                                            ======== ==========
</TABLE>
 
4. Accrued Expenses
 
  Accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                December 31,
                                                              -----------------
                                                                1997     1998
                                                              -------- --------
   <S>                                                        <C>      <C>
   Accrued bonus............................................. $ 84,167 $149,900
   Accrued clinical trial costs..............................   61,650    5,950
   Accrued professional fees.................................   44,579   99,425
   Accrued vacation..........................................   28,604   53,931
   Accrued other.............................................  127,770  161,797
                                                              -------- --------
                                                              $346,770 $471,003
                                                              ======== ========
</TABLE>
 
                                      29
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
5. Stockholders' Equity
 
 Public Offering of Common Stock
 
  On August 2, 1996, the Company completed its initial public offering for the
sale of 2,437,750 shares of common stock. The Company received approximately
$19,654,000 from the sale of the shares, net of underwriting discounts and
expenses associated with the offering.
 
 Preferred Stock
 
  The Company had authorized 10,400,000 shares of preferred stock, of which
6,900,000 shares had been designated as Series A convertible preferred stock
("Series A Preferred Stock") and 2,500,000 shares had been designated as
Series B convertible preferred stock ("Series B Preferred Stock"). The
remaining authorized shares have not been designated. In conjunction with the
Company's initial public offering in August 1996, all shares of Series A
Preferred Stock and Series B Preferred Stock were converted into 3,289,041 and
1,166,667 shares of common stock, respectively, and these classes of stock
were eliminated.
 
  On May 29, 1996, the Company's Board of Directors authorized an additional
2,000,000 shares of the Company's $0.001 par value preferred stock, bringing
the total amount of authorized preferred stock to 3,000,000. 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.
 
 Warrants
 
  In connection with the Series A Preferred Stock issuance, warrants to
purchase 328,904 shares of common stock were issued to the Company's selling
agent, a related party (Note 10). The warrants were issued with an exercise
price of $2.00 per share and expired on September 24, 1998. During 1997 and
1998, warrants to purchase 191,208 and 180,609 shares of common stock,
respectively, were exercised, resulting in the issuance of 168,086 and 140,454
shares of common stock, respectively.
 
  In addition, warrants to purchase 109,634 shares of common stock were issued
in February 1993 to a related party who provides consulting services to the
Company (Note 10). These warrants were issued with an exercise price of $2.00
per share. The warrants were exercised during 1998 and 85,510 shares of common
stock were issued to this related party.
 
  In conjunction with certain license agreements entered into during 1996, the
Company issued warrants to purchase 25,000 shares of common stock to an
unrelated party. The warrants were issued with an exercise price of $11.00 per
share, are exercisable beginning in December 1999 and expire in March 2000.
However, the warrants terminate if the related license agreements are
terminated prior to exercise.
 
  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.
 
6. 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
 
                                      30
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
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"). The Incentive Plan provides 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.
 
  Terms of the Incentive Plan are similar to those of the 1993 Plan. Grants of
stock appreciation rights, performance shares, restricted stock and
unrestricted stock may be made at the discretion of the Board of Directors
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.
 
 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).
 
  Transactions under the Company's stock option plans during the years ended
December 31, 1996, 1997 and 1998 are summarized as follows:
 
<TABLE>
<CAPTION>
                          December 31, 1996   December 31, 1997   December 31, 1998
                          ------------------- ------------------- -------------------
                                     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................  1,284,499   $0.47   1,354,249   $1.54   1,372,750   $3.57
Granted.................    244,500    7.04     514,700    7.85     653,000    5.92
Exercised...............   (156,250)   0.16    (218,549)   0.42    (147,750)   0.23
Canceled................    (18,500)   0.72    (277,650)   3.83    (536,500)   7.80
                          ---------           ---------           ---------
Outstanding at end of
 year...................  1,354,249   $1.54   1,372,750   $3.57   1,341,500   $3.55
                          =========   =====   =========   =====   =========   =====
Exercisable at end of
 year...................    593,964   $0.41     539,034   $0.49     560,467   $0.74
                          =========   =====   =========   =====   =========   =====
Weighted average fair
 value of options
 granted during the
 year...................              $6.17               $5.29               $1.71
                                      =====               =====               =====
</TABLE>
 
 
                                      31
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
  All options granted during 1997 and 1998 have exercise prices equal to the
fair market value of the common stock at the date of grant. The weighted
average exercise price and weighted average fair value of options granted
during 1996 at exercise prices less than the market price of the common stock
at the date of grant were $1.59 and $6.97, respectively. The weighted average
exercise price and weighted average fair value of options granted during 1996
at exercise prices equal to the market price of the common stock at the date
of grant were $9.22 and $5.85, respectively.
 
  During 1996, the Company repriced approximately 107,000 options granted to
employees prior to the Company's initial public offering at an exercise price
of $10.00 per share to an exercise price of $8.13 per share, the fair market
value of the Company's common stock at the time of the repricing. On May 20,
1997, the Company repriced 52,000 options with original exercise prices
ranging from $11.00 to $12.00 per share to $7.75 per share, the fair market
value of the Company's common stock at the time of the repricing.
 
  During 1998, the Board of Directors determined that, certain stock options
held by employees and members of the Company's Scientific Advisory Board
("SAB") had an exercise price significantly higher than the fair market value
of the Company's Common stock, and therefore such options were not providing
the desired incentive to employees and SAB members. Accordingly, the Board
provided employees the right to elect to surrender previously granted
unexercised options with exercise prices between $6.75 and $10.25 in return
for new option grants at $5.00, the fair market value of the Company's Common
stock on October 16, 1998. All vesting in the exchanged options was forteited
by employees. The new options vest at the rate of 25% each year over four
years starting October 16, 1998. Options to purchase 396,250 shares of Common
stock were surrendered by employees and repriced. Options to purchase a total
of 538,998 shares of Common stock were eligible for this program. The
company's CEO and all other members of the Board of Directors were excluded
from this program.
 
  Members of the Company's SAB were granted the right to elect to surrender
previously granted unexercised options with an exercise price of $7.75 in
return for new option grants at $6.75, the fair market value of the Company's
Common stock on October 21, 1998. All vesting in the exchanged options was
forfeited. The new options vest at the rate of 33% per year over three years
starting October 21, 1998. Options to purchase 40,000 shares of Common stock
were surrendered by SAB members and repriced. Options to purchase a total of
60,000 shares of Common stock were eligible for this program.
 
  The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1998:
 
<TABLE>
<CAPTION>
                                           Weighted                         Weighted
                                            Average                          Average
                                           Remaining  Weighted              Exercise
                                          Contractual Average   Number of   Price of
                                Number     Life, in   Exercise   Options     Options
   Range of exercise prices   Outstanding    Years     Price   Exercisable Exercisable
   ------------------------   ----------- ----------- -------- ----------- -----------
   <S>                        <C>         <C>         <C>      <C>         <C>
   $.002-$.020.............       32,070     5.30      $0.02      32,070      $0.02
   $.20-$.50...............      517,018     6.80       0.63     507,874       0.27
   $1.00-$2.00.............      118,162     7.09       1.77     112,163       1.81
   $4.00-$5.00.............      416,000     9.73       5.00         500       4.00
   $7.00-$9.38.............      258,250     8.40       8.14      80,230       8.70
                               ---------                         -------
                               1,341,500     7.46      $3.52     682,757      $1.53
                               =========                         =======
</TABLE>
 
  At December 31, 1998, 2,223,388 shares of common stock are reserved for
issuance upon exercise of the options issued under the Company's stock option
plans and there are 761,450 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)
 
 
  During 1996, the Company granted stock options to purchase 13,750 and 56,250
shares of its common stock at exercise prices of $4.00 and $1.00 per share,
respectively, to certain employees. The Company recorded deferred compensation
of $448,750, representing the difference between the estimated fair market
value of the common stock on the date of grant ($8.00) and the exercise price.
Deferred compensation related to these options is recorded as a reduction of
stockholders' equity and is being amortized ratably over the option vesting
period of five years. Compensation cost associated with these options was
$67,312, $66,001 and $29,437 during 1996, 1997 and 1998 respectively. The
forfeiture of options granted to certain of these employees resulted in the
reversal of previously recorded deferred compensation totaling $283,750 and
$24,792 during 1997 and 1998, respectively.
 
  The Company also recorded additional compensation expense totaling $191,875
and $16,541 during 1997 and 1998, respectively. Compensation expense related
to 60,000 options granted to non-employee consultants for services rendered
was $100,000 in 1997 and $16,541 in 1998. Compensation expense of $91,875
related to the cashless exercise of 15,000 options by an employee was also
recorded 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 and 11,929 shares of common stock at an average price of $8.02
and $5.72 during 1997 and 1998 respectively. No shares were issued during
1996. At December 31, 1998, the Company had 79,511 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
1996, 1997 and 1998, the Company's net loss and net loss per share would have
been as follows:
 
<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                               --------------------------------
                                                  1996       1997       1998
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Net loss:
     As reported.............................. $4,034,879 $6,047,619 $6,537,085
     Pro forma................................ $4,161,030 $6,511,042 $6,900,661
   Net loss per share:
     As reported--basic and diluted........... $     0.66 $     0.58 $     0.61
     Pro forma--basic and diluted............. $     0.69 $     0.62 $     0.65
</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 1996, 1997 and 1998, respectively: (i) dividend
yield of 0% for all periods; (ii) expected volatility of 0%-50%, 60% and 50%;
(iii) risk
 
                                      33
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
free interest rates of 5.8%-6.8%, 6.1%-6.9% and 4.58%; and (iv) expected
option terms of 7 years for 1996, 4 to 7 years for 1997 and five years for
1998. 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 results of
operations for future years.
 
7. Income Taxes
 
  The income tax benefit consists of the following:
 
<TABLE>
<CAPTION>
                                               Year ended December 31,
                                          -----------------------------------
                                             1996        1997        1998
                                          ----------  ----------  -----------
   <S>                                    <C>         <C>         <C>
   Income tax benefit:
     Federal............................. $1,393,000  $2,146,000  $ 2,344,000
     State...............................    249,000     402,000      513,000
                                          ----------  ----------  -----------
                                           1,642,000   2,548,000    2,857,000
   Deferred tax asset valuation
    allowance............................ (1,642,000) (2,548,000)  (2,857,000)
                                          ----------  ----------  -----------
                                          $      --   $      --   $       --
                                          ==========  ==========  ===========
</TABLE>
 
  Deferred tax assets (liabilities) are comprised of the following:
 
<TABLE>
<CAPTION>
                                                          December 31,
                                                     ------------------------
                                                        1997         1998
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Net operating loss carryforwards................. $ 6,435,000  $ 9,164,000
   Research and development tax credit
    carryforwards...................................     598,000      856,000
   Deferred start up and organization expenses......       9,000          --
   Other............................................      11,000       43,000
                                                     -----------  -----------
     Gross deferred tax assets......................   7,053,000   10,063,000
   Capitalized software.............................         --      (137,000)
   Fixed assets.....................................     (29,000)     (48,000)
   Patent costs.....................................     (23,000)     (16,000)
                                                     -----------  -----------
     Net deferred tax assets........................   7,001,000    9,862,000
     Deferred tax asset valuation allowance.........  (7,001,000)  (9,862,000)
                                                     -----------  -----------
                                                     $       --   $       --
                                                     ===========  ===========
</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).
 
                                      34
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
  Approximately $614,000 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.
 
  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,
                            ---------------------
                            1996    1997    1998
                            -----   -----   -----
   <S>                      <C>     <C>     <C>
   Statutory U.S. federal
    tax rate............... (35.0)% (35.0)% (35.0)%
   State taxes, net of
    federal tax benefit....  (6.2)   (6.7)   (6.4)
   Non-deductible
    expenses...............   1.3     1.6     0.2
   Federal research and
    development credits....  (1.6)   (2.6)   (2.7)
   Other...................    .8     0.6     0.2
   Valuation allowance on
    deferred tax assets....  40.7    42.1    43.7
                            -----   -----   -----
                              -- %    -- %    -- %
                            =====   =====   =====
</TABLE>
 
  As of December 31, 1998, the Company has $22,973,000 of net operating loss
carryforwards and $576,000 and $425,000 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 2018.
 
  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 1995, 1996 or 1997.
 
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 $98,700, $159,700 and $178,600 for the
years ended December 31, 1996, 1997 and 1998, respectively.
 
                                      35
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
  At December 31, 1998, future minimum rental payments under the noncancelable
leases are as follows, net of rental payments to be received under a
noncancelable sublease:
 
<TABLE>
   <S>                                                                  <C>
   1999................................................................ $175,010
   2000................................................................   41,283
   2001................................................................   33,117
                                                                        --------
                                                                        $249,411
                                                                        ========
</TABLE>
 
 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 1996, 1997 and 1998 amounted to $20,000 in each year. The future
minimum license maintenance fee commitments at December 31, 1998 are
approximately as follows:
 
<TABLE>
   <S>                                                                  <C>
   1999................................................................ $ 20,000
   2000................................................................   40,000
   2001................................................................   40,000
   2002................................................................   40,000
   Thereafter..........................................................  240,000
                                                                        --------
                                                                        $380,000
                                                                        ========
</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.
 
  In December 1996, the Company entered into two exclusive license agreements
with an unrelated third party. One license agreement requires payment of an
annual fee of $30,000 for ten years in order to maintain the license rights.
 
  The other license agreement requires payment of a perpetual annual license
maintenance fee of $30,000. In order to maintain the exclusivity of this
second license agreement, the Company must meet certain development milestones
within three years (five years if the Company agrees to increase the annual
license maintenance fee to $50,000). During the term of this license
agreement, the Company is also obligated to pay a royalty (ranging from 2.0%
to 3.5%) based on net sales of any products developed from the licensed
technology. The annual maintenance fees for this license are creditable
against royalties otherwise payable for such year.
 
  If the Company chooses to sublicense the technologies covered by these two
license agreements to an unrelated party, the Company must also pay a royalty
equal to 33% of the gross revenue received from the unrelated party for
products developed from such technologies.
 
  These two license agreements are terminable by the Company without cause.
 
  In connection with these license agreements, a warrant to purchase 25,000
shares of common stock was issued to the third party (Note 5).
 
                                      36
<PAGE>
 
                             CAMBRIDGE HEART, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
10. Related Party Transactions, Including Royalty Obligations
 
 License Agreement/Consulting and Technology Agreement
 
  The Company has 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.
 
  The Company has also 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 monthly consulting fees of either $12,500 or
$10,000, as stipulated in the agreement. Total payments made during 1996, 1997
and 1998 were approximately $106,000, $112,600 and $118,600, 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 (Note 5). This warrant was
exercised during 1998, and 85,510 shares of common stock were issued.
 
  Operations through December 31, 1998 did not result in the recognition of
any material royalty expense in connection with these agreements.
 
11. Major Customers, Export Sales and Concentration of Credit Risk
 
  During 1996, the Company derived 34% and 42% of its product revenues from
two distributors of the Company's products in Japan and Europe, respectively.
These same two distributors accounted for 39% and 40% of the Company's
accounts receivable at December 31, 1996. During 1997, the Company derived 47%
and 11% of product revenues from the same two customers, respectively, and one
of these customers comprised 40% of the accounts receivable balance at
December 31, 1997. During 1998, the Company terminated its distribution
contract with this European distributor. Revenues from the Company's Japanese
and European distributors accounted for 36% and 8% respectively of total
revenues during 1998 and 37% and 7% respectively of the accounts receivable
balance at December 31, 1998. The Company does not anticipate non-performance
by the counterparties and, accordingly, does not require collateral.
 
                                      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 June 15, 1999 (the "1999 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 1999 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 1999 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 1999 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.
 
  (a)3. Listing of Exhibits
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
  (1)3.1     Certificate of Incorporation, as amended, of the Registrant.
 
  (1)3.2     Form of Restated Certificate of Incorporation of the Registrant to
             be filed upon the closing of the public offering.
 
  (1)3.3     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.
 
</TABLE>
 
 
                                      38
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
 (1)10.2#    1996 Equity Incentive Plan.
 
 (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.
 
 (1)10.7#    License Agreement By and Between the Registrant and Dr. Richard J.
             Cohen, dated February 8, 1993.
 
 (1)10.8     Lease By and Between the Registrant and R.W. Connelly, dated June
             1, 1995.
 
 (1)10.9*    Exclusive Distributorship Agreement by and between the Registrant
             and Fukuda Denshi Co., Ltd.
 
 (1)10.10    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)10.11    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)10.12    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.
 
 (1)10.13    Investors' Rights Agreement by and among the Company, Financial
             Strategic Portfolios, Inc.--Health Sciences Portfolio and the
             Global Health Sciences Fund, dated September 29, 1993.
 
 (1)10.14    Investors' Rights Agreement by and among the Company and Morgan
             Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture
             Capital Fund II, C.V. and Morgan Stanley Venture Investors, L.P.,
             dated April 19, 1995.
 
 (1)10.15    Form of additional warrant to purchase shares of Common Stock of
             the Company.
 
 (1)10.16    Form of Registration Rights Agreement by and between the Company
             and various Founders, each dated March 29, 1993.
 
 (2)10.17    Amended and Restated Lease By and Between the Registrant and R.W.
             Connelly, dated October 22, 1997.
 
 (2)10.18    Sublease By and Between Registrant and Pinpoint Corporation, dated
             January 30, 1998.
 
 (2)10.19#   Agreement to Extend the Consulting and Technology Agreement
             between the Registrant and Dr. Richard J. Cohen, dated January 23,
             1998.
 
 (3)10.20    Notice of Termination of Exclusive Distribution Agreement by and
             between the Registrant and Kontron Instruments Ltd., dated
             December 30, 1997.
 
 (4)10.21    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".
 
 (4)10.22    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".
 
</TABLE>
 
 
                                       39
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
 (4)10.23    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".
 
 (4)10.24*   First Amendment to the Exclusive Distributorship Agreement by and
             between the Registrant and Fukuda Denshi Co., Ltd.
 
 (4)10.25*   Distributor Agreement, dated as of April 1, 1998, by and between
             the Registrant and Reynolds Medical Ltd.
 
 (4)10.26*   Distributor Agreement, dated as of March 1, 1998, by and between
             the Registrant and Image. Monitoring, Inc
 
 (5)11.1     Computation of Net Loss Per Share.
 
 (5)23.1     Consent of PricewaterhouseCoopers LLP.
 
 (5)27       Financial Data Schedule.
</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 for the
    quarter ended March 31, 1998.
(4) Incorporated herein by reference to the Company's Form 10-Q, as amended,
    for the quarter ended June 30, 1998.
(5) Filed herewith.
 *  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.
 
                                      40
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
 
                                          Cambridge Heart, Inc.
 
                                                   /s/ Jeffrey M. Arnold
                                          By: _________________________________
                                                     Jeffrey M. Arnold
                                               President and Chief Executive
                                                          Officer
 
Date: March 30, 1999
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, 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>
                 Name                            Title                   Date
                 ----                            -----                   ----
 
<S>                                    <C>                        <C>
        /s/ Jeffrey M. Arnold          President, Chief Executive   March 30, 1999
______________________________________  Officer and Director
          Jeffrey M. Arnold
 
         /s/ Richard J. Cohen          Director                     March 30, 1999
______________________________________
           Richard J. Cohen
 
          /s/  Rolf S. Stutz           Director                     March 30, 1999
______________________________________
            Rolf S. Stutz
 
          /s/ J. Daniel Cole           Director                     March 30, 1999
______________________________________
            J. Daniel Cole
 
       /s/ Laurence J. Blumberg        Director                     March 30, 1999
______________________________________
         Laurence J. Blumberg
 
         /s/ Harris A. Berman          Director                     March 30, 1999
______________________________________
           Harris A. Berman
</TABLE>
 
                                      41
<PAGE>
 
EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
   (1)3.1    Certificate of Incorporation, as amended, of the Registrant.
 
   (1)3.2    Form of Restated Certificate of Incorporation of the Registrant to
             be filed upon the closing of the public offering.
 
   (1)3.3    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.
 
  (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.
 
  (1)10.7#   License Agreement By and Between the Registrant and Dr. Richard J.
             Cohen, dated February 8, 1993.
 
  (1)10.8    Lease By and Between the Registrant and R.W. Connelly, dated June
             1, 1995.
 
  (1)10.9*   Exclusive Distributorship Agreement by and between the Registrant
             and Fukuda Denshi Co., Ltd.
 
  (1)10.10   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)10.11   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)10.12   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.
 
  (1)10.13   Investors' Rights Agreement by and among the Company, Financial
             Strategic Portfolios, Inc.--Health Sciences Portfolio and the
             Global Health Sciences Fund, dated September 29, 1993.
 
  (1)10.14   Investors' Rights Agreement by and among the Company and Morgan
             Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture
             Capital Fund II, C.V. and Morgan Stanley Venture Investors, L.P.,
             dated April 19, 1995.
 
  (1)10.15   Form of additional warrant to purchase shares of Common Stock of
             the Company.
 
  (1)10.16   Form of Registration Rights Agreement by and between the Company
             and various Founders, each dated March 29, 1993.
 
  (2)10.17   Amended and Restated Lease By and Between the Registrant and R.W.
             Connelly, dated October 22, 1997.
 
  (2)10.18   Sublease By and Between Registrant and Pinpoint Corporation, dated
             January 30, 1998.
 
  (2)10.19#  Agreement to Extend the Consulting and Technology Agreement
             between the Registrant and Dr. Richard J. Cohen, dated January 23,
             1998.
 
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
  (3)10.20   Notice of Termination of Exclusive Distribution Agreement by and
             between the Registrant and Kontron Instruments Ltd., dated
             December 30, 1997.
 
  (4)10.21   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".
 
  (4)10.22   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".
 
  (4)10.23   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".
 
  (4)10.24*  First Amendment to the Exclusive Distributorship Agreement by and
             between the Registrant and Fukuda Denshi Co., Ltd.
 
  (4)10.25*  Distributor Agreement, dated as of April 1, 1998, by and between
             the Registrant and Reynolds Medical Ltd.
 
  (4)10.26*  Distributor Agreement, dated as of March 1, 1998, by and between
             the Registrant and Image Monitoring, Inc
 
  (5)11.1    Computation of Net Loss Per Share.
 
  (5)23.1    Consent of PricewaterhouseCoopers LLP.
 
  (5)27      Financial Data Schedule.
</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 for the
    quarter ended March 31, 1998.
(4) Incorporated herein by reference to the Company's Form 10-Q, as amended,
    for the quarter ended June 30, 1998.
(5) Filed herewith.
 *  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.