<PAGE>

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

                                   FORM 10-Q

(Mark One)

    X        Quarterly report pursuant to Section 13 or 15(d) of the Securities
   ---       Exchange Act of 1934
             For the quarterly period ended March 31, 1997

                                      or

   ---       Transition report pursuant to Section 13 or 15(d) of the Securities
             Exchange Act of 1934
             For the transition period from               to                 .
                                           --------------    ---------------

                         COMMISSION FILE NUMBER: 0-27330

                                 HEARTSTREAM, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                                       91-1577477
     (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                      Identification Number)

                           2401 4TH AVENUE, SUITE 300 
                               SEATTLE, WA  98121
            (Address of principal executive offices, including zip code)

                                 (206) 443-7630
                 (Registrant's telephone number, including area code)

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
                                    ----      ----

At April 23, 1997, there were 11,714,262 shares of the Registrant's Common 
Stock outstanding. 

<PAGE>

                                HEARTSTREAM, INC.

                         QUARTERLY REPORT ON FORM 10-Q

                                    INDEX

PART I.       FINANCIAL INFORMATION

  Item 1.     Financial Statements
                                                                          PAGE
                                                                          ----

              Balance Sheets as of March 31, 1997 (Unaudited) 
               and December 31, 1996 . . . . . . . . . . . . . . . . .      3

              Statements of Operations (Unaudited) for the three months
               ended March 31, 1997 and 1996 . . . . . . . . . . . . .      4

              Statements of Cash Flows (Unaudited) for the three months 
               ended March 31, 1997 and 1996 . . . . . . . . . . . . .      5

              Notes to Financial Statements. . . . . . . . . . . . . .      6

  Item 2.     Management's Discussion and Analysis of Financial Condition
               and Results of Operations . . . . . . . . . . . . . . .      8


PART II.      OTHER INFORMATION

  Item 1.     Legal Proceedings. . . . . . . . . . . . . . . . . . . .     16

  Item 6.     Exhibits and Reports on Form 8-K . . . . . . . . . . . .     17

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     18

INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . .     19

                                       2

<PAGE>

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                               HEARTSTREAM, INC.
                                BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                               March 31,       December 31,
                                                                 1997             1996
                                                              -----------      -----------
                                                              (Unaudited)
<S>                                                          <C>              <C>
Current assets:
    Cash and cash equivalents. . . . . . . . . . . . . . .  $ 25,857,276      $ 24,726,216
    Securities available-for-sale. . . . . . . . . . . . .    19,444,576        25,353,693
    Accounts receivable. . . . . . . . . . . . . . . . . .       839,179           944,579
    Inventories. . . . . . . . . . . . . . . . . . . . . .     2,892,569         1,548,441
    Prepaid expenses and other . . . . . . . . . . . . . .       693,399           114,091
                                                             -----------       -----------
        Total current assets . . . . . . . . . . . . . . .    49,726,999        52,687,020
Property and equipment, net. . . . . . . . . . . . . . . .     2,413,256         2,492,351
Other assets . . . . . . . . . . . . . . . . . . . . . . .            --           111,084
                                                             -----------       -----------
                                                            $ 52,140,255      $ 55,290,455
                                                             -----------       -----------
                                                             -----------       -----------

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable . . . . . . . . . . . . . . . . . . .  $  2,138,160      $  1,779,871
    Accrued compensation and benefits. . . . . . . . . . .       651,243           293,312
    Other accrued expenses . . . . . . . . . . . . . . . .       418,477           127,246
    Current portion of long-term obligations . . . . . . .       414,815           409,207
                                                             -----------       -----------
        Total current liabilities. . . . . . . . . . . . .     3,622,695         2,609,636

Long-term obligations, less current portion  . . . . . . .       126,069           215,753

Commitments and contingencies

Stockholders' equity:
    Common stock, $0.001 par value
        Authorized shares - 30,000,000
        Issued and outstanding shares - 
          11,679,444 at March 31, 1997 and
          11,635,404 at December 31, 1996. . . . . . . . .        11,679            11,635
    Additional paid-in-capital . . . . . . . . . . . . . .    77,291,636        77,271,965
    Accumulated deficit. . . . . . . . . . . . . . . . . .   (28,887,214)      (24,779,410)
    Deferred compensation. . . . . . . . . . . . . . . . .       (24,610)          (39,124)
                                                             -----------       -----------
        Total stockholders' equity . . . . . . . . . . . .    48,391,491        52,465,066
                                                             -----------       -----------
                                                            $ 52,140,255      $ 55,290,455
                                                             -----------       -----------
                                                             -----------       -----------

</TABLE>

                             SEE ACCOMPANYING NOTES.

                                       3

<PAGE>

                               HEARTSTREAM, INC.
                           STATEMENTS OF OPERATIONS
                                  (UNAUDITED)


                                               Three Months Ended March 31,
                                            --------------------------------
                                                1997                 1996
                                            -----------           ----------
Net sales. . . . . . . . . . . . . . .      $ 1,280,979          $        --
Cost of sales. . . . . . . . . . . . .         (805,529)                  --
                                            -----------           ----------
  Gross margin . . . . . . . . . . . .          475,450                   --

Operating expenses:
  Research and development . . . . . .        1,351,714            1,347,866
  General and administrative . . . . .        1,544,724              916,781
  Sales and marketing. . . . . . . . .        2,305,173              340,031
                                            -----------           ----------
                                              5,201,611            2,604,678

Loss from operations . . . . . . . . .       (4,726,161)          (2,604,678)

Interest income, net . . . . . . . . .          600,792              513,786
                                            -----------           ----------
Net loss . . . . . . . . . . . . . . .      $(4,125,369)         $(2,090,892)
                                            -----------           ----------
                                            -----------           ----------



Net loss per share, historical . . . .      $     (0.35)         $     (0.25)
                                            -----------           ----------
                                            -----------           ----------

Shares used to calculate
  historical net loss per share. . . .       11,674,610            8,525,522
                                            -----------           ----------
                                            -----------           ----------

Net loss per share, pro forma. . . . .      $     (0.35)         $     (0.21)
                                            -----------           ----------
                                            -----------           ----------
Shares used to calculate
  pro forma net loss per share . . . .       11,674,610           10,159,074
                                            -----------           ----------
                                            -----------           ----------

                             SEE ACCOMPANYING NOTES.

                                       4

<PAGE>

                                HEARTSTREAM, INC.
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                      Three Months Ended March 31,
                                                                    -------------------------------
                                                                        1997                1996
                                                                    -----------         -----------
<S>                                                                <C>                <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $(4,125,369)       $ (2,090,892)
Adjustments to reconcile net loss to
  net cash used in operating activities:
    Depreciation and amortization. . . . . . . . . . . . . . . .       254,609             166,311
    Amortization of deferred compensation                               14,514              65,929
    (Accretion) of discounts and amortization of
      premiums on securities . . . . . . . . . . . . . . . . . .       (25,288)             16,918
    Changes in:
      Decrease in accounts receivable. . . . . . . . . . . . . .       105,400                  --
      Increase in inventories. . . . . . . . . . . . . . . . . .    (1,344,128)           (310,961)
      Increase in prepaid expenses . . . . . . . . . . . . . . .      (579,308)           (110,269)
      Decrease (increase) in other assets                              111,084             (12,789)
      Increase in accounts payable and accrued expenses  . . . .     1,007,451             403,659
                                                                    -----------         -----------
Net cash used in operating activities. . . . . . . . . . . . . .    (4,581,035)         (1,872,094)

INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . .      (175,514)           (187,213)
Purchase of securities . . . . . . . . . . . . . . . . . . . . .    (3,777,921)        (34,297,669)
Sales of securities. . . . . . . . . . . . . . . . . . . . . . .     2,700,000             500,000
Maturities of securities . . . . . . . . . . . . . . . . . . . .     7,029,891           2,002,490
                                                                    -----------         -----------
Net cash provided by (used in) investing activities  . . . . . .     5,776,456         (31,982,392)

FINANCING ACTIVITIES:
Deferred offering costs. . . . . . . . . . . . . . . . . . . . .            --             301,806
Principal payments on capitalized lease obligations. . . . . . .       (84,076)            (74,104)
Issuance of common stock, net of issuance costs  . . . . . . . .        19,715          49,000,887
                                                                    -----------         -----------
Net cash (used in) provided by financing activities. . . . . . .       (64,361)         49,228,589
                                                                    -----------         -----------
Net increase in cash and cash equivalents  . . . . . . . . . . .     1,131,060          15,374,103
Cash and cash equivalents, beginning of period . . . . . . . . .    24,726,216           5,970,768
                                                                    -----------         -----------
Cash and cash equivalents, end of period                           $25,857,276        $ 21,344,871
                                                                    -----------         -----------
                                                                    -----------         -----------
NONCASH TRANSACTION AND SUPPLEMENTAL DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . .   $    32,276        $     34,884
                                                                    -----------         -----------
                                                                    -----------         -----------
Conversion of preferred stock to common stock. . . . . . . . . .   $        --        $      6,190
                                                                    -----------         -----------
                                                                    -----------         -----------

</TABLE>

                             SEE ACCOMPANYING NOTES.

                                       5

<PAGE>

                                HEARTSTREAM, INC.
                          NOTES TO FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

        The accompanying unaudited financial statements have been prepared by
    Heartstream, Inc. ("Heartstream" or the "Company") according to the rules 
    and regulations of the Securities and Exchange Commission.  Accordingly, 
    they do not include all of the information and footnote disclosures normally
    included in financial statements prepared in accordance with generally 
    accepted accounting principles.  In the opinion of management, the financial
    statements reflect all adjustments, which include only normal and recurring
    items, necessary for fair presentation of the interim periods presented. The
    results for the three months ended March 31, 1997 may not necessarily be
    indicative of the results for the year ending December 31, 1997.  These
    financial statements and related notes should be read in conjunction with 
    the Company's audited financial statements for the year ended December 31, 
    1996, included in its Annual Report to Stockholders incorporated by 
    reference into the Form 10-K filed with the Securities and Exchange 
    Commission on March 31, 1997.

2.  INVENTORIES

        Inventories consist of the following:

                                                March 31,       December 31,
                                                  1997              1996
                                               ----------        ----------
        Raw materials                          $1,556,979        $1,023,182
        Work-in-process                           583,139           462,919
        Finished goods                            752,451            62,340
                                               ----------        ----------
                                               $2,892,569        $1,548,441
                                               ----------        ----------
                                               ----------        ----------

3.  NET LOSS PER SHARE

        Historical net loss per share is computed based on the weighted average
    number of common shares outstanding and gives effect to the following
    adjustments:  common equivalent shares are not included in the per-share
    calculation where the effect of their inclusion would be antidilutive, 
    except that, in accordance with Securities and Exchange Commission 
    requirements, common and common equivalent shares issued during the 
    12-month period prior to the filing of an initial public offering have been
    included in the calculation as if they were outstanding for all periods 
    using the treasury stock method and the initial public price of $13 per 
    share even though their inclusion would be antidilutive.

        The pro forma net loss per share is computed based on the historical net
    loss per share adjusted for the assumed conversion of all outstanding shares
    of convertible preferred stock into common stock at the time of issuance.

                                       6

<PAGE>

                                HEARTSTREAM, INC.
                          NOTES TO FINANCIAL STATEMENTS

3.  NET LOSS PER SHARE (CONTINUED)

        In February 1997, the Financial Accounting Standards Board issued 
    Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
    ("Statement 128"), which is effective for financial statements for both 
    interim and annual periods ending after December 15, 1997.  At that time,
    the Company will be required to change its method for calculating earnings
    per share and restate all prior periods presented.  The impact of Statement
    128 on the calculation of net loss per share for all current and prior 
    periods is not expected to be material.

4.  LITIGATION

        In 1995, Physio-Control Corporation ("Physio-Control"), a competitor 
    of the Company, filed a lawsuit in Washington state court alleging trade 
    secret misappropriation and tortious interference with business 
    relations against the Company and five of its employees and their 
    spouses in connection with development of the Company's automatic 
    external defibrillator, ForeRunner-TM-.  These employees were founders 
    of Heartstream and former employees of Physio-Control.  The complaint 
    includes related allegations that the five employees breached 
    proprietary information agreements with Physio-Control. The complaint 
    seeks injunctive relief, unspecified monetary damages and an order 
    declaring Physio-Control the owner of certain patent applications filed 
    by the Company and any patents that may issue from those applications. 
    Heartstream has filed counterclaims against Physio-Control.  The pending 
    litigation has resulted and will continue to result in substantial 
    expense to the Company and significant diversion of effort by the 
    Company's technical and management personnel.  If the court finds 
    against the Company, the Company could be enjoined from manufacturing or 
    selling its ForeRunner product, the Company could be required to seek 
    licenses from Physio-Control, and the Company could also be held liable 
    for damages.  The litigation is currently in the discovery phase with a 
    trial date set for September 1997. The Company has conducted a review of 
    its technology in light of the Physio-Control claims and, after 
    consultation with its intellectual property and litigation counsels, 
    believes that the Company should prevail in the litigation based on 
    several defenses including, among other things, the Company's conclusion 
    that it has independently developed the technology at issue.  However, 
    litigation is subject to inherent uncertainties, especially cases such 
    as this where complex technical issues may be decided by a lay jury.  
    Accordingly, no assurance can be given that the lawsuit will not be 
    decided against the Company.  Adverse determinations in the litigation 
    with Physio-Control could have a material adverse effect on the 
    Company's business, financial condition and results of operations. 

        On January 7, 1997, the Company was awarded a patent relating to the
    Company's defibrillator self-test technology.  On January 10, 1997, the
    Company filed a lawsuit in U.S. Federal District Court in Seattle against
    Physio-Control for infringement of this patent.  Physio-Control has filed a
    counterclaim charging infringement of one of its patents by the Company. 
    Each party is seeking injunctive relief and unspecified monetary damages. 
    The litigation is at a very early stage and a trial date has not yet been
    determined.

5.  RECLASSIFICATIONS

        Certain prior period amounts have been reclassified to conform with 
    current period presentation.

                                       7

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

OVERVIEW

    Heartstream, Inc. ("Heartstream" or "Company") was founded in December 1992
and has conducted organizational, research and development, market development
and clinical trial activities of its automatic external defibrillator ("AED"),
ForeRunner-TM-, during the past four years.  In 1996 the Company received the
required approvals to market ForeRunner and its accessories in several
countries, including the United States, Canada and the 18 countries of the
European Economic Area.  With completion of ForeRunner's development process and
required regulatory approvals, the Company initiated commercial shipments of the
ForeRunner AED and its accessories to Heartstream's direct customers and
international distribution partners in November 1996.  

    The Company had an accumulated deficit of $28.9 million at March 31, 1997,
and expects to continue to incur operating losses at least through 1998 as it
builds its sales force, increases market development activities, seeks
regulatory clearance for its products in additional jurisdictions, develops new
products and increases administrative activities to support the growth of the
Company.  The Company does not have significant experience manufacturing,
marketing or selling its products in commercial quantities and there can be no
assurance that the ForeRunner defibrillator will ever gain commercial acceptance
or that the Company will ever achieve profitability.  In addition, the Company
and its distributors are required to comply with regulations regarding product
quality and safety in order to maintain regulatory approvals.  Failure to comply
with these requirements could result in warning letters, fines, injunctions,
civil penalties, recall or seizure of products, suspension of production, or
delays in the approval of additional products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

    In 1995, Physio-Control Corporation ("Physio-Control"), a competitor of the
Company, filed a lawsuit in Washington state court alleging trade secret
misappropriation and tortious interference with business relations against the
Company and five of its employees and their spouses in connection with
development of the Company's automatic external defibrillator, ForeRunner-TM-. 
These employees were founders of Heartstream and former employees of
Physio-Control.  The complaint includes related allegations that the five
employees breached proprietary information agreements with Physio-Control.  The
complaint seeks injunctive relief, unspecified monetary damages and an order
declaring Physio-Control the owner of certain patent applications filed by the
Company and any patents that may issue from those applications.  Heartstream has
filed counterclaims against Physio-Control.  The pending litigation has resulted
and will continue to result in substantial expense to the Company and
significant diversion of effort by the Company's technical and management
personnel.  If the court finds against the Company, the Company could be
enjoined from manufacturing or selling its ForeRunner product, the Company could
be required to seek licenses from Physio-Control, and the Company could also be
held liable for damages.  The litigation is currently in the discovery phase
with a trial date set for September 1997.  The Company has conducted a review of
its technology in light of the Physio-Control claims and, after consultation
with its intellectual property and litigation counsels, believes that the
Company should prevail in the litigation based on several defenses including,
among other things, the Company's conclusion that it has independently developed
the technology at issue.  However, litigation is subject to inherent
uncertainties, especially cases such as this where complex technical issues may
be decided by a lay jury.  Accordingly, no assurance can be given that the
lawsuit will not be decided against the Company.  Adverse determinations in the
litigation with Physio-Control could have a material adverse effect on the
Company's business, financial condition and results of operations.

                                       8

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

    On January 7, 1997, the Company was awarded a patent relating to the
Company's defibrillator self-test technology.  On January 10, 1997, the Company
filed a lawsuit in U.S. Federal District Court in Seattle against Physio-Control
for infringement of this patent.  Physio-Control has filed a counterclaim
charging infringement of one of its patents by the Company.  Each party is
seeking injunctive relief and unspecified monetary damages.  The litigation is
at a very early stage and a trial date has not yet been determined.

RESULTS OF OPERATIONS

    Net sales totaled $1.3 million for the three months ended March 31, 1997,
representing the first full quarter of commercial shipments of the ForeRunner
AED.  The Company had no sales in the first quarter of 1996 as shipment of the
Company's products commenced in November 1996. Sales to the Company's
international distribution partners accounted for approximately 45% of net sales
for the quarter.  The Company expects international sales to decrease as a
percent of total sales during the remainder of 1997 as it continues to identify
domestic distribution partners and increases the size of its domestic sales
force.  Accessories accounted for approximately 15% of total sales for the
quarter.

    Gross margin totaled $0.5 million, or 37% of net sales, for the three 
months ended March 31, 1997.  The Company experienced production 
inefficiencies (which were resolved during the quarter) that affected 
margins.  However, this was offset by an increase in sales of higher-margin 
domestic units.  The Company expects margins to decline during the second 
quarter of 1997 due to the impact of an expected shipment to a large 
customer.  Future margins may be impacted by shifts in the sales distribution 
channel mix and large sales at volume discounts to certain customers.  In 
addition, the Company has established production facilities based on 
forecasted product demand.  Actual utilization of these facilities may affect 
future margins.

    Research and development expenses totaled $1.4 million for the three 
months ended March 31, 1997, which is consistent with the same period in 
1996.  The Company expects research and development expenses in the next 
several quarters to continue near current levels as the development team 
improves the ForeRunner production process and undertakes development of new 
products and product enhancements. 

    General and administrative expenses totaled $1.5 million for the three 
months ended March 31, 1997 compared to $0.9 million for the three months 
ended March 31, 1996.  This represents an increase of $0.6 million, or 68% 
over the same period in the prior year.  The increase was due to increased 
costs to operate as a public company, additional personnel and facilities 
costs to support growth of the Company and additional legal costs in 
connection with the Physio-Control litigation.

    Sales and marketing expenses totaled $2.3 million for the three months 
ended March 31, 1997 compared to $0.3 million for the three months ended 
March 31, 1996.  The increase is primarily due to the hiring of direct sales 
representatives and marketing personnel, as well as promotional and market 
development activities.  Sales and marketing expenses for the remainder of 
1997 are expected to increase significantly over the same period of the prior 
year due to continued worldwide commercialization of the ForeRunner AED, 
including the hiring of additional direct sales representatives, 
establishment of additional domestic and international distribution channels, 
and increased advertising and promotional activities.

                                       9

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)


    Interest income was $0.6 million for the three months ended March 31, 1997
compared to $0.5 million for the same period in 1996.  This represents an
increase of $0.1 million, or 15%.  The increase was primarily due to higher cash
and investment balances in 1997 as proceeds from the Company's initial public
offering of common stock were received in February 1996.

INCOME TAXES

    The Company has not generated any net income to date and therefore has not
paid any federal income taxes since inception.  At March 31, 1997, the Company
had net operating loss carryforwards of approximately $28.0 million and research
and development credit carryforwards of approximately $0.3 million, net of
carryforwards expected to expire before their complete utilization.  The
operating loss carryforwards and research and development carryforwards begin to
expire in the year 2008.  Utilization of federal income tax carryforwards is
subject to certain limitations under Section 382 of the Internal Revenue Code of
1986, as amended.  The Company's past sales of preferred and common stock have
resulted in "ownership changes" as defined under Section 382, resulting in
limitations on the future use of carryforwards.  These limitations are expected
to result in the expiration of approximately $1.0 million of net operating loss
carryforwards and approximately $0.1 million research and development credit
carryforwards before their complete utilization. 

LIQUIDITY AND CAPITAL RESOURCES

    At March 31, 1997, the Company's cash, cash equivalents and securities
available-for-sale were $45.3 million, compared to $50.1 million at December 31,
1996.  Cash used to fund operating activities was $4.6 million for the three
months ended March 31, 1997 compared to $1.9 million for the three months ended
March 31, 1996, reflecting increasing net losses principally related to
increased sales, marketing and administrative expenditures.  The Company expects
to continue to incur operating losses as it supports the growth of its sales and
marketing organization, undertakes new development activities and supports its
ongoing litigation and administrative activities.  Although the Company believes
that its existing liquid assets and cash flows from sales will be sufficient to
fund its operations through 1998, there can be no assurance that the Company
will not require additional financing in the near future or that additional
financing will be available on satisfactory terms, if at all.

RISK FACTORS

    This quarterly report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties.  The Company's actual results could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors including those set forth below.

    FLUCTUATIONS IN OPERATING RESULTS.  The Company's results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including actions relating to regulatory matters, the extent to which
the Company's products gain market acceptance, and competition.  Results of
operations will also be affected by the timing of orders received and the
ability of its sales force and distributors to effectively commercialize the
Company's products.

                                      10

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

    LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE 
LOSSES.  The Company was founded in December 1992 and to date has engaged 
primarily in organizational, research and development, market development and 
clinical trial activities.  The Company has generated limited revenues and, 
as of March 31, 1997, had an accumulated deficit of approximately $28.9 
million. The Company expects to continue to incur operating losses at least 
through 1998 as it increases market development activities, initiates new 
research and development projects, seeks regulatory clearance for its 
products in additional jurisdictions and increases administrative activities 
to support growth of the Company.  The Company has limited experience in 
manufacturing, marketing and selling its products in commercial quantities 
and there can be no assurance that the ForeRunner will ever gain commercial 
acceptance or that the Company will ever achieve profitability.

    DEPENDENCE UPON FORERUNNER.  The ForeRunner AED and its related 
accessories are currently the Company's only products.  The Company expects 
that the ForeRunner and its related accessories will account for 
substantially all of the Company's revenues for the foreseeable future.  
Accordingly, any problem or disruption in the manufacturing, acceptance or 
sale of the ForeRunner AED and its accessories could have a material adverse 
effect on the Company's business, financial condition and results of 
operations.

    PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE.  The 
manufacture and sale of medical products entail significant risk of product 
liability claims or product recalls.  There can be no assurance that the 
Company's existing insurance coverage limits are adequate to protect the 
Company from any liabilities it might incur in connection with the sale of 
its product. In addition, the Company may require increased product liability 
coverage as its products are further commercialized.  Such insurance is 
expensive and in the future may not be available on acceptable terms, if at 
all.  A successful product liability claim or series of claims brought 
against the Company in excess of its insurance coverage, or a recall of the 
Company's products, could have a material adverse effect on the Company's 
business, financial condition and results of operations.

    UNCERTAINTY OF MARKET ACCEPTANCE AND DEPENDENCE ON MARKET DEVELOPMENT.  
The Company's success is substantially dependent upon market acceptance of 
the ForeRunner AED.  Currently, all other commercially available AEDs utilize 
a monophasic waveform and utilize 200 to 360 Joules of energy in delivering 
their defibrillation therapy.  Many of these AEDs have been marketed for 
several years, comply with the American Heart Association ("AHA") recommended 
guideline for external defibrillation therapy and have been extensively used 
in the field. The Company's ForeRunner AED utilizes a biphasic waveform 
delivered at lower energy levels.  There can be no assurance that the market 
will accept the Company's lower energy biphasic waveform protocol.  In 
addition, there can be no assurance that ForeRunner will demonstrate benefits 
in ease of use, maintenance and safety or will achieve acceptance in its 
target markets.

    The Company's success is also substantially dependent upon market 
development and expansion.  AEDs are currently marketed by a number of 
companies into the existing professional emergency medical technician ("EMT") 
market, the Company's initial target market.  The Company's future success 
depends upon substantially increasing the number of AEDs sold into the 
professional EMT market segment, as well as the emerging first responder 
market.  Development of the first responder market will depend in large part 
on the Company's ability to demonstrate to physicians and potential customers 
the benefits, safety, efficacy and cost-effectiveness of widespread use of 
its AED by responders who are less 

                                      11

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

trained than EMTs.  Doing so may require significant sales and marketing 
resources. There can be no assurance that the ForeRunner will gain market 
acceptance or that market demand for the ForeRunner will be sufficient to 
allow profitable operations.

    Several states and foreign jurisdictions have enacted laws and 
regulations which govern the delivery of emergency medical services, 
including the use of external defibrillators.  These laws and regulations in 
many cases currently restrict use of these devices to physicians or other 
specified categories of trained personnel, mandate levels of operator 
training and, in some cases, require that certain features be incorporated 
into external defibrillators, including features such as an ECG strip chart 
printer which are not currently incorporated into the ForeRunner.  
Accordingly, market acceptance of the ForeRunner will be significantly 
dependent upon the Company's ability to convince state, local and foreign 
government bodies and medical directors of the safety and efficacy of the 
ForeRunner and its potential for widespread deployment.  There can be no 
assurance that such restrictions on the use of AEDs will be eased or removed.

    LENGTHY CUSTOMER DECISION PROCESSES.  Because of budgetary and 
bureaucratic constraints, and because of the ForeRunner's innovative approach 
to treatment of sudden cardiac arrest, the Company believes purchasing 
decisions of some of its customers, particularly municipal accounts, may be 
characterized by long decision processes.  The lengthy decision process may 
be exacerbated through sales and marketing tactics of the Company's 
competitors, which may be designed to create uncertainty and doubt in the 
minds of customers concerning the technology and efficacy of the ForeRunner 
AED.  Accordingly, the Company's products may be subject to long sales cycles.

    COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE.  The domestic and 
international markets for external defibrillators are highly competitive, and 
most of the Company's competitors have substantial installed bases of 
products and significantly greater financial, technical, research and 
development, or sales and marketing resources than the Company.  Several of 
the Company's competitors have been manufacturing defibrillators for many 
years and may have greater name recognition than the Company.  Accordingly, 
the Company's competitors may be able to bring new product offerings to 
market quickly and may be able to increase sales of their products by 
leveraging their installed bases and established distribution channels.  The 
Company believes that its primary competitors are companies that currently 
market AEDs into the professional EMT segment of the market.  This market 
segment is dominated by Laerdal Medical, Inc. ("Laerdal") and Physio-Control 
International Corporation ("Physio-Control").  Other competitors that sell 
products into this market segment include SurVivaLink Corporation 
("SurVivaLink"), and Zoll Medical, Inc. Laerdal, Physio-Control and 
SurVivaLink have recently introduced new AEDs targeted at markets similar to 
those targeted by the ForeRunner defibrillator. The introduction of these or 
other similar products may cause pricing pressure on the Company's existing 
products in order for the Company to remain competitive in the market.

    The Company believes that the principal competitive factors for AEDs in 
the professional EMT and first responder market segments are ease of use, low 
maintenance and training requirements, cost-effectiveness, size, safety and 
reliability.  The ForeRunner AED is designed to address all these factors. 
However, there can be no assurance that the Company's products will compete 
favorably with the products offered by its competitors, or that superior 
defibrillation technologies will not be developed by these competitors or 
others which may render the Company's technology or products obsolete or 
noncompetitive.  In addition, a number of companies may be engaged in the 
development of approaches for the treatment 

                                      12

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

of sudden cardiac arrest other than those utilized by the Company.  There can 
be no assurance that superior defibrillation technologies will not be 
developed by these competitors or others, or that alternative therapies or 
approaches, including pharmaceutical or other alternatives, will not render 
the Company's technology or products under development obsolete or 
noncompetitive.

    LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE. The Company has 
limited experience selling and marketing its product in domestic or 
international markets.  In the United States, the Company currently sells its 
products through a direct sales force.  The Company intends to expand the 
size of its direct sales force during 1997.  However competition for sales 
personnel is fierce and there can be no assurance that the Company will be 
able to attract qualified personnel.  In addition to expanding its direct 
sales force, the Company believes that it may be necessary to enter into 
alliances with one or more domestic partners with significant distribution 
capabilities to successfully penetrate various segments of the first 
responder market.  Although the Company has had discussions with potential 
domestic distributors and potential partners, the Company has not yet entered 
into any domestic distribution agreements.  In international markets, the 
Company sells its products primarily through distributors, and to date has 
entered into agreements with distributors covering countries in Europe and 
the Asia-Pacific region.  However, there can be no assurance that the 
Company's distributors will devote adequate resources to selling the 
Company's products over other products or will adequately train their sales 
force on the Company's products.  In addition, there can be no assurance that 
the sales and marketing organization will be cost-effective, or that the 
Company's sales and marketing efforts will be successful.

    LIMITED MANUFACTURING EXPERIENCE.  The Company performs final assembly, 
testing, and inspection at its facility in Seattle, Washington.  Due to 
limited experience in manufacturing its products in commercial quantities, 
the Company may encounter difficulties in manufacturing the ForeRunner 
device, including problems involving material requirements planning, 
production yields, quality control and assurance and shortages of qualified 
personnel.

    POTENTIAL COMPONENT SHORTAGES; DEPENDENCE ON SOLE SOURCES OF SUPPLY.  The 
Company manufactures its products based on forecasted product orders, and 
purchases subassemblies and components prior to receipt of purchase orders 
from customers.  Lead times for materials and components ordered by the 
Company vary significantly, and depend upon factors such as the specific 
supplier, contract terms and demand for a component at a given time.  In 
addition, certain components used in the Company's products have long lead 
times and have been in short supply.  The Company has acquired an inventory 
of certain components in anticipation of possible shortages, and may continue 
this practice for these or other components in the future.  If orders do not 
match forecasts, the Company may have excess or inadequate inventory of 
certain materials and components. The Company purchases some key components, 
such as the main energy storage capacitor and the LCD display screen used in 
the ForeRunner, from sole source suppliers.  For certain components, 
including the ForeRunner's batteries and microprocessors, there are 
relatively few sources of supply.  In addition, several of the subassemblies 
in ForeRunner require the supplier to perform extensive testing before the 
Company accepts the subassembly into its final manufacturing process.  These 
tests are specific to the design of ForeRunner and if a supplier is unable to 
meet the Company's requirements, an alternate supplier may be required. There 
can be no assurance that establishment of additional or replacement suppliers 
for these components can be accomplished quickly, or at all.  Any significant 
component supply delay or interruption could require the Company to qualify 
new sources of supply, if available.

                                      13

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

    DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY; RELATED LITIGATION.  
At March 31, 1997, the Company had filed a total of 39 patent applications 
with the United States Patent and Trademark Office, 16 of which had either 
been issued or allowed.  The Company's success will depend in part on its 
ability to obtain patent protection for its products and processes, to 
preserve its trade secrets and to operate without infringing the proprietary 
rights of third parties.  The Company's strategy is to actively pursue patent 
protection in the United States and foreign jurisdictions for technology that 
it believes to be proprietary and that offers a potential competitive 
advantage for its products.  However, no assurance can be given that any 
patents from pending patent applications or from any future patent 
application will be issued, that the scope of any patent protection will 
exclude competitors or provide competitive advantages to the Company, that 
any of the Company's patents will be held valid if subsequently challenged or 
that others will not claim rights in or ownership of the patents and other 
proprietary rights held by the Company.  In addition, the laws of certain 
foreign countries do not protect the Company's intellectual property rights 
to the same extent as do the laws of the United States.  Litigation or 
regulatory proceedings, which could result in substantial cost and 
uncertainty to the Company, may also be necessary to enforce patent or other 
intellectual property rights of the Company or to determine the scope and 
validity of other parties' proprietary rights.  There can be no assurance 
that third parties will not assert infringement claims in the future with 
respect to the Company's current or future products or that any such claims 
will not require the Company to enter into license arrangements or result in 
litigation, regardless of the merits of such claims.  No assurance can be 
given that any necessary licenses can be obtained on commercially reasonable 
terms, or at all.  Should litigation with respect to any such claims 
commence, such litigation could be extremely expensive and time consuming 
regardless of the outcome of such litigation. 

    The medical device market has been characterized by extensive litigation 
regarding patents, trade secrets and other intellectual property rights.  In 
1995, Physio-Control Corporation, a competitor of the Company, filed a 
lawsuit in Washington state court alleging trade secret misappropriation and 
tortious interference with business relations against the Company and five of 
its employees and their spouses in connection with development of the 
Company's automatic external defibrillator, ForeRunner-TM-.  These employees 
were founders of Heartstream and former employees of Physio-Control.  The 
complaint includes related allegations that the five employees breached 
proprietary information agreements with Physio-Control.  The complaint seeks 
injunctive relief, unspecified monetary damages and an order declaring 
Physio-Control the owner of certain patent applications filed by the Company 
and any patents that may issue from those applications.  Heartstream has 
filed counterclaims against Physio-Control.  The pending litigation has 
resulted and will continue to result in substantial expense to the Company 
and significant diversion of effort by the Company's technical and management 
personnel.  If the court finds against the Company, the Company could be 
enjoined from manufacturing or selling its ForeRunner product, the Company 
could be required to seek licenses from Physio-Control, and the Company could 
also be held liable for damages.  The litigation is currently in the 
discovery phase with a trial date set for September 1997. The Company has 
conducted a review of its technology in light of the Physio-Control claims 
and, after consultation with its intellectual property and litigation 
counsels, believes that the Company should prevail in the litigation based on 
several defenses including, among other things, the Company's conclusion that 
it has independently developed the technology at issue. However, litigation 
is subject to inherent uncertainties, especially cases such as this where 
complex technical issues may be decided by a lay jury. Accordingly, no 
assurance can be given that the lawsuit will not be decided against the 
Company.  Adverse determinations in the litigation with Physio-Control could 
have a material adverse effect on the Company's business, financial condition 
and results of operations. 

                                      14

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

    On January 7, 1997, the Company was awarded a patent relating to the 
Company's defibrillator self-test technology.  On January 10, 1997, the 
Company filed a lawsuit in U.S. Federal District Court in Seattle against 
Physio-Control for infringement of this patent.  Physio-Control has filed a 
counterclaim charging infringement of one of its patents by the Company.  
Each party is seeking injunctive relief and unspecified monetary damages.  
The litigation is at a very early stage and a trial date has not yet been 
determined.

    While the Company generally enters into confidentiality agreements with 
its employees and consultants, there can be no assurance that the Company's 
trade secrets or proprietary technology will not become known or be 
independently developed by competitors in such a manner that the Company has 
no practical recourse.

    GOVERNMENT REGULATION.  The design, manufacturing, labeling, distribution 
and marketing of the Company's products are subject to extensive and rigorous 
government regulation in the United States and certain other countries where 
the process of obtaining and maintaining required regulatory approvals is 
lengthy, expensive and uncertain.

    In 1996 the Company received the required approvals to market ForeRunner 
and its accessories in several countries, including the United States, Canada 
and the 18 countries of the European Economic Area.  In order for the Company 
to market the ForeRunner and its related accessories in certain other foreign 
jurisdictions, the Company and its distributors and agents must obtain the 
required regulatory approvals and clearances. These regulations vary from 
country to country.  There can be no assurance that the Company will obtain 
regulatory approvals in such countries or that it will not be required to 
incur significant costs in obtaining or maintaining its foreign regulatory 
approvals.

    Regulatory approvals may include significant limitations on the indicated 
uses for which the product may be marketed.  In addition, the Company and its 
distributors must comply with various regulations regarding product safety 
and quality in order to maintain approvals.  The Company's manufacturing 
processes will be required to comply with the GMP regulations of the FDA.  
These regulations include design, testing, production, control, documentation 
and other requirements.  Enforcement of GMP regulations has increased 
significantly in the last several years, and the FDA has publicly stated that 
compliance will be more strictly scrutinized.  The Company's facilities and 
manufacturing processes, as well as those of certain of the Company's third 
party suppliers, are subject to periodic inspection by the FDA and other 
agencies.  Failure to comply with these and other applicable regulatory 
requirements could result in, among other things, warning letters, fines, 
injunctions, civil penalties, recall or seizure of products, total or partial 
suspension of production, refusal of the government to grant premarket 
clearance or premarket approval for devices, withdrawal of approvals and 
criminal prosecution.

    DEPENDENCE UPON KEY PERSONNEL.  The Company's ability to operate 
successfully depends in significant part upon the continued service of 
certain key scientific, technical and managerial personnel, and its 
continuing ability to attract and retain additional highly qualified 
scientific, technical and managerial personnel.  Competition for such 
personnel is intense, and there can be no assurance that the Company can 
retain such personnel or that it can attract or retain other highly qualified 
personnel in the future.  In addition, many employees of the Company, 
including a number of its key scientific, technical and managerial personnel, 
are subject to the terms of confidentiality agreements with respect to 
proprietary information of their former employers. The failure of these 
employees to comply with the 

                                      15

<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
           RESULTS OF OPERATIONS (CONTINUED)

terms of their agreements with, or other obligations to, such former 
employers could result in assertion of claims against the Company and such 
employees, which, if successful, could restrict their role with the Company.

    POSSIBLE VOLATILITY OF STOCK PRICE.  The stock market has from time to 
time experienced significant price and volume fluctuations that are unrelated 
to the operating performance of particular companies.  These broad market 
fluctuations may adversely affect the market price of the Company's common 
stock.  In addition, the market price of the Company's common stock is likely 
to be highly volatile due to the Company's relatively recent introduction of 
its products. Factors such as fluctuations in the Company's sales and 
operating results, announcements of technological innovations or new products 
by the Company or its competitors, FDA and international regulatory actions, 
developments with respect to patents or proprietary rights, public concern as 
to the safety of products developed by the Company or others, changes in 
health care policy in the United States and internationally, changes in stock 
market analyst recommendations regarding the Company, other medical device 
companies or the medical device industry generally and general market 
conditions may have a significant effect on the market price of the common 
stock.

PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

    On January 7, 1997, the Company was awarded a patent relating to the 
Company's defibrillator self-test technology.  On January 10, 1997, the 
Company filed a lawsuit in U.S. Federal District Court in Seattle against 
Physio-Control for infringement of this patent.  Physio-Control has filed a 
counterclaim charging infringement of one of its patents by the Company.  
Each party is seeking injunctive relief and unspecified monetary damages.  
The litigation is at a very early stage and a trial date has not yet been 
determined. 

                                      16

<PAGE>

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

  (a)  Exhibits

        3.1(1)      Restated Certificate of Incorporation, as in effect prior to
                    initial public offering
        3.2(1)      Restated Certificate of Incorporation, as currently in
                    effect
        3.3(1)      Bylaws
        3.4(3)      Certificate of Designation of Rights, Preferences and
                    Privileges of Series A Participating Preferred Stock
        4.1(1)      Specimen Common Stock Certificate
        4.2(2)      Preferred Share Rights Agreement, dated as of December 6,
                    1996 between the Registrant and ChaseMellon Shareholder
                    Services, L.L.C.
        10.1(1)     Form of Indemnification Agreement between the Registrant and
                    each of its directors and officers
        10.2(3)     1993 Employee and Consultant Stock Plan, as amended, and
                    form of Stock Option Agreement thereunder
        10.3(1)     1995 Director Option Plan and form of Stock Option Agreement
                    thereunder
        10.4(1)     1995 Employee Stock Purchase Plan and forms of agreements
                    thereunder
        10.5(1)     Lease dated May 25, 1994 between the Registrant and Martin
                    Selig
        10.6(1)     Restated Investors Rights Agreement dated March 16, 1995
                    between the Registrant and certain holders of the
                    Registrant's securities
        10.7(1)     Agreement dated August 3, 1995 between the Registrant and
                    Oki Semiconductor
        10.8(1)(4)  International Distributor Agreement (undated) between the
                    Registrant and Schiller AG
        10.9(1)     Employee Agreement dated November 8, 1993 between the
                    Registrant and Alan J. Levy
        10.10(1)(4) International Distributor Agreement dated January 1996
                    between the Registrant and Nellcor Puritan-Bennett Europe
                    B.V.
        11.1        Calculation of earnings per share
        27          Financial Data Schedules

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

        (1)   Incorporated by reference to the same numbered exhibit
              previously filed with the Company's Registration Statement on
              Form S-1 (No. 33-99908)
        (2)   Incorporated by reference to Exhibit 1 filed with the
              Registrant's registration statement on Form 8-A filed with the
              Commission on December 10, 1996
        (3)   Incorporated by reference to the Registrant's 1996 Form 10-K
              filed with the Commission on March 31, 1997
        (4)   Confidential treatment granted with respect to a portion of this
              exhibit

  (b)  Reports on Form 8-K

       None.

                                      17

<PAGE>

                                  SIGNATURES


    Pursuant to the requirements of the Securities and Exchange Act of 1934, 
the Registrant has duly caused this report to be signed on its behalf by the 
undersigned thereunto duly authorized.

                                    HEARTSTREAM, INC.
                                    (Registrant)


Date          May 9, 1997           /s/ Gary Onn
    ----------------------------    --------------------------------
                                    Gary Onn
                                    Vice President, Finance and
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)



Date          May 9, 1997           /s/ Alan J. Levy
    ----------------------------    --------------------------------
                                    Alan J. Levy
                                    President, Chief Executive Officer and 
                                     Director
                                    (Principal Executive Officer)

                                      18

<PAGE>

                                HEARTSTREAM, INC.

                                INDEX TO EXHIBITS


Exhibit No.
-----------
3.1(1)      Restated Certificate of Incorporation, as in effect prior to initial
            public offering
3.2(1)      Restated Certificate of Incorporation, as currently in effect
3.3(1)      Bylaws
3.4(3)      Certificate of Designation of Rights, Preferences and Privileges of
            Series A Participating Preferred Stock
4.1(1)      Specimen Common Stock Certificate
4.2(2)      Preferred Share Rights Agreement, dated as of December 6, 1996 
            between the Registrant and ChaseMellon Shareholder Services, L.L.C.
10.1(1)     Form of Indemnification Agreement between the Registrant and each 
of          its directors and officers
10.2(3)     1993 Employee and Consultant Stock Plan, as amended, and form of 
            Stock Option Agreement thereunder
10.3(1)     1995 Director Option Plan and form of Stock Option Agreement
            thereunder
10.4(1)     1995 Employee Stock Purchase Plan and forms of agreements thereunder
10.5(1)     Lease dated May 25, 1994 between the Registrant and Martin Selig
10.6(1)     Restated Investors Rights Agreement dated March 16, 1995 between the
            Registrant and certain holders of the Registrant's securities
10.7(1)     Agreement dated August 3, 1995 between the Registrant and Oki
            Semiconductor
10.8(1)(4)  International Distributor Agreement (undated) between the Registrant
            and Schiller AG
10.9(1)     Employee Agreement dated November 8, 1993 between the Registrant 
            and Alan J. Levy
10.10(1)(4) International Distributor Agreement dated January 1996 between the
            Registrant and Nellcor Puritan-Bennett Europe B.V.
11.1        Calculation of earnings per share
27          Financial Data Schedules

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

(1)  Incorporated by reference to the same numbered exhibit previously filed 
     with the Company's Registration Statement on Form S-1 (No. 33-99908)
(2)  Incorporated by reference to Exhibit 1 filed with the Registrant's
     registration statement on Form 8-A filed with the Commission on 
     December 10, 1996
(3)  Incorporated by reference to the Registrants 1996 Form 10-K filed with the
     Commission on March 31, 1997
(4)  Confidential treatment granted with respect to a portion of this exhibit


                                      19