<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-Q


      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                             EXCHANGE ACT OF 1934


For the quarterly period
ended September 30,1998                          Commission File Number 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 Identification No.)
  incorporation or organization)

          1 OAK PARK DRIVE
        BEDFORD, MASSACHUSETTS                               01730
 (Address of principal executive offices)                 (Zip Code)

                                 781-271-1200
             (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
    --------    --------


Number of shares outstanding of each of the issuer's classes of common stock as
of November 11, 1998:


        Class                                     Number of Shares Outstanding
---------------------------------------           ----------------------------
Common Stock, par value $.001 per share                10,885,216
<PAGE>
 
                             CAMBRIDGE HEART, INC.

                                     INDEX


                                                                     PAGE NUMBER
                                                                     -----------


PART I.   FINANCIAL INFORMATION

          ITEM 1.    FINANCIAL STATEMENTS

                     BALANCE SHEET AT DECEMBER 31, 1997 AND
                     SEPTEMBER 30, 1998                                    3

                     STATEMENT OF OPERATIONS
                     FOR THE THREE MONTH AND NINE MONTH
                     PERIODS ENDED SEPTEMBER 30, 1997 AND 1998             4

                     STATEMENT OF CASH FLOW
                     FOR THE NINE MONTH PERIODS ENDED
                     SEPTEMBER 30, 1997 AND 1998                           5

                     NOTES TO CONDENSED FINANCIAL
                     STATEMENTS                                            6

          ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS
                     OF FINANCIAL CONDITION AND RESULTS OF
                     OPERATIONS                                            8

PART II.  OTHER INFORMATION


          ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K                     16


SIGNATURES


     This Quarterly Report on Form 10-Q 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," and
similar expressions are intended to identify forward-looking statements. The
important factors discussed below under the caption "Certain Factors That May
Affect Future Operating Results," among others, could cause actual results to
differ materially from those indicated by forward-looking statements made herein
and presented elsewhere by the Company's management from time to time.

                                       2
<PAGE>
 
                        PART I - FINANCIAL INFORMATION
                                    ITEM 1
                             FINANCIAL STATEMENTS

                                 BALANCE SHEET

<TABLE>
<CAPTION>
                                                                              December 31,   September 30,
                                                                                  1997           1998
                                                                              ------------    ------------
                                                                                              (Unaudited)
<S>                                                                           <C>             <C>
Assets
Current assets:
Cash and cash equivalents...............................................      $  5,665,736    $  2,864,228
Marketable securities...................................................         7,090,605       4,967,391
Accounts receivable, net................................................           509,918         740,811
Inventory...............................................................           416,224         305,972
Prepaid expenses and other current assets...............................           301,127         264,093
                                                                              ------------    ------------
  Total current assets..................................................        13,983,610       9,142,495

Fixed assets, net.......................................................           574,660         683,098
Other assets............................................................           190,167         331,941
                                                                              ------------    ------------
                                                                              $ 14,748,437    $ 10,157,534
                                                                              ============    ============
Liabilities and stockholders' equity 
Current liabilities:
Accounts payable........................................................      $    170,531    $    302,987
Accrued expenses........................................................           356,606         517,024
                                                                              ------------    ------------
Total current liabilities...............................................           527,137         820,011
                                                                              ------------    ------------
Stockholders' equity:
Common stock, $.001 par value; 20,000,000 shares authorized; 10,606,041.and
  10,877,908 shares issued and outstanding at December 31, 1997
  and September 30, 1998, respectively..................................            10,606          10,878
Additional paid-in capital..............................................        29,405,685      29,481,634
Accumulated  deficit....................................................       (15,163,304)    (20,152,489)
                                                                              ------------    ------------

                                                                                14,252,987       9,340,023
Less: deferred compensation.............................................           (31,687)         (2,500)
                                                                              ------------    ------------
  Total stockholders' equity............................................        14,221,300       9,337,523
                                                                              ------------    ------------
                                                                              $ 14,748,437    $ 10,157,534
                                                                              ============    ============
</TABLE>

            See accompanying notes to condensed financial statements.

                                       3
<PAGE>
 
                              CAMBRIDGE HEART, INC.

                             STATEMENT OF OPERATIONS
                                   (unaudited)

<TABLE>
<CAPTION>
                                   Three months ended September 30,   Nine months ended September 30,
                                   --------------------------------   -------------------------------
                                         1997             1998            1997             1998
                                   ---------------  --------------    ------------     -------------
<S>                                <C>              <C>               <C>              <C>
Revenue............................   $    340,179    $    661,260    $  1,077,658      $  1,511,452

Cost of goods sold.................        331,528         550,415         969,245         1,360,623
                                      ------------    ------------    ------------      ------------
                                             8,651         110,845         108,413           150,829
Cost and expenses:
Research and development...........        757,814         899,259       2,786,755         2,863,002

Selling, general and administrative        742,622         868,979       2,466,643         2,739,321
                                      ------------    ------------    ------------      ------------

  Loss from operations.............     (1,491,785)     (1,657,393)     (5,144,985)       (5,451,494)

Interest income....................        242,525         133,424         707,878           462,308
                                      ------------    ------------    ------------      ------------

Net loss...........................   $ (1,249,260)   $ (1,523,969)   $ (4,437,107)     $ (4,989,186)
                                      ============    ============    ============      ============
Net loss per share - basic and
diluted............................   $      (0.12)   $      (0.14)   $       (.43)     $       (.47)
                                       ===========     ===========     ===========       ===========
Weighted average common
 shares outstanding - basic and
 diluted...........................     10,495,282      10,810,080      10,406,818        10,698,837
                                       ===========     ===========     ===========       ===========
</TABLE>

           See accompanying notes to condensed financial statements.

                                       4
<PAGE>
 
                             STATEMENT OF CASH FLOWS
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                         Nine months ended September 30,
                                                                         -------------------------------
                                                                          1997                     1998
                                                                         ------                   ------
<S>                                                                <C>                           <C>         
Cash flows from operating activities:
Net loss...........................................................   $ (4,437,107)              $(4,989,186)
Adjustments to reconcile net loss to net
  cash used for operating activities:
Depreciation ......................................................        133,182                   182,866
Amortization of deferred compensation .............................        155,438                     4,396
Compensation expense related to non employee stock
  options .........................................................           --                      46,920
Changes in assets and liabilities:
 Increase in accounts receivable ..................................        (39,516)                 (230,893)
 (Increase) decrease in inventory .................................        (23,060)                  110,252
 Decrease in prepaid expenses and other
   current assets .................................................        114,455                    37,034
  (Increase) decrease in other assets .............................         53,150                  (141,774)
  Increase (decrease) in accounts payable
   and accrued expenses ...........................................        (19,026)                  292,874
  Decrease in license fees payable ................................         (6,481)                     --
                                                                      ------------              ------------
  Net cash used for operating activities ..........................     (4,068,965)               (4,687,511)
                                                                      ------------              ------------
Cash flows from investing activities:
Net (purchase) maturity of marketable securities ..................     (6,569,271)                2,123,214
Purchase of fixed assets ..........................................       (342,627)                 (291,304)
                                                                      ------------              ------------
  Net cash (used for) provided by  investing activities                 (6,911,898)                1,831,910
                                                                      ------------              ------------
Cash flows from financing activities:

Proceeds from issuance of common stock ............................        246,595                    54,093
                                                                      ------------              ------------

Net decrease in cash and cash equivalents .........................    (10,734,268)               (2,801,508)
Cash and cash equivalents at beginning
  of period .......................................................     18,588,583                 5,665,736
                                                                      ------------              ------------
Cash and cash equivalents at end
  of period .......................................................   $  7,854,315              $  2,864,228
                                                                      ============              ============
</TABLE>

           See accompanying notes to condensed financial statements.

                                       5
<PAGE>
 
                              CAMBRIDGE HEART, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (unaudited)

1.   NATURE OF BUSINESS

     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.

2.   BASIS OF PRESENTATION

     The condensed financial statements have been prepared by the Company
     without audit, pursuant to the rules and regulations of the Securities and
     Exchange Commission. Certain information and footnote disclosures normally
     included in financial statements prepared in accordance with generally
     accepted accounting principles have been omitted pursuant to such rules and
     regulations. These condensed financial statements should be read in
     conjunction with the financial statements dated December 31, 1997 and the
     notes thereto included in the Company's Annual Report on Form 10-K. In the
     opinion of management, all adjustments, consisting only of normal recurring
     adjustments, necessary to present fairly the financial position of the
     Company as of September 30, 1998, and the results of its operations and its
     cash flows for the nine month periods ended September 30, 1997 and 1998,
     have been made. The results of operations for such interim periods are not
     necessarily indicative of the results for the full year or any future
     period.

     Certain amounts in the three month and nine month periods ended September
     30, 1997 have been reclassified to conform to the current period
     presentation. These reclassifications had no effect on the Company's
     reported net loss.

     The Company anticipates that its existing capital resources will be
     adequate to satisfy its capital requirements until at least September 30,
     1999. The Company's future liquidity and capital requirements will depend
     on numerous factors including the success of commercializing the CH 2000
     System, the ability of the Company's suppliers to continue to meet the
     demands of the Company at current contract prices, obtaining and enforcing
     patents important to the Company's business, the status of regulatory
     approvals and competition. Changes in these circumstances could accelerate
     the Company's use of capital. If this occurs, the Company may from time to
     time incur indebtedness or issue, in public or private transactions, equity
     or debt securities. However, there can be no assurance that suitable debt
     or equity financing will be available to the Company on acceptable terms,
     if at all.

3.   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 (FIFO) method.

                                       6
<PAGE>
 
4.   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 holders of common stock by the
     weighted-average number of common shares outstanding for the period.
     Diluted earnings per share includes dilutive potential common stock (such
     as stock subject to repurchase, options, warrants and convertible preferred
     stock) and is computed similarly to fully-diluted earnings per share
     pursuant to APB 15. The Company adopted SFAS 128 and Securities and
     Exchange Commission Staff Accounting Bulletin No. 98, which provides new
     guidance with respect to earnings per share computations in the periods
     preceding a company's initial public offering, in the fourth quarter of
     fiscal 1997 and has restated all prior periods in its financial statements.

         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 the three and
     nine month periods ended September 30, 1997 and 1998, as its inclusion
     would have been anti-dilutive.

5.   REPRICING OF STOCK OPTIONS

     On October 16, 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. 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
     forfeited 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.

     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 

                                       7
<PAGE>
 
     repriced. Options to purchase a total of 60,000 shares of Common stock were
     eligible for this program.

          The Company will record deferred compensation expense relating to 
     these options of $6,584 in the fourth quarter, 1998 representing the
     difference between the fair market value of the common stock on the date
     the election was made by the employees and the exercise price. Compensation
     expense related to options which vest over time will be recorded as a
     component of stockholders equity and will be amortized over the vesting
     period of the related options. The Company's CEO and all other members of
     the Board of Directors were excluded from this program.



                                    ITEM 2
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS


OVERVIEW

         Cambridge Heart, Inc. (the "Company" or "Cambridge Heart") is engaged
in the research, development and commercialization of products for the
non-invasive diagnosis of cardiac disease, the leading cause of death in the
United States and many other developed countries. Using innovative technologies,
including proprietary disposable electrodes, the Company is addressing such key
problems in cardiac diagnosis as (i) the identification of those at risk of
sudden cardiac death, 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 has experienced
substantial net losses since its inception, and expects to incur substantial and
increasing net losses for the foreseeable future. The Company believes that its
research and development expenses will increase significantly in the future as
it develops additional products and funds clinical trials of its product
candidates. The Company's research and development expenses may also increase in
the future as it supplements its internal research and development with
additional third party technology licenses and potential acquisition of
complimentary products and technologies. The Company also expects that its
selling, general and administrative expenses will continue to increase in
connection with the Company's continued expansion of its sales and marketing
activities. Revenues generated from the sale of the Company's products will
depend upon numerous factors, including the timing of regulatory actions,
progress of product development, the extent to which the Company's products gain
market acceptance, varying pricing promotions and volume discounts to customers,
competition and the availability of third party reimbursement. The Company has
incurred cumulative net losses since inception through September 30, 1998 of
$20,152,489.

         The Company's principal products are the CH 2000 System and
Hi-Resolution electrodes. Both products have received 510(k) clearance from the
U. S. Food and Drug Administration ("FDA") for sale in the United States, have
received the CE mark for sale in Europe and have been approved for sale by the
Ministry of Health in Japan. The 510(k) clearance for the CH 2000 System
includes the claim that the CH 2000 System can measure T-wave alternans but no
claim about the applicability or prognostic value of T-wave alternans
measurement.

         During the three month period ended September 30, 1998, the Company
received the final results of its 272 patient, multi center labeling study and
events follow-up study for its T-wave alternans technology. The Company's
labeling study examined the ability of T-wave alternans to noninvasively
identify patients susceptible to life threatening rhythm disturbances as

                                       8
<PAGE>
 
indicated by the results of invasive electrophysiology testing ("EP"). In the
final statistical report prepared by the independent contract research
organization ("CRO"), Medical and Technical Research Associates, the results
showed that the noninvasive measurement of microvolt alternans can predict the
results of EP testing with a statistical significance of p Less than 0.0001 and
met all other tests defined in the protocol.

         The Company's events follow up study compared the results of measuring
T-wave alternans to the results of EP testing and signal average
electrocardiogram (SAECG) in predicting episodes of life threatening arrhythmias
and sudden cardiac death. The design of the follow-up study calls for event data
collection to continue. The results to date included in the final CRO report
showed that the noninvasive measure of microvolt alternans was a significant
predictor of major cardiac events, such as sudden cardiac death and episodes of
life-threatening arrhythmias. In the events included in the report, T-wave
alternans predicted tachyarrhythmic events (sudden death and resuscitated
sustained ventricular arrhythmia) with a relative risk of 6.7 (p Less than
0.007) and tachyarrhythmic events and total mortality with a relative risk of
11.0 (p Less than 0.001). EP was slightly less predictive with a relative risk
of 4.9 (p Less than 0.001) and 3.1 (p Less than 0.006) respectively. Relative
risk is the chance of having an event if the test is positive divided by the
chance of having an event if the test is negative. The greater the number, the
more predictive the test. SAECG, an older noninvasive method, was not a
statistically significant predictor of the events to date.

         In August 1998, the results of both the Company's multi-center labeling
study and events follow-up study were included in the Company's 510(K) submitted
to the FDA for expansion of its labeling claims regarding the predictive
accuracy of the measurement of T-wave alternans. The Company is not able to
predict the timing or final result of this regulatory review process.


RESULTS OF OPERATIONS

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1998

    Revenue for the three month periods ended September 30, 1997 and 1998 were
$340,179 and $661,260 respectively, an increase of 94%. Revenue for the nine
month periods ended September 30, 1997 and 1998 were $1,077,658 and $1,511,452,
respectively, an increase of 40%. The Company's domestic revenue increased 178%
from $136,930 during the three month period ended September 30, 1997 to $380,629
for the same period in 1998. For the nine month period ended September 30, 1997
and 1998, domestic revenue increased 119% from $362,667 to $795,883. The
domestic revenue growth for the three month period is a result of the increase
in effectiveness of the Company's domestic sales organization that was
reorganized during the first three months of 1998. The Company believes the
growth also reflects a growing awareness in the medical community about its
T-wave alternans technology. The Company has increased the size of its U. S.
sales organization from less than 15 at September 30, 1997 to approximately 40
at September 30, 1998. International revenue for the three month period ended
September 30, 1997 and 1998 were $203,249 and $280,631 respectively, an increase
of 38%. For the nine month period ended September 30, 1998, international
revenue was $715,569, relatively unchanged from the $714,991 reported for the
same period in 1997.

         The gross margin for the three month periods ended September 30, 1997
and 1998 were $8,651 (3% of revenues) and $110,845 (17% of revenues),
respectively. 

                                       9
<PAGE>
 
Gross margin for the nine month periods ended September 30, 1997 and 1998 were
$108,413 (10% of revenues) and $150,829 (10% of revenues), respectively. The
third quarter 1998 results include the effect of increases in the amount revenue
derived from sale of the more profitable CH 2000 systems with T-wave alternans
in both the U.S. and overseas. Additionally, the higher unit volume in the three
month period ended September 30, 1998 provided greater leverage of fixed
overhead costs.

     Research and development expenses increased from $757,814 in the three
month period ended September 30, 1997 to $899,259 for the same period of 1998.
The third quarter included costs associated with completion of the Company's
multi-center labeling and follow-up clinical studies, the results of which were
included in the Company's 510(K) recently submitted to the FDA for expansion of
labeling claims for its T-wave alternans technology. Research and development
expenses for the nine month period ended September 30, 1997 and 1998 were
$2,786,755 and $2,863,002, respectively.

     Selling, general and administrative expenses increased from $742,622 in the
three month period ended September 30, 1997 to $868,979 in the same period in
1998. The increase in costs is a result of the Company's expansion of its U.S.
sales organization and it marketing efforts in support of the adoption of T-wave
alternans testing by clinical cardiologists. For the nine month period ended
September 30, 1997 and 1998, selling, general and administrative expenses were
$2,466,643 and $2,739,321, respectively.

     Interest income was $242,525 for the three month period ended September 30,
1997 compared to $133,424 for the same period in 1998. For the nine month period
ended September 30, 1997 and 1998, interest income was $707,878 and $462,308
respectively. This decrease reflected the decline in the remaining proceeds of
the initial public offering of the Company's common stock in August 1996, as a
result of the operating losses incurred by the Company.



LIQUIDITY AND CAPITAL RESOURCES

     The Company initially financed operations primarily from the sale of
convertible preferred stock. 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 common stock.

     As of September 30, 1998, the Company had cash, cash equivalents and
marketable securities of $7,831,619. The proceeds of the equity offerings have
been used primarily to fund operating losses of $20,152,489, reflecting
expenditures made primarily to support research, new product development, and
clinical trial activities, to support a marketing and sales organization, to
develop an expanded administrative infrastructure and the investment of
approximately $1,366,000 in property and equipment as of September 30, 1998.

     During the nine month period ended September 30, 1998, the Company's
cash, cash equivalents and marketable securities decreased by $4,924,722, or 39%
consistent with its net loss for the nine month period ended September 30, 1998
of $4,989,186. Fixed asset additions during the third quarter of $118,304

                                       10
<PAGE>
 
represent increased sales demonstration and clinical research units to support
the Company's expanded efforts in these areas.

     The Company expects its capital expenditures to increase as it continues to
commercialize its products and expand its clinical trial efforts. The Company
does not expect capital expenditures to exceed an aggregate of $3,000,000 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 through 2008. The Company is committed to pay an aggregate of
$390,000 of such minimum license maintenance fees subsequent to September 30,
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 will be
adequate to satisfy its capital requirements until at least September 30, 1999.
The Company's future liquidity and capital requirements will depend on numerous
factors, including the success of commercializing the CH 2000 System, the
ability of the Company's suppliers to continue to meet the demands of the
Company at current contract prices, obtaining and enforcing patents important to
the Company's business, the status of regulatory approvals and competition.
Changes in these factors could accelerate the Company's use of capital. If this
occurs, the Company may from time to time incur indebtedness or issue, in public
or private transactions, equity or debt securities. However, there can be no
assurance that suitable debt or equity financing will be available to the
Company on acceptable terms, if at all.


CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

         The Company is engaged primarily in the commercialization, manufacture,
research and development of its products for the non-invasive diagnosis of
cardiac disease. The Company has incurred substantial and increasing net losses
through September 30, 1998. There can be no assurance that the Company will ever
generate substantial revenues or achieve profitability on a quarterly or annual
basis.

         The Company believes that its future success substantially
depends upon the successful commercialization and market acceptance of its
T-wave alternans technology. The analysis of T-wave alternans to diagnose
ventricular arrhythmia is a new diagnostic approach that is currently
investigational. The Company has submitted a 510(k) application for clearance
from the FDA for a labeling claim covering the applicability or prognostic use
of its T-wave alternans technology. There can be no assurance that the FDA will
concur with the Company's 510(K) request for clearance, or that the FDA will not
require the Company to file a more extensive submission known as a pre-market
approval ("PMA") application. The process for obtaining clearance of a PMA can
be more expensive, uncertain and lengthy than the process of obtaining 510(K)
clearance, and frequently requires from one to several years from the date of
submission before approval, if approval is obtained at all. The failure to
obtain 510(K) clearance for 

                                       11
<PAGE>
 
additional labeling claims for the CH 2000 System would have a material adverse
effect on the Company's business, financial condition and results of operations.

         Market acceptance will depend upon the Company's ability to obtain
regulatory clearance or approval for claims covering the applicability or
prognostic use of T-wave alternans measurement, as well as its 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 the Company will be able to successfully commercialize or
achieve market acceptance of its T-wave alternans technology or that the
Company's competitors will not develop competing technologies that are superior
to those of the Company.

         The Company has sponsored and is continuing to sponsor clinical studies
relating to its T-wave alternans technology and Hi-Resolution electrodes to
establish the prognostic value of such technology. While these studies on high
risk patients to date have indicated that the measurement of T-wave alternans to
predict the risk of ventricular arrhythmia is comparable to EP testing, there
can be no assurances that the results of such studies, particularly studies
involving patients who are not high risk, will continue to do so. Any results of
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 this, or other
Company technologies, would have a material adverse effect on the Company's
business, financial condition and results of operations.

         The Company's products, product development activities, manufacturing
processes and sales and marketing are subject to extensive and rigorous
regulation by the FDA and comparable regulatory agencies in foreign countries.
In the United States, the FDA regulates the introduction of medical devices as
well as manufacturing, labeling and record keeping procedures for such products.
In order for the Company to market its products for clinical use in the United
States, the Company must obtain from the FDA clearance of a 510(k) pre-market
notification. Marketing clearance or approval for new medical devices from the
FDA can be costly and time consuming, and there can be no assurance that such
clearance or approval will be granted for the Company's future products on a
timely basis, if at all, or that FDA review will not involve delays that will
adversely affect the Company's ability to commercialize additional product or
expand permitted uses of existing products.

         A significant portion of the Company's revenue is dependent upon sales
of its 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 the Company will be able to obtain EC
approval for any future products. The inability or failure of the Company 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 the Company's products, and thereby adversely
affect the Company's business, financial condition and results of operations.

         The medical device market is characterized by intense competition 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

                                       12
<PAGE>
 
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.

         Competition from competitors' medical devices that help to diagnose
cardiac disease is intense and likely to increase. The Company competes with
manufacturers of ECG stress tests, the conventional method of diagnosing
ischemic heart disease, and may compete with manufacturers of other non-invasive
tests, including ECG's, Holter monitors, ultrasound tests and systems of
measuring cardiac late potentials. 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 physicians and hospitals which may act as a barrier to market entry.

         The Company currently markets its products in the United States through
a small direct sales force and independent manufacturers' representatives. There
can be no assurance that the Company will be able to continue to recruit and
retain skilled sales management, direct sales persons or independent
manufacturers' representatives. The Company markets its 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 the Company's
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 the Company relies on sales in certain territories
through distributors, any revenues the Company receives in those territories
will depend upon the efforts of its distributors. Furthermore, there can be no
assurance that a distributor will market the Company's products successfully or
that the terms of its distribution arrangements will be acceptable to the
Company.

         The testing, manufacture, marketing and sale of medical devices entail
the inherent risk of liability claims or product recalls. Although the Company
maintains product liability insurance in the United States and in other
countries in which the Company intends 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 the Company, or both, and could have a material
adverse effect on the Company's business, financial condition and ability to
market the CH 2000 System as currently contemplated.

         The Company's success will depend in part on its ability 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 Cambridge Heart, are generally
uncertain and involve complex legal and factual questions. No assurance can be

                                       13
<PAGE>
 
given that patents will issue from any patent applications owned or licensed to
Cambridge Heart 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. 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 techniques 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 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 might be based. 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 termination of the licenses.

         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 the Company, 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. In particular, competitors of
the Company and other third parties hold issued patents and are assumed by the
Company to hold pending patent applications which may result in claims of
infringement against the Company to hold pending patent applications which may
result in claims of infringement against the Company or other patent litigation.
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 the Company, 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 products of the Company.

         The Company relies on confidentiality agreements with its
collaborators, employees, advisors, vendors and consultants. 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 any reason, could
have a material adverse effect on the Company.

         The Company's ability to successfully market its 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 government third party payors (including the Medicare and Medicaid
programs), government health administration authorities, private health insurers
and other organizations. 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

                                       14
<PAGE>
 
charged for medical products and services, and in some instances, have pressured
medical suppliers to lower their prices. The Company is unable to predict what
changes will be made in the reimbursement methods utilized by third party
healthcare payors, Furthermore, the Company 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 the Company's products are used. If coverage and adequate reimbursement
levels are not provided by government or third party payors for uses on the
Company's technologies or products, the Company's business, financial position
and ability to market its technologies or products may be adversely affected.

         The Company expects to derive a substantial majority of its future
revenues from sales of the CH 2000 System. If the Company is unable to
commercialize the CH 2000 System successfully, the period during which the
Company is in the development stage would be extended significantly. This would
have a material adverse effect on the Company's business, financial condition
and results of operations.

         The Company has determined that its products are Year 2000 compliant.
The Company has completed an initial assessment of Year 2000 issues with respect
to its business systems and has begun to take actions to ensure their
compliance. 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.

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 $1,366,000 for the purchase and installation of machinery and
equipment and approximately $12,742,000 for working capital.

RECENTLY ENACTED ACCOUNTING STANDARDS

         In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and
for Hedging Activities." SFAS No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from the changes in the values of those derivatives would be
accounted for depending on the use of the derivatives and whether they qualify
for hedge accounting. The Company is required to adopt this statement in the
first quarter of 2000. The Company is currently assessing the impact
implementation of SFAS No. 133 will have on the Company's financial position and
results of operations.

                                       15
<PAGE>
 
                           PART II - OTHER INFORMATION

                                     ITEM 6
                       EXHIBITS AND REPORTS ON FORM 8-K

     a.   Exhibits

                                  EXHIBIT INDEX


Exhibit Number                Description
--------------                -----------

     11                       Statement re Computation of Net Loss per Share

     27                       Financial Data Schedule

     99.1 *                   Press Release dated August 19, 1998

     99.2 **                  Integrated Clinical Statistical Report - A
                              Prospective Multi-Center Study to Determine the
                              Effectiveness of T-Wave Alternans in Predicting
                              Susceptibility to Ventricular Arrhythmias

     99.3 **                  Integrated Clinical Statistical Report (Interim
                              Report) - A 12 Month Follow-Up Study of Patients
                              Enrolled in a Prospective Multi-Center Study to
                              Determine the Effectiveness of T-Wave Alternans in
                              Predicting Susceptibility to Ventricular
                              Arrhythmias


     *  Incorporated by reference to exhibits filed with the Company's Current
        Report on Form 8-K filed August 19, 1998.

     ** Incorporated by reference to exhibits filed with the Company's Amendment
        No. 1 to Current Report on Form 8-K/A filed September 4, 1998.



     b.   Reports on Form 8-K


            On August 19, 1998 the Company filed a Current Report on Form 8-K
reporting the results of its labeling and follow-up studies.

            On September 4, 1998 the Company filed Amendment Number 1 to its
Current Report on Form 8-K dated August 19, 1998 reporting the full text of the
Integrated Clinical Statistical Report A Prospective Multi-Center Study to
Determine the Effectiveness of T-Wave Alternans in Predicting Susceptibility to
Ventricular Arrhythmia and the Integrated Clinical Statistical Report (Interim
Report) - A 12 Month Follow-Up Study of Patients Enrolled in a Prospective 
Multi-Center Study to Determine the Effectiveness of T-Wave Alternans in
Predicting Susceptibility to Ventricular Arrhythmias.

                                       16
<PAGE>
 
                                    SIGNATURE



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



                                      CAMBRIDGE HEART, INC.


Date: November 13, 1998                    By: /s/ Jeffrey M. Arnold
                                         ---------------------------------------
                                              Jeffrey M. Arnold
                                              Chairman, President, Chief
                                              Executive Officer

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