<PAGE>

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

                                    FORM 10-K

(Mark One)
[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

                  For the fiscal year ended: November 30, 2001

                                       OR

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

                         Commission file number: 0-11868


                    CARDIODYNAMICS INTERNATIONAL CORPORATION
             (Exact name of registrant as specified in its charter)


             California                                   95-3533362
 (State or other jurisdiction of                       (I.R.S. Employer
  incorporation or organization)                      Identification No.)

6175 Nancy Ridge Drive, Suite 300, San Diego, California            92121
         (Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (858) 535-0202


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

           Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock, no par value
                                (Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S229.405 of this chapter) is not contained herein and will
not be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]

The aggregate market value of the common stock held by non-affiliates of the
registrant at February 22, 2002, was approximately $172,202,000 based on the
closing price for the common stock in the Nasdaq-Amex National Market.

At February 22, 2002, 46,069,595 shares of registrant's common stock were
outstanding.

<PAGE>

                                 CardioDynamics
                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<S>                                                                                               <C>
Part I    Item 1    Description of Business.....................................................   3

          Item 2    Description of Property.....................................................  28

          Item 3    Legal Proceedings...........................................................  28

          Item 4    Submission of Matters to a Vote of Security Holders.........................  28

Part II   Item 5    Market for Registrant's Common Equity and Related
                    Stockholder Matters.........................................................  29

          Item 6    Selected Financial Data.....................................................  30

          Item 7    Management's Discussion and Analysis of Financial Condition
                    and Results of Operations...................................................  31

          Item 7A   Quantitative and Qualitative Disclosures About Market Risk..................  38

          Item 8    Financial Statements........................................................  39

          Item 9    Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure.........................................  62

Part III  Item 10   Directors and Executive Officers of the Registrant..........................  63

          Item 11   Executive Compensation......................................................  66

          Item 12   Security Ownership of Certain Beneficial Owners and
                    Management..................................................................  73

          Item 13   Certain Relationships and Related Transactions..............................  75

Part IV   Item 14   Exhibits, Financial Statement Schedules, and Reports on Form 8-K............  76

      Schedule II   Valuation and Qualifying accounts...........................................  79

                    Signatures..................................................................  80
</TABLE>

<PAGE>

This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements include statements regarding our plans, goals,
strategies, intent, beliefs or current expectations. These statements are
expressed in good faith and we believe had a reasonable basis when expressed,
but there can be no assurance that these expectations will be achieved or
accomplished. Sentences in this document containing verbs such as "plan",
"intend", "anticipate", "target", "estimate", "expect", etc., and/or
future-tense or conditional constructions ("will", "may", "could", "should",
etc.) constitute forward-looking statements that involve risks and
uncertainties. Items contemplating, or making assumptions about, actual or
potential future sales, market size, collaborations, trends or operating results
also constitute such forward-looking statements. These statements are only
predictions and actual results could differ materially. Certain factors that
might cause such a difference are discussed throughout this Form 10-K, including
the section entitled "Risk Factors" on pages 21 to 28 of this document. Any
forward-looking statement speaks only as of the date we made the statement, and
we do not undertake to update the disclosures contained in this document or
reflect events or circumstances that occur subsequently or the occurrence of
unanticipated events.


                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

CardioDynamics International Corporation ("CardioDynamics", or "CardioDynamics -
The ICG Company") is the innovator and market leader of a breakthrough
technology called Impedance Cardiography (ICG). We develop, manufacture, and
market noninvasive heart-monitoring devices using our proprietary ICG
technology, DISQ(TM) (Digital Impedance Signal Quantifier) technology, and
ZMarc(TM) algorithm.

Our proprietary, patented technology noninvasively monitors the heart's ability
to deliver blood to the body and the amount of fluid in the chest. Our products
measure 12 hemodynamic (blood flow) parameters, the most significant of which is
cardiac output, or the amount of blood pumped by the heart each minute. Our lead
product, the BioZ.com(R), has been cleared by the Federal Drug Administration
(FDA) and carries the CE mark. We sell to US physicians and hospitals through
our own direct sales force and distribute our products to domestic hospitals and
targeted international markets through a strategic alliance with GE Medical
Systems Information Technologies (GEMS-IT) and a network of international
distributors. In November 1998, Health Care Finance Administration (HCFA), now
known as the Center for Medicare & Medicaid Services (CMS), mandated Medicare
reimbursement for our BioZ(R) procedures and in January 2001, implemented
uniform reimbursement throughout the United States. To date, we have an
installed base of over 1,650 ICG systems in over 1,000 physician offices and
hospital sites throughout the world.

Our products help physicians assess, diagnose and treat cardiovascular disease,
which is the number one killer of adults in the United States. According to the
American Heart Association (AHA), approximately one in five Americans have some
form of cardiovascular disease. The AHA estimates that over $300 billion was
spent in the United States during 2000 as a result of cardiovascular disease and
stroke. This figure includes both the direct costs associated with physicians
and other professionals, hospital and nursing home services and medication and
the indirect costs associated with lost productivity resulting from morbidity
and mortality.

                                       3

<PAGE>

Electrocardiogram (EKG) is a widely used noninvasive assessment of the heart.
Its limitation is that it only measures the electrical characteristics of the
heart. Our ICG technology noninvasively quantifies the mechanical functioning of
the heart. Conditions that can interfere with the proper mechanical functioning
of the heart include hypertension, congestive heart failure, pulmonary disease,
high-risk pregnancy and kidney dysfunction. Our technology complements EKG and
supplements information obtained through the five vital signs - heart rate,
respiration rate, body temperature, blood pressure and oxygen saturation -
immediately, safely and cost effectively. We consider noninvasive cardiac output
to be the "Sixth Vital Sign(TM)."

Currently, the primary method used to measure hemodynamic parameters is
pulmonary artery catheterization (PAC). The invasive PAC procedure requires
hospitalization and involves an incision into the patient's neck or groin region
and the insertion of a catheter (plastic tube) through the heart directly into
the pulmonary artery. Complications associated with this procedure occur in as
many as one in four reported cases and include irregular heartbeats, infection,
pulmonary artery rupture and death.

Because of the high risk of complications, physicians generally prescribe PAC
only for critically ill patients. In the non-sterile environment of a
physician's office or outpatient clinic, PAC is simply unavailable. As a result,
in the great majority of situations, the physician seeking to diagnose
cardiovascular disease must indirectly assess the patient's hemodynamic status
by measuring blood pressure, checking the pulse, looking at neck veins and
employing subjective examination techniques that are prone to human error. A
compelling need exists for objective, noninvasive measurement tools, such as our
BioZ(R) systems.

During ICG monitoring using our BioZ(R) systems, an undetectable electrical
signal is sent through our proprietary sensors on the patient's neck and chest.
Our sophisticated DISQ(TM) technology and ZMARC(TM) algorithm analyze and record
significant hemodynamic parameters. Based on this data, a physician can quickly
and safely identify underlying cardiovascular disorder, assess and diagnose,
customize and target treatment, monitor the effectiveness of prescribed
medications and more accurately identify potential complications.

Our objective is to establish the BioZ(R) product line as a standard of care in
cardiovascular medicine. Specifically, our strategy is to:

..    accelerate market penetration through our direct sales force;

..    broaden our distribution channels through strategic relationships;

..    secure additional recurring revenue through enhanced proprietary sensors;

..    maintain market leadership through product improvements and extensions;

..    target new market opportunities through technology development; and

..    develop ICG products for home healthcare.

We were incorporated as a California corporation in 1980 and changed our name in
1993. Our principal executive offices are located at 6175 Nancy Ridge Drive,
Suite 300, San Diego, California 92121, and our telephone number is
858-535-0202. Our common stock trades under the symbol CDIC on the Nasdaq-Amex
National Market System.

                                       4

<PAGE>

Industry Overview and Company History

Cardiovascular disease is the number one killer of men and women in the United
States and in 31 of the 35 countries reporting mortality statistics. In the
United States alone, HFCA estimated that there were 60 million physician office
visits and over 4 million emergency room visits in 1996 with a primary diagnosis
of cardiovascular disease. Our proprietary technology provides medical
professionals in the hospital and physician's office with noninvasive access to
the objective patient data they need to effectively assess, diagnose and treat
congestive heart failure and hypertension, and to evaluate emergency, pacemaker
and dialysis patients.

In the hospital setting, the BioZ(R) is a noninvasive, cost-effective and safe
alternative to the invasive PAC procedure and may also be used in many
situations in which PAC is not feasible. However, advantages of our proprietary
technology are not limited to the hospital or the critically ill. We believe
that the greatest potential for the BioZ(R) product line is in the new uses the
medical community will have for noninvasive hemodynamic measurements. We believe
that the total market opportunity is over $5 billion for our BioZ(R) product
lines.

We envision expanding the domestic market from the current two million annual
invasive PAC procedures to over 72 million annual noninvasive ICG procedures, as
summarized in the chart below. Assuming total worldwide procedures are
approximately double those in the United States, there would be over 140 million
procedures worldwide. These numbers do not include home healthcare monitoring,
which we believe would, if implemented, significantly increase demand for our
technology.

               Potential Annual Noninvasive Monitoring Procedures
                                   US Patients

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
                                                Estimated Annual
                                                   Monitoring        Total Annual
          Disease State          US Patients       Procedures         Procedures

----------------------------------------------------------------------------------
<S>                              <C>            <C>                  <C>
Congestive heart failure          5,000,000            4.0            20,000,000
----------------------------------------------------------------------------------
Hypertension                     50,000,000            0.5            25,000,000
----------------------------------------------------------------------------------
Emergency departments            20,000,000            1.0            20,000,000
----------------------------------------------------------------------------------
Pacemaker                         1,100,000            2.0             2,200,000
----------------------------------------------------------------------------------
Dialysis                            450,000           12.0             5,400,000
----------------------------------------------------------------------------------

----------------------------------------------------------------------------------
TOTAL                                                                 72,600,000
----------------------------------------------------------------------------------
</TABLE>

Strategy

Our objective is to establish the BioZ(R) product line as a standard of care in
cardiovascular medicine. Our objective will be achieved if and when noninvasive
cardiac output, our primary measurement, becomes the Sixth Vital Sign(TM), as
oxygen saturation became the fifth vital sign in the mid-1980s. We intend to
position ICG technology as a key diagnostic and monitoring tool in assessing and
treating congestive heart failure, hypertension, pacemaker, emergency,
critically ill, surgical, high-risk obstetric, dialysis, cardiac rehabilitation,
immune suppressed and home healthcare patients. Key elements of our corporate
strategy include:

                                       5

<PAGE>

     Accelerate market penetration through our direct sales force

We intend to expand our direct sales force to capitalize on our first-to-market
position in the United States and to further penetrate the physician office
market. We believe that a strong direct sales force is best suited to educate
the medical community about how the various applications of our technology
improve patient outcomes and decrease costs. We currently have 41 direct sales
representatives who focus exclusively on our products. During fiscal 2000 we
began recruiting clinical sales specialists to supplement our field sales team
by enhancing customer understanding, usage and satisfaction. We currently have 9
clinical sales specialists onboard. We believe that the resulting improved
device utilization will strengthen customer loyalty and increase our recurring
revenue from proprietary sensors.

     Broaden our distribution channels through strategic relationships

We intend to establish strategic relationships with major patient monitoring
companies, pacemaker manufacturers and other medical products and technology
companies to increase the availability of our proprietary technology. We believe
that strategic relationships will accelerate market penetration of ICG
technology in markets not served by our direct sales team and provide us with
access to large installed bases of patient monitoring, cardiology and other
complementary medical equipment. We have a strategic relationship with GEMS-IT
that provides increased distribution capabilities and collaborative product
development programs. We intend to enter into similar arrangements with other
patient monitoring companies. We also intend to establish technology-sharing
arrangements with leading pacemaker, defibrillator, external enhanced
counterpulsation and other medical products and technology companies.

     Secure additional recurring revenue through enhanced proprietary sensors

During fiscal 2000 we successfully developed and received FDA 510(k) clearance
on our proprietary BioZtect(TM) sensor technology that provides notable
improvements in performance and safety. Its unique shape and chemical
composition, adhesion characteristics and more user-friendly design optimize
signal transmission and detection sensitivity. The new sensor and cable system
has a proprietary interface, which promotes the exclusive use of our proprietary
sensors with our equipment. As our installed base of BioZ(R) products grows, we
expect that the recurring revenue stream from our proprietary sensors could
account for as much as 30% to 40% of our total revenue within five years. For
the fiscal year ended November 30, 2001, recurring revenue accounted for
approximately 10% of our total revenue.

     Maintain market leadership through product improvements and extensions

We intend to advance the development of our core algorithms to provide
physicians with improved cardiac function measurement capabilities on a broad
class of patients. We believe that continued advances in our ICG technology will
increase physician usage and loyalty and strengthen our industry position. We
will capitalize on our expertise in ICG signal processing and sensor technology
to improve system performance in the presence of noise and patient movement. We
believe that these improvements will lead to additional applications in cardiac
stress testing and ambulatory cardiac function monitoring. We also plan to adapt
our current measurement algorithm and to develop a smaller BioZtect(TM) sensor
tailored for pediatric patients weighing less than 60 pounds.

                                       6

<PAGE>

     Target new market opportunities through technology development

We will continue to focus on new applications for our core technology. Advances
in base impedance analysis could be applied in the areas of proper nutrition and
weight management, fluid management (including dialysis), oncology, drug
noncompliance, HIV patient management and pharmaceutical development and
testing. Pharmaceutical companies such as GlaxoSmithKline, Eli Lilly and Co. and
Pfizer Inc. are currently using our technology to document the cardiovascular
effects of their pharmaceutical agents in both animals and humans. We intend to
collaborate with GEMS-IT in basic research in EKG and ICG technology to develop
new clinical applications that build upon advances in both technologies.
Continued innovation and commercialization of new proprietary products are
essential elements in our long-term growth strategy. We also intend to maintain
our competitive advantage through acquisitions of new technologies, and to seek
additional patents and other proprietary rights as we deem appropriate.

     Develop ICG products for home healthcare

We intend to drive a broad utilization of our noninvasive technology. We believe
the broadest use of our technology could occur with frequent monitoring of
congestive heart failure and hypertensive patients in the home or extended care
settings. We intend to pursue strategic relationships with leading technology
companies to capitalize on the power of the Internet and the availability of
wireless communication to monitor patients in their homes and alternative care
settings.

ICG Technology

As EKG technology noninvasively measures the heart's electrical characteristics,
our ICG technology makes it possible to measure the heart's mechanical or blood
flow characteristics. By using our products, physicians have an easy,
noninvasive and cost-effective way to monitor the heart's ability to deliver
blood to the body.

ICG technology is based on Ohm's Law and the fact that blood is the most
electrically conductive substance in the body. Blood volume and velocity change
with each heart beat and result in a change in the electrical conductivity, or
impedance, of the chest.

In order to measure this conductivity change, our BioZ(R) products use four dual
sensors (two on the neck and two on the chest) to deliver a undetectable, high
frequency (70 kHz), low magnitude (4 mA), alternating current through the chest.
Use of a high frequency current eliminates the possibility of interference with
bioelectrical activity of the heart and brain. Additionally, at a high
frequency, there is no sensation to the patient. By setting the current at a
constant magnitude, variations in blood volume and velocity in the descending
thoracic aorta which cause a proportional voltage change may be measured.

Our BioZ.com(R) ICG product generates the impedance signal with CS2(TM) (Crystal
Signal Stabilization) Technology and after the signal travels harmlessly through
the body, our proprietary DISQ(TM) technology measures the changes in impedance
to the electrical signal. The changes in impedance are then applied to the
ZMARC(TM) algorithm to provide the following are the 12 hemodynamic parameters:

                                       7

<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Parameter                                    Description
----------------------------------------------------------------------------------------------------------------
<S>                                          <C>
Cardiac output / index*                      The amount of blood pumped by the heart each minute.
----------------------------------------------------------------------------------------------------------------
Acceleration index*                          The measure of how quickly the blood reaches peak velocity.
----------------------------------------------------------------------------------------------------------------
Systemic vascular resistance / index*        The force the heart has to pump against to deliver blood
                                             throughout the body.
----------------------------------------------------------------------------------------------------------------
Velocity index*                              A measure of how fast the blood is moving.
----------------------------------------------------------------------------------------------------------------
Thoracic fluid content                       An indicator of the amount of fluid in the chest.
----------------------------------------------------------------------------------------------------------------
Stroke volume                                The amount of blood pumped by the left ventricle each heart beat.
----------------------------------------------------------------------------------------------------------------
Left ventricular ejection time (LVET)        The time interval from the opening to the closing of the
                                             aortic valve.
----------------------------------------------------------------------------------------------------------------
Pre-ejection period (PEP)                    The time that it takes for the electrical stimulation of the
                                             heart shown via EKG to cause a mechanical contraction
                                             opening of the aortic valve shown via ICG technology.
----------------------------------------------------------------------------------------------------------------
Systolic time ratio                          The relationship between the electrical time period and the
                                             mechanical time period of the heart. This ratio between PEP
                                             and LVET, measures ventricular performance.
----------------------------------------------------------------------------------------------------------------
Left cardiac work / index*                   An indicator of the amount of work the left ventricle must
                                             perform to pump blood each minute.
----------------------------------------------------------------------------------------------------------------
Heart rate                                   The number of times the heart beats each minute.
----------------------------------------------------------------------------------------------------------------
Mean arterial pressure                       Average blood pressure.
----------------------------------------------------------------------------------------------------------------
</TABLE>

*Index means that the results are normalized for body surface area.

Of these 12 parameters, the ones most widely used by physicians are cardiac
output, systemic vascular resistance and thoracic fluid content. Another
important hemodynamic measure, the speed and strength of the heart's contraction
(also known as contractility), may be derived from the velocity index and the
acceleration index.

ICG technology measures the change in conductivity, or the inverse, which is
impedance, over a change in time and calculates stroke volume, or the volume of
blood pumped with each heartbeat. The physician receives a report with vital
patient data that allows him or her to customize and optimize treatment.

Some physical and medical conditions may diminish the accuracy of the
measurements provided by our products and therefore discourage their use. We
believe that inaccuracies most frequently occur in patients who are experiencing
severe septic shock, significant pulmonary hypertension, severe aortic valve
regurgitation, severe hypertension (where mean arterial pressure is greater than
180), severe irregular ventricular heartbeats or heart rates greater than 180
beats per minute. In addition, there is inadequate data demonstrating the
accuracy of our products in patients who are shorter than 47 inches or who weigh
less than 66 pounds or more than 342 pounds, as well as in patients who move
excessively during the BioZ(R) procedures.

Our Products, Services and Solutions

     Pricing

Our stand-alone BioZ(R) systems, as sold to end users, range in list price from
$36,710 to $38,710 depending upon configuration. We discount the list prices of
our products in some circumstances based primarily upon volume commitments. We
also provide discounts on the purchase of demo equipment and to distributors who
perform sales and customer service functions for us. The list price for our
sensors is $9.95 for the BioZ.com ICG Monitor and $19.95 per set for the BioZ
ICG Module. We offer a sensor auto-ship program that allows discounts on sensor
purchases based on minimum monthly volume commitments.

                                       8

<PAGE>

     BioZ.com(R) ICG Monitor

Our lead noninvasive cardiac function monitoring device features a portable
design, transport battery and integrated blood pressure. The BioZ.com(R) system
is sold with a pole cart, printer and keyboard for end user data entry and
includes a standard five-year warranty. The BioZ.com(R) is compact and features
the ability to interface directly with most hospital central monitoring systems.

     BioZtect(TM) sensors

We also market disposable sensors designed specifically for use with the BioZ(R)
products. With each monitoring session, four dual sensors are utilized. We also
make available an optional integrated cable and sensor set with pre-attached
lead wires. The integrated cable and sensors are preferred in operating rooms
and for patients with infectious diseases. During fiscal 2000, we successfully
developed and released our BioZtect(TM) sensors, a new proprietary sensor and
cable system that provides enhanced features to our customers and promotes the
exclusive use of our proprietary sensors with our equipment.

     BioZ(R) ICG Module

The BioZ(R) ICG Module was jointly developed with GEMS-IT. The module integrates
our proprietary BioZ(R) ICG technology into GE's Solar patient monitoring
systems. We commenced shipments of the BioZ(R) module in May 2001.

     BioZ.sim ICG Simulator

The BioZ.sim is a simulation and calibration tool specifically designed to allow
end-users and hospital biomedical engineering departments to test and verify the
functionality of their BioZ(R) systems.

     BioZ(R) system & BioZ.pc(TM) system

The BioZ(R) system is our original noninvasive cardiac ICG monitoring device. It
consists of a Pentium-based central processing unit, 15-inch high-resolution
medical grade color monitor and keyboard. Included in the central processing
unit is our proprietary digital signal processing circuit board and software.
The BioZ.pc(TM) system is a customized noninvasive ICG monitoring device that we
developed through a collaborative research and development program with Profiles
in Health, Inc. Neither of these systems is currently in production.

     Zcare(R)

In addition to our standard warranty, we offer extended service agreements,
called Zcare(R). The extended service agreement covers hardware and software
maintenance beyond the warranty period. Also included in the agreement is a next
day loaner unit while a device is under repair, free shipping for the loaner
unit and repaired device, and free software upgrades.

Sales and Distribution

The United States medical marketplace consists of two distinct segments: the
hospital market and the outpatient market. The outpatient market for BioZ(R)
products include physician offices and hospital-based and free-standing
outpatient facilities. During fiscal 1997, we established distribution
agreements with 17 regional specialty distributors as our representatives in the
hospital market. By the end of fiscal 1997, it was apparent that we needed to
broaden our sales channels. We decided to add a direct sales force targeted at
both the hospital and outpatient markets in the majority of the United States,
and we reduced the number of our domestic distributors. During fiscal 2000 we
began hiring clinical sales specialists to supplement our field sales team and
to enhance customer understanding, usage and satisfaction. We believe that the
resulting improved device utilization will strengthen customer loyalty and
increase our recurring revenue from proprietary sensors.

                                       9

<PAGE>

During fiscal 1998 and 1999, our direct sales force began to produce an
increased percentage of our overall sales in the outpatient market. In contrast
to the hospital market, there are few, if any, formal capital equipment budget
processes in this market segment, and purchasing decisions can therefore be made
more quickly. Consequently, we focused our direct sales force primarily on the
outpatient markets and sought an alliance with a hospital-based industry leader
to penetrate the hospital market. Currently, we have a direct sales force of 41
focused primarily on the outpatient market.

In October 1999, we announced a strategic alliance with GEMS-IT for the
distribution of our products to domestic hospitals with over 100 beds. We now
have over 60 of GEMS-IT sales representatives promoting and selling our
BioZ.com(R) in larger domestic hospitals. Internationally, we utilize a variety
of distributors, including GEMS-IT, to actively promote the BioZ.com(R) in more
than 70 countries. We also offer BioZ.buy(TM), our electronic commerce solution
that provides the ability to electronically acquire our products, services and
information through our company website.

Strategic Relationships

In August 1999, we entered into a strategic relationship with GEMS-IT for
exclusive distribution of our BioZ.com(R) to select countries in Europe. In
January 2000, we expanded the GEMS-IT distribution agreement to include 18
additional countries including Russia, Egypt, Saudi Arabia and the United Arab
Emirates. In September 2000 the agreement was again expanded to include Japan,
the worlds second largest health care market. Through GEMS-IT and our other
international distributors, we now have representation in over 70 countries
throughout Europe, Asia Pacific, Africa, the Middle East, Australia, New Zealand
and Latin America. In May 2001, GEMS-IT, GmbH, agreed to provide up to $600,000
of funding over the next two years to support ICG clinical sales specialists in
Germany, Italy and Egypt.

In October 1999, we entered into an agreement with GEMS-IT for distribution of
the BioZ.com(R) in the domestic hospital market. The agreement gave GEMS-IT
exclusive rights through July 2001, to market and sell our BioZ.com(R) in
hospitals with over 100 beds, a market in which GEMS-IT has a significant
presence. GEMS-IT is widely recognized for its success in introducing new
medical technologies, particularly in the areas of diagnostic cardiology,
clinical information systems and patient monitoring systems.

During the fourth quarter of fiscal 2000, we entered into an agreement with
GEMS-IT for the development of a custom plug-in module for the GEMS-IT Solar
7000 and 8000 Series of bedside monitors. This product was introduced to the
market in June 2001 and extends the capabilities of the GEMS-IT Solar product
family to provide all of the hemodynamic parameters of the BioZ.com(R) to
GEMS-IT's installed customer base of over 30,000 units. The module is built at
GEMS-IT's Milwaukee, Wisconsin facility using circuit board assemblies, patient
cables and sensors supplied by us. The product is being distributed by the
GEMS-IT direct sales force worldwide, and we receive a royalty payment for each
module sold. We believe that other patient monitoring companies could benefit
from the addition of similar modules to their estimated installed base of over
300,000 modular bedside monitors.

In March 2000, we entered into an agreement to provide BioZ(R) monitors and
sensors sets to Profiles in Health, Inc., a privately held California
corporation. Under the terms of the agreement, we were to manufacture and sell
customized BioZ(R) monitors called BioZ.pc(TM), which would be integrated into
the Profiles in Health Proveillance(TM) system. The contract contemplated a
three-phase development program during which we would develop and provide to
Profiles in Health, ICG components and sensors. Although Profiles in Health,
Inc. continues to pursue funding, we established a 100% allowance for the
receivables and inventory unique to this entity as their inability to pay became
apparent in our fourth quarter of 2000.

                                       10

<PAGE>

In March 2001, we entered into an agreement with The Heart-Lung Associates of
America, PC for use of our BioZ ICG technology in their DiTECTM pilot program to
enhance the cardiac care of end stage chronic kidney failure patients. The
program links kidney disease specialists with cardiologists and aims to
significantly reduce cardiac event rates, decrease costs, and improve dialysis
patient outcomes. During the latter part 2001 we received FDA 510(k) clearance
on a new lower cost BioZ.com that could serve as a cost-effective solution for
the dialysis market.

We have implemented various programs and partnerships to enhance our sales force
productivity. In April 2001, we entered into a co-promotional agreement with
Vasomedical, Inc. which allows our direct sales force, along with Vasomedical's
sales force, to jointly market our BioZ.com(R) ICG monitoring systems and
Vasomedical's EECP(R) enhanced external counterpulsation systems to physicians
and hospitals throughout the United States. That same month, we entered into an
agreement with Spacelabs Medical, Inc. for development of an interface using
Spacelab's Universal Flexport(R) to integrate and display our ICG technology on
their Ultraview Care Network(TM) monitoring system. In August 2001 we launched
the Government Market Initiative Program to target and further penetrate
Government markets. The program provides tools and incentives to our direct
sales force to promote sales to VA hospitals.

Medicare and Other Third-Party Reimbursement

In the outpatient market most medical procedures are reimbursed by a variety of
third-party payers, including Medicare and private insurers. CMS (formerly known
as HCFA), the governmental body that approves medical diagnosis and treatment
for financial reimbursement under Medicare, determines whether to reimburse for
a given type of procedure and the dollar amount allowed. In November 1998, CMS
mandated Medicare coverage of BioZ(R) procedures on a nationwide basis. This
reimbursement approval for our BioZ(R) systems has improved our ability to
penetrate the outpatient market, as it provides for national coverage to over 75
million Americans. In November 2000 CMS established national reimbursement
pricing for the use of our equipment. In January 2002, the AMA issued a formal
Level I CPT code covering our BioZ ICG technology. The current base amount paid
by CMS for BioZ ICG is $35.11 per procedure, adjusted geographically based on
pre-determined cost of living factors.

In the US hospital market the financial and healthcare cost containment
pressures resulting from per-capita compensation techniques required by health
maintenance organizations and diagnosis-related groups, are driving medical
departments to decrease costs. A managed care system involving capitation
rewards healthcare providers who utilize the most cost-effective methods
available in order to maintain per-patient costs within the monthly fees. When
used instead of PAC, our products could reduce direct hospital costs by an
aggregate of $600 and total hospital costs by an average of $13,600. As a
result, we believe a financial incentive exists, independent of third-party
reimbursement circumstances, for hospitals to purchase and use our products.

Marketing

Until recently, comprehensive hemodynamic information has been available only in
acute care settings, such as an intensive care unit or operating room, through
the use of PAC. The BioZ(R) systems make obtaining and assessing this type of
information simple, fast, cost-effective, safe, continuous and painless. For
these reasons, the utilization of noninvasive ICG technology is expanding in
both hospital and outpatient environments.

Our primary prospects in the outpatient market include cardiologists, internal
medicine physicians and family practitioners caring for congestive heart
failure, hypertension and pacemaker patients. Patients in the United States who
may benefit from our technology include the 50 million hypertension patients,
five million congestive heart failure patients, over one million pacemaker
patients, 20 million emergency

                                       11

<PAGE>

patients and many patients requiring fluid management. Congestive heart
failure-related expenditures exceeded $40 billion in 1998, more than any other
illness.

Our marketing strategy is designed to:

   .  increase physician and hospital personnel knowledge of ICG technology;

   .  demonstrate the cost savings of providing ICG monitoring to patients;

   .  demonstrate the ability of the BioZ(R) systems to assist physicians in the
      objective identification and appropriate pharmacological treatment of
      congestive heart failure, hypertension and fluid management patients;

   .  show the ability of the BioZ(R)systems to assist physicians in the
      optimization of pacemakers;

   .  demonstrate cost savings through more efficient care and reimbursement
      through CMS-mandated Medicare and private insurers; and

   .  educate physicians and hospital staff of the importance of hemodynamics in
      the treatment of patients who would normally not be monitored with a PAC
      due to practice setting, costs and complications.

In addition, within the hospital setting, our marketing strategy is to emphasize
the benefits of our noninvasive technology over the invasive PAC procedure.

We believe that acceptance of our products within the outpatient and hospital
markets will lay the foundation for the utilization of ICG technology in the
home healthcare market which will allow patients with chronic illnesses, such as
congestive heart failure, to monitor their hemodynamic status simply and
inexpensively and to transmit this information, via telephone or Internet, to
their physicians on a regular basis. We believe that this "telemedicine"
application has the potential to alert the physician effectively and efficiently
to any changes in status, the need to adjust medications or patient
noncompliance with prescribed treatment.

Our marketing promotion strategy is based on key medical conference
participation, facsimile and mail direct response programs, select medical
journal advertising and product and clinical education literature.

We actively support research utilizing the BioZ(R) systems because it may
provide further clinical validation for ICG. We seek to have each study
published in a peer-reviewed journal or presented at a major medical conference.
Clinical publications and presentations at major medical conferences provide us
with the exposure necessary to establish credibility for ICG technology and the
BioZ(R) systems.

Research and Development

Our research and development team has extensive experience in the areas of ICG,
biological signal processing, hardware and software development and regulatory
compliance. The team is responsible for on-going product engineering, new
product development and basic research into ICG technology and additional
noninvasive monitoring applications.

To supplement our engineering staff, we utilize Rivertek Medical Systems, Inc.,
located in Minneapolis, Minnesota, as an integral part of our research and
development team. Rivertek serves as an engineering consulting firm for medical
device manufacturers, including Guidant Corporation and Medtronic, Inc., as well
as emerging medical technology companies. Dennis Hepp, our chief technology
officer, founded Rivertek in 1988. Rivertek employs 17 full time medical
hardware, software and biomedical engineers.

                                       12

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Clinical Studies

Our research and development team participates in monitoring and analysis of
company-sponsored clinical trials, for which we employ clinical research
specialists. Each of these individuals has a strong clinical background and is
responsible for monitoring clinical studies and assisting in research and
customer training.

     Previous generation technology

More than 80 research papers on ICG technology have been published since 1993.
In general, these studies reported favorable results when comparing cardiac
output measurements with those of other techniques, such as PAC.

Previous generation technology worked reasonably well in a select group of
patients. However, significant limitations on the technology became evident when
monitoring ventilated patients and those with increasing heart rates, high heart
rates, abnormal heartbeats, high respiration rates and pacemakers. These
limitations related to both hardware and software inadequacies. As a result of
intense focus and concerted effort, combined with advances in computer
processing power, we have addressed these limitations by improving the
electronics and processing as well as the algorithms.

     The BioZ(R) Systems

We are committed to supporting well-designed clinical research studies utilizing
ICG technology, several of which are currently in process. Studies which are of
most importance to us are those which demonstrate validity, reproducibility,
clinical utility and cost-effectiveness. The results of several major studies
addressing each of these areas have been released with positive results. In May
2001, the results of a significant 100+ patient Mayo Clinic study was released
at the American Society of Hypertension meeting held in San Francisco. The study
demonstrated a 65% superiority in effectively treating previously-uncontrolled
hypertension patients when our BioZ ICG was used as compared to traditional
management by high blood pressure specialist physicians. In the study, one-half
of the 104 resistant (uncontrolled) hypertension patients When the Company's
BioZ ICG was utilized were treated with prescribed drugs based on traditional
hypertension specialist evaluation and one-half of the patients were treated
with prescribed drugs based upon the BioZ's hemodynamic data. The BioZ
augmented-patient group reached goal (140/90 mm Hg) blood pressure 65% more
often than the patients being treated without BioZ data. The study's
investigators concluded "noninvasive hemodynamic management achieved superior
blood pressure levels and control rates, when compared to management by
experienced hypertension clinicians."

In September 2001 we announced the results of a significant ICG clinical study
presented at the Fifth Annual Heart Failure (HFSA) Scientific Meeting in
Washington, D.C. The Study, presented by researchers from the Iowa Heart Center,
demonstrated CardioDynamics ICG technology's benefit in caring for pacemaker
patients. Optimization of the pacemaker setting using the BioZ ICG benefited 89%
of all patients in the Study. Small changes in pacemaker settings have the
potential to create dramatic improvement in the heart's ability to deliver blood
to the body while reducing the amount of effort required. The Study demonstrates
the value of BioZ's noninvasive measurements to document possible improvement in
heart function for patients being evaluated for a pacemaker. The results
confirmed that benefit could be possible and allows identifying 'the best'
setting for the pacemaker. Based on the results of this study it appears that
ICG technology may be more useful than the commonly used echocardiographic
measurements.

                                       13

<PAGE>

In addition to the completed studies, we are involved in a number of additional
studies:

PREDICT - Prospective Evaluation and Identification of Cardiac Decompensation in
Heart Failure by Impedance Cardiography Test. We have 21 research sites
participating in this company-sponsored study and currently have 208 patients
enrolled. The study design of PREDICT includes serial blinded measurements of
ICG that are performed at two week intervals for 26 weeks. All patients are
managed according to the judgment of physicians and nurses responsible for the
patients care, who are not aware of the ICG data. The statistical analyses will
involve determining if changes in specific ICG variables reliably precede the
development of worsening heart failure. We have approximately 100 patients who
have now completed the 6 months of monitoring.

ESCAPE BIG - Evaluation Study of Congestive Heart Failure and Pulmonary Artery
Catheterization Effectiveness (ESCAPE) Bio-Impedance Cardiography in Advanced
Heart Failure (BIG). We are participating as a substudy with a primary objective
of evaluating how accurately hemodynamics parameters obtained from ICG predict
clinical outcomes and to evaluate the relationship between hemodynamic data
derived from ICG with hemodynamic data obtained from invasive monitoring. There
are currently 56 patients enrolled in this substudy.

ED-IMPACT - Impedance Cardiography-Aided Assessment Changes Therapy in Emergent
Dyspnea. This study is just getting underway. The primary endpoint will be the
rate of change in diagnosis and treatment following the addition of BioZ data to
the physician's initial clinical impression and therapeutic plan. Secondary
endpoints will include an analysis of the changes in cost that resulted as a
consequence of learning the hemodynamic data. We'll also be looking at ICG data
corresponding to initial chest x-ray, echocardiography, and BNP (B-type
Natriuretic Peptide) diagnostic results.

Medical Advisory Board

We have established a distinguished medical advisory board consisting of 22
physicians, many of whom are affiliated with prestigious universities and
well-known medical institutions throughout the United States such as Stanford
University School of Medicine, Cleveland Clinic, Scripps Clinic, University of
California, San Diego, and Baylor College of Medicine, Houston, Texas. Our
members, who have expertise in cardiology, electrophysiology, anesthesiology,
hypertension, pulmonary and critical care, internal medicine, heart failure and
emergency medicine, are as follows:

   .  William T. Abraham, M.D. is director of the Heart Failure & Cardiac
      Transplantation Department and the University of Kentucky Medical Center
      in Lexington, Kentucky.

   .  Peter Alagona, Jr., M.D. is a private practice cardiologist at Health
      Centers of Excellence in Tampa, Florida.

   .  Peter H. Belott, M.D. is a board certified internist and cardiologist
      specializing in cardiac pacing and electrophysiology in San Diego,
      California.

   .  Anthony N. DeMaria, M.D. is chief of cardiovascular medicine for the
      cardiology division of the University of California, San Diego in San
      Diego, California.

   .  Nicholas V. Diaco, M.D. has served as chairman of our medical advisory
      board since February 1995. He is the director of the coronary care unit
      and the heart catheterization laboratory at St. John's Hospital and Health
      Center in Santa Monica, California.

   .  Barry H. Greenberg, M.D. is the director of the heart failure/transplant
      cardiology program at University of California, San Diego Medical Center
      in San Diego, California.

                                       14

<PAGE>

Medical Advisory Board - (Continued)

   .  James Heywood, M.D. is the medical director of the cardiomyopathy program
      at Loma Linda University Medical Center in Loma Linda, California.

   .  Meldon C. Levy, M.D. is director of the cardiac noninvasive laboratory and
      vice chairman, governing board, of the Century City Hospital, Los Angeles,
      California.

   .  William C. Maguire, M.D., Ph.D. has a private practice in critical care
      and pulmonary disease and is on the staff of Grossmont and Alvarado
      Hospitals, San Diego, California.

   .  Srinivasm Murali, M.D. is associate professor of medicine, director of
      transplant cardiology of the heart failure/transplantation unit of UPMC
      Health System located in Pittsburgh, Pennsylvania.

   .  Loi Phi Nguyen, M.D. is Chief of Cardiology at West Houston Hospital in
      Houston, Texas.

   .  Steven E. Nissen. M.D. is vice-chariman, department of cardiology and
      director of clinical cardiology at the Cleveland Clinic in Cleveland, Ohio

   .  Frank Peacock, M.D. is a physician in the emergency department of the
      Cleveland Clinic in Cleveland, Ohio.

   .  W. Scott Sageman, M.D. is a physician in private practice in critical care
      and pulmonary medicine at the Community Hospital of Monterey Peninsula in
      Monterey, California.

   .  Richard A. Schatz, M.D. is research director of cardiovascular
      interventions at the heart, lung and vascular center at Scripps Clinic and
      Research Foundation in La Jolla, California.

   .  John S. Schroeder, M.D. is the chief of the cardiovascular medicine clinic
      and a professor of medicine at Stanford University School of Medicine in
      Stanford, California.

   .  Marc A. Silver, M.D. is the director of the heart failure institute and
      the cardiovascular disease fellowship program at Christ Hospital and
      Medical Center in Oak Lawn, Illinois.

   .  Bruce D. Spiess, M.D. is a professor, chief of cardiothoracic anesthesia
      and director of clinical research at the Medical College of Virginia
      Commonwealth University in Richmond, Virginia.

   .  John E. Strobeck, M.D., Ph.D. is a member of the executive committee and
      co-founder of the Heart Failure Society of America and medical director of
      the Heart-Lung Center in Hawthorne, New Jersey.

   .  Guillermo Torre-Amione, M.D., Ph.D. is an assistant professor of medicine
      and medical director at Baylor College of Medicine in Houston, Texas.

   .  Richard F. Wright, M.D. is the research director at St. John's Pacific
      Heart Institute in Santa Monica, California.

   .  Clyde W. Yancy, Jr., M.D. is the director of the congestive heart failure
      program and medical director at the University of Texas Southwestern
      Medical Center in Dallas, Texas.

                                       15

<PAGE>

Our medical advisory board provides guidance regarding clinical trials,
technological improvements and potential uses for our products. Members of the
medical advisory board receive reimbursement for their expenses in attending
company-sponsored meetings and, in some cases, receive consulting fees for time
spent working on our behalf. No fees were paid to the members during fiscal
2001, 2000 or 1999 services on our medical advisory board. However, in some
cases, members receive options to purchase shares of our common stock for
participating in meetings and studies.

Manufacturing

We are licensed as a healthcare device manufacturer by the Food and Drug Branch
of the California Department of Health Services, which is the State of
California equivalent of the FDA, and operate under the FDA Good Manufacturing
Practice regulation.

In our facility our production process for the BioZ(R) monitors consists
primarily of final assembly, integration and testing of standard and custom
components. We currently outsource to a third party the production of our
BioZtect(TM) sensors and patient boards to qualified subcontractors, who have
met our supplier certification process and are placed on an approved vendor
list.

We have implemented quality procedures and documentation required for successful
International Organization for Standardization (ISO) 9001 certification. In June
1998, we received ISO 9001 and EN 46001 quality certification for developing and
marketing medical devices.

We maintain a quality-assurance program covering our manufacturing operations.
Suppliers of purchased components are required to meet stated specifications. We
certify suppliers prior to use by conducting audits and product inspections. We
engage in ongoing evaluations of the performance of our suppliers by evaluating
the results of inspections and tests as well as the timeliness of product
deliveries. We employ numerous quality-assurance procedures during our in-house
manufacturing processes to ensure that our finished products meet our
specifications. Quality assurance procedures include operator training, process
validation, equipment calibration, inspection and testing. All manufacturing
procedures and processes are formally approved and updated using established
revision control procedures. Documentation of in-house and final testing results
is maintained in device history records for every unit. We maintain an ongoing
post-sale performance-monitoring program.

Warranty and Service

Our systems come with a standard five-year, parts and labor warranty commencing
at the date of shipment. When warranty repairs are necessary, we generally
perform them at our headquarters. In some cases, our distributors perform
repairs in authorized service centers. We also provide field clinical sales
specialists as necessary, as well as 24-hour on-call technical support. In
addition to the standard warranty, we offer extended service agreements, called
Zcare(R), for hardware and software maintenance beyond the warranty period. We
also service equipment on a time and materials basis.

Competition

     Direct competition

We are aware of three domestic and two international manufacturers of ICG
monitors. Since all five companies are privately held, sales and financial
figures for these competitors are not available. We believe that our BioZ(R)
products provide the most advanced ICG monitoring and commercially attractive
designs, at prices that are competitive. Thus far, we have not observed sales
and marketing efforts by our competitors in the market place.

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<PAGE>

     PAC

Also known as thermodilution, right heart catheterization or Swan-Ganz(TM)
catheterization, the PAC procedure was introduced in the early 1970's. Despite
its limitations, costs and risks, PAC remains the most commonly used technology
for monitoring hemodynamic status. Medical Data International estimates that PAC
procedures are used nearly 2 million times per year worldwide. The estimated
cost of PAC to the US healthcare system in 1997 was $2 billion for the cost of
the catheters and their insertion and $15 billion per year for the cost of
complications arising from the procedure. Edwards Lifesciences, Abbott
Laboratories and Datex-Ohmeda produce the majority of right heart catheters used
in the United States.

PAC is an invasive procedure involving an incision into a patient's neck or
groin region and the insertion of a catheter (plastic tube) through the vascular
system and through the heart directly into the pulmonary artery. Complications
associated with this procedure occur in as many as one in four reported cases
and include irregular heartbeats, infection, pulmonary artery rupture and death.
Additionally, a September 1996 study published in the Journal of the American
Medical Association (JAMA) determined that the use of PAC to monitor cardiac
output significantly increased the risk of death in critically ill patients.
This study, which examined data from 5,735 intensive-care patients treated at
five US medical centers, reported that patients who underwent PAC had a 21%
higher risk of death within 30 days of discharge, as compared to those who did
not undergo the procedure. The importance of this finding is underscored by the
fact that patients in both groups were matched for disease severity and
prognosis.

Another significant drawback in the use of PAC is cost. The PAC procedure
requires a hospital to allocate valuable resources in terms of an intensive care
unit bed, a cardiac catheterization laboratory or operating room, highly skilled
medical personnel and expensive equipment to obtain non-continuous hemodynamic
data. According to the JAMA study, the mean cost of the hospital stay for
critically-ill patients having a PAC was $13,600 greater than the $35,700 cost
for similar critically-ill patients who did not undergo a PAC.

Many patients who might otherwise benefit from hemodynamic monitoring are
excluded presently because the risks and costs associated with PAC often
outweigh the potential benefits. ICG technology eliminates PAC-caused
complications and death, lowers costs, reduces procedure time, expands clinical
applications and offers immediate availability of vital, real-time and
continuous hemodynamic data.

     Echocardiography

Echocardiography (echo) is a medical diagnostic tool utilizing ultrasound
frequency waves to detect anatomical abnormalities of the heart and blood
vessels. Echo technology was developed during the 1970's and has advanced
through the years with the addition of sophisticated electronics and
digitalization for acquisition of better images. A continuous wave suprasternal
Doppler echo measures cardiac output noninvasively by placing a Doppler
transducer on the chest, aiming it toward the ascending aorta and measuring
aortic blood flow velocity. Specifically, echo measures the aortic diameter and
the movement of red blood cells to determine the velocity and direction of blood
flow to calculate stroke volume and thus calculate cardiac output.

Limitations in measuring cardiac output via echo include:

   .  inconsistency in images and in the data generated due to differences in
      technician skill and experience, patient size and disease state; and

   .  difficulty in procuring images in patients with evidence of pulmonary
      disease, tracheotomies, chest wounds or obesity.

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<PAGE>

In addition, echo is a time-consuming procedure that typically requires 30-45
minutes, and in some patients, reliable, accurate images simply cannot be
obtained for unknown reasons.

     Trans-esophageal echo

Trans-esophageal echo has been developed in recent years to obtain closer images
of the heart. It is useful in patients for whom examination from the usual
position is technically impossible and for hospitalized patients undergoing
cardiac surgery. Trans-esophageal echo is performed with the ultrasound
transducer placed invasively in the esophagus through the mouth. Although this
procedure enables more direct, accurate images of the heart, disadvantages
include its invasive nature, increased patient discomfort and the requirement
for patient sedation to promote procedure tolerance. In addition, patient airway
complications may result, causing the need for available emergency equipment,
such as oxygen, intubation equipment and EKG monitoring. The procedure is
customarily performed with several attendants, including an echo technician, a
nurse and a physician.

     Direct Fick

Direct Fick was the original method conceived in the late 1800's to measure
cardiac output. It is based on calculating the oxygen difference between the
arterial and venous blood, along with oxygen inhalation and expiration. The
Direct Fick method is seldom used because it is time consuming, costly and
complicated. A variation of the Direct Fick method, called Fick Partial
Re-breathing, was introduced in late 1998 to the hospital surgical market. Fick
Partial Re-breathing uses carbon dioxide instead of oxygen to measure cardiac
output. The Fick Partial Re-breathing method is limited to patients who are
mechanically ventilated, which severely restricts the number of patients who are
candidates for the procedure. In addition, lack of CMS-mandated reimbursement
creates a barrier for adoption by the medical community.

Intellectual Property

Our success will, to some extent, depend on our ability to maintain patent
protection for our products and processes, to preserve our trade secrets and
proprietary technology and to operate without infringing upon the patents or
proprietary rights of others. Currently we hold two United States patents that
will expire in 2006 and 2009. These existing patents were issued prior to the
re-engineering of our products to incorporate digital signal processing. Our
research department has developed new technologies for which we have filed six
patent applications. We also possess proprietary software, which we have elected
not to disclose through patents. We may in the future file new patent
applications covering modifications to our products and algorithms.

Government Regulation

In November 1996, we received 510(k) clearance from the FDA to market the
BioZ(R) system. In September 1997, the FDA granted 510(k) clearance to market
the BioZ(TM) Portable and to implement our proprietary DISQ(TM) technology into
redesigned monitors. DISQ(TM) provides improved measurement of impedance
waveforms through enhanced digital signal processing and automatic
calibration.

In March 1998, we received 510(k) marketing clearance for our BioZ.com(R)
monitoring system. The BioZ.com(R) incorporates our ZMARC(TM) algorithm, which
allows the system to sense and modulate values on patients with over-compliant
or under-compliant aortas.

Our products and activities are subject to extensive, ongoing regulation by the
FDA and other governmental and foreign regulatory agencies. Under the Federal
Food, Drug and Cosmetic Act, the FDA regulates the clinical testing,
manufacture, labeling, packaging, marketing, distribution and record keeping for
medical devices. Delays in receipt of, or failure to obtain or maintain,
regulatory clearances

                                       18

<PAGE>

and approvals, or any failure to comply with regulatory requirements, could
delay or prevent our ability to market our product line.

Before a new device may be introduced or marketed, the manufacturer generally
must obtain either FDA 510(k) clearance or approval of a pre-market approval
application. FDA clearance or approval may entail an expensive, lengthy and
uncertain process. We have received a marketing clearance for the BioZ(R)
system, the BioZ.pc(TM) and the BioZ.com(R). These clearances are nevertheless
subject to continued FDA audits and may be rescinded if we change the design of
our technology. Further, we plan to submit additional new products for FDA
clearance or approval in the future. It is possible that our future products may
not gain FDA clearance or approval in a timely fashion, or at all.

We are also subject to routine inspection by the FDA and state agencies, such as
the California Department of Health Services, for compliance with good
manufacturing practice requirements, medical device reporting requirements and
other applicable regulations. Violation or alleged violation of these
regulations may result in government action ranging from warning letters to
criminal prosecution. Companies who violate these regulations are also subject
to penalties of up to $500,000.

The Federal Food, Drug and Cosmetic Act requires that medical devices be
manufactured in accordance with good manufacturing practice requirements. Good
manufacturing practice requirements specify, among other things, that:

   .  the manufacturing process be regulated and controlled by the use of
      written procedures;

   .  the ability to produce devices which meet the manufacturer's
      specifications be validated by the extensive and detailed testing of every
      aspect of the process; and

   .  deficiencies in the manufacturing process or in the products produced be
      investigated and detailed records kept.

Manufacturing facilities are subject to FDA inspection on a periodic basis to
monitor compliance with current good manufacturing practice requirements.
Labeling and promotional activities are regulated by the FDA and, in some
circumstances, by the Federal Trade Commission. Modifications or enhancements
that could significantly affect the safety or effectiveness of a device or that
constitute a major change to the intended use of the device require a new 510(k)
submission. If the FDA requires us to submit a new 510(k) notice for any product
modification, even one that addresses device performance issues, we may be
prohibited from marketing the modified product until the 510(k) notice is
cleared by the FDA.

Laws and regulations regarding the manufacture, sale and use of medical devices
are subject to change and depend heavily on administrative interpretations.
Future changes in the regulations or interpretations made by the FDA or other
regulatory bodies may have retroactive effect and may adversely affect us.

In order to sell our products within the European community, we must comply with
the European Commission's medical device directive. In late 1998 we received
authorization from TUV Rhineland of North America to place the CE mark on our
BioZ.com(R). The CE mark is recognized worldwide as an essential European
regulatory approval and enables us to expand our sales and distribution of the
BioZ.com(R) throughout Europe. Future regulatory changes could limit our ability
to use the CE mark, and any new products we develop may not qualify for the CE
mark. If we fail to obtain authorization to use the CE mark or lose this
authorization, we will not be able to sell our products in the European
community. In December 2001, we had our annual compliance review and we passed
without any significant issues. In May 2000, we received approval from the State
Drug Administration of the People's Republic of China and in November 2000, we
received a Canadian Medical Device License.

                                       19

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Employees

As of February 15, 2002, we had 122 employees, two of which are considered
part-time. Of this number, 63 are in sales and marketing, 21 are in
manufacturing, 13 are in research and development, and the balance are in
management or administration.

                                       20

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                                  RISK FACTORS

We depend upon on our BioZ(R) product line, the market acceptance of which is in
its early stages.

Our future is dependent upon the success of the BioZ(R) product line and similar
products that are based on the same core technology. The market for these
products is in a relatively early stage of development and may never fully
develop as we expect. The long-term commercial success of the BioZ(R) product
line requires widespread acceptance of our products as safe, efficient and
cost-effective. Widespread acceptance would represent a significant change in
medical practice patterns. In the past, some medical professionals have
hesitated to use ICG products because of limitations experienced with older,
analog-based monitors. Invasive procedures, such as PAC, are generally accepted
in the medical community and have a long history of use.

We have sponsored, and will continue to sponsor or conduct clinical trials. We
cannot be certain that clinical trials will be completed, that they will have a
positive outcome or that a positive outcome in these trials will be sufficient
to promote widespread acceptance of our products within the medical community.

Technological change is difficult to predict and to manage.

We face the challenges that are typically faced by companies emerging from the
development phase. Our product line has required, and any future products will
require, substantial development efforts and compliance with governmental
clearance or approval requirements. We may encounter unforeseen technological or
scientific problems that force abandonment or substantial change in the
development of a specific product or process.

We must maintain and develop strategic relationships with third parties to
increase market penetration of our product lines.

We distribute our products to domestic hospitals and targeted international
markets through our strategic alliance with GEMS-IT. We intend to enter into
similar agreements with other major patient monitoring companies and to
establish technology partnerships with pacemaker and other medical product and
technology companies. Widespread acceptance of our BioZ(R) products is dependent
on our establishing and maintaining these strategic relationships with third
parties and on the successful distribution efforts of third parties.

Many aspects of our relationships with third parties, and the success with which
third parties promote distribution of our products, are beyond our control. We
may be unsuccessful in maintaining our existing strategic relationships and in
identifying and entering into future development and distribution agreements
with third parties.

Our success depends in part upon the availability of third-party reimbursement
at adequate price levels.

Our success will depend in part on the availability of adequate reimbursement
from third-party healthcare payers, such as Medicare, private health insurers
and managed care organizations. Third-party payers increasingly challenge the
pricing of medical products and services. Third-party payers may not cover the
cost of a device and related services, or they may place significant
restrictions on the circumstances in which coverage will be available. In
addition, reimbursement may not be at or remain at price levels adequate to
allow medical professionals to realize an appropriate return on the purchase of
our products.

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We depend on management and other key personnel.

We dependent on a limited number of key management and technical personnel. The
loss of one or more of our key employees may hurt our business if we are unable
to identify other individuals to provide us with similar services. We do not
maintain "key person" insurance on any of our employees. In addition, our
success depends upon our ability to attract and retain additional highly
qualified sales, management, manufacturing and research and development
personnel. We face intense competition in our recruiting activities and may not
be able to attract or retain qualified personnel.

We depend on Rivertek Medical Systems and other third parties for development
and manufacturing services.

Our strategy for development and commercialization of some of our products
depends upon entering into various arrangements with third parties and upon the
subsequent success of these parties in performing their obligations. We may not
be able to negotiate acceptable arrangements in the future, and our existing
arrangements may not be successful. We rely on contracted development services,
particularly from Rivertek Medical Systems, Inc. Also, we currently assemble our
products from components manufactured by a limited number of manufacturers.
Therefore, we are dependent on component and subassembly manufacturers. If we
experience a termination, modification or disruption of any of our development
or manufacturing arrangements, we may be unable to deliver products to our
customers on a timely basis, which may lead to customer dissatisfaction and
damage to our reputation.

We may not have adequate intellectual property protection.

Our patents and proprietary technology may not be able to prevent competition by
others. In addition, in the future our products may be found to infringe upon
the rights of others. From time to time, we have received communications from
third parties asserting that features of some of our products may infringe on
the intellectual property rights of others. Any claims resulting in intellectual
property litigation, whether defensive or offensive, would have no certain
outcome other than to drain our resources.

The validity and breadth of claims in medical technology patents involve complex
legal and factual questions. Future patent applications may not be issued, the
scope of any patent protection may not exclude competitors, and our patents may
not provide competitive advantages to us. Our patents may be found to be
invalid, and other companies may claim rights in or ownership of the patents and
other proprietary rights held or licensed by us. Also, our existing patents may
not cover products that we develop in the future. Moreover, when our patents
expire, the inventions will enter the public domain. See "Business -
Intellectual Property."

Since patent applications in the United States are maintained in secrecy until
patents are issued, our patent applications may infringe patents that may be
issued to others. If our products were found to infringe patents held by
competitors, we may have to modify our products to avoid infringement, and it is
possible that our modified products would not be commercially successful.

We face competition from other companies and technologies.

We compete with other companies that are developing and marketing noninvasive
hemodynamic monitors. We are also subject to competition from companies that
support invasive technologies. Many of these companies have more established and
larger marketing and sales organizations, significantly greater financial and
technical resources and a larger installed base of customers than we do. The
introduction by others of products embodying new technologies and the emergence
of new industry standards may render our products obsolete and unmarketable. In
addition, other technologies or products may be developed that have an entirely
different approach or means of accomplishing the

                                       22

<PAGE>

intended purposes of our products. Accordingly, the life cycles of our products
are difficult to estimate. To compete successfully, we must develop and
introduce new products that keep pace with technological advancements, respond
to evolving consumer requirements and achieve market acceptance. We may be
unable to develop new products that address our competition.

Our business plan contemplates an income stream from sales of disposable sensors
that are compatible with an installed base of our monitors. We may be subject to
price competition from other sensor manufacturers whose products are also
compatible with our monitors. To mitigate this we successfully developed
proprietary sensor technology that provides enhanced features to our customers
and promotes the exclusive use of our proprietary sensors with our equipment.

The current widespread acceptance of PAC, and the lack of widespread acceptance
of noninvasive technologies like ours, is an important competitive disadvantage
that we must overcome. In addition, our current and potential competitors may
establish cooperative relationships with large medical equipment companies to
gain access to greater research and development or marketing resources.
Competition may result in price reductions, reduced gross margins and loss of
market share.

The cost and availability of power in the State of California is subject to
uncertainty.

In late 2000 and continuing in 2001, the State of California has been subject to
a deterioration in the ability of major utilities to provide energy for the
State's needs. The crisis has resulted in "rolling blackouts" where certain
areas are not provided with any electricity for several hours. To date, while
our facilities have been subject to intermittent power outages, the most
immediate impact has been the significant increase in power rates for most
users, including us. In addition, the major utility providers are purchasing
power on a "spot" basis. The cost of such purchases has exceeded their ability
to fully collect the increases from their customers. Any future interruption in
power or further increases in power costs could delay production or increase our
operating costs and could have a material adverse effect on our operations.

We have no experience with home healthcare.

We intend to enter the home healthcare market through pursuit of strategic
relationships with other parties. We have not concluded any agreements or
understandings with any third parties, and we may not be able to enter into any
arrangements on terms satisfactory to us. Even if we are successful in
negotiating acceptable arrangements with third parties, the parties may not
perform their obligations to us for reasons beyond our control. If we are not
able to negotiate arrangements with other parties to implement our home
healthcare strategy, or if such arrangements, once negotiated, are not
successful, we will not be able to meet our business objectives in this area.

We have a history of losses and may experience continued losses.

We have experienced losses every year. These losses have resulted because we
have expended more money in the course of researching, developing and enhancing
our technology and products and establishing our sales, marketing and
administrative organizations than we have generated in revenues. We expect that
our operating expenses will increase substantially in the foreseeable future as
we increase our sales and marketing activities, expand our operations and
continue to develop our technology. It is possible that we will never achieve or
sustain the revenue levels required for profitability.

                                       23

<PAGE>

We may need additional capital, which may be unavailable.

The commercialization of our current product line and the development and
commercialization of any additional products may require greater expenditures
than expected in our current business plan. Our capital requirements will depend
on numerous factors, including:

   .  our rate of sales growth--fast growth may actually increase our need for
      additional capital to hire additional staff, purchase additional component
      inventories, finance the increase in accounts receivable and supply
      substantial support services;

   .  our progress in marketing-related clinical evaluations and product
      development programs, all of which will require additional capital;

   .  our receipt of, and the time required to obtain, regulatory clearances and
      approvals--the longer regulatory approval takes, the more working capital
      we will need to support our regulatory and development efforts in advance
      of sales;

   .  the level of resources that we devote to the development, manufacture and
      marketing of our products--any decision we make to improve, expand or
      simply change our process, products or technology will require increased
      funds;

   .  facilities requirements--as we grow we may need additional manufacturing,
      warehousing and administration facilities and the costs of the facilities
      would be borne long before any increased revenue from growth would occur;

   .  market acceptance and demand for our products--although growth may
      increase our capital needs, the lack of growth and continued losses would
      also increase our need for capital; and

   .  financing strategies--our attempt to accelerate the otherwise lengthy
      purchasing processes of hospitals by offering leasing programs as an
      alternative to outright purchasing and by providing purchasers with
      extended payment terms and financing options will consume additional
      capital.

We may be unable to predict accurately the timing and amount of our capital
requirements. We may be required to raise additional funds through public or
private financing, bank loans, collaborative relationships or other arrangements
earlier than expected. It is possible that banks, venture capitalists and other
investors may perceive our capital structure, our history of losses or the need
to achieve widespread acceptance of our technology as too great a risk to bear.
As a result, additional funding may not be available on attractive terms, or at
all. If we cannot obtain additional capital when needed, we may be forced to
agree to unattractive financing terms, to change our method of operation or to
curtail our operations.

We may not be able to manage growth.

If successful, we will experience a period of growth that could place a
significant strain upon our managerial, financial and operational resources. Our
infrastructure, procedures and controls may not be adequate to support our
operations and to achieve the rapid execution necessary to successfully market
our products. Our future operating results will also depend on our ability to
expand our direct sales force and our internal sales, marketing and support
staff. If we are unable to manage future expansion effectively, our business,
results of operations and financial condition will suffer, our senior management
will be less effective, and our revenues and product development efforts may
decrease.

                                       24

<PAGE>

Our quarterly operating results frequently vary due to factors outside our
control.

We have experienced and expect to continue to experience fluctuations in
quarterly operating results as a result of a number of factors. We cannot
control many of these factors, which include the following:

   .  the timing and number of new product introductions;

   .  the mix of sales of higher and lower margin products in a quarter;

   .  the market acceptance of our products;

   .  development and promotional expenses relating to the introduction of new
      products or enhancements of existing products;

   .  product returns;

   .  changes in pricing policies by us and our competitors;

   .  the timing of orders from major customers and distributors; and

   .  delays in shipment.

For these reasons, you should not rely on period-to-period comparisons of our
financial results as indications of future results.

We may not continue to receive necessary FDA clearances or approvals.

Our products and activities are subject to extensive, ongoing regulation by the
Food and Drug Administration and other governmental authorities. Delays in
receipt of, or failure to obtain or maintain, regulatory clearances and
approvals, or any failure to comply with regulatory requirements, could delay or
prevent our ability to market our product line.

We may not receive approvals by foreign regulators which are necessary for
international sales.

Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary from country to country. If we, or our
international distributors, fail to obtain or maintain required pre-market
approvals or fail to comply with foreign regulations, foreign regulatory
authorities may require us to file revised governmental notifications, cease
commercial sales of our products in the applicable countries or otherwise cure
the problem. Such enforcement action by regulatory authorities may be costly.

In order to sell our products within the European community, we must comply with
the European community's medical device directive. The CE marking on our
products attests to this compliance. Future regulatory changes may limit our
ability to use the CE mark, and any new products we develop may not qualify for
the CE mark. If we lose this authorization or fail to obtain authorization on
future products, we will not be able to sell our products in the European
community.

                                       25

<PAGE>

We do not know the effects of healthcare reform proposals.

The healthcare industry is undergoing fundamental changes resulting from
political, economic and regulatory influences. In the United States,
comprehensive programs have been proposed that seek to increase access to
healthcare for the uninsured, control the escalation of healthcare expenditures
within the economy and use healthcare reimbursement policies to balance the
federal budget.

We expect that Congress and state legislatures will continue to review and
assess healthcare proposals, and public debate of these issues will likely
continue. We cannot predict which, if any, of such reform proposals will be
adopted and when they might be adopted. Other countries also are considering
healthcare reform. Significant changes in healthcare systems could have a
substantial impact on the manner in which we conduct our business and could
require us to revise our strategies.

We are subject to product liability claims and product recalls that may not be
covered by insurance.

The nature of our business exposes us to risks of product liability claims and
product recalls. Medical devices as complex as ours frequently experience errors
or failures, especially when first introduced or when new versions are released.
For example, we voluntarily recalled 43 units of our new BioZ.comII's from
purchasers in December due to performance issues identified in conjunction with
early users of this product. All of the recalled units were replaced with
BioZ.com's and we have retrofitted the recalled units to address the performance
issues. Our products are sometimes used in procedures where there is a high risk
of serious injury or death. These risks will exist even with respect to those
products that have received, or may in the future receive, regulatory clearance
for commercial sale.

We did not carry product liability insurance during some periods before May 15,
1995. We currently maintain product liability insurance at $20,000,000 per
occurrence and $20,000,000 in the aggregate. Our product liability insurance may
not be adequate. In the future, insurance coverage may not be available on
commercially reasonable terms, or at all. In addition, product liability claims
or product recalls could damage our reputation even if we have adequate
insurance coverage.

Our common stock is subject to price volatility.

The market price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to various factors beyond our control, including:

   .  quarterly variations in operating results;

   .  announcements of technological innovations, new products or pricing by our
      competitors;

   .  changes in, or failure to meet, financial estimates of securities
      analysts;

   .  the rate of adoption by physicians of ICG technology in targeted markets;

   .  the timing of patent and regulatory approvals;

   .  the timing and extent of technological advancements;

   .  results of clinical studies;

   .  the sales of our common stock by affiliates or other shareholders with
      large holdings; and

   .  general market conditions.

Our future operating results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock. In addition, the stock market
has experienced significant price and volume fluctuations that have affected

                                       26

<PAGE>

the market prices of the stock of many medical device companies and that often
have been unrelated to the operating performance of such companies. These broad
market fluctuations may directly influence the market price of our common stock.

We may be required to issue additional shares of common stock at prices that are
below then market value.

The holders of warrants to purchase our common stock could require us to issue
additional shares of common stock to them pursuant to anti-dilution rights.
These rights would cause us to issue additional common stock upon exercise of
their warrants if we sell common stock at a price less than the exercise price
of their warrants. If we need to sell common stock at a time when the market
price for our shares is depressed, these anti-dilution rights could further
depress the market price and impair our ability to raise needed capital. As of
February 15, 2002 there are 2,396,128 warrants outstanding.

Our international sales expose us to unique risks.

In fiscal 2001, international sales accounted for approximately 5% of our
revenue. We believe that international sales will represent a meaningful portion
of our revenue in the future. We rely on GEMS-IT and other regional distributors
to assist us with our international sales efforts. We are exposed to risks from
international sales, which include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions and reduced protection
for intellectual property rights. Moreover, fluctuations in the rates of
exchange may increase the price in local currencies of our products in foreign
markets and make our products relatively more expensive than competitive
products.

Recent terrorist attacks in the United States have affected travel, the stock
market, the postal service and the general economy.

On September 11, 2001, terrorists carried out attacks that destroyed the World
Trade Center in New York and badly damaged the Pentagon outside Washington, D.C.
In the wake of these attacks, stock prices broadly declined from the prices that
existed prior to the attacks. In addition to affecting the stock markets, the
terrorist attacks may affect the national and international economies because of
the uncertainties that exist as to how the United States will respond in the
future and as to whether additional attacks will be carried out against the
United States. These uncertainties brought about challenges in travel, mail
delivery and contributed to a slowdown in economic activity in the United States
and beyond. Limitations on travel by our sales and clinical staff could
negatively effect our ability to achieve our revenue goals. Additionally, travel
closures or delays could negatively impact deliveries of raw materials from our
vendor required to manufacture our products including the disposable sensors and
deliver them in a timely way to our customers. Delays in the delivery of mail
could inhibit our ability to invoice and collect amounts owed to us. The
weakened economy may have the effect of and impacting the ability of our
management and sales staff to conduct business and, as a result, decreasing our
sales.

Recent corporate scandals involving alleged accounting irregularities have
resulted in unavailability of, or significantly higher premiums for director and
officer liability insurance.

As a result of recent well publicized corporate business failures alleged to
have involved improper acts by executives and accounting irregularities,
director and officer liability insurance has become more difficult to obtain and
the premiums for such insurance have increased significantly. If we are unable
to obtain director and officer liability insurance at rates that are reasonable
or at all, we may not be able to retain our current officers and directors or
attract qualified directors and officers in the future. Common stock that is
available for immediate resale may depress our market price.

                                       27

<PAGE>

We have filed registration statements with the Securities and Exchange
Commission covering the potential resale by our shareholders of up to 18,700,000
shares of common stock, the majority of which have not been sold. The existence
of a substantial number of shares of common stock subject to immediate resale
could depress the market price for our common stock and impair our ability to
raise needed capital.

A low stock price could result in our being de-listed from the Nasdaq Market and
subject us to regulations that could reduce our ability to raise funds.

If our stock price were to drop below $1.00 per share and remain below $1.00 per
share for an extended period of time, or if we fail to maintain other Nasdaq
criteria, Nasdaq may de-list our common stock from the Nasdaq-Amex National
Market. In such an event, our shares could only be traded on over-the-counter
bulletin board system. This method of trading could significantly impair our
ability to raise new capital.

In the event that our common stock was de-listed from the Nasdaq-Amex National
Market due to low stock price, we may become subject to special rules, called
penny stock rules, that impose additional sales practice requirements on
broker-dealers who sell our common stock. The rules require, among other things,
the delivery, prior to the transaction, of a disclosure schedule required by the
Securities and Exchange Commission relating to the market for penny stocks. The
broker-dealer also must disclose the commissions payable both to the
broker-dealer and the registered representative and current quotations for the
securities, and monthly statements must be sent disclosing recent price
information.

In the event that our common stock becomes characterized as a penny stock, our
market liquidity could be severely affected. The regulations relating to penny
stocks could limit the ability of broker-dealers to sell our common stock and
thus the ability of purchasers in this offering to sell their common stock in
the secondary market.

We do not intend to pay dividends in the foreseeable future.

We do not intend to pay any cash dividends on our common stock in the
foreseeable future. Payment of such cash dividends would, in any event, be
prohibited or limited under the terms of our line of credit with Imperial Bank.

ITEM 2.   DESCRIPTION OF PROPERTY

Our executive offices are located in an approximately 18,000 square foot leased
facility in San Diego, California. This facility houses all of our research,
development, manufacturing, marketing, sales and administrative activities
except for field and contract personnel. Approximately 12,000 square feet of the
facility is being utilized by our research, development and manufacturing
functions with the balance occupied by our marketing, sales and administrative
staff. The five-year lease expires in June 2002. We are currently looking at
several alternatives, including moving the manufacturing operations to a second
location and expanding our office space in the current location or moving to a
new facility entirely.

ITEM 3.   LEGAL PROCEEDINGS

We are from time to time subject to legal proceedings and claims, which arise in
the ordinary course of our business. Management believes that resolution of
these matters will not have a material adverse effect on our results of
operations or financial condition.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended November 30, 2001.

                                       28

<PAGE>

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the Nasdaq-Amex National MarketSM under the symbol
CDIC. The following table sets forth for the periods indicated the high and low
closing prices per share of common stock as furnished by The Nasdaq-Amex
National Market(SM).

<TABLE>
<CAPTION>
                                                                         High       Low
                                                                         ----       ---
               Year Ending November 30, 2001
               <S>                                                      <C>       <C>
               Fourth Quarter ........................................  $ 7.28    $ 4.20

               Third Quarter .........................................    6.17      4.15

               Second Quarter ........................................    5.35      2.75

               First Quarter .........................................    5.00      3.16

               Year Ending November 30, 2000

               Fourth Quarter ........................................  $ 6.50    $ 4.31

               Third Quarter .........................................    7.28      4.00

               Second Quarter ........................................   13.13      4.66

               First Quarter .........................................    7.00      3.16
</TABLE>

In May 2000, the Company moved from the Nasdaq Small Cap Market to the
Nasdaq-Amex National Market System.

On February 11, 2002 there were approximately 474 holders of record of our
common stock and a total shareholder base of approximately 13,000. We have not
declared or paid any cash dividends on shares of our common stock and do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain any future earnings for use in the operation of our business.

                                       29

<PAGE>

ITEM 6.   SELECTED FINANACIAL DATA

The following table summarizes certain selected financial information for, and
as of the end of, each of the fiscal years in the five-year period ended
November 30, 2001. The information set forth below is derived from the financial
statements of the Company which were audited by KPMG LLP, independent auditors,
and should be read in conjunction with the Management's Discussion and Analysis
of Financial Condition and Results of Operations, the Financial Statements and
related Notes.

<TABLE>
<CAPTION>
                                                                   Years Ended November 30,
                                                            (In thousands, except per share data)
                                        -------------------------------------------------------------------------------
Statement of Operations
Information                                   2001             2000            1999            1998            1997
                                        ---------------  ---------------  --------------  --------------  -------------
<S>                                          <C>            <C>             <C>               <C>          <C>
Net sales                                    $19,598        $13,102         $ 7,281           $ 2,099      $   478
Net loss from operations                      (1,162)        (8,501)         (3,274)           (5,224)      (4,273)
Net loss to common shareholders                 (659)        (8,267)         (4,219)           (5,358)      (4,278)
Loss per share - basic & diluted                (.01)          (.19)           (.12)             (.17)        (.14)
Weighted-average number of common
   shares outstanding                         45,583         43,145          36,296            32,118       31,386


                                                                   Years Ended November 30,
                                                                        (In thousands)
                                        -------------------------------------------------------------------------------
Balance Sheet Information
                                              2001           2000             1999              1998          1997
                                        ---------------   -----------    --------------    --------------  ------------
Working capital                              $15,684        $15,855         $ 3,589           $ 1,337      $ 2,993
Total assets                                  21,461         21,561           8,497             4,649        4,023
Long-term debt, less current
   maturities                                     40             87           1,350             1,112           27
Preferred stock                                   --             --              --             2,152           --
Total shareholders' equity (deficit)          18,423         18,566           2,643            (1,620)       2,996
</TABLE>

                                       30

<PAGE>
ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with our Financial Statements
and the Notes related to those statements, as well as the other financial
information included in this Form 10-K. Some of our discussion is
forward-looking and involves risks and uncertainties. For information regarding
risk factors that could have a material adverse effect on our company's
business, refer to Item I of this Form 10-K, Description of Business - Risk
Factors.

Results of Operations (This discussion refers to fiscal years which end on
November 30)

Net Sales were $19,598,000, $13,102,000 and $7,281,000 for fiscal years 2001,
2000 and 1999, respectively. The annual sales increases were driven primarily by
strong revenue growth from our domestic direct sales force, strategic partners
and sensor revenue. For fiscal year 2001, initial purchases of $2,263,000 in
BioZ(R) ICG module kits from our strategic partner, GE Medical Information
Technologies (GEMS-IT) added to the sales growth. We believe demand for our
products continues to grow as the medical community's recognition of the
clinical usefulness of our BioZ(R) increases.

In March 1998, we received FDA 510(k) marketing clearance for our BioZ.com(R)
ICG monitoring system. The BioZ.com(R) is compact and features a transport
battery, integrated blood pressure module and the ability to directly interface
with most hospital central monitoring systems. The BioZ.com(R) utilizes our
proprietary ICG technology, DISQ(TM) technology and ZMARC(TM) algorithm for
improved measurement of impedance waveforms and automatic electronic
calibration. The BioZ systems accounted for 78% of our overall sales in fiscal
2001. Sales of the BioZ systems accounted for 92% and 95% of our overall sales
in fiscal 2000 and 1999, respectively.

Sales by our domestic direct sales force, which targets physician offices and US
hospitals, increased 61% in fiscal 2001 as compared with fiscal 2000, and
increased 91% when comparing fiscal 2000 to fiscal 1999. The average price per
unit sold by our direct sales force has increased 50% in the last three years,
from approximately $24,000 for the fourth quarter of fiscal 1998, to $36,000 for
the fourth quarter of fiscal 2001. There are several reasons for this increase:
including greater awareness and acceptance of ICG technology, uniform nationwide
Medicare reimbursement, inclusion of additional options, a five-year warranty
and accessories in the system price, and the absence of competitive products or
cost-effective alternative technologies. In fiscal 2000, we began to hire
clinical sales specialists to supplement the direct sales force. These clinical
sales specialists assist in three primary areas: pre-sales activities including
demonstrations, initial set-up and training for physician and staff,
in-servicing customers post-sale, and on-going customer support to increase
customer satisfaction and increase recurring revenues.

In November of 1998, we received CE Mark approval for our BioZ.com(R) which
expanded our opportunities for distribution in Europe. During fiscal 1998 and
1999, we established international distribution agreements with 15 medical
device distributors and in August 1999, we entered into a strategic alliance
with GEMS-IT for exclusive distribution of our BioZ.com(R) to select countries
in Europe. In January 2000, the GEMS-IT distribution agreement was expanded to
include 18 additional countries including Russia, Egypt, Saudi Arabia, and
United Arab Emirates. In September 2000, the agreement was again expanded to
include Japan, the world's second largest healthcare market. Through GEMS-IT and
our other international distributors, we now have representation in over 70
countries throughout Europe, Asia Pacific, Africa, the Middle East, Australia,
New Zealand and Latin America. In May 2000, we received State Drug
Administration approval from the People's Republic of China and in November
2000, a Canadian Medical Device License.

                                       31

<PAGE>

Results of Operations - (Continued)

Sales to our international distributors and strategic partner internationally
were $914,000, $1,140,000 and $1,521,000, for fiscal years 2001, 2000 and 1999,
respectively. In May 2001, GEMS-IT, GmbH, agreed to provide us with up to
$600,000 of funding over the next two years to support the hiring of ICG
clinical sales specialists in Germany, Italy and Egypt.

Sales to our domestic strategic partners were $3,113,000, $2,264,000 and
$458,000 for fiscal 2001, 2000 and 1999, respectively. In the second quarter of
fiscal 2001 we commenced shipments of a custom plug-in module for the Marquette
Solar 7000 Series of bedside monitors. The module extends the capabilities of
the Solar 7000 product family to provide all of the hemodynamic parameters of
the BioZ.com(R). The module is built at GEMS-IT's Milwaukee, Wisconsin facility
using circuit board assemblies, patient cables and sensors supplied by us and is
being distributed by the GEMS-IT direct sales force worldwide. We receive a
royalty payment for each module sold. Beginning in the first quarter of fiscal
2002 our direct sales force will also begin selling ICG modules to the GEMS-IT
installed customer base of over 30,000 patient monitors. The monitors we sell
will be manufactured jointly by GEMS-IT and CardioDynamics and will be carried
in our inventory until sold to the end-user.

In March 2001, we entered into an agreement with The Heart-Lung Associates of
America, PC for use of our BioZ ICG technology in their DiTECTM pilot program to
enhance the cardiac care of end stage chronic kidney failure patients. The
program links kidney disease specialists with cardiologists and aims to
significantly reduce cardiac event rates, decrease costs, and improve dialysis
patient outcomes. During the latter part of 2001 we received FDA 510(k)
clearance on a new lower cost BioZ.com that could serve as a cost-effective
solution for the dialysis market.

Included in domestic strategic partner sales in fiscal 2000 is $644,000 of sales
to Profiles in Health, Inc. In March 2000, we entered into an agreement to
provide ICG monitors and sensors to Profiles in Health, Inc., a privately held
California corporation organized to provide a variety of healthcare data and
support services for many disease states, infection control and exposure
management. Under the terms of the agreement, we manufactured and sold
customized ICG monitors called BioZ.pc(TM), for integration into the Profiles in
Health Proveillance(TM) system for use by healthcare providers and managed care
organizations throughout the United States. On July 6, 2000 we received FDA
510(k) clearance for the BioZ.pc(TM) system. Pricing of the customized ICG
components and sensors under the Profiles in Health agreement reflect a
substantial volume discount. Although Profiles in Health, Inc. continues to
pursue funding, we established a 100% allowance for the note and accounts
receivable and inventory unique to this entity as their inability to pay became
apparent in our fourth quarter of 2000. We did not sell or manufacture any
inventory related to this agreement in fiscal 2001.

Additionally, we have implemented various programs and partnerships to enhance
our sales force productivity. In April 2001, we entered into a co-promotional
agreement with Vasomedical, Inc. which allows our direct sales force, along with
Vasomedical's sales force, to jointly market our BioZ.com(R) ICG monitoring
systems and Vasomedical's EECP(R) enhanced external counterpulsation systems to
physicians and hospitals throughout the United States. That same month, we
entered into an agreement with Spacelabs Medical, Inc. for development of an
interface using Spacelab's Universal Flexport(R) to integrate and display our
ICG technology on their Ultraview Care Network(TM) monitoring system. In August
2001 we launched the Government Market Initiative Program to target and further
penetrate Government markets. The program provides tools and incentives to our
direct sales force to promote sales to VA hospitals.

Each time our BioZ products are used, disposable sets of four dual sensors are
required. In May 2000, we received FDA 510(k) clearance on the BioZtect(TM)
sensor and cable system which provides enhanced

                                       32

<PAGE>

features to our customers and promotes the exclusive use of our proprietary
sensors with our equipment. Its unique shape, chemical composition, adhesion
characteristics and more user-friendly design optimize signal transmission and
detection sensitivity. In October 2000, we filed two patent applications
covering the utility and unique design features of the BioZtect(TM) sensors.
During fiscal 2000 we implemented an auto-ship sensor program that allows
customers to receive sensor pricing discounts in exchange for minimum monthly
sensor purchase commitments. The BioZtect(TM) sensors for our stand-alone
systems have a list price of $9.95 per application and $19.95 per application
for the ICG module. Sensor and other revenues for fiscal years 2001, 2000 and
1999 were $2,042,000, $1,060,000 and $342,000, respectively. As the installed
base of BioZ systems grows, we expect the revenue generated by our disposable
sensors to continue to comprise a larger portion of our overall revenue stream.

Gross Margins were $13,984,000, $8,557,000 and $4,682,000 for the fiscal years
ending 2001, 2000 and 1999, respectively. As a percentage of net sales, gross
margins for the corresponding periods were 71%, 65% and 64%, respectively. The
improvement in the gross margin from year to year was principally due to the
higher sales volumes along with a higher average sales price per unit as a
greater percentage of our products were sold by our direct sales force. In
addition, during fiscal 2001 and 2000 we reduced our direct material cost per
unit by 15% in each of the two years through material procurement cost reduction
initiatives. Late in the fourth quarter of fiscal 2001, we commenced shipments
of our new, re-engineered lower manufactured cost BioZ.com which has a
manufactured cost that is reduced an additional 30%. In January 2002, we
voluntarily recalled the first 43 BioZ.comII units due to performance issues
identified in conjunction with early users of this product. The replacement and
retrofit of these units did not lead to a significant increase our expenses for
the first quarter of 2002.

Research and Development expenses for the fiscal years ended November 30, 2001,
2000 and 1999 were $3,215,000, $2,758,000, and $1,914,000, respectively. The
increase from fiscal year 2000 to 2001 of 17% is largely the result of the
sponsorship of two clinical studies, PREDICT (Prospective Evaluation and
Identification of Cardiac Decompensation in Heart Failure by Impedance
Cardiography Test) and ESCAPE (Evaluation Study of Congestive Heart Failure and
Pulmonary Artery Catheterization Effectiveness). The larger of the two studies,
PREDICT, has 21 research sites participating with over 200 patients currently
enrolled. The 44% increase in fiscal year 2000 over fiscal 1999 can be
attributed primarily to increased spending for the development of our
BioZtect(TM) proprietary sensors, integration of our technology into the GE
Solar(R) patient monitoring system and development of the BioZ.pc(TM). We
anticipate that the expenses associated with research, heart failure,
hypertension and emergency department clinical studies, further enhancements to
the BioZ systems and working with strategic partners on new product development
will continue to comprise a substantial portion of our overall expense
structure.

Selling and Marketing expenses decreased by 19% from fiscal 2000 to $10,184,000
in 2001 because the fiscal 2000 amount included a non-cash charge of $3,382,000
related to the vesting of the remaining 1,000,000 performance-based warrants
issued to GEMS-IT and $1,928,000 of bad debt expense related to past due
accounts receivable balances, including a 100% provision for amounts due from
Profiles in Health, Inc. Excluding the non-cash charges in fiscal 2000, the
increase in sales and marketing expenses year over year was due to our continued
investment in our direct sales force and clinical sales specialists, as well as
other areas of the company which directly contribute to revenue growth.

General and Administrative expenses were $1,747,000, $1,662,000 and $1,369,000
for fiscal years 2001, 2000 and 1999 respectively. The increase in total
expenses from year to year was primarily attributable to additional staffing
needs and a stronger focus on investor and public relations. We continue to
focus on ongoing cost containment especially in areas that are not directly
related to sales growth and as a result, general and administrative expenses as
a percentage of sales, continued to decrease to 9% in fiscal 2001 from 13% in
fiscal 2000 and 19% in fiscal 1999.

                                       33

<PAGE>

Other Income and Expense - We earned interest on our invested funds of $584,000,
$481,000 and $91,000 for the 2001, 2000 and 1999 fiscal years, respectively.
Despite lower interest rates during fiscal 2001, interest income increased 21%
in fiscal 2001 when compared to fiscal 2000, due to the improvement in cash
flows from operations and the interest income recognized from the internal
financing program we offered during the third and fourth quarters of fiscal
2000. The 429% increase in interest income in fiscal 2000 over fiscal 1999 was
due primarily to increased funds available for investment from the various
financings which occurred during the year.

We incurred interest expense of $47,000, $226,000 and $312,000 for fiscal years
2001, 2000 and 1999, respectively. The decrease of $179,000 in interest expense
in 2001, as compared with 2000, and the $86,000 decrease in interest expense in
fiscal 2000 over 1999 are primarily because in August 2000, we repaid our term
loan with City National Bank and our line of credit agreement with our Chairmen.

Other - Net - To achieve an orderly conversion of the shares of our Series A
convertible preferred stock and minimize the potential impact on the market
price of our common stock, in June of 1999, we identified a group of strategic
investors and facilitated the private sale of the common shares issued upon
conversion of the remaining portion of our Series A preferred stock. As a result
of this transaction, we recorded a non-cash charge of $492,000 included in other
expense.

Income Taxes for fiscal years 2001, 2000 and 1999, income tax provisions were
recorded in the amounts of $1,000, $11,000 and $1,000, respectively. As we
expanded our direct sales force, we incurred filing obligations in various
states other than California. Therefore the income tax provision for fiscal 2000
included payments to these states.

Dividends - In the third fiscal quarter of 1999, we declared a $192,000 stock
dividend related to warrants issued to the Series A preferred shareholders in
exchange for the relinquishment of their contractual right to purchase an
additional $3,000,000 of convertible preferred stock. Preferred stock dividends
totaled $226,000 in fiscal 1999. There were no dividends in fiscal 2000 or 2001.

Net Loss - In 2001 we recorded a net loss to common shareholders of $659,000, or
$.01 per share. Fiscal 2000's net loss to common shareholders was $8,267,000, or
$.19 per common share, versus a net loss to common shareholders of $4,219,000 or
$.12 per share, in fiscal 1999. The fiscal 2000 net loss included non-cash
charges of $3,382,000 for warrants that vested in the fourth quarter to GEMS-IT
and an additional allowance for doubtful accounts of $1,928,000 related to past
due accounts receivable including a 100% provision for amounts due from Profiles
in Health, Inc.

The number of common shares outstanding at November 30, 2001 was 45,798,322, an
increase of less than 1% over the number of common shares outstanding at
November 30, 2000, due to the exercise of stock options. The number of common
shares outstanding at November 30, 2000 increased by 14% over the number
outstanding at November 30, 1999, primarily due to the issuance of additional
shares in the December 1999 and July 2000 financings as well as the exercise of
options and warrants during the year.

Liquidity and Capital Resources

Our working capital at November 30, 2001 was $15,684,000, virtually unchanged
from one year before at $15,855,000. At November 30, 2001 we had $6,394,000 of
cash, a decrease from $11,595,000 of cash at November 30, 2000. The decrease can
be attributed primarily to cash used to support increases in trade accounts
receivable, long-term receivables and inventory as a result of increased sales
volumes. We are also paying our vendors more quickly, thereby reducing our
accounts payable and accrued expenses from the November 30, 2000 levels.

                                       34

<PAGE>
Liquidity and Capital Resources - Continued)

In June 1997, we entered into a five-year lease for an 18,000 square-foot
manufacturing facility that also houses our research, development, marketing,
sales and administrative activities. The lease commenced on September 1, 1997
and current lease payments are $22,000 per month, including CAM charges and
property taxes. In fiscal 2001, 2000 and 1999, we invested $200,000, $381,000
and $34,000 respectively, in property and equipment, principally for new
computers, software and equipment to be used in our manufacturing process. The
lease expires in June 2002 and we are evaluating our options for renewal of the
lease or the lease of alternative (or additional) space for our operations. We
do not anticipate that our rent expense for our facilities or expenses incurred
in moving to new space subsequent to June 2002 will have a material adverse
effect on our cash flow or results of operations.

In July 2000, we sold $18.7 million of common stock in a private placement of
approximately 3.3 million shares of our common stock to institutional and other
accredited investors. The investors purchased unregistered common stock at $5.59
per share, a 13% discount to the 20-day weighted-average closing price as of the
June 21, 2000 pricing date. In addition, a portion of the proceeds were used to
repurchase, at $5.59 per share, and retire 418,908 shares from the estate of
Allen E. Paulson. The financing was exempt from the registration requirement of
the Securities Act of 1933, as amended, in reliance upon Regulation D
promulgated under the Act. In connection with the private placement, we incurred
issuance costs totaling $1,382,086.

In May 2000, we moved from the Nasdaq Small Cap Market to the Nasdaq-Amex
National Market System (NMS). We believe trading on the NMS enables companies to
address a broader investor base and to increase the liquidity of their stock.

In December 1999, we sold $3.3 million of common stock in a private placement to
institutional investors who purchased unregistered shares with a four-month
holding restriction for $2.50 per share, representing a 9% discount from the
30-day average closing bid price.

In May 1999, we sold $5.2 million of common stock in a private placement to
institutional and other accredited investors. The investors purchased
unregistered shares with a six-month holding restriction for $1.00 per share,
representing a 27% discount from the closing bid price.

In January 1999, the Company established a secured revolving credit line with
Imperial Bank. The credit line provides for borrowings of up to $3,000,000 at
the bank's prime rate. Under the terms of the agreement, the Company is required
to maintain minimum ratios of current assets to liabilities and not to exceed
certain loss levels. All the assets of the Company collateralize the credit
line. In June of 2001 the line of credit was renewed and increased to $4,000,000
and has been extended through June 2002. At November 30, 2001 there was no
outstanding borrowing under the line of credit.

In August 1998, we sold $3,000,000 of Series A convertible preferred stock.
During fiscal 1999, we facilitated conversion of the remaining shares of the
Series A preferred stock into common stock. There are no preferred shares
outstanding at November 30, 2000 or 2001.

These equity financings, together with our bank credit facilities and other
lines of credit, have provided the capital required to fund initial
commercialization of our BioZ(R) products and ongoing research and development
efforts. These financings have also allowed us to expand of our direct sales
force and international sales presence, meet our capital expenditures working
capital requirements, including cash flow needs relating to the significant
increase in accounts receivable resulting from higher sales volumes and extended
payment terms.

                                       35

<PAGE>
Liquidity and Capital Resources - Continued)

Our long-term liquidity will depend on our ability to commercialize the BioZ(R)
and other diagnostic products and to raise additional funds through public or
private financing, bank loans, collaborative relationships or other
arrangements. We can give no assurance that such additional funding will be
available on terms attractive to us, or at all.

We have operating loss carryforwards of approximately $28,234,000 for federal
income tax purposes. The Tax Reform Act of 1986 contains provisions which limit
the federal net operating loss carryforwards that can be used in any given year
in the event of specified occurrences, including significant ownership changes.
If these specified events occur we may lose some or all of the tax benefits of
these carryforwards. A valuation allowance has been recognized for the full
amount of the deferred tax asset created by these carryforwards.

Critical Accounting Principles and Estimates

In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" and 33-8056, "Commission
Statement about Management's Discussion and Analysis of Financial Condition and
Results of Operations," we have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of our financial statements. The preparation of our financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and judgments that affect
our reported amounts of assets and liabilities, revenues and expenses and
related disclosures of contingent assets and liabilities. On an ongoing basis we
evaluate our estimates, including those related to allowance for doubtful
accounts, sales returns and revenue recognition. We state these accounting
policies in the notes to the financial statements and at relevant sections in
this discussion and analysis. The estimates are based on the information that is
currently available to us and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results could vary from those
estimates under difference assumptions or conditions.

We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:

We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments, which is included
in bad debt expense. We determine the adequacy of this allowance by regularly
reviewing the complexion of our accounts receivable aging and evaluating
individual customer receivables, considering customer's financial condition,
credit history and current economic conditions. If the financial condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. We also maintain an
estimate of potential future product returns related to current period product
receivables. We analyze the rate of historical returns when evaluating the
adequacy of the allowance for sales returns, which is included with the
allowance for doubtful accounts on our balance sheet.

We recognize revenue from the sale of product when persuasive evidence of a sale
exists, the product has been shipped, the sales price is fixed and determinable
and collection of the resulting receivable is reasonably assured. We sell some
products under long term financing arrangements and recognize the present value
of the minimum payments as revenue at the time of sale and recognize interest
income over the term of the arrangement.

                                       36

<PAGE>
New Accounting Standards

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 141, Business Combinations, and 142,
Goodwill and Other Intangible Assets, which supersedes Accounting Principles
Board Opinion 17, Intangible Assets. SFAS 141 requires that all business
combinations be accounted for under the purchase method. The statement further
requires separate recognition of intangible assets that meet one of the two
criteria, as defined in the statement. This statement applies to all business
combinations initiated after June 30, 2001. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are tested
at least annually for impairment. Separable intangible assets with defined lives
will continue to be amortized over their useful lives. The provisions of SFAS
142 will apply to goodwill and intangible assets acquired before and after the
statement's effective date, fiscal years beginning after December 15, 2001 or
the beginning of the Company's fiscal year 2003. It is not anticipated that the
adoption of the provisions of SFAS 141 and 142 will have a material impact on
our results of operations or financial position.

In August 2001, the Financial Accounting Standards Board issued SFAS 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. We are required to adopt the provisions of Statement No. 143 for the
quarter ending February 28, 2003. It is not anticipated the adoption of SFAS 143
will have a material effect on our results of operations and financial position.

In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement
No. 144), which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. While Statement No. 144 supersedes Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (Statement No.
121), it retains many of the fundamental provisions of Statement No. 121,
including the recognition and measurement of the impairment of long-lived assets
to be held and used, and the measurement of long-lived assets to be disposed of
by sale. Statement No. 144 also supersedes the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(Opinion No. 30), for the disposal of a segment of a business. However, it
retains the requirement in Opinion No. 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Statement No. 144 is effective for fiscal years
beginning after December 15, 2001. It is not anticipated that the financial
impact of this statement will have a material effect on our results of
operations and financial position.

                                       37

<PAGE>
OTHER ITEMS

The Company is not a party to off-balance sheet arrangements, does not engage in
trading activities involving non-exchange traded contracts, and is not a party
to any transaction with persons or activities that derive benefits, except as
disclosed herein, from their non-independent relationships with the Company.

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate sensitivity

The primary objective of our investment activities is to preserve principal,
while at the same time, maximize the income we receive from our investments
without significantly increasing risk. In the normal course of business, we
employ established policies and procedures to manage our exposure to changes in
the fair market value of our investments. Under our current policies, we do not
use interest rate derivative instruments to manage exposure to interest rate
changes. We attempt to ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. Some of the
securities that we have invested in may be subject to market risk. This means
that a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if we hold a security that was issued with
a fixed rate equal to the then-prevailing interest rate and the prevailing
interest rate later rises, the fair value of our investment will decline. To
minimize this risk, we maintain substantially all of our portfolio of cash
equivalents in commercial paper, certificates of deposit and money market funds.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, however, due to the nature of our short-term investments, we
have concluded that there is no material market risk exposure.

                                       38

<PAGE>

ITEM 8.     FINANCIAL STATEMENTS


                          Independent Auditors' Report


The Board of Directors and Shareholders
of CardioDynamics International Corporation:

We have audited the accompanying balance sheets of CardioDynamics International
Corporation as of November 30, 2001 and 2000, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended November 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CardioDynamics International
Corporation as of November 30, 2001 and 2000, and the results of its operations
and its cash flows for each of the years in the three-year period ended November
30, 2001, in conformity with accounting principles generally accepted in the
United States of America.

                                    /s/ KPMG LLP

San Diego, California
January 22, 2002

                                       39

<PAGE>
                    CardioDynamics International Corporation

                                 Balance Sheets

                           November 30, 2001 and 2000
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                    Assets

                                                                                  2001              2000
                                                                               -----------      ----------
<S>                                                                            <C>              <C>
Current assets:
   Cash and cash equivalents                                                   $    6,394       $   11,595
   Accounts receivable, net of allowance for doubtful accounts
     of $1,425 in 2001 and $1,649 in 2000                                           7,373            3,771
   Inventory, net (note 2)                                                          2,821            2,255
   Current portion of long-term receivables (note 4)                                1,663              911
   Other current assets                                                               431              231
                                                                               ----------       ----------

                  Total current assets                                             18,682           18,763

Property and equipment, net (note 3)                                                  490              575
Long-term receivables and note receivable, net (note 4)                             2,259            2,193
Deposits                                                                               30               30
                                                                               ----------       ----------

                  Total assets                                                 $   21,461       $   21,561
                                                                               ==========       ==========

                     Liabilities and Shareholders' Equity

Current liabilities:
   Accounts payable                                                            $    1,338       $    1,588
   Accrued expenses                                                                   277              521
   Accrued salaries, wages and benefits                                               903              671
   Current maturities of long-term debt (note 11)                                      69               85
   Deferred service revenue                                                           411               43
                                                                               ----------       ----------

                  Total current liabilities                                         2,998            2,908

Long-term debt, less current maturities (note 11)                                      40               87
                                                                               ----------       ----------

                             Total liabilities                                      3,038            2,995

Shareholders' equity: (notes 7, 8 and 9)
   Preferred stock; no par value; 18,000,000 shares authorized; no shares
     issued or outstanding at November 30, 2001 or 2000                                --               --

   Common stock; no par value; 100,000,000 shares authorized;
     issued and outstanding 45,798,322 shares at November 30,
     2001 and 45,518,475 shares at November 30, 2000                               48,786           48,270
   Accumulated deficit                                                            (30,363)         (29,704)
                                                                               ----------       ----------

                  Total shareholders' equity                                       18,423           18,566
                                                                               ----------       ----------
Commitments and contingencies (note 11)

                  Total liabilities and shareholders' equity                   $   21,461       $   21,561
                                                                               ==========       ==========
</TABLE>

See accompanying notes to financial statements.

                                       40

<PAGE>
                    CardioDynamics International Corporation

                            Statements of Operations

              For the years ended November 30, 2001, 2000 and 1999
                      (In thousands, except per share data)

                                                 2001        2000        1999
                                               --------    --------    --------
Net sales                                      $ 19,598    $ 13,102    $  7,281
Cost of sales                                     5,614       4,545       2,599
                                               --------    --------    --------

                Gross margin                     13,984       8,557       4,682
                                               --------    --------    --------
Operating expenses:
   Research and development                       3,215       2,758       1,914
   Selling and marketing                         10,184      12,638       4,673
   General and administrative                     1,747       1,662       1,369
                                               --------    --------    --------

                Total operating expenses         15,146      17,058       7,956
                                               --------    --------    --------

Loss from operations                             (1,162)     (8,501)     (3,274)

Other income (expense):
   Interest income                                  584         481          91
   Interest expense                                 (47)       (226)       (312)
   Other, net (note 8)                              (33)        (10)       (497)
                                               --------    --------    --------

                Total other income (expense):       504         245        (718)

Loss before income taxes                           (658)     (8,256)     (3,992)
Income taxes (note 10)                               (1)        (11)         (1)
                                               --------    --------    --------
Net loss before preferred stock dividends          (659)     (8,267)     (3,993)

Preferred stock dividends                            --          --        (226)
                                               --------    --------    --------
Net loss to common shareholders                $   (659)   $ (8,267)   $ (4,219)
                                               ========    ========    ========

Net loss per common share, basic and diluted   $   (.01)   $   (.19)   $   (.12)
                                               ========    ========    ========

Weighted-average number of common shares
   outstanding - basic and diluted               45,583      43,145      36,296
                                               ========    ========    ========

See accompanying notes to financial statements.

                                       41

<PAGE>

                    Cardiodynamics International Corporation

                       Statements of Shareholders' Equity

              For the years ended November 30, 2001, 2000 and 1999
                        (In thousands, except share data)


<TABLE>
<CAPTION>
                                                            Common Stock
                                                        ------------------------   Accumulated
                                                           Shares       Amount       Deficit      Total
                                                        ------------  ----------  ------------  ---------
<S>                                                     <C>           <C>       <C>              <C>
Balance at November 30, 1998                              32,676,029  $   15,598   $   (17,218)  $ (1,620)
Compensatory stock options granted                                --           8            --          8
Issuance of common stock warrants                                 --         554            --        554
Issuance of common stock, net                              5,527,272       5,577            --      5,577
Issuance of common stock - upon exercise of
  stock options                                               91,000         152            --        152
Issuance of common stock - upon conversion of
  preferred stock                                          1,567,962       2,145            --      2,145
Preferred stock dividends paid in common stock
  and warrants                                                26,548          46          (226)      (180)
Net loss                                                          --          --        (3,993)    (3,993)
                                                        ------------  ----------  -----------  ----------
Balance at November 30, 1999                              39,888,811      24,080       (21,437)     2,643


Compensatory stock options granted                                --          64            --         64
Issuance of common stock - upon conversion of
  long-term debt                                             101,521          25            --         25
Issuance of common stock warrants                                 --       3,382            --      3,382
Issuance of common stock, net                              4,667,767      20,399            --     20,399
Issuance of common stock - upon exercise of
  stock options and warrants                               1,279,284       2,517            --      2,517
Redemption of common stock from related party               (418,908)     (2,197)           --     (2,197)
Net loss                                                          --          --        (8,267)    (8,267)
                                                        ------------  ----------  ------------  ---------
Balance at November 30, 2000                              45,518,475      48,270                   18,566
                                                                                       (29,704)

Compensatory stock options granted                                --          61            --         61
Common stock issuance costs                                       --          (2)           --         (2)
Issuance of common stock - upon exercise of
  stock options                                              279,847         457            --        457
Net loss                                                          --          --          (659)      (659)
                                                        ------------  ----------  ------------  ---------
Balance at November 30, 2001                              45,798,322  $   48,786   $   (30,363)  $ 18,423
                                                        ============  ==========  ============  =========
</TABLE>


See accompanying notes to financial statements.

                                       42

<PAGE>

                    Cardiodynamics International Corporation

                            Statements of Cash Flows

              For the years ended November 30, 2001, 2000 and 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                         2001         2000         1999
                                                                      ----------   ----------   ----------
<S>                                                                   <C>          <C>          <C>
Cash flows from operating activities:
   Net loss                                                           $     (659)  $   (8,267)  $   (3,993)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation and amortization                                           275          207          117
     Loss (gain) on sale of fixed assets                                       3           --           (2)
     Provision for obsolete inventory                                         67          138           70
     Provision for warranty repairs                                          136          (95)          76
     Reduction in reserve for inventory returns                               --           --          (23)
     Provision for demonstration inventory                                   (67)         (58)          61
     Provision for doubtful receivables                                     (224)       1,096          520
     Provision for doubtful long-term receivables                            (53)         566           --
     Compensatory stock options granted                                       61           64            8
     Warrants issued                                                          --        3,382          350
     Non-cash expense for retirement of Series A preferred stock              --           --          483
     Other non-cash items                                                     --          (19)          --
     Changes in operating assets and liabilities:
       Accounts receivable                                                (3,378)        (641)      (4,114)
       Inventory                                                            (566)        (992)        (479)
       Other current assets                                                 (952)      (1,026)         (28)
       Long-term receivables and note receivable                             (13)      (2,732)         (26)
       Deposits                                                               --           13           (3)
       Accounts payable                                                     (250)         463          547
       Accrued expenses                                                     (381)         432           30
       Accrued salaries, wages and benefits                                  232          362           33
           Deferred service revenue                                          368           43           --
                                                                      ----------   ----------   ----------

                  Net cash used in operating activities                   (5,401)      (7,064)      (6,373)
                                                                      ----------   ----------   ----------

Cash flows from investing activities:
   Purchases of property and equipment                                      (200)        (381)         (34)
   Proceeds from sale of fixed assets                                          7           --            1
                                                                      ----------   ----------   ----------

                  Net cash used in investing activities                     (193)        (381)         (33)
                                                                      ----------   ----------   ----------
</TABLE>


(Continued)

                                       43

<PAGE>

                    CardioDynamics International Corporation

                      Statements of Cash Flows (Continued)

              For the years ended November 30, 2001, 2000 and 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   2001          2000          1999
                                                                ----------    ----------    -----------
<S>                                                             <C>           <C>           <C>
Cash flows from financing activities:
   Repayment of long-term debt                                  $      (62)   $   (2,085)   $    (2,067)
   Borrowing of long-term debt                                          --            --          2,000
   Proceeds from line of credit                                         --            --          1,000
   Repayment of revolving line of credit                                --        (1,000)            --
   Repayment of note payable - related party                            --        (1,000)            --
   Exercise of options and warrants                                    457         2,517            152
   Redemption of common stock from related party                        --        (2,197)            --
   Preferred stock issuance costs                                       --            --             (8)
   Issuance of common stock, net                                        (2)       20,399          5,102
                                                                ----------    -----------   -----------

             Net cash provided by financing activities                 393        16,634          6,179
                                                                ----------    ----------    -----------

Net increase (decrease) in cash and cash equivalents                (5,201)        9,189           (227)

Cash and cash equivalents at beginning of year                      11,595         2,406          2,633
                                                                ----------    -----------   -----------

Cash and cash equivalents at end of year                        $    6,394    $   11,595    $     2,406
                                                                ==========    ==========    ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                              2001       2000           1999
                                                                           ---------   ----------     ---------
<S>                                                                        <C>         <C>            <C>
Supplemental disclosures of cash flow information:
   Cash paid for interest                                                  $      47   $      226     $     311
   Cash paid for income taxes                                              $       1   $       11     $       1

Supplemental disclosures of non-cash investing and financing
   activities:
   Common stock issued upon redemption or conversion of preferred stock           --           --     $   2,145
   Common stock issued to extinguish long-term debt including interest            --   $       25            --
   Fixed assets acquired by capital lease                                  $      36   $       66     $     153
   Preferred stock dividends paid in common stock and warrants                    --           --     $     226
</TABLE>




See accompanying notes to financial statements.

                                       44

<PAGE>


                    CardioDynamics International Corporation

                          Notes to Financial Statements

                            November 30, 2001 and 2000


(1)       Summary of Significant Accounting Policies

          Description of Business

          CardioDynamics International Corporation (the "Company") is a medical
          technology company that develops, manufactures and markets
          heart-monitoring devices that provide medical professionals with
          continuous data on a wide range of parameters relating to blood flow
          and heart function. Unlike other cardiac function monitoring
          technologies, our monitors are noninvasive (without cutting into the
          body). The Company's BioZ(R) Systems use a proprietary technology
          called impedance cardiography (ICG) to obtain data in a safe,
          efficient and cost-effective manner not previously available in the
          physician's office and many hospital settings. Just as
          Electrocardiography (ECG) noninvasively measures the heart's
          electrical characteristics, ICG makes it possible to noninvasively
          measure the heart's mechanical characteristics. The Company's
          strategic partners include GE Medical Systems Information Technologies
          (GEMS-IT), Spacelabs Medical Systems, and Vasomedical. The Company was
          originally incorporated in California in June 1980 as Bomed Medical
          Manufacturing, Ltd. and in October 1993 changed its name to
          CardioDynamics International Corporation.

          Cash Equivalents

          Cash equivalents consist of short-term money market funds and
          commercial paper and are stated at cost, which approximates fair
          market value. The Company considers all highly liquid debt instruments
          with original maturities of three months or less to be cash
          equivalents.

          The Company maintains its cash in bank deposit accounts, which, at
          times, may exceed the federally insured limits. The Company has not
          experienced any losses in such accounts, and management believes it
          places its cash on deposit with financial institutions that are
          financially stable. At November 30, 2001, the Company has cash
          deposits in excess of federally insured limits totaling $6,194,000.

          Inventory

          Inventory is stated at the lower of cost or market, cost being
          determined on a first-in, first-out (FIFO) basis. The Company
          evaluates inventory on hand against historical and planned usage to
          determine appropriate provisions for obsolete, slow-moving and
          non-saleable inventory.

          Property and Equipment

          Property and equipment are recorded at cost. Property and equipment
          acquired under capital leases are recorded at the present value of
          future minimum lease payments. Leasehold improvements are amortized
          using the straight-line method over the shorter of the remaining lease
          term or the estimated useful life. Depreciation is computed using the
          straight-line method over the estimated useful lives of the assets,
          generally three to seven years.

                                       45

<PAGE>


                    CardioDynamics International Corporation

                          Notes to Financial Statements

                            November 30, 2001 and 2000


(1)       Summary of Significant Accounting Policies -- (Continued)

          Revenue Recognition

          Revenue is recognized on products at the time of shipment. Service
          revenue received in advance is recognized as revenue over the life of
          the service contract. Appropriate provisions for estimated returns and
          allowances are netted against revenues. Deferred revenue consists of
          amounts received for service contracts that have not yet been earned.

          Warranty Cost

          The Company provides, by a current charge to cost of goods sold, an
          amount it estimates will be needed to cover future warranty
          obligations for products sold during the year. The accrued liability
          for warranty costs is included in accrued expenses in the accompanying
          balance sheets.

          Research and Development

          All research and development costs are expensed in the period
          incurred.

          Patents

          Costs to obtain, maintain and defend patents are expensed in the
          period incurred.

          Advertising

          All advertising costs are expensed in the period incurred. Advertising
          costs, including trade show expenses, amounted to $471,000 in 2001,
          $745,000 in 2000 and $321,000 in 1999.

          Segment Reporting

          Statement of Financial Accounting Standard ("SFAS") No. 131,
          Disclosures about Segments of an Enterprise and Related Information,
          establishes annual and interim reporting standards for an enterprise's
          operating segments and related disclosures about its products,
          services, geographic areas and major customers. An operating segment
          is defined as a component of an enterprise that engages in business
          activities from which it may earn revenues and incur expenses, and
          about which separate financial information is regularly evaluated by
          the chief operating decision maker in deciding how to allocate
          resources. All of the Company's business activities are aggregated
          into one reportable segment given the similarities of economic
          characteristics between the activities and the common nature of the
          Company's services and customers.

                                       46

<PAGE>


                    CardioDynamics International Corporation

                          Notes to Financial Statements

                            November 30, 2001 and 2000


 (1)      Summary of Significant Accounting Policies -- (Continued)

          Income Taxes

          Income taxes are accounted for under the asset and liability method.
          Deferred tax assets and liabilities are recognized for the future tax
          consequences attributable to differences between the financial
          statement carrying amounts of existing assets and liabilities and
          their respective tax bases and operating loss and tax credit
          carryforwards. Deferred tax assets and liabilities are measured using
          enacted tax rates expected to apply to taxable income in the years in
          which those temporary differences are expected to be recovered or
          settled. The effect on deferred tax assets and liabilities of a change
          in tax rates is recognized in income in the period that includes the
          enactment date.

          Net Loss Per Share

          Net loss per share is computed by dividing the net loss by the
          weighted-average number of common shares outstanding during the
          period. Diluted loss per share is calculated by including the
          additional shares of common stock issuable upon exercise of
          outstanding options and warrants in the weighted-average share
          calculation. The following table lists the options and warrants, each
          convertible into one share of common stock, which were not included in
          the diluted earnings per share calculation as their effect was
          antidilutive.

                                                       November 30,
                                        ---------------------------------------
                                            2001          2000          1999
                                        -----------   -----------   -----------

           Stock options                  3,884,416     3,533,915     3,831,666
           Warrants                       2,472,170     2,472,170     2,993,184
                                        -----------   -----------   -----------
           Total                          6,356,586     6,006,085     6,824,850
                                        ===========   ===========   ===========



          Accounting Estimates

          Management of the Company has made a number of estimates and
          assumptions relating to the reporting of assets and liabilities,
          revenue and expenses and the disclosure of contingent assets and
          liabilities to prepare these financial statements in conformity with
          accounting principles generally accepted in the United States of
          America. Actual results could differ from those estimates.

          Reclassifications

          Certain reclassifications have been made to certain prior year
          balances in order to conform to current year presentation.

                                       47

<PAGE>


                    CardioDynamics International Corporation

                          Notes to Financial Statements

                            November 30, 2001 and 2000


(1)       Summary of Significant Accounting Policies -- (Continued)

          Significant Customers

          In August 1999, the Company entered into a strategic alliance with
          GEMS-IT for distribution of our BioZ.com(R) in Europe. In October 1999
          the Company expanded on the European agreement by signing a U.S.
          hospital distribution agreement with GEMS-IT. In September 2000, the
          alliance was expanded to include Japan. In the second quarter of
          fiscal 2001 we commenced shipments of the jointly developed BioZ(R)
          ICG module to GEMS-IT, the first and only patient monitoring system
          capable of non-invasively acquiring and displaying hemodynamic
          information. The plug-in BioZ(R) ICG module extends the capabilities
          of the GE Solar(R) patient monitoring product family to provide all of
          the cardiac function parameters of the BioZ.com(R) to GEMS-IT's
          installed customer base of over 30,000 units. The following table
          details the amount of revenue received for systems, sensors and ICG
          modules as a percentage of total revenue received as a result of this
          strategic alliance:

                                                Years Ended November 30,
                                          ------------------------------------
                                             2001         2000         1999
                                          ----------   ----------   ----------

           Revenue                        $3,583,000   $1,769,000   $1,076,000
           Percentage of total sales              18%          14%          15%


          Fair Value of Financial Instruments

          The carrying amount of cash and cash equivalents, accounts receivable,
          long-term receivables, accounts payable, accrued expenses and accrued
          salaries, wages and benefits, are considered to be representative of
          their fair values because of the short-term nature of these financial
          instruments. The carrying amount of long-term debt is a reasonable
          estimate of fair value as the loans bear interest based on market
          rates available for debt with similar terms.

          Stock Based Compensation

          The Company accounts for stock options granted to employees in
          accordance with the provisions of Accounting Principles Board ("APB")
          Opinion No. 25. As such, compensation expense is recorded on the date
          of grant only if the current market price of the underlying stock
          exceeds the exercise price. The Company applies the disclosure only
          provisions of SFAS No. 123, which established accounting and
          disclosure requirements using fair-value-based methods of accounting
          for stock based employee compensation plans.

                                       48

<PAGE>


                    CardioDynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000


(1)       Summary of Significant Accounting Policies - (Continued)

          Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
          of

          The Company reviews long-lived assets and identifiable intangibles for
          impairment whenever events or changes in circumstances indicate that
          the carrying amount of an asset may not be recoverable. Recoverability
          of assets to be held and used is measured by a comparison of the
          carrying amounts of an asset to future net cash flows, undiscounted
          and without interest, expected to be generated by the asset. If such
          assets are considered to be impaired, the impairment to be recognized
          is measured by the amount by which the carrying amounts of the assets
          exceed the fair values of the assets. Assets to be disposed of are
          reported at the lower of the carrying amount or fair value, less costs
          to sell.

 (2)      Inventory

          Inventory at November 30, 2001 and 2000 consists of the following (in
          thousands):

                                                             2001        2000
                                                           --------    --------

            Electronic components and subassemblies        $  1,657    $  1,556
            Finished goods                                    1,100         806
            Demonstration units                                 773         602
            Less provision for obsolete inventory              (572)       (505)
            Less provision for demonstration inventory         (137)       (204)
                                                           --------    --------

                                                           $  2,821    $  2,255
                                                           ========    ========

          In 2001 and 2000 the Company used a number of vendors for components
          and subassemblies and believes that, should these suppliers not be
          able to provide inventory to the Company in the future, it would be
          able to obtain alternate suppliers within a reasonable amount of time
          to meet production demands.

                                       49

<PAGE>


                    CardioDynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000


(3)       Property and Equipment

          Property and equipment at November 30, 2001 and 2000 consist of the
          following (in thousands):

                                                               2001      2000
                                                             --------  --------
            Office furniture and equipment                   $    267  $    250
            Manufacturing and lab equipment and fixtures          280       228
            Sales equipment and exhibit booth                      39        31
            Computer software and equipment                       547       445
            Leasehold improvements                                117       117
                                                             --------  --------

                                                                1,250     1,071
            Less accumulated depreciation and amortization       (760)     (496)
                                                             --------  --------

                                                             $    490  $    575
                                                             ========  ========

          At November 30, 2001 and 2000, the Company had $315,000 and $310,000,
          of property and equipment under capital lease, respectively.
          Accumulated amortization on the leased equipment was $205,000 in 2001
          and $143,000 in 2000.

(4)       Long-Term Receivables and Note Receivable

          In our third and fourth fiscal quarters of 2000, the Company offered
          no-interest financing of its BioZ(R) Systems with maturities ranging
          from 24 to 60 months. The long-term receivables are collateralized by
          the systems. In the first fiscal quarter of 2001, the Company
          established a similar program through a third-party financing company
          to replace the internal equipment financing program. Under certain
          circumstances the Company continue to provide financing to its
          customers, although the contracts now typically include market rate
          interest provisions.

          In March 2000, the Company entered into a license and purchase
          agreement with Profiles in Health, Inc., a privately held California
          corporation. Under the terms of the agreement, the Company
          manufactured and provided custom ICG monitors called BioZ.pc(TM) and
          disposable sensor sets. Under the terms of the agreement, the Company
          has a right to suspend performance should Profiles in Health become
          delinquent on any amounts due us. As of November 30, 2000, the Company
          suspended shipments and established a 100% allowance for the
          receivables and inventory unique to this customer.

                                       50

<PAGE>

                    CardioDynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000


(4)       Long-Term Receivables and Note Receivable -- (Continued)


          Long-term receivables and note at November 30, 2001 and 2000 consist
          of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 2001      2000
                                                               --------  --------
<S>                                                            <C>       <C>
            Long-term receivables, net of deferred interest    $  4,086  $  3,345
            Secured note receivable                                 349       325
            Less allowance for doubtful long-term receivables      (513)     (566)
                                                               --------  --------

                                                                  3,922     3,104
            Less current portion of long-term receivables        (1,663)     (911)
                                                               --------  --------

                                                               $  2,259  $  2,193
                                                               ========  ========
</TABLE>

          The fair value of each below-market, long-term receivable is estimated
          by discounting the future cash flows based on our incremental
          borrowing rate. At November 30, 2001, the fair value of the
          receivables approximated the carrying value.

 (5)      Financing Agreements

          In February of 1999 the Company entered into a three-year $2,000,000
          unsecured term loan agreement with City National Bank. Under the terms
          of the agreement the Company borrowed $2,000,000 with monthly interest
          only payments for the first 12 months at the bank's prime rate. During
          the second fiscal quarter of 2000 the Company began making monthly
          principal installments of $83,000 each, plus interest at 1% above the
          bank's prime rate. In connection with the loan, the Company issued to
          the bank 50,000 warrants to purchase our common stock at $2.20 per
          share. The co-chairmen of the Company's Board of Directors guaranteed
          the loan. During the quarter ended August 31, 2000, the loan was
          repaid in full.

          In January 1999, the Company established a secured revolving credit
          line with Imperial Bank. The credit line provides for borrowings of up
          to $3,000,000 at the bank's prime rate. Under the terms of the
          agreement, the Company is required to maintain minimum ratios of
          current assets to liabilities and not to exceed certain loss levels.
          All the assets of the Company collateralize the credit line. In June
          of 2001 the line of credit was renewed and increased to $4,000,000 and
          has been extended through June 2002. At November 30, 2001 there were
          no outstanding borrowings under this line of credit.

          In May of 1998, the Company entered into a six-month unsecured term
          loan agreement with Imperial Bank. Under the terms of the agreement,
          the Company could borrow up to $4,000,000, of which the Company
          borrowed $3,000,000. The term loan bore interest at 1% above the
          bank's prime rate and was guaranteed by the co-chairmen of the
          Company's Board of Directors. In August 1998 the Company repaid
          $1,000,000, reducing the outstanding balance to $2,000,000.

          In exchange, the bank extended the loan until February 28, 1999. In
          February 1999, the term loan was repaid in full and the credit line
          terminated.

                                       51

<PAGE>

                    CardioDynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000


(6)       Long-term Debt

          In March 1998, the Company entered into an 18-month unsecured private
          line of credit agreement with the co-chairmen of our Board of
          Directors. Under the terms of the agreement the Company could borrow
          up to $3,000,000 on an as-needed basis with monthly interest-only
          payments at an annual interest rate of 10.0%. In August 1998, the
          Company borrowed $1,000,000 on this line of credit and used the
          proceeds to reduce outstanding borrowings under the Imperial Bank term
          loan. During the quarter ended August 31, 2000, the loan was repaid in
          full.

          Long-term debt at November 30, 2001 and 2000 consists of the following
          (in thousands):

<TABLE>
<CAPTION>
                                                                     2001       2000
                                                                   --------   --------
<S>                                                                <C>        <C>
            Capital lease obligations payable in monthly
               installments between $63 and $1,192, bearing
               interest at rates between 10% and 20.8%, maturing
               from December 2001 to November 2006.                $    109        172

            Less current maturities of long-term debt                   (69)       (85)
                                                                   --------   --------

                                                                   $     40   $     87
                                                                   ========   ========
</TABLE>

          The aggregate maturities of long-term debt subsequent to November 30,
          2001 are as follows: 2002, $69,000; 2003, $16,000; 2004, $7,000; 2005,
          $8,000; and 2006, $ 9,000.

(7)       Shareholders' Equity

          During fiscal 2001, the Company assisted both the Allen E. Paulson
          Living Trust and the Scripps Research Foundation in the placement of
          4.2 million shares of Company stock. These shares were placed
          primarily to institutional investors, bringing the Company's current
          institutional ownership to approximately 31%. In addition to
          increasing the institutional ownership in the Company, these
          transactions also reduced the trust's beneficial ownership to 19% at
          November 30, 2001. The Company's received fees in the amount of
          $446,000 for their assistance in placing the shares. These fees were
          offset by $389,000 of expenses incurred on behalf of the selling
          shareholders.

          On July 25, 2000, the Company completed an $18.7 million private
          placement of approximately 3.3 million shares of common stock to
          institutional and other accredited investors. The investors purchased
          unregistered common stock at $5.59 per share, a 13% discount to the
          20-day weighted-average closing price as of the June 21, 2000 pricing
          date. In addition, a portion of the proceeds were used to repurchase,
          at $5.59 per share, and retire 418,908 shares from the estate of Allen
          E. Paulson. The financing was exempt from the registration requirement
          of the Securities Act of 1933, as amended, in reliance upon Regulation
          D promulgated under the Act. In connection with the private placement
          the Company incurred issuance costs totaling $1,382,000.

                                       52

<PAGE>

                    CardioDynamics International Corporation

                          Notes to Financial Statements

                            November 30, 2001 and 2000


(7)       Shareholders' Equity -- (Continued)

          On December 3, 1999, the Company completed a $3.3 million private
          placement of common stock to institutional investors who purchased
          unregistered shares with a four-month holding restriction for $2.50
          per share, representing a 9% discount from the 30-day average closing
          bid price.

          On August 25, 1999, the Company issued 2,000,000 common stock warrants
          to GEMS-IT. One million of the warrants were granted to GEMS-IT to
          obtain access to their technology. In connection with these warrants,
          the Company recorded a non-cash charge of $350,000 in fiscal 1999. The
          remaining 1,000,000 performance based warrants vested during November
          2000 as a result of GEMS-IT meeting their minimum sales objectives.
          This resulted in a non-cash charge included in sales and marketing
          expense of $3,382,000 based on the fair market value of the warrants.
          Each warrant represents the right to purchase one share of the
          Company's stock at an exercise price of $4.10, until the expiration
          date of August 25, 2004.

          On May 28, 1999, the Company completed a $5.2 million private
          placement of common stock to institutional and other accredited
          investors who purchased unregistered shares with a six-month holding
          restriction for $1.00 per share, representing a 27% discount from the
          closing bid price.

          In March 1999, in connection with the City National Bank financing
          agreement, the Company issued 50,000 common stock warrants. Each
          warrant represented the right to purchase one share of the Company's
          stock at an exercise price of $2.20, until the expiration date of
          March 7, 2004. In September 2000, all of the warrants were exercised.

          On August 21, 1998, in connection with the shares of Series A
          convertible preferred stock issuance, 123,000 common stock purchase
          warrants were issued. Each warrant represents the right to purchase
          one share of the Company's common stock at an exercise price of $2.55,
          until the expiration date of August 21, 2003. During fiscal 2000,
          113,800 of the warrants were exercised.

          On May 15, 1998, in connection with the completion of the Imperial
          Bank financing agreement, 33,334 common stock purchase warrants were
          issued to the bank. Each warrant represents the right to purchase one
          share of the Company's common stock at an exercise price of $3.00,
          until the expiration date of May 14, 2003. On August 21, 1998 an
          additional 15,000 common stock purchase warrants were issued to the
          bank. Each warrant represented the right to purchase one share of the
          Company's stock at an exercise price of $2.00, until the expiration
          date of August 21, 2003. In March 2000, all the 48,334 warrants were
          exercised in a cashless exchange resulting in the issuance of 37,934
          shares of common stock.

          On March 6, 1997, in connection with the $7.2 million private
          placement the Company issued 276,514 common stock warrants to EVEREN
          Securities, Inc. which served as placement agent. Each warrant
          represents the right to purchase one share of the Company's common
          stock at an exercise price of $3.56, until the expiration date of
          March 5, 2002. During fiscal 2000, 183,880 of the warrants were
          exercised.

                                       53

<PAGE>

                    CardioDynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000


(7)       Shareholders' Equity -- (Continued)

          During February 1995, the Company entered into an agreement with a
          related party, CardioDynamics Holdings, LLC ("CDH"), a California
          limited liability company, for the sale of approximately 37.6% of the
          Company's common stock. Additionally, the Company issued a five-year
          secured promissory note (the "CDH note") in the amount of $100,000. In
          fiscal 1996 and 1997, the CDH note was amended to increase the loan
          amount, establish a per share conversion price of $0.25 per share,
          subject to adjustment under specified circumstances, and change the
          maturity date to March 31, 2000. The CDH note was collateralized by a
          subordinated interest in substantially all of the assets of the
          Company. Advances under the CDH note accrued interest at 7.5% with
          interest-only payable quarterly through maturity at March 31, 2000.
          Upon maturity, the balance, including interest, was converted into
          101,521 shares of CardioDynamics common stock.

(8)       Convertible Preferred Stock

          On August 21, 1998, the Company sold 3,000 shares of Series A
          convertible preferred stock to institutional investors for $3,000,000,
          net of issuance costs of $117,000. The Series A preferred stock was
          convertible into common stock at the lesser of $2.70 or 95% of the
          then-current common stock market value (92% after August 21, 1999).
          The Series A preferred stock had a cumulative dividend of 3% per year,
          which could be paid in cash or the Company's common stock at the
          discretion of the Company. For the year ended November 30, 1999, the
          Company issued 26,548 shares of common stock as dividends to the
          preferred shareholders. To achieve an orderly conversion of the
          outstanding shares of the Series A convertible preferred stock and
          minimize the potential impact on the market price of the Company's
          common stock, in June 1999, the Company identified a group of
          strategic investors and facilitated the private sale of the common
          shares issued upon conversion of the remaining portion of the Series A
          preferred stock. In conjunction with this transaction, the Company
          issued 305,772 additional shares of common stock at the market price
          of $1.56 per share and 20,336 common stock purchase warrants at an
          exercise price of $1.63, with an expiration date of June 2002. As a
          result of the Series A preferred stock retirement, the Company
          recorded a non-cash accounting charge of $483,000, which is included
          in other expenses. During fiscal 1999 all outstanding shares of the
          Series A preferred stock were converted into 1,567,962 shares of
          common stock.

          The original purchasers of the Series A preferred stock could, under
          specified conditions, require the Company to sell them up to 3,000
          shares of Series B preferred stock. In August 1999, we declared
          $192,000 of preferred stock dividends related to 375,000 premium
          priced warrants issued to the Series A preferred shareholders in
          exchange for the relinquishment of their contractual right to purchase
          an additional $3,000,000 of convertible preferred stock. Each warrant
          represents the right to purchase one share of the Company's common
          stock at an exercise price of $3.54 per share, until the expiration
          date in August 2004. In March 2000, 25,000 of these warrants were
          exercised.

                                       54

<PAGE>

                    Cardiodynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000

(9)      Stock Options

         In 1995, the shareholders approved a Stock Option/Stock Issuance Plan
         (the "Option Plan") that provides for the granting of options to
         officers, directors and key employees to purchase the Company's common
         stock. Under the Option Plan, as amended in 2001 after approval by a
         shareholder vote, 6,000,000 shares of common stock have been reserved
         for granting of options at not less than 85% of the fair market value
         of the Company's common stock on the date of grant.

         The Option Plan also provides for monthly grants, at fair market value
         to each non-employee director of the Company, of options to purchase
         1,000 shares of Company common stock as payment for director fees for
         each full month of service. The options are exercisable immediately
         upon grant and expire upon the earlier of ten years from the date of
         grant or two years after the director terminates his position on the
         Board. During fiscal 2001, 2000 and 1999, 72,000, 68,000 and 81,000
         options, respectively, were granted to the Board of Directors.

         The Option Plan also provides for grants of options and issuance's of
         stock in exchange for professional services. During fiscal years 2001,
         2000 and 1999, 30,900, 30,800 and 37,500 options were granted in
         exchange for services. The options were valued at $49,000, $52,000 and
         $8,000, respectively.

         At November 30, 2001, there were 2,343,067 shares available for grant
         under the Option Plan. The per share weighted-average fair value of
         stock options granted during fiscal 2001, 2000 and 1999 was $6.03,
         $3.96 and $0.80, respectively on the grant date using the Black-Scholes
         option-pricing model with the following weighted-average assumptions:

                                              2001        2000        1999
                                            --------    --------   ---------

         Expected volatility                  91.7%       90.9%       33.2%
         Expected dividend yield                 0%          0%          0%
         Risk-free interest rate               4.56%       5.66%       5.17%
         Expected life                        4 years     4 years     4 years

         The Company applies APB Opinion No. 25 in accounting for its Option
         Plan and, accordingly, no compensation cost has been recognized in the
         financial statements for its stock options issued to officers,
         directors and employees. Had the Company determined compensation cost
         based on the fair value at the grant date for its stock options under
         SFAS No. 123, the Company's net loss would have been increased to the
         pro forma amounts below (in thousands except per share data):

<TABLE>
<CAPTION>
                                                            2001         2000        1999
                                                          ---------    ---------  ----------
                                                                      (In Thousands)
                                                          ----------------------------------

<S>                                                       <C>          <C>          <C>
        Net loss to common shareholders, as reported      $    (659)   $   (8,267)  $  (4,219)
        Pro forma net loss to common shareholders         $  (5,770)   $  (11,378)  $  (4,741)

        Net loss per common share, basic and diluted,
            as reported                                   $    (.01)   $     (.19)  $    (.12)

        Pro forma net loss per common share, basic and
            diluted                                       $    (.13)   $     (.26)  $    (.13)
</TABLE>

                                       55

<PAGE>

                    Cardiodynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000

(9)      Stock Options - (Continued)

         Stock option activity during the periods indicated is as follows:

                                                                    Weighted-
                                                       Number of     average
                                                        shares    exercise price
                                                     ----------- ---------------

         Options Outstanding at November 30, 1998    2,005,000   $   1.91
         Granted                                       655,700       2.34
         Exercised                                     (91,000)      1.66
         Forfeited                                    (244,834)      1.89
         Expired                                       (38,000)      2.85
                                                     ---------   --------
         Options Outstanding at November 30, 1999    2,286,866   $   2.04

         Granted                                       793,568       5.92
         Exercised                                    (571,670)      1.85
         Forfeited                                    (196,181)      3.27
         Expired                                       (16,668)      3.22
                                                     ---------   --------

         Options Outstanding at November 30, 2000    2,295,915   $   3.30

         Granted                                       814,658       4.10
         Exercised                                    (119,847)      1.64
         Forfeited                                    (165,854)      4.22
         Expired                                        (8,456)      4.21
                                                     ---------   --------

         Options Outstanding at November 30, 2001    2,816,416   $   3.55
                                                     =========   ========


         At November 30, 2001 the weighted-average exercise price and
         weighted-average remaining contractual life of outstanding options was
         $3.55 and seven years. At November 30, 2001, 2000 and 1999, the numbers
         of options exercisable were 1,631,648, 1,091,629 and 968,269
         respectively, and the weighted-average exercise prices of those options
         were $3.10, $2.55 and $2.15, respectively.

                                       56

<PAGE>

                    Cardiodynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000

(9)      Stock Options - (Continued)

         The following table sets forth information regarding options
outstanding at November 30, 2001:

<TABLE>
<CAPTION>
                                         Options Outstanding                   Options Exercisable
                              ----------------------------------------    ----------------------------
                                               Weighted-
                                                average    Weighted-                        Weighted-
                Range of                       remaining    average                         average
                exercise        Number       contractual    exercise           Number      exercise
                 prices       outstanding      life          price           exercisable     price
            ---------------   -----------  ------------- -------------    --------------  ------------
<S>                           <C>           <C>          <C>              <C>            <C>
            $  0.00 - 1.18      88,000          4.3       $  1.00             38,000         1.01
               1.19 - 2.37     957,804          6.7          1.86            827,849         1.85
               2.38 - 3.56     572,608          6.5          3.14            345,855         3.09
               3.57 - 4.75     402,741          8.4          4.10             71,349         3.97
               4.76 - 5.94     393,300          8.7          5.20            131,252         5.27
               5.95 - 7.12     325,945          8.1          6.20            161,245         6.21
               7.13 - 8.31      68,018          8.4          7.96             49,266         7.95
               8.32 - 9.50       7,000          7.2          8.71              6,416         8.71
              9.51 - 11.88       1,000          8.3         11.88                416        11.88
                             ---------                                    ----------

                             2,816,416          7.3       $  3.55          1,631,648         3.10
                             =========                                    ==========
</TABLE>

         As part of an employment agreement with its then chief executive
         officer, Richard Otto, 250,000 non-transferable stock options were
         granted (outside the Option Plan) to Mr. Otto at an exercise price of
         $0.50 per share. The options vest if the quoted market price of the
         Company's common stock attains specified levels. During fiscal 2000,
         100,000 of these options vested and were exercised. At November 30,
         2001, of the remaining 150,000 options, none were vested. The options
         expire June 15, 2005.

         On March 23, 1998, the Company entered into an employment agreement
         with Michael K. Perry, who succeeded Mr. Otto as chief executive
         officer. Under the terms of the agreement, Mr. Perry was granted
         1,500,000 non-transferable stock options (not under our Option Plan) at
         an exercise price of $2.55 per share, subject to vesting requirements.
         The first tranche vested on September 23, 1998, and the final tranche
         was not scheduled to vest until March 23, 2002. On October 16, 1998,
         Mr. Perry relinquished his 1,500,000 old options in exchange for a new
         grant of 1,295,000 options. The new options have an exercise price of
         $1.625 per share, and all accrued vesting was forfeited. The new
         options vest over a four-year period with a commencement date of
         October 16, 1998. At November 30, 2001, 928,000 of the options had
         vested and 604,250 were exercisable. During fiscal 2001, Mr. Perry
         exercised 160,000 of these options. The options expire on October 15,
         2008.

                                       57

<PAGE>

                    CardioDynamics International Corporation

                          Notes to Financial Statements

                           November 30, 2001 and 2000

 (10)    Income Taxes

         Income taxes in the accompanying statements of operations are comprised
         of the following (in thousands):

                                            2001          2000          1999
                                        -----------   -----------   -----------

         Federal                        $        --   $        --   $       --
         State                                    1            11            1
                                        -----------   -----------   -----------

                                        $         1   $        11   $        1
                                        ===========   ===========   ===========

         The difference between the provision for income taxes and income taxes
         computed using the U.S. federal income tax rate were as follows for the
         years ended November 30,

<TABLE>
<CAPTION>
                                                                2001            2000             1999
                                                             ------------   -------------    -----------
                                                                            (In thousands)
                                                             -------------------------------------------
         <S>                                                 <C>           <C>               <C>

         Computed "expected" tax benefit                     $    (224)    $      (2,807)    $   (1,358)
         State and local taxes, net of federal benefit               1                 7              1
         Change in valuation allowance, net                       (576)            2,953          1,197
         Adjustment to true-up prior year net operating
           losses                                                  760                --             --
         Other                                                      40              (142)           161
                                                             ---------     -------------    -----------
         Provision for income taxes                          $       1     $          11     $        1
                                                             =========     =============    ===========
</TABLE>

         At November 30, 2001, the Company had federal net operating loss
         carryforwards of approximately $28,234,000, expiring as follows:

                2002        $1,284,000          2011           $2,444,000
                2005           753,000          2012            3,201,000
                2006           787,000          2018            4,445,000
                2007           557,000          2019            3,549,000
                2008           433,000          2020            6,360,000
                2009           513,000          2021            1,532,000
                2010         2,376,000


         These amounts may be subject to significant limitations under section
         382 of the Internal Revenue Code of 1986. The Tax Reform Act of 1986
         contains provisions which limit the federal net operating loss
         carryforwards that may be used in any given year in the event of
         specified occurrences, including significant ownership changes. If
         these specified events occur we may lose some or all of the tax
         benefits of these carryforwards. A valuation allowance has been
         recognized for the full amount of the deferred tax asset created by
         these carryforwards.

                                       58

<PAGE>
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                          Notes to Financial Statements

                            November 30, 2001and 2000

(10)     Income Taxes - (Continued)

         At November 30, 2001, the Company had state of California net operating
         loss carryforwards of approximately $15,400,000 that expire between
         2001 and 2006.

         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets as of November 30, 2001 and 2000
         are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  2001           2000
                                                              -------------   ------------
         <S>                                                  <C>             <C>
         Deferred tax assets:
            Net operating loss carryforwards                  $      10,961   $     11,812
            Allowance for doubtful accounts and returns                 830            949
            Inventory                                                   604            625
            Deferred compensation                                     1,664          1,638
            Accrued expenses                                            388            246
            Other                                                        30             26
                                                              -------------   ------------
                           Total gross deferred tax assets           14,477         15,296

         Valuation allowance                                        (14,477)       (15,296)
                                                              -------------   ------------

                           Net deferred tax assets            $          --   $         --
                                                              =============   ============
</TABLE>


         A 100% valuation allowance has been applied to the net deferred tax
         assets due to the uncertainty surrounding the realization of such
         assets. Management periodically evaluates the recoverability of the
         deferred tax assets. At such time as it is determined that it is more
         likely than not that deferred tax assets are realizable, the valuation
         allowance will be reduced. Accordingly, no tax benefit has been
         recorded for the years ended November 30, 2001 and 2000.

                                       59

<PAGE>
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                          Notes to Financial Statements

                           November 30, 2001 and 2000

(11)     Leases

         In June 1997, the Company entered into a five-year operating lease for
         a 18,000 square-foot manufacturing facility that also houses the
         Company's research, development, marketing, sales and administrative
         activities. The lease expires in June 2002, however the Company is
         currently evaluating several alternatives, including moving the
         manufacturing operations to a second location and expanding our office
         space in the current location or moving to a new facility entirely.
         Future minimum lease payments under all non-cancelable operating leases
         (with initial or remaining lease terms in excess of one year) as of
         November 30, 2001 are (in thousands):

<TABLE>
<CAPTION>
                                                                                Capital              Operating
                          Years ending November 30,                             Leases                 Leases
            ---------------------------------------------------------------------------------------------------------
            <S>                                                           <C>                    <C>
                          2002                                            $        81            $            129
                          2003                                                     19                          --
                          2004                                                     10                          --
                          2005                                                     10                          --
                          2006                                                     10                          --
                                Later years                                        --                          --
                                                                          --------------         -------------------
            Total minimum lease payments                                          130            $          129
                                                                                                 ===================

            Less amount representing interest, bearing interest at                (21)
                                                                          --------------
            Present value of net minimum capital lease payments                   109

            Less current installments of obligations under capital
                 leases                                                           (69)
                                                                          --------------

            Obligations under capital leases excluding current
                 installments                                             $        40
                                                                          ==============
</TABLE>


         Rent expense under operating leases was $267,000 $264,000 and $287,000
         for the years ended November 30, 2001, 2000 and 1999, respectively.

(12)     401(k) Plan

         In 1996, the Company established a qualified savings plan under section
         401(k) of the Internal Revenue Code of 1986. Employees who have
         completed three months of service and are 21 years of age are eligible
         to participate in the plan, subject to limitations. The Company may
         make discretionary contributions to the plan. Eligible employees may
         contribute up to 20% of eligible wages. Employer matching contributions
         were $64,000, $42,000 and $24,000 for the fiscal years ended November
         30, 2001, 2000 and 1999, respectively.

                                       60

<PAGE>
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                          Notes to Financial Statements

                           November 30, 2001 and 2000

 (13)    Related Party Transactions

         The Company receives certain engineering, development and consulting
         services from Rivertek Medical Systems, Inc., of which Dennis Hepp is a
         100% beneficial owner. Mr. Hepp has been an officer of the Company
         since 1997. The Company paid $865,000, $898,000 and $391,000 for these
         services in fiscal 2001, 2000 and 1999, respectively. Amounts payable
         to this related party at November 30, 2001, 2000 and 1999 were $93,000,
         $246,000 and $39,000, respectively. Cam Garner, a member of our Board
         of Directors, was paid $25,000 in each of the last three fiscal years,
         for consulting services.

(14)     Segment Information

         The Company operates solely in the noninvasive heart-monitoring device
         sector of the cardiac medicine industry. All of the Company's business
         activities are aggregated into one reportable segment given the
         similarities of economic characteristics between the activities and the
         common nature of the Company's services and customers and therefore
         believes that given the single market focus of its operations the
         Company operates a single operating segment. The Company assesses
         performance and allocates resources on the basis of a single operating
         entity.

         Revenues derived by sales channel are as follows (in thousands):

<TABLE>
<CAPTION>
                                             2001          2000         1999
                                         -----------   -----------  -----------
          <S>                            <C>           <C>          <C>
          Domestic Sales:
           Direct sales                  $    15,571   $     9,677  $     5,066
           Distributor sales                      --            21          236
           Strategic partner sales             3,113         2,264          458
                                         -----------   -----------  -----------
             Subtotal domestic                18,684        11,962        5,760
                                         -----------   -----------  -----------
          International Sales:
           Distributor sales                     444           959          903
           Strategic partner sales               470           181          618
                                         -----------   -----------  -----------
             Subtotal international              914         1,140        1,521
                                         -----------   -----------  -----------
                                         $    19,598   $    13,102  $     7,281
                                         ===========   ===========  ===========
</TABLE>

                                       61

<PAGE>

                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                          Notes to Financial Statements

                           November 30, 2001 and 2000

(15)     Quarterly Financial Information (Unaudited)

         Summarized quarterly financial information for the years ended
         November 30, 2001 and 2000 is as follows (In thousands, except for per
         share data):

<TABLE>
<CAPTION>
                                                       First            Second          Third            Fourth
                                                      Quarter           Quarter        Quarter           Quarter
                                                   --------------    ------------   -------------    --------------
          <S>                                      <C>               <C>            <C>              <C>
          Year Ended November 30, 2001
          Net sales                                $     3,964       $     4,480    $     5,231      $       5,923
          Gross margin                                   2,749             3,196          3,757              4,282
          Income (loss) from operations                   (705)             (572)           (56)               171
          Net income (loss)                               (533)             (430)            50                254
          Income (loss) per share - basic          $      (.01)      $      (.01)   $       .00      $         .01
          Income (loss) per share - diluted        $      (.01)      $      (.01)   $       .00      $         .01
</TABLE>

<TABLE>
<CAPTION>
                                                       First            Second          Third            Fourth
                                                      Quarter           Quarter        Quarter           Quarter
                                                   --------------    ------------   -------------    --------------
          <S>                                      <C>               <C>            <C>              <C>
          Year Ended November 30, 2000
          Net sales                                $     2,624       $     3,073    $     3,573      $       3,832
          Gross margin                                   1,835             2,013          2,429              2,280
          Income (loss) from operations                   (524)             (491)          (499)            (6,987)
          Net income (loss)                               (558)             (496)          (443)            (6,770)
          Income (loss) per share - basic          $      (.01)      $      (.01)   $      (.01)     $        (.15)
          Income (loss) per share - diluted        $      (.01)      $      (.01)   $      (.01)     $        (.15)
</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                       62

<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

     Our directors and executive officers as of January 31, 2002 are as
follows:

<TABLE>
<CAPTION>
Name                                                Age              Position(s)
----                                                ---     -----------------------------
<S>                                                 <C>     <C>
James C. Gilstrap..............................      65     Chairman of the Board of Directors
Michael K. Perry...............................      41     Chief Executive Officer and Director
Rhonda F. Rhyne................................      41     President
Stephen P. Loomis..............................      41     Chief Financial Officer
Russell H. Bergen..............................      55     Vice President of Operations
Patrick W. Bradley Ph.D. ......................      48     Vice President of  Business Development
Dennis G. Hepp.................................      52     Chief Technology Officer
Richard E. Trayler.............................      50     Chief Operating Officer
Connie R. Curran, Ed.D., RN....................      54     Director
Jacques C. Douziech............................      55     Director
Cam L. Garner..................................      53     Director
Richard O. Martin, Ph.D........................      62     Director
</TABLE>

     James C. Gilstrap served as the chairman of our board of directors from May
1995 to June 1996 and co-chairman of the board from June 1996 until the death of
Allen E. Paulson in July 2000, at which time Mr. Gilstrap resumed his role as
chairman. Mr. Gilstrap is retired from Jefferies & Company, where he served as
senior executive vice president, partner and a member of the executive
committee. Mr. Gilstrap is past president of the Dallas Securities Dealers, as
well as a past member of the board of governors of the National Association of
Securities Dealers, Inc.

     Michael K. Perry has been our chief executive officer and a director since
April 1998. From 1994 to 1997, Mr. Perry was vice president of operations at
Pyxis Corporation, a leading provider of healthcare automation, information
management services and pharmacy management services to hospitals and outpatient
facilities. Pyxis was sold to Cardinal Health, Inc. in 1996. Prior to joining
Pyxis, Mr. Perry served in management with the medical products group of Hewlett
Packard Company. Additionally, he was director of quality for a division of
Hewlett-Packard's deskjet printer group. Mr. Perry holds a bachelor's degree in
mechanical engineering from General Motors Institute and a master's degree in
business administration from Harvard University. Mr. Perry serves on the
executive committee of the University of California San Diego Cardiovascular
Center.

     Rhonda F. Rhyne has been our president since June 1997, previously serving
as chief operating officer from 1996 to 1997 and as vice president of operations
from 1995 to 1996. From 1992 until 1995, Ms. Rhyne was president, chief
executive officer and vice president of sales and marketing for Culture
Technology, Inc. Ms. Rhyne has also held sales positions at GE Medical Systems
and Quinton Instrument Company, both medical device subsidiaries of publicly
held companies. Ms. Rhyne holds a bachelor's degree in pharmacy from Washington
State University and a master's degree in business administration, executive
program, from University of California Los Angeles, Anderson School of Business.

                                       63

<PAGE>

     Stephen P. Loomis has been our vice president of finance since September
1996 and has held the positions of chief financial officer and corporate
secretary since April 1997. From 1993 until 1996, he served as director of
financial reporting for Kinko's Inc. From 1988 to 1993, Mr. Loomis was chief
financial officer for Terminal Data Corporation, a publicly traded company. He
earned his bachelor's degree in business administration from California State
University at Northridge. Mr. Loomis is a certified public accountant.

     Russell H. Bergen has served as our vice president of operations since
September 1998. From 1971 to 1998, Mr. Bergen held management positions in the
instrument group, peripheral products group and inkjet business unit of Hewlett
Packard Company. Previously, Mr. Bergen was employed at Honeywell, Inc. as a
procurement engineer. Mr. Bergen earned a bachelor's degree in aerospace
engineering and manpower management from the University of Colorado at Boulder.

     Patrick W. Bradley, Ph.D. joined CardioDynamics in September 2000 as vice
president of business development. From 1999 to 2000, Dr. Bradley served as
director of new technologies for Cardiac Science, Inc. and from 1993 to 1999 Dr.
Bradley was director of product management at Quinton Instrument Company. Prior
to that he was associate vice president for OEM Technologies at VitalCom, Inc.
and served on the Scientific Peer Review Committee for the American Heart
Association and on the Sports Science Research Group for the United States
Olympic Committee. He has a bachelor's degree in biology from Texas A&M
University and a master's degree and Ph.D. in physiology from University of
Texas and University of Houston, respectively.

     Dennis G. Hepp has been our chief technology officer since June 1997 and
has served as a consultant to us since July 1995. From 1974 to 1986, Mr. Hepp
held engineering and management positions at Medtronic, Inc. In 1989, Mr. Hepp
founded, and remains a key employee and managing director of, Rivertek Medical
Systems, Inc., an engineering consulting firm to medical device manufacturers.
Mr. Hepp holds a bachelor's degree in electrical engineering from the University
of Detroit.

     Richard E. Trayler has served as our chief operating officer since July
1997. From 1982 to 1997, Mr. Trayler held the positions of regional and
divisional sales manager at Quinton Instrument Company. He has also held
positions at the Heart Institute for CARE, the University of Washington and the
Boeing Company. Mr. Trayler earned a bachelor's degree from Texas A&M University
and a master's degree from the University of Washington.

     Connie R. Curran, Ed.D., RN became a director in February 2000. Dr. Curran
has been president and chief executive officer of CurranCare since 1995, has
held a variety of executive positions in academia and multi-system healthcare
operations and serves as vice president of the American Hospital Association,
national director of patient care for APM, Inc. and a director for Allegiance
Corporation and Finova Group. Dr. Curran holds a master's degree in
medical-surgical nursing from De Paul University and a doctorate in educational
psychology from Northern Illinois University.

     Jacques C. Douziech has served as a director since July 2000. Mr. Douziech
is a Partner for Sofinov, Biotechnology and Life Sciences Division, a subsidiary
of the Caisse de depot et placement du Quebec. From 1998 to March 2000, Mr.
Douziech was director and vice president of business development at Procrea
Biosciences, and from 1980 to 1989 and 1991 to 1998, he held executive positions
at Boehringer Mannheim Canada (now Roche Diagnostics). He was also marketing
director at Kodak Canada Inc. and vice president, sales & marketing of Synermed
Diagnostics from 1989 to 1991. Douziech worked from 1965 to 1979 at the Queen
Elizabeth Hospital of Montreal where he was the assistant-chief of the
biochemistry and immunology laboratories. Mr. Douziech holds a licentiate and
fellowship degree in medical laboratory sciences with a specialty in clinical
biochemistry.

                                       64

<PAGE>

     Cam L. Garner has served as a director since July 1997 and provides us with
consulting services for $25,000 per year. Mr. Garner served as president and
chief executive officer of Dura Pharmaceuticals, Inc. from 1989 and was named
Chairman in 1995 until Dura Pharmaceuticals was acquired by Elan Corporation,
PLC in November 2000 for $1.8 billion. Prior to joining Dura, Mr. Garner was a
member of the management team that built Hybritech Inc., a division of Eli Lilly
& Co., that developed monoclonal antibodies for use in diagnostic and
pharmaceutical products. Mr. Garner currently serves on several boards including
Favrille, Inc., Cancer-Vax Corporation, Nanogen Corporation, Pharmion
Corporation and Xcel Pharmaceuticlas, Inc. Mr. Garner earned his master's degree
in business administration from Baldwin-Wallace College in Berea, Ohio, and his
bachelor's of arts degree in biology from Virginia Wesleyn.

     Richard O. Martin, Ph.D. has served as a director since July 1997. Dr.
Martin is president of Medtronic-Physio-Control Corporation, a medical device
company that designs, manufactures and sells external defibrillators and heart
monitors. Until Medtronic's acquisition in 1998 of Physio-Control Corporation,
Dr. Martin was chairman and chief executive officer. Prior to that he was vice
president of cardiovascular business development with Sulzer Medica and has held
management positions at Intermedics, Inc. and Medtronic, Inc. Dr. Martin serves
on the boards of directors of Scout Medical technologies, LLC and Cardia
Dimensions, Inc. and Encore Medical. Dr. Martin earned a bachelor's degree in
electrical engineering from Christian Brothers College, a master's degree in
electrical engineering from Notre Dame University and a doctorate in
electrical/biomedical engineering from Duke University.


Section 16(a) Beneficial Ownership Reporting Compliance

We believe that each person who, at any time during the fiscal year ended
November 30, 2001, was a director, officer, or beneficial owner of more than 10%
of a class of registered equity securities of CardioDynamics, filed on a timely
basis all reports required by Section 16(a) of the Securities Exchange Act, with
the exception of Jacques C. Douziech who, upon discovery of the transaction,
filed an amended Form 4 in November 2001 to report a September 2001 purchase of
5,000 shares of the Company's stock by Sofinov Societe Financiere d'Innovation
Inc., for whom Mr. Douziech is a consultant.

                                       65

<PAGE>

ITEM 11.   EXECUTIVE COMPENSATION

The following table provides information regarding the annual and long-term
compensation earned for services rendered in all capacities to CardioDynamics
for the fiscal years ended November 30, 2001, 2000 and 1998 of those persons who
were, at November 30, 2001 (i) the Chief Executive Officer and (ii) the four
most highly compensated executive officers of CardioDynamics whose aggregate
direct remuneration from the Company during the fiscal year ended November 30,
2001 exceeded $100,000 (collectively, the "Named Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                      Long Term Compensation
                                                                                      ----------------------
                                                                                                Awards
                                                          Annual Compensation (1)               ------
                                                  -------------------------------             Securities
                                                                              Other           Underlying
  Name and                                                                    Annual           Options/
  Principal Position          Year        Salary($)        Bonus($)       Compensation($)      SARs (#)
  ------------------          ----        ---------        --------       ---------------      --------
<S>                           <C>         <C>              <C>            <C>                 <C>
  Michael K. Perry            2001         197,479          60,170              -0-              30,300
    Chief Executive           2000         181,480          44,153              -0-              50,000
    Officer                   1999          91,450         216,170(2)           -0-              45,000

  Rhonda F. Rhyne             2001         186,000          46,930              -0-              25,000
     President                2000         176,000          35,550              -0-              40,900
                              1999         148,020          11,045          17,000 /(3)/         40,000

  Stephen P. Loomis           2001         138,000          36,750              -0-              20,600
     Chief Financial          2000         122,000          24,750              -0-              30,300
     Officer                  1999         137,543           8,520              -0-              30,000

  Russell H. Bergen           2001         130,000          35,990              -0-              20,300
     Vice President of        2000         120,000          24,175              -0-              30,000
     Operations               1999         120,000           5,800              -0-                 -0-

  Richard E. Trayler          2001         146,000          28,940              -0-              20,000
     Chief Operating          2000         130,000           2,475              -0-              30,300
     Officer                  1999         129,584           8,745              -0-              35,000
</TABLE>

_________________
(1)  Employee benefits provided to each of the Named Officers under various
     Company programs do not exceed the disclosure thresholds established under
     the SEC rules and are therefore not included, except as disclosed.

(2)  Bonus amount paid in 1999 includes $205,000 pursuant to Mr. Perry's
     employment agreement dated March 23, 1998, under which Mr. Perry was paid a
     salary of $1.00 for the initial 14 months of his employment. In exchange,
     he was eligible to receive a performance bonus based on achieving a 100%
     increase in sales during the 12-month period ending May 31, 1999, over the
     previous 12-month period.

(3)  Amounts represent Company paid lodging of $11,000 and $6,000 for automobile
     expenses.

                                       66

<PAGE>

The following table provides information regarding option grants during the
fiscal year ended November 30, 2001 to the Named Officers in fiscal 2001.
CardioDynamics has not granted any stock appreciation rights.

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                             Individual Grants
                       -----------------------------------------------------------------------------------------
                              Number of
                              Securities        % of Total
                              Underlying      Options Granted
                               Options         to Employees                   Exercise           Expiration
Name                           Granted        in Fiscal 2001              Price($/Sh)/(1)/          Date
--------------------------- ----------------  -------------------------  -----------------  --------------------
<S>                          <C>              <C>                        <C>                <C>
Michael K. Perry               30,000               4%                         $4.063            01/17/2011
                                  300               0%                         $3.125            04/06/2001
Rhonda F. Rhyne                25,000               3%                         $4.063            01/17/2011
Stephen P. Loomis              20,000               2%                         $4.063            01/17/2011
                                  600               0%                         $4.400            09/27/2011
Russell H. Bergen              20,000               2%                         $4.063            01/17/2011
                                  300               0%                         $4.750            09/19/2011
Richard E. Trayler             20,000               2%                         $4.063            01/17/2011
</TABLE>

____________________________
(1)  All options were granted at fair market value (closing sale price for our
     common stock on the NASDAQ/AMEX Stock Market on the date of grant).

                                       67

<PAGE>
The following table provides further information regarding the Named Officers'
exercises and outstanding stock options as of November 30, 2001. No stock
appreciation rights were granted or exercised.

                     AGGREGATED OPTION/SAR EXERCISES IN LAST
                FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES


<TABLE>
<CAPTION>
                                                          Number of
                                                          Securities
                                                          Underlying            Value(1) of
                                                          Unexercised           Unexercised
                                                          Options/SARs          In-the-Money
                                                          at FY-End (#)       Options/SARs at FY-
                       Shares Acquired    Value           Exercisable/       End ($) Exercisable/
Name                   On Exercise(#)   Realized ($)      Unexercisable        Unexercisable(2)
----                   ------------     ------------      -------------        ----------------
<S>                    <C>              <C>             <C>                <C>
Michael K. Perry           160,000       564,265         659,340 / 393,960    3,520,876 / 2,103,746
Rhonda F. Rhyne             40,000       162,306         331,730 / 129,170    1,539,227 /   599,349
Stephen P. Loomis           20,000        68,653          65,898 /  45,002      250,412 /   171,008
Russell H. Bergen            -0-           -0-            63,423 /  51,877      272,719 /   223,071
Richard E. Trayler          10,000        34,046          98,840 /  46,460      418,390 /   196,526
</TABLE>

--------------------------------------
(1)   Represents the difference between the closing sale price of our common
      stock on the NASDAQ/AMEX Stock Market of $7.28 on November 30, 2001 and
      the exercise price of the options.

(2)   The respective Named Officers as of November 30, 2001 could not exercise
      these options and future exercisability is subject to certain vesting
      provisions including specific stock price thresholds and/or remaining in
      the employ of the Company for up to four additional years.

Employment Agreements

On March 23, 1998, we entered into an employment agreement with Michael Perry as
Chief Executive Officer. Under the terms of the agreement, Mr. Perry was granted
1,500,000 non-transferable stock options (not under our Option Plan) at an
exercise price of $2.55 per share, subject to vesting requirements. The first
tranche vested on September 23, 1998, and the final tranche was not scheduled to
vest until March 23, 2002. On October 16, 1998, Mr. Perry cancelled his
1,500,000 old options in exchange for a new grant of 1,295,000 options. The new
options have an exercise price of $1.625 per share, and all accrued vesting was
forfeited. The new options vest over the same four-year period with a
commencement date of October 16, 1998. At November 30, 2001, 928,000 of the
options had vested and 604,250 were exercisable. Mr. Perry exercised 160,000
options during fiscal 2001. The options expire on October 15, 2008.

Long Term Incentive Plans

We do not have any long-term incentive plans (as defined in the Securities and
Exchange Commission regulations).

                                       68

<PAGE>
Directors' Fees

Each non-employee director who has not been employed by us during the proceeding
two years receives 1,000 automatic stock options granted at fair market value on
the last day of the month for each full month of service as a director of our
Company. In the case of 10% shareholders the options are granted at 110% of fair
market value. On August 1, 1997, Cam L. Garner, a Director of our Company,
entered into a consulting agreement with our Company whereby Mr. Garner is paid
a monthly fee of $2,083 and received a one-time grant of 5,000 stock options to
purchase CardioDynamics' common stock in exchange for consulting services. Total
fees paid to Mr. Garner in fiscal 2001 were $25,000. He received the same
compensation during fiscal 2000 and 1999.

                BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE
                                  COMPENSATION

CardioDynamics' compensation programs and policies applicable to its executive
officers are established and administered by the Compensation Committee of the
Board of Directors. The Compensation Committee comprises of three non-employee
directors, none of whom have interlocking relationships as defined by the
Securities and Exchange Commission.

It is the philosophy of CardioDynamics that executive compensation be aligned
with CardioDynamics' overall business strategies, values and performance. The
compensation policies of CardioDynamics are designed to set its executive
compensation, including salary, cash bonus awards and long-term stock-based
incentive awards, at a level consistent with amounts paid to executive officers
of companies of similar size, industry and geographic location.

Compensation Philosophy and Objectives

The Compensation Committee believes that compensation of CardioDynamics'
executive officers should:

..    Encourage creation of shareholder value and achievement of strategic
     corporate objectives.

..    Integrate compensation with CardioDynamics' annual and long-term corporate
     objectives, values and business strategies, and focus executive actions on
     the fulfillment of those objectives, values and strategies.

..    Provide a competitive total compensation package that enables
     CardioDynamics to attract and retain, on a long-term basis, high caliber
     personnel.

..    Provide a compensation opportunity that is competitive with companies in
     the medical device and biotechnology industries, taking into account
     relative company size, performance and geographic location as well as
     individual responsibilities and performance.

..    Align the interests of management with the long-term interests of
     stockholders and enhance stockholder value by providing management with
     longer-term incentives through equity ownership.

The Compensation Committee periodically reviews the approach to executive
compensation and will make changes as competitive conditions and other
circumstances warrant and will seek to ensure the Company's compensation
philosophy is consistent with the Company's best interests.

                                       69

<PAGE>

Key Elements of Executive Compensation

The compensation of executive officers is based upon CardioDynamics financial
performance as well as the achievement of certain business objectives,
including: accelerating market penetration through its direct sales force,
broadening of distribution channels through strategic relationships, securing
recurring revenue, targeting new market opportunities, furtherance of ICG
technology and development of ICG products for new medical applications as well
as the achievement of individual business objectives by each executive officer.

To meet these objectives, executive compensation is comprised of three elements
(i) base salary, (ii) cash bonus awards and (iii) long-term stock-based
incentive awards. The summary below describes in more detail the factors that
the Board considers in establishing each of the three primary components of the
variable compensation package provided to the executive officers.

Base salary - Salary ranges are largely determined through comparisons with
companies of similar headcount, revenues, market capitalization or complexity in
the medical device and biotechnology industries. Actual salaries are based on
individual performance contributions and other, more qualitative and
developmental criteria within a competitive salary range for each position that
is established through job evaluation of responsibilities, competitive,
inflationary, internal equity and market considerations. The Compensation
Committee, on the basis of its knowledge of executive compensation in the
industry, believes that the CardioDynamics' salary levels for the executive
officers are at a level that the Compensation Committee, at the time such salary
determinations were made, considered to be reasonable and necessary given
CardioDynamics' financial resources and the stage of its development. The
Compensation Committee reviews executive salaries each October and sets the
salaries for the following year.

Cash Bonus Plan - The cash bonus plan is an incentive bonus program providing
for the payment to each executive officer of quarterly cash bonuses that are
directly related to the group and individual achievements of executive
management and the revenues of CardioDynamics. The bonus pool is established
based on quarterly revenues achieved and of the pool is allocated to individual
executives half of which is based on achievement of Company revenue goals and
half of which is based on CEO and Compensation Committee assessment of the
executive's overall contribution to CardioDynamics' success.

In fiscal 2001, the target bonuses for executive officers ranged from 36% to 46%
of annual base salary. Incentive award amounts for each participant are based on
his or her potential impact on the Company's operating and financial results and
on market competitive pay practices. Bonuses for the Company's executive
officers in 2001 were paid pursuant to this plan. Under the plan, incentive
awards are paid based on achievement of quarterly performance goals. These
performance goals include individual performance goals, which are established by
the CEO at the beginning of each quarter, and annual corporate performance
goals. The corporate performance goals are based on the Company's achievement of
strategic objectives as well as specific revenue growth targets for each quarter
and the fiscal year. A percentage of the bonuses are paid for each quarterly
period in which goals are achieved.

Long-term stock-based incentive awards - CardioDynamics' Option plan which was
initially approved by the CardioDynamics Shareholders in 1995, as well as the
executive bonus plan are structured to permit awards under such plans to qualify
as performance-based compensation and to maximize the tax deductibility of such
awards. The Committee intends that compensation paid to management, including
stock options, be exempt from the limitations on deductibility under Section
162(m) of the Internal Revenue Code. Accordingly, the Compensation Committee
administers grants under the Company's Option Plan to members of management.

                                       70

<PAGE>

The Compensation Committee believes that the interest of shareholders and
executive officers will be closely aligned by providing incentives that focus
attention on managing CardioDynamics from the perspective of an owner with an
equity stake in the business. Therefore, all employees, and particularly those
persons who have substantial responsibility for the management and growth of the
Company are eligible to receive annual stock option grants, although the
Compensation Committee, at its discretion, may grant options at other times in
recognition of exceptional achievements.

The number of shares underlying stock options granted to executive officers is
based on competitive practices in the industry as determined by independent
surveys and the Compensation Committee's knowledge of industry practice. The
Compensation Committee grants options under the Option plan with an exercise
price equal to the fair market value on the date of grant. The grants are
intended to be competitive in order to retain and encourage positive future
performance and to provide a direct link with the interests of the shareholders
of the Company. The Compensation Committee, in making its determination as to
grant levels, takes into consideration: (i) executive's historical and expected
contribution toward CardioDynamics' objectives, (ii) prior award levels, (iii)
award levels necessary to replace particular executives, (iv) the executive's
direct ownership of CardioDynamics' shares, (v) the number of options vested and
unvested, and (vi) the options outstanding as a percentage of total shares
outstanding. During fiscal 2001, a total of 814,658 options were granted,
representing 1.78% of CardioDynamics' shares outstanding. Of those, 129,533 were
granted to executive officers of the company. The Option plan limits the total
number of shares subject to options that may be granted to a participant during
the lifetime of the Plan to 800,000 shares. The Option Plan contains provisions
providing for forfeiture of the options in the event the option holder engages
in certain intentional misconduct contrary to the interests of CardioDynamics.

Chief Executive Officer Compensation

Michael K. Perry is CardioDynamics' Chief Executive Officer. In October 2000,
the Compensation Committee set Mr. Perry's annual base salary for 2001 at
$206,000. The Compensation Committee increased Mr. Perry's base salary from
$196,000 for the prior year in recognition of his achievement of specific
corporate objectives, which included: growing CardioDynamics revenues 80%,
raising approximately $20 million in equity financing, the achievement of
additional strategic collaborations, the 68% increase in CardioDynamics' market
capitalization; the further establishment and development of the Company's
products and markets. The committee also considered Mr. Perry's compensation
relative to medical device and biotechnology industry norms as well as the
average increase in annual salaries for all employees of the Company as a whole.
The Committee determined that these achievements were important to the Company's
future growth and could assist the Company in enhancing shareholder value. The
Committee also increased Mr. Perry's target bonus to 44% of base salary from 31%
of base salary for the prior year.

In recognition of Mr. Perry's accomplishments in fiscal 2000, and as an
incentive for future performance, the Compensation Committee in January 2001
granted Mr. Perry options under its Option Plan, exercisable at the fair market
value on the date of grant, to purchase 30,000 shares of CardioDynamics' Common
Stock. The options vest over a four-year period.

Mr. Perry is a member of the Board of Directors, but did not participate in
matters involving the evaluation of his own performance or the setting of his
own compensation. The foregoing report has been furnished by the Compensation
Committee of the Board of Directors of CardioDynamics:

Compensation Committee:

Cam L. Garner - Chairman
James C. Gilstrap
Richard O. Martin, Ph.D.

                                       71

<PAGE>

                                PERFORMANCE GRAPH

The following graph compares the five-year cumulative total return (assuming
reinvestment of dividends) from November 30, 1996 to November 30, 2001 for (i)
the Company's common stock, (ii) the Russell 2000 stock index and (iii) the
Medical Equipment and Appliance Industry Group index. The Company's common stock
is included in both of these indices. The Russell 2000 is comprised of the
smallest 2,000 companies in the Russell 3000 index, which contains the 3,000
largest US companies, based on total market capitalization. Also includes 32,654
shares held by the trust.

                Comparison of Five Year Cumulative Total Return
      CardioDynamics, Russell 2000 and Medical Equipment & Appliance Group

                                     [GRAPH]


                                      1996  1997  1998  1999  2000  2001
                                      ----  ----  ----  ----  ----  ----
CardioDynamics                        $100    75    73    86   127   208
Russell 2000 Index                    $100   121   112   128   126   130
Medical Equipment & Appliance Group   $100   119   145   165   206   193


                                       72

<PAGE>

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Common Stock - Certain Beneficial Holders

The following are the only persons known by us to own beneficially, as of
January 31, 2002, five percent (5%) or more of the outstanding shares of our
common stock.

Name and Address of                    Shares Beneficially Owned
                                   --------------------------------
Beneficial Owner                   Number /(1)/      Percentage /(2)/
------------------                 ----------        ----------

J. Michael Paulson/(3)/             8,527,298          18.5%
P.O. Box 9660
Rancho Santa Fe, CA 92067

James C. Gilstrap/(4)/              2,664,418          5.8%
5067 Shore Drive
Carlsbad, CA 92008

Domain Partners LP                  3,240,500          7.0%
One Palmer Square
Princeton, NJ 08542

Societe Generale Veritas            3,000,000          6.5%
4 New York Plaza
New York, NY 10004

----------------------
1)   Except as indicated in the footnotes to this table, the persons named in
     the table have sole voting and investment power with respect to all shares
     of common stock shown as beneficially owned by them, subject to community
     property laws, where applicable.

2)   Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).

3)   Includes 7,655,234 shares held in the Allen E Paulson Living Trust dated
     12-23-86 of which J. Michael Paulson is the co-executor. Also includes
     7,000 shares of common stock beneficially owned by the Allen E. Paulson
     Living Trust Date 12-23-86, by virtue of its right to acquire such shares
     from CardioDynamics under stock options now exercisable or exercisable
     within 60 days. Also includes 17,000 shares of common stock beneficially
     owned J. Michael Paulson, by virtue of its right to acquire such shares
     from CardioDynamics under stock options now exercisable or exercisable
     within 60 days. Includes 103,764 shares of common stock beneficially owned
     by CardioDynamics Holding, LLC (CDH), of which the trust is a member with a
     majority interest. Mr. Paulson disclaims beneficial ownership of these
     shares except to the extent of the estate's pecuniary interest in CDH.
     Excludes 2,000,000 shares of common stock owned by Mr. Paulson's bothers;
     Mr. Paulson disclaims beneficial ownership of such shares.

4)   Includes 103,764 shares of common stock beneficially owned by CDH, of which
     Mr. Gilstrap is a member with a minority interest.  Mr. Gilstrap disclaims
     beneficial ownership of these shares except to the extent of his individual
     pecuniary interest in CDH. Includes 300,000 shares held by the Scripps
     Medical Charitable Limited Partnership of which Mr. Gilstrap is a general
     partner with a minority ownership interest. Mr. Gilstrap declaims any
     pecuniary interest in 299,752 of the shares. Also includes 78,000 shares of
     common stock Mr. Gilstrap beneficially owns, by virtue of his right to
     acquire such shares from CardioDynamics under stock options now exercisable
     or exercisable within 60 days. Also includes 32,654 shares held by the
     trust.

                                       73

<PAGE>

Common Stock - Management

The following table sets forth the beneficial ownership of common stock of
CardioDynamics as of January 31, 2002 by each Director and each Named Officer,
and by all Directors and executive officers of our Company as a group. Each such
person has a business address, care of CardioDynamics.

                                         Shares  Beneficially  Owned
                                         ---------------------------
Name                                     Number/(1)/     Percent/(2)/
---------------------------------------  ----------      -----------

Russell H. Bergen/(3)/                       88,006                *

Connie R. Curran                             26,000                *

Jacques C. Douziech/(3)/                  1,403,086              3.0%

Cam L. Garner/(3)/                          127,000                *

James C. Gilstrap/(4)/                    2,664,418              5.8%

Stephen P. Loomis/(3)/                       74,731                *

Richard O. Martin, Ph.D./(3)/               114,000                *

Michael K. Perry/(3)/                       646,006              1.4%

Rhonda F. Rhyne/(3)/                        357,398                *

Richard E. Trayler/(3)/                     191,090                *

All Directors and executive
officers as a group - (12 persons)/(5)/   5,825,414             12.2%
----------------------------
*Less than 1%

(1)    Except as indicated in the footnotes to this table, the persons named
       in the table have sole voting and investment power with respect to all
       shares of common stock shown as beneficially owned by them, subject to
       community property laws, where applicable. Share ownership in each case
       includes shares issuable on exercise of certain outstanding options as
       described in the footnotes below.

(2)    Percentage of ownership is calculated pursuant to SEC Rule 13d-3d(1).

(3)    Includes shares of common stock that may be acquired pursuant to stock
       options exercisable currently or exercisable within 60 days.

(4)    Includes 103,764 shares of common stock beneficially owned by CDH, of
       which Mr. Gilstrap is a member with a minority interest. Mr. Gilstrap
       disclaims beneficial ownership of these shares except to the extent of
       his individual pecuniary interest in CDH. Includes 300,000 shares held by
       the Scripps Medical Charitable Limited Partnership of which Mr. Gilstrap
       is a general partner with a minority ownership interest. Mr. Gilstrap
       declaims any pecuniary interest in 299,752 of the shares. Also includes
       78,000 shares of common stock Mr. Gilstrap beneficially owns, by virtue
       of his right to acquire such shares from CardioDynamics under stock
       options now exercisable or exercisable within 60 days. Also includes
       32,654 shares held by the trust.

(5)    Shares beneficially owned include shares held by entities affiliated with
       certain directors and named Officers as described above in the footnotes.

                                       74



<PAGE>

Preferred Stock

All previously outstanding preferred stock was converted to common stock during
fiscal 1999.

ITEM 13.          CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

Before and after becoming an executive officer of CardioDynamics in June 1997,
Dennis G. Hepp has served as a consultant and vendor to our Company since July
1995 through the company he founded in 1989, Rivertek Medical Systems, Inc.,
located in Minneapolis, Minnesota. Rivertek, which is 100% owned by Mr. Hepp and
his wife, provides engineering consulting to medical device manufacturers, and
continues to be one of our largest vendors. In fiscal 2001, 2000 and 1999, we
paid $865,000, $898,000 and $391,000, respectively, to Rivertek.

                                       75

<PAGE>
                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)     The following documents are filed as part of this report.

<TABLE>
<CAPTION>
        1. Financial Statements                                                Page
<S>                                                                            <C>
             Independent Auditors' Report                                        39

             Balance Sheets as of November 30, 2001 and 2000                     40

             Statements of Operations for the years ended November 30,
             2001, 2000 and 1999                                                 41

             Statements of Shareholders' Equity for the years ended
             November 30, 2001, 2000 and 1999                                    42

             Statements of Cash Flows for the years ended November 30,
             2001, 2000 and 1999                                              43-44

             Notes to Financial Statements                                    45-62

        2. Financial Statement Schedules

             Independent Auditors' Report on Schedule and Consent             Exhibit 23.1

             Schedule II - Valuation and  Qualifying  Accounts for the years
             ended November 30, 2001, 2000 and 1999                              79

             All other schedules are omitted because they are not
             applicable or because the required information is shown in
             the financial statements or the notes thereto.

        3.   Exhibits

             The following exhibits are included with this report or
             incorporated herein by reference:
</TABLE>

   Exhibit   Title
   -------   -----

    2.1      Fourth Amended Plan of Reorganization. (Incorporated by reference
             from November 30, 1994 Form 10-KSB.)

    3.1      Bylaws, as amended through May 15, 1995.(Incorporated by reference
             from May 31, 1995 Form 10-QSB.)

    3.1.1    Amendment to Bylaws, dated June 2, 1999.(Incorporated by reference
             from August 31, 1999 Form 10-QSB.)

                                       76

<PAGE>
                    Exhibit Index - (Continued)

    Exhibit         Title
    -------         -----

      3.2           Restated Articles of Incorporation as filed July 24, 1998.
                    (Incorporated by reference from August 31, 1998 Form
                    10-QSB.)

      10.1          Service Agreement among Rivertek Medical Systems, Inc.,
                    Dennis G. Hepp and the Company, dated October 16, 1998.
                    (Incorporated by reference from November 30, 1998 Form
                    10-KSB.)

      10.2          Lease between AGBRI Nancy Ridge, LLC and the Company dated
                    June 20, 1997. (Incorporated by reference from August 31,
                    1997 Form 10-QSB.)

      10.3*         Employment Agreement, dated March 23, 1998, between the
                    Company and Michael K. Perry. (Incorporated by reference
                    from May 31, 1998 Form 10-QSB.)

      10.4          1995 Stock Option/Stock Issuance Plan, as amended June 10,
                    1997. (Incorporated by reference from August 31, 1997 Form
                    10-QSB.)

      10.4.1        Amendment to 1995 Stock Option/Stock Issuance Plan dated May
                    20, 1998. (Incorporated by reference from August 31, 1998
                    Form 10-QSB.)

      10.4.2        Amendment to 1995 Stock Option/Stock Issuance Plan dated
                    April 12, 2001. (Incorporated by reference from October 3,
                    2001 Form S-8.)

      10.5          Line of Credit Agreement with Imperial Bank, dated January
                    15, 1999. (Incorporated by reference from February 28, 1999
                    Form 10-QSB.)

      10.5.1        First Amendment and extension to Line of Credit Agreement
                    with Imperial Bank, dated February 14, 2000. (Incorporated
                    by reference from February 29, 2000 Form 10-QSB.)

      10.6          Warrants to purchase 2,000,000 shares of CardioDynamics
                    International Corporation common stock to GE Marquette
                    Medical Systems, Inc., Dated August 25, 1999. (Incorporated
                    by reference from August 31, 1999 Form 10-QSB.)

      10.7          ** License and Purchase Agreement between CardioDynamics
                    International Corporation and Profiles in Health, Inc.,
                    dated March 1, 2000. (Incorporated by reference from May 31,
                    2000 Form 10-QSB.)

      10.8          ** OEM Development and Purchase Agreement between
                    CardioDynamics International Corporation and GE Marquette
                    Medical Systems, Inc., dated July 7, 2000. (Incorporated by
                    reference from August 31, 2000 Form 10-QSB.)

      10.9**        Omnibus Amendment between CardioDynamics International
                    Corporation and GE Medical Systems Information Technologies,
                    Inc. (Incorporated by reference from November 30, 2000 Form
                    10-KSB)

      10.10         Letter Agreement dated July 18, 2001 between CardioDynamics
                    and the Allen E. Paulson Living Trust. (Incorporated by
                    reference from July 31, 2001 Form S-3)

                                       77

<PAGE>

                    Exhibit Index - (Continued)

      Exhibit       Title
      -------       -----

      10.11         Registration Rights Agreement dated July 19, 2001 between
                    CardioDynamics and Pine Ridge Financial, Inc. (Incorporated
                    by reference from July 31, 2001 Form S-3)

      10.12         Letter Agreement dated August 13, 2001 between
                    CardioDynamics and the Allen E. Paulson Living Trust.
                    (Incorporated by reference from September 14, 2001 Form S-3)

      10.13         Registration Rights Agreement dated August 13, 2001 between
                    CardioDynamics and Pine Ridge Financial, Inc. (Incorporated
                    by reference from July 31, 2001 Form S-3)

      10.14         Letter Agreement dated August 31, 2001 between
                    CardioDynamics and the Allen E. Paulson Living Trust.
                    (Incorporated by reference from October 3, 2001 Form S-3)

      10.15         Registration Rights Agreement dated August 31, 2001 between
                    CardioDynamics and Pine Ridge Financial, Inc. (Incorporated
                    by reference from October 3, 2001 Form S-3)

      10.16         Letter Agreement dated September 10, 2001 between
                    CardioDynamics and the Allen E. Paulson Living Trust.
                    (Incorporated by reference from September 14, 2001 Form S-3)

      23.1          Report on Schedule and Consent of Independent Auditors, KPMG
                    LLP

--------------------
*   This management contract or compensatory plan or arrangement is required to
    be filed as an exhibit.

**  Confidential treatment has been granted as to certain portions of this
    Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such
    portions have been omitted and filed separately with the Securities and
    Exchange Commission.

(b)  Reports on Form 8-K:

         None.

                                       78

<PAGE>

                    CardioDynamics International Corporation

                 Schedule II - Valuation and Qualifying Accounts

           For the Three Years Ended November 30, 2001, 2000, and 1999
                                 (In thousands)

<TABLE>
<CAPTION>
     Column A              Column B                       Column C                       Column D                   Column E
-------------------    -----------------    -------------------------------------    -----------------         -----------------
                                                         Additions
                                            -------------------------------------
   Description            Balance at           Charged to          Charged to            Deductions               Balance at
                         Beginning of          Costs and              Other                 From                    End of
                            Period             Expenses            Accounts-              Reserves                 Period
                                                                   Revenues
-------------------    -----------------    -----------------    ----------------    -----------------         -----------------
<S>                    <C>                 <C>                  <C>                 <C>                        <C>
 Allowance
for Doubtful
  Accounts
    1999               $      33           $      149           $     1,099         $       28        (1)      $       553
                                                                                           700        (2)

    2000                     553                1,928                   158                174        (1)            1,649
                                                                                           816        (2)

    2001                   1,649                  562                 1,743              1,103        (1)            1,425
                                                                                         1,426        (2)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

    (1) Represents the net write-off's of uncollectible accounts (less
        recoveries).

    (2) Represents the net amounts charged against revenues for sales returns.


See accompanying independent auditors' report.

                                       79

<PAGE>
                                   SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated: February 28, 2002         CardioDynamics  International  Corporation


                                            By:  /s/ Michael K. Perry
                                                 ---------------------------
                                                     Michael K. Perry
                                                     Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
Signature                                                      Title                         Date
-------------------------------------------------    -----------------------------     -----------------
<S>                                                  <C>                               <C>
/s/ Michael K. Perry                                 Chief Executive Officer           February 28, 2002
-------------------------------------------------
Michael K. Perry                                     (Principal Executive Officer)

/s/ Stephen P. Loomis                                Vice President Finance,           February 28, 2002
-------------------------------------------------
Stephen P. Loomis                                    Chief Financial Officer
                                                     (Principal Financial and
                                                     Accounting Officer)

                                                     Director                          February 28, 2002
/s/ Connie R. Curran
-------------------------------------------------
Connie R. Curran, Ed.D. RN

/s/ Jacques C.  Douziech                             Director                          February 28, 2002
-------------------------------------------------
Jacques C. Douziech

/s/ Cam L. Garner                                    Director                          February 28, 2002
-------------------------------------------------
Cam L. Garner

/s/ James C. Gilstrap                                Director                          February 28, 2002
-------------------------------------------------
James C. Gilstrap

/s/ Richard O. Martin, Ph.D.                         Director                          February 28, 2002
-------------------------------------------------
Richard O. Martin, Ph.D.
</TABLE>

                                       80