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


                                  FORM 10-KSB

(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, 1998

                                      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)

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

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

       Registrant's telephone number, including area code: (619) 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-B 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-KSB or any amendment to
this Form 10-KSB. [X]

The issuer's revenues for the year ending November 30, 1998, were $2,098,696.

The aggregate market value of the Common Stock held by nonaffiliates of the
registrant at February 20, 1999, was approximately $ 21,855,716 based on the
closing price for the Common Stock in the Nasdaq SmallCap Market.  At February
20, 1999,  32,741,126  shares of registrant's Common Stock were outstanding.

Transitional Small Business Disclosure Format (check one): Yes      No  X 
                                                               ---     --- 
<PAGE>
 
This Form 10-KSB 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-KSB
including the section entitled "Risk Factors" on pages 16 to 25 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

At CardioDynamics International Corporation, we develop, manufacture and market
heart monitoring devices which provide physicians 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 non-invasive.  Our
primary products, the BioZ(TM) System, the BioZ(TM) Portable, and the
BioZ.com(TM) use a technology called thoracic electrical bioimpedance to obtain
data which is typically available only through a time-consuming, costly, and
potentially dangerous invasive procedure known as right heart catheterization,
or pulmonary artery catheterization.

Many patients who might otherwise benefit from cardiac function monitoring are
often not given such treatment because the risks and costs associated with
pulmonary artery catheterization often outweigh the potential benefits.  The
BioZ(TM) Systems allow such patients to receive treatment in a safe, efficient,
and cost-effective manner. Since the BioZ(TM) Systems provide cardiac function
monitoring noninvasively, these systems have the potential to expand the number
of clinical applications well beyond cardiac, intensive care, and surgery. These
include applications for emergency, hypertensive, congestive heart failure, high
risk obstetric, immune suppressed, dialysis, pacemaker, and sports medicine
patients.

In November 1996, we received 510(k) clearance from the U.S. Food and Drug
Administration ("FDA") to market the BioZ(TM) System, a completely re-
engineered, digital signal processing-based version of an earlier, previously-
approved analog thoracic electrical bioimpedance machine developed by Bomed in
the 1980's. Additionally, in September 1997, the FDA granted 510(k) clearance to
us to market the BioZ(TM) Portable System and implement our proprietary Digital
Impedance Signal Quantifier ("DISQ(TM)") technology into our next generation of
monitors. DISQ(TM) provides improved measurement of impedance waveforms through
enhanced digital signal processing and automatic calibration.
<PAGE>
 
In March 1998, we received 510(k) marketing clearance for our next generation
monitoring system, the BioZ.com(TM) incorporating the Z MARC(TM) (Modulating
Aortic Compliance) algorithm which allows the system to sense and modulate
values on patients with over or under compliant aortas. The BioZ.com(TM) is even
more compact than the BioZ(TM) Portable and features a transport battery,
integrated blood pressure module and direct data interface to most hospital
central monitoring systems. In November 1998, our systems received from the
Health Care Financing Administration (HCFA) formal approval for full Medicare
coverage on a nationwide basis. These FDA clearances, together with Medicare
reimbursement, provide us with the opportunity to significantly increase our
sales.

We were incorporated as a California corporation in June 1980 as Bomed Medical
Manufacturing, Ltd. ("Bomed") and changed our name to CardioDynamics
International Corporation in October 1993.  Our principal executive offices are
located at 6175 Nancy Ridge Drive, Suite 300, San Diego, California 92121, and
our telephone numbers are (888) 522-2342 and (619) 535-0202.  Our Common Stock
trades on The Nasdaq Stock Market(SM), under the symbol CDIC.

Industry Overview

Hemodynamic measurements provide information about the cardiovascular system's
ability to deliver oxygen-rich blood throughout the body.  There are several
parameters that are used to assess the effectiveness of the cardiovascular
system.  For example, heart rate and blood pressure provide important
information about of the effectiveness of the cardiovascular system.  In healthy
or slightly ill patients, heart rate and blood pressure often provide physicians
with sufficient information to adequately evaluate their patients.  However, in
critically ill patients, or patients with complex diseases, more precise
hemodynamic parameters are required for assessment and patient management.
Examples of these more physiologically precise parameters include:

          .      The speed and strength of the heart's contraction;
          .      The amount of blood pumped per beat;
          .      The amount of blood pumped per minute;
          .      The resistance to the flow of blood throughout the vascular
                 system;
          .      The amount of fluid in the chest.
 
The BioZ(TM) Systems continuously measure, calculate, and display each of these
physiological parameters.

Invasive Methodology.  Although hemodynamic parameters are critical in assessing
cardiac function, historically they have been difficult to obtain.  The primary
method currently used to measure hemodynamic parameters is pulmonary artery
catheterization.  Introduced in the 1970's, pulmonary artery catheterization is
invasive in that it requires direct access to the heart.  The procedure involves
an incision into a patient's neck or groin region and insertion of a catheter
through the vascular system and through the heart directly into the pulmonary
artery.

This procedure can cause serious complications including pneumothorax, pulmonary
artery rupture, arrhythmia, and severe infections. Complication rates are
approximately 10% to 24% (Moore et al., Surgical Clinics of North America,
August 1991).  Additionally, a study which was reported in the September 1996
issue of the Journal of the American Medical Association ("JAMA") by Connors et
al., determined that the use of pulmonary artery catheterization 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 U.S. medical centers, reported that patients who underwent
pulmonary artery catheterization had a 21% higher risk of death within 30 days
of discharge 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.
<PAGE>
 
Another significant consideration in the use of pulmonary artery catheterization
is cost.  The pulmonary artery catheterization procedure requires a hospital to
allocate valuable resources in terms of an intensive care unit bed, cardiac
catheterization laboratory, or operating room, highly skilled medical personnel
and expensive equipment to obtain non-continuous hemodynamic data.  According to
the above referenced JAMA article, the mean cost of the hospital stay for
critically ill patients having a pulmonary artery catheterization was $49,300,
or $13,600 (38%) greater than the $35,700 cost for similar critically ill
patients who did not undergo pulmonary artery catheterization.  Overall, it is
estimated by the authors of the JAMA article that there are one million
pulmonary artery catheterizations performed annually in the U.S.  The associated
annual cost to the U.S. healthcare system is estimated at $2 billion for the
cost of catheters and their insertion and an additional $12 billion per year for
the cost of complications arising from the procedure.

Many patients who might otherwise benefit from hemodynamic monitoring are
excluded presently because the risks and costs associated with pulmonary artery
catheterization often outweigh the potential benefits.

Noninvasive Methodology.  Our core technology, thoracic electrical bioimpedance,
is a noninvasive technology, which determines the mechanical activity of the
heart (blood flow), rather than its electrical activity (ECG).  Thoracic
electrical bioimpedance has significant advantages over pulmonary artery
catheterization, including:

    . Elimination of pulmonary artery catheterization-caused complications and
      death;
    . Lower costs;
    . Reduction in set-up and procedure time;
    . Immediate availability of hemodynamic parameters;
    . Continuous, real time data;
    . Expanded clinical applications.

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

In order to measure this conductivity change, the BioZ(TM) Systems use four dual
electrodes (two on the neck and two on the chest) to deliver a 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.  With current set at a constant
magnitude, variations in blood volume and velocity in the descending thoracic
aorta cause a proportional voltage change.  The measured voltage change is
processed by the BioZ(TM) Systems, using sophisticated proprietary Digital
Signal Processing ("DSP") technology. An impedance waveform is captured and
electronically processed to produce a rate of impedance change. The changes in
impedance are then applied to the Z MARC(TM) algorithm to calculate 12
hemodynamic parameters including:

    . Stroke volume;
    . Cardiac output;
    . Systemic vascular resistance;
    . Thoracic fluid content;
    . Velocity index;
    . Acceleration index;
    . Pre-ejection period;
    . Left ventricular ejection time;
    . Heart rate.
<PAGE>
 
In the simplest of terms, thoracic electrical bioimpedance measures the change
in conductivity (or the inverse, which is impedance) over a change in time,
while pulmonary artery catheterization measures the change in blood temperature
over a change in time.  Because our products noninvasively measure cardiac
function parameters, broader clinical applications exist for our products,
including use on critically ill, surgical, emergency, hypertensive, congestive
heart failure, high risk obstetric, dialysis, sports medicine, and pacemaker
patients.

Some hemodynamic measurements using thoracic electrical bioimpedance are subject
to inaccuracies when the theoretical calculations do not fit a particular
patient's clinical circumstances.  The following conditions may limit the
accuracy of thoracic electrical bioimpedance data:
 
          .  Severe septic shock;*
          .  Significant pulmonary hypertension;
          .  Severe aortic valve regurgitation;
          .  Severe hypertension;
          .  Ventricular rhythms;
          .  Tachycardia rates greater than 180 beats per minute;
          .  Patients shorter than 47 inches;*
          .  Patients who weigh less than 66 pounds or more than 342
             pounds,*
          .  Extreme patient movement.*
             _______________
             * We are currently working on algorithms that, if we succeed in
               developing them, may allow the technology to function on patients
               with these conditions.

Managed Care Environment.  In the 1970's, the healthcare environment was not as
focused on cost containment as it is today.  Additionally, market acceptance of
noninvasive cardiac function methods was limited because of inaccuracies due to
the technological limitations of the then-available products.  In the early
1980s, national attention focused on escalating healthcare costs.  Congress
introduced a new Medicare payment system called Diagnosis-Related Groups
("DRG's"), which limited reimbursement amounts for patient care.  Additionally,
third-party payers such as insurance companies, employers and Health Maintenance
Organizations ("HMO's") identified numerous factors driving healthcare costs,
one of which was the growing number of invasive procedures.  To induce providers
to seek more cost-effective treatments, third-party payers began to institute
their own capitated payment systems, thereby shifting the financial risk of
offering patient care from the payer to the provider.  In this environment,
payment incentives are shifting away from the more expensive invasive
technologies.  Increasingly, providers are seeking technologies and products
that produce effective outcomes at lower cost.

In November 1998 our systems received from the Health Care Financing
Administration (HCFA) recommended approval for full Medicare coverage on a
nationwide basis.  This approval provides for national coverage to over 75
million Americans.
<PAGE>
 
Company History

Noninvasive alternatives for cardiac function monitoring have been studied for a
number of years.  In fact, thoracic electrical bioimpedance has been researched
since the 1940's.  In the 1960's and 1970's, thoracic electrical bioimpedance
research was funded by NASA, whose goal was to monitor non-invasively
astronauts' cardiac functions under conditions of space flight.  While this was
not practical with the technological limitations of that time, thoracic
electrical bioimpedance found its way into medical research.

In 1980, Bomed Medical Manufacturing (Bomed) was founded to capitalize on the
advent of managed healthcare.  Throughout the 1980's, Bomed obtained patents on
thoracic electrical bioimpedance and ultimately produced a noninvasive analog-
based cardiac output monitor.  The product had only modest commercial success
due to reimbursement disincentives, microprocessor limitations and inaccurate
physiological assumptions.  Bomed entered into Chapter 11 bankruptcy in March
1992, and emerged in October 1993, under the name of CardioDynamics
International Corporation.

Recognizing the potential value of thoracic electrical bioimpedance and the
advancement of microprocessors, a group of investors, which included Allen E.
Paulson, James C. Gilstrap, and Nicholas V. Diaco, M.D., purchased control of
CardioDynamics International Corporation in February 1995. A new management team
was recruited to revitalize the business and commercialize thoracic electrical
bioimpedance.  Since that time, we have made significant advances in many areas
including:

    . Continued development of the core technologies related to our products;
    . Establishment of a prominent medical advisory board;
    . Completion of  important clinical trials;
    . Arrangement of additional capital;
    . Implementation of a sales and marketing plan;
    . Implementation of quality assurance and regulatory programs;
    . Three FDA product approvals;
    . HCFA reimbursement for nationwide Medicare coverage.

We believe our technological advancements, product improvements, high quality
clinical trials, strong medical advisory board, and the product's low cost/low
risk nature will enhance physician and insurance company acceptance of the
BioZ(TM) Systems.

Products

BioZ(TM) System.  The BioZ(TM) System is a noninvasive cardiac function
monitoring device, with a suggested retail price of $22,900. It consists of a
Pentium-based CPU, 15" high-resolution medical grade color monitor, and
keyboard. Included in the CPU is our proprietary DSP circuit board and software.
The BioZ(TM) System is available in ergonomically designed shelf cart or pole
cart configurations. With the application of four dual electrodes to the
patient's neck and chest, the physician is able to immediately assess twelve
hemodynamic parameters.

Portable BioZ(TM) System.  The Portable BioZ(TM) System is a noninvasive cardiac
function monitoring device, with a suggested retail price of $24,540.  This more
compact version has a 10.4" active matrix color display and built-in keyboard.
Our proprietary DSP circuit board and patented software are also an integral
part of this system.
<PAGE>
 
BioZ.com(TM) System. The BioZ.com(TM) is our newest product. This noninvasive
cardiac function monitoring device, with a suggested retail ranging from $25,400
to $30,900 depending on accessories, is even more compact than the BioZ(TM)
Portable and features a transport battery, integrated blood pressure module and
direct data interface to most hospital central monitoring systems. The
BioZ.com(TM) utilizes our proprietary DISQ(TM) technology and Z MARC(TM)
algorithm, which provide improved measurement of impedance waveforms and
automatic electronic calibration.

BioZ(TM) Transducer/Sensor Electrodes. We also market disposable sensors
designed specifically for use with the BioZ(TM) Systems. With each monitoring
event, four dual sensors are utilized. These sensors are placed on the patient's
neck and chest and are generally replaced after each use or every 24 - 36 hours.
Sales of this disposable component of the product mix should continue to
increase as more of our machines are sold. The suggested retail price of the
sensors is $10.00 per set (four dual sensors). An optional transducer sensor set
with pre-attached lead wires is priced at $27.00 per set. The transducer sensors
are preferred in operating rooms or for patients with infectious diseases.

Cardiac Function Parameters Provided by BioZ(TM) Systems and Corresponding PAC
Parameters

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
BioZ(TM) System                             PAC                  Comments
Parameters                                  Parameters
-----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                <C> 
SV (stroke volume, ml) and SVI               SV, SVI             BioZ measures volumes of blood flow; PAC measures
 (stroke volume indexed, ml/m/2/)                                pressures of blood flow.  SVI = SV divided by BSA
                                                                 (body surface area)
-----------------------------------------------------------------------------------------------------------------------
CO (cardiac output, l/min) and CI             CO, CI             Calculated parameters in both techniques:
 (cardiac output indexed,                                        CO = SV x HR, CI = CO divided by BSA
 l/min/m/2/)
-----------------------------------------------------------------------------------------------------------------------
SVR (systemic vascular resistance,           SVR                 Calculated from Mean Arterial Pressure (mmHg)
 mmHg x min x liters/-1/)
-----------------------------------------------------------------------------------------------------------------------
EDV (end diastolic volume, ml)               PAOP or "wedge      Wedge provides a reflection of left ventricular
                                             pressure"           pressure via measurement of the "back pressure" of
                                                                 blood flow in the pulmonary artery; inaccurate in
                                                                 patients with mitral valve disease. The BioZ EDV
                                                                 (which is an estimated value) provides a left
                                                                 ventricular end diastolic volume instead of pressure
-----------------------------------------------------------------------------------------------------------------------
VI (velocity index, liters/seconds)          No similar          Index of velocity of blood in the aorta; provides
                                             measurement         insight into LV contractility
-----------------------------------------------------------------------------------------------------------------------
ACI (acceleration index, liters              No similar          Index of acceleration of blood in the aorta; provides
 per seconds/2/)                             measurement         insight into LV contractility
-----------------------------------------------------------------------------------------------------------------------
LCW (left cardiac work,                      No similar          Useful clinical data regarding LV contractility and
kg x m x m/-2/)                              measurement         volemic status
-----------------------------------------------------------------------------------------------------------------------
PEP (pre-ejection period, msec)              No similar          Time from onset of ventricular depolarization to
                                             measurement         opening of aortic valve.  Used in calculation of STR
-----------------------------------------------------------------------------------------------------------------------
LVET (left ventricular ejection              No similar          Time from opening to closing of the aortic valve.
 time, msec)                                 measurement         Used in calculation of STR
-----------------------------------------------------------------------------------------------------------------------
STR (systolic time ratio,                    No similar          An index of LV performance.  An increase in STR
PEP/LVET)                                    measurement         indicates LV dysfunction; whereas, a decrease in STR
                                                                 indicates a stronger, more athletic heart
-----------------------------------------------------------------------------------------------------------------------
TFC (thoracic fluid content,                 No similar          Useful clinical data regarding patients' thoracic
ohms/-1/)                                    measurement         fluid status (intravascular, interstitial,
                                                                 intra-alveolar) and is important in distinguishing
                                                                 between cardiac and pulmonary problems.  Also, TFC
                                                                 trends with shock.
-----------------------------------------------------------------------------------------------------------------------
No similar measurement                       PVR (pulmonary      Determines pressure within the pulmonary vascular
                                             Vascular            circulation
                                             Resistance) 
-----------------------------------------------------------------------------------------------------------------------
HR (heart rate, beats/min)                   No similar          BioZ measures HR via modified ECG leads
                                             measurement 
------------------------------------------------------------------------------------------------------------------------------- 
</TABLE>
<PAGE>
 
The Features and Benefits of the BioZ(TM) Systems, as Compared to PAC

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Feature                         Benefit
--------------------------------------------------------------------------------------------------------------------
<S>                             <C>
Noninvasive                     Painless
                                No complications or death from procedure
                                Reduced costs and liabilities
                                May be used on wider range of patients
--------------------------------------------------------------------------------------------------------------------
Portable                        May be easily transported and used in many settings, including multiple hospital
                                departments, physician offices and clinics
--------------------------------------------------------------------------------------------------------------------
Quick Setup                     Simple procedure performed by nurses or technicians
                                Rapid assessment with potential for improved patient outcomes
                                Immediate clinical decision capabilities
--------------------------------------------------------------------------------------------------------------------
Continuous Data                 Reports continuous changes
                                Potential for improved patient outcomes
--------------------------------------------------------------------------------------------------------------------
Disposable Sensors              Reduced cost per evaluation
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Warranty and Service

Our systems are sold with a limited thirteen-month parts and labor warranty
commencing at the date of shipment.  When warranty repairs are necessary, we
generally perform them at our headquarters or, in some cases, by our
distributors in authorized service centers.  We also provide field clinical
application specialists as necessary, as well as 24-hour on-call technical
support.  In addition to the standard warranty we offer extended service
agreements, called Z CARE(TM) for hardware and software maintenance beyond the
warranty period.  Otherwise, we may also service equipment on a time and
materials basis.

Marketing

Until recently, comprehensive cardiac function information has been available
only in acute care settings, such as an intensive care unit (ICU) or operating
room. The BioZ(TM) Systems make obtaining and assessing this type of information
simple, rapid, cost-effective, safe, continuous and painless. For these reasons,
we expect utilization of noninvasive cardiac function information to spread from
the ICU and operating room to other areas of the hospital and expand beyond the
hospital setting.

Departments serving high-risk surgical, critical care, obstetrics, acute
dialysis, and emergency patients are the primary targets in the hospital market.
The primary targets in the outpatient market include: cardiologists/general
internists caring for congestive heart failure (CHF), hypertension,
surgicenters, and obstetric/gynecology patients.  Among the patients in the
United States who can benefit from our technology are 60 million hypertensive
patients, five million CHF patients, one million pacemaker patients, 50 million
emergency patients and many patients requiring fluid management.  CHF-related
expenditures exceeded $40 billion in 1998, more than any other illness.  Our
products can facilitate the appropriate pharmacological treatment of these
highly unstable patients.

In addition to significant savings in these costly disease states, with recent
HCFA-mandated Medicare reimbursement, our BioZ(TM) Systems provide a tremendous
financial incentive to the practicing outpatient physician.  We have also
identified a number of secondary target markets where thoracic electrical
bioimpedance has potential applicability including: pharmaceutical companies,
pacemaker companies, cardiac rehabilitation, burn units, home health care,
exercise stress testing, and medical schools.
<PAGE>
 
Our marketing strategy has been designed to:

    . Increase physicians' and hospital personnel's knowledge of thoracic
      electrical bioimpedance;

    . Remind physicians and hospital staff of the limitations and relative
      contraindications of pulmonary artery catheterization;

    . Remind 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;

    . Present the BioZ(TM) Systems as the technology of choice;

    . Build sales to establish ourselves as the market leader.

To accomplish this, we have invested considerable resources on market research,
development of product literature, and attendance at trade shows that target our
primary markets.

We will continue to participate in key medical trade shows including the North
American Society of Pacing and Electrophysiologists, the American Society of
Anesthesiology, the American Heart Association, the Society for Critical Care
Medicine, the American College of Cardiology, the American Society of
Cardiovascular Professionals, the American College of Emergency physicians, the
American Society of Critical Care Medicine, American College of Surgeons, and
others.  These trade shows result not only in valuable exposure of our Company
and its products, but also are a good source of leads, some of which have
resulted in product sales.

Advertising in key medical publications has been used to a limited degree.  The
target audience and publications have been carefully selected to maximize
exposure at a reasonable cost.  Targeted direct mailing campaigns were used in
fiscal 1997.  In 1998, our efforts were refined and expanded to support the
direct sales efforts.  Targeted audiences included anesthesiologists, surgeons
(orthopedic, vascular, and general), critical care physicians, biomedical
technicians, hospital Chief Financial Officers, cardiologists, internists, and
home health care agencies.

In late 1998 we received authorization from TUV Rhineland of North America to
place the CE Mark on our BioZ.com(TM). 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(TM) throughout Europe. In anticipation of receiving
the CE Mark approval we have already established a network of European
Distributors. As of the end of fiscal 1998 we have formalized distribution
agreements covering eleven European countries.

We actively support research utilizing the BioZ(TM) Systems.  In addition to
providing further clinical validation for thoracic electrical bioimpedance, we
plan to have each study published in a peer-reviewed journal and/or presented at
major medical conferences.  Clinical publications and presentations at major
medical conferences provide us with the exposure necessary to establish the
credibility of thoracic electrical bioimpedance, and the BioZ(TM) Systems in
particular.
<PAGE>
 
Sales and Distribution

The United States medical marketplace consists of two distinct segments: the
hospital (acute care) market, and the outpatient (alternative care) market.
During fiscal 1997, we established distribution agreements with seventeen
regional specialty distributors as our representatives in the hospital market.
These distributors collectively covered 44 states, and employed over 100 sales
representatives.  By the end of fiscal 1997, it was apparent that we needed to
broaden our sales channel.  We opted to add a direct sales force targeted at
both the hospital and outpatient markets in the majority of the United States,
and reduced the number of domestic distributors.

We determined that a direct sales force could more effectively demonstrate the
cost and safety advantages of the BioZ(TM) over traditional invasive techniques
by directly marketing to, and educating, health care professionals and insurance
companies, including HMOs, as to the positive cost advantages and clinical
outcome profiles of the BioZ(TM) Systems. This marketing strategy has proven to
be more effective and is one of the major reasons we show such a substantial
increase in our annual sales for fiscal 1998.

Despite the significant benefits and numerous applications of the BioZ(TM)
Systems, it is a "concept sale" that requires physicians to change conventional
practices (some of which are reimbursed at a higher rate than thoracic
electrical bioimpedance). In addition, the hospital buying cycle can be long and
complex, particularly for a new product that is unbudgeted. Consequently, the
amount of time and effort required to penetrate these markets is often greater
than the time and effort many of the distributor sales representatives were
willing to invest.

In 1998, we hired 12 domestic direct sales representatives and our three
existing territory sales managers assumed responsibilities as direct sales
representatives.  These sales representatives have been placed in major
metropolitan areas throughout the United States.  We have an aggressive hiring
plan that calls for as many as 24 direct sales representatives to be in place by
the end of 1999.

As we began to expand our direct sales force in targeted metropolitan areas, we
recognized that we might not be able to maintain satisfactory relationships with
our regional specialty distributors.  Under the terms of the distribution
agreements, distributors have the right, under certain circumstances (including
our placing a direct sales representative in the distributor's territory), to
terminate the distribution agreement and return demonstration and stocking
inventory purchased from us.  Because we anticipated that we might be required
to take back BioZ(TM) Systems and unused supplies and refund amounts paid by
distributors (net of contracted depreciation and restocking charges), we
established a reserve for distributor returns.  This reserve represented 100% of
sales to domestic distributors that had not, as of November 30, 1997, been
resold to end-users.  At November 30, 1998, all but three of these distributor
agreements have been terminated.

In November of 1998, we received CE Mark approval and have been actively
pursuing European and Asian markets. In anticipation of this approval, we
established a network of European and Asian distributors to market the
BioZ.com(TM). As of November 30, 1998 agreements have been formalized with four
distinguished medical distributors representing 11 European countries. In
addition to our European distribution partners, we have established
relationships with seven distributors in Asia Pacific, the Middle East and Latin
America. We plan to increase the number of international distributors to as many
as 20 during 1999.

Research and Development and Clinical Studies

Our research and development ("R&D") team has extensive experience in the areas
of impedance tomography, thoracic electrical bioimpedance, biological signal
processing, hardware/software development, and regulatory compliance.  The team
is responsible for on-going product engineering, new product development, and
basic research into thoracic electrical bioimpedance and additional noninvasive
monitoring applications.
<PAGE>
 
To supplement our engineering staff, we utilize Rivertek Medical Systems, Inc.
("Rivertek"), located in Minneapolis, Minnesota.  Rivertek serves as an
engineering consulting firm for medical device manufacturers, including Guidant
Corporation and Medtronic, Inc., as well as emerging medical technology
companies.  Rivertek was founded in 1988 by Dennis Hepp, our Chief Technology
Officer, and employs over 30 medical hardware, software, and biomedical
engineers.

The R&D team participates in monitoring and analysis of Company-sponsored
clinical trials, for which we employ Clinical Application Specialists ("CAS").
Each of these individuals has strong clinical backgrounds and is responsible for
monitoring clinical studies and assisting in research and customer training.

Studies Utilizing Previous Generation CDIc (Bomed) Technology.  A considerable
amount of research has been published on thoracic electrical bioimpedance.  In
fact, more than 80 research papers have been published using our previous
system, the Bomed NCCOM System ("Bomed System").  In general, these studies
reported favorable results when comparing cardiac output measurements using the
Bomed System with that of other techniques, such as pulmonary artery
catheterization.

The Bomed System worked fairly well, in a select group of patients.  However,
there were significant limitations of the system.  These became evident when
monitoring patients with increasing heart rates, high heart rates, abnormal
heartbeats, high respiration rates, pacemakers, and hospitalized ventilated
patients.  These limitations related to both hardware and software inadequacies
of the Bomed System. As a result of intense focus and concerted effort we have
successfully addressed these limitations in the BioZ(TM) Systems by improving
the electronics and processing as well as the algorithms.

Studies Utilizing the BioZ(TM) Systems.  We are committed to supporting well-
designed clinical research studies utilizing TEB technology.  Studies which are
of most importance to us are those which demonstrate:

        .  Validity;
        .  Reproducibility;
        .  Clinical utility;
        .  Cost-effectiveness.

We are currently involved in several studies targeted at further validation in
each of these areas.

Medical Advisory Board

We have established a distinguished Medical Advisory Board consisting of 15
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, Scripps Clinic, Crawford Long Hospital, Mayo
Clinic, and the University of California, San Diego.  Members of our Medical
Advisory Board have expertise in cardiology, electrophysiology, anesthesiology,
hypertension, pulmonary and critical care, internal medicine, heart failure, and
emergency medicine.  The Medical Advisory Board provides guidance to us on
structuring clinical trials as well as identifying 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 certain cases receive consulting
fees for time spent working on our behalf.  During the fiscal year ended
November 30, 1997, the members of the Medical Advisory Board each received an
average of $2,000 in consulting fees.  For the fiscal year ended November 30,
1998 there were no consulting fees paid.
<PAGE>
 
Manufacturing

We are licensed as a healthcare device manufacturer by the Food and Drug Branch
of the California Department of Health Services (equivalent to a State FDA) and
operate under the U. S. FDA Good Manufacturing Practice ("GMP") regulation 21
CFR 820.

ISO 9000 Series.  In concert with management's commitment to quality, 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.

CE Mark.  In late 1998, we received authorization from TUV Rhineland of North
America to place the CE Mark on the BioZ.com(TM).  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(TM) throughout Europe. In
anticipation of receiving the CE Mark approval, we have already begun to
establish a network of European and Asian distributors. As of the end of fiscal
1998, we have formalized agreements with four medical distributors representing
eleven European countries.

Competition

Indirect Competition

Pulmonary Artery Catheterization - Also known as thermodilution, right heart
catheterization, and Swan-Ganz(TM) catheterization.  The PAC procedure was
introduced in the early 1970's and despite its limitations, is the most commonly
used invasive technology for monitoring a patient's hemodynamic status.  It is
estimated that pulmonary artery catheterization procedures are used more than
one million times per year in the United States and more than two million times
per year worldwide.  The estimated cost to the U.S. healthcare system is
estimated at $2 billion for the cost of the catheters and their insertion and
$12 billion per year for the cost of complications arising from the procedure.
Baxter Healthcare Corporation, Abbott Laboratories and B. Braun Medical, Inc.
produce the majority of right heart catheters used in the U.S. The PAC Procedure
has significant limitations.  Some of the limitations of PAC include:

Limitations of the PAC Procedure

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------- 
<S>                                  <C>                                                <C>
Limitation                              Explanation                                         Reference (If Applicable)
---------------------------------------------------------------------------------------------------------------------  
Complications                           Rates of 10% to 24%, including infection,           Per Moore, op. cit.
                                        cardiac arrhythmia, air embolus, pulmonary
                                        infarction, pulmonary artery rupture and
                                        Pneumothorax
---------------------------------------------------------------------------------------------------------------------             
Death                                   Increased 30 day death rates in patients          Per Connors, op. cit.
                                        undergoing PAC as compared to those patients
                                        not receiving PAC
---------------------------------------------------------------------------------------------------------------------   
Costs                                   Average increased hospitalization costs           Per Connors, op. cit.
                                        Of $13,600 per patient
---------------------------------------------------------------------------------------------------------------------   
Insertion requirements                  Hospitalization in an intensive care setting,
                                        operating room or cardiac catheterization
                                        laboratory; sterile environment; physician,
                                        nurses and trained personnel required for
                                        insertion; X-ray confirmation of placement
---------------------------------------------------------------------------------------------------------------------   
Availability of data                    Intermittent; requires multiple personnel
---------------------------------------------------------------------------------------------------------------------   
Variability of data                     +/-20% error/inconsistency                         Per Moore, op. cit.
---------------------------------------------------------------------------------------------------------------------   
Conditions that may limit               Obesity; anatomical, vascular and cardiac
placement or accuracy                   structure anomalies; tricuspid, pulmonary and
                                        mitral valve abnormalities
---------------------------------------------------------------------------------------------------------------------   
</TABLE>
<PAGE>
 
Echocardiography (Doppler and Trans-esophageal).  Echocardiography ("Echo") is a
medical diagnostic tool utilizing ultrasound frequency waves to detect
anatomical abnormalities of the heart, valvular structures, and coronary
arteries.  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, it
measures the aortic diameter and the moving red blood cells to determine the
velocity and direction of blood flow to calculate stroke volume, and hence
calculate cardiac output.

Limitations in measuring cardiac output via doppler echo include:

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

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

        .  Time consuming procedure that typically requires 30-45 minutes;

        .  In some patients, reliable, accurate images simply cannot be obtained
           by doppler echo for unknown reasons.

Trans-esophageal Echo ("TEE") has been developed in recent years to obtain
closer images of the heart.  It is useful in patients in whom examination from
the usual position is technically impossible and in patients undergoing cardiac
surgery.  TEE 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, several disadvantages accompany this technique
because of its invasive nature including increased patient discomfort and the
requirement for patient sedation to promote procedure tolerance. In addition,
patient airway complications may result, necessitating the need for available
emergency equipment, such as oxygen, intubation equipment, and ECG monitoring.
Consequently, the procedure customarily is performed with several attendants,
usually an Echo technician, a nurse and a physician.

Direct Competition

We are aware of three other manufacturers of thoracic electrical bioimpedance
cardiac function monitors.  Since all three companies are privately held, sales
and financial figures for these potential competitors are not available.  We
believe that our BioZ(TM) products provide the most advanced TEB monitoring,
commercially attractive designs, at prices that are competitive.  Thus far,
sales and marketing efforts by our competitors has not been visible to us.  No
industry ads, trade show participation, or significant direct sales efforts were
known to us in 1998.

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.  As of November 30, 1998, we have six U.S. patents
and multiple international patents and patent applications based on our U.S.
patents.

All of our existing patents were issued prior to the re-engineering of the
products to a DSP-based system.  As such, several of the patents are not
integral to the design of the BioZ(TM). We also possess proprietary software,
which we have strategically elected not to disclose through patents. In
addition, we may file new patent applications covering certain modifications to
our products and algorithms during 1999.
<PAGE>
 
Government Regulation

Our products and activities are subject to extensive regulation by the FDA and
other governmental and foreign regulatory agencies.  Delays in receipt of, or
failure to obtain, regulatory clearances and approvals, or any failure to comply
with regulatory requirements, could have a very negative effect on our business.

Under the federal Food, Drug, and Cosmetic Act (the "FDC Act"), the FDA
regulates the clinical testing, manufacture, labeling, packaging, marketing,
distribution and record keeping for medical devices, in order to ensure that
medical devices distributed in the United States are safe and effective for
their intended use.

Before a new device can be introduced into the market, the manufacturer
generally must obtain either FDA 510(k) clearance or approval of a premarket
approval application.  Following submission of a 510(k) or PMA application, the
manufacturer may not market the new device until an order is issued by the FDA
granting clearance or approval, which can entail an expensive, lengthy and
uncertain process. We have received a marketing clearance for the BioZ(TM)
System, the BioZ(TM) Portable and the BioZ.com(TM). However, such clearances are
subject to continued FDA audits and can be rescinded. Further, we plan to submit
additional new products for FDA approval in the future. It is possible that our
future products might not gain FDA approval in a timely fashion, or at all. It
is also possible that our current products may someday lose their FDA approval.

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 (GMP) requirements, Medical Device Reporting requirements
and other applicable regulations.  Although we work hard at attempting to comply
with all governmental regulations, it is possible that an inspector could
someday find a violation.  Such a violation could result in government action
ranging from warning letters to fines to criminal prosecution.  Should we ever
incur a significant penalty it is possible it would be detrimental to us.  The
FDC 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;

        .  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 GMP requirements.  Labeling and promotional
activities are regulated by the FDA and, in certain circumstances, by the
Federal Trade Commission.  For any medical device cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the 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, we may be
prohibited from marketing the modified product until the 510(k) notice is
cleared by the FDA.

The FDA also regulates computer software that performs the function of a
regulated device or that is intimately associated with a given device, such as
control software for diagnostic devices like our products.  The FDA is
reevaluating its regulation of such software, and if the FDA undertakes
increased or more rigorous regulation of such software, the BioZ(TM) product
line and related products may become subject to further regulatory processes and
clearance requirements.
<PAGE>
 
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, with possible retroactive effect, may adversely affect us.

Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary from country to country.  We currently rely on
our international distributors and sub-distributors for the receipt of pre-
market approvals and compliance with clinical trial requirements in those
countries that require them, and we expect to continue to rely on them in those
countries where we continue to use distributors.  If 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 cause the applicable distributor 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 could be
costly.

In order to sell our products within the European Economic Area, we have to
comply with the European Commission's Medical Device Directive and affix a "CE"
marking on our products to attest such compliance.  In November 1998, we
received authorization from TUV Rhineland of North America to place the CE Mark
on our BioZ.com(TM).

Third-Party Reimbursement

Most medical procedures are reimbursed by a variety of third-party payers,
including Medicare and private insurers.  Health Care Finance Association
(HCFA), the governmental body that approves medical diagnosis and treatment for
financial reimbursement for Medicare coverage, determines whether to reimburse
for a given type of procedure and what dollar amount should be allowed.  In
November of 1998 we received HCFA approval for Medicare coverage on a nationwide
basis. We believe that this reimbursement approval for our BioZ(TM) Systems will
improve our ability to penetrate the inpatient and outpatient markets.

The financial and health care cost containment pressures at U.S. hospitals,
resulting from per-capita compensation techniques required by HMOs, are driving
medical departments to decrease costs.  In a managed care system involving
capitation, the health care provider is strongly induced to utilize the most
cost-efficient methods available in order to maintain per-patient costs within
the monthly fees.  Our products can reduce hospital costs by an estimated
minimum of $600 per patient in non-complicated cases (Clancy, T.V., et al.,
Journal of Trauma, August 1991) to as much as $13,600 where pulmonary artery
catheterization is used (Connors, op. cit.).  Therefore, a financial incentive
exists, independent of third-party reimbursement circumstances, for hospitals to
purchase and use our products.

Employees

As of February 20, 1999, we had 49 employees, 48 of which are considered full-
time.  We believe that the success of our business will depend, in part, on our
ability to identify, attract and retain qualified personnel.  In the future, we
will add additional skilled personnel or retain consultants in such areas as
research and development, manufacturing, administration and marketing and sales.
We consider our relationships with our employees to be good.
<PAGE>
 
Risk Factors

Dependence on BioZ(TM) Product Line Whose Market Acceptance is Unclear

Our future is dependent upon the success of the BioZ(TM) product line and
similar products that are based on the same technology. The market for thoracic
electrical bioimpedance products is in a relatively early stage of development,
and it is possible that this market will never fully develop. The long-term
commercial success of the BioZ(TM) product line and any follow-on products
requires widespread acceptance of our thoracic electrical bioimpedance products
as safe, efficient, and cost-effective. Widespread acceptance would represent a
significant change in medical practice patterns. Historically, some medical
professionals have indicated hesitancy in using thoracic electrical bioimpedance
products such as analog-based monitors previously manufactured by us. Invasive
procedures, such as pulmonary artery catheterization, are generally accepted in
the medical community and have a long history of use.

We have limited clinical data with which to demonstrate the clinical benefits of
our products.  However, we have sponsored and plan to continue to sponsor and/or
conduct clinical trials that we hope will demonstrate consistent clinical
benefits resulting from the use of our products.  We cannot be certain that
these clinical trials will be completed or if they will have a positive outcome
or if a positive outcome in these trials would be sufficient to enable
acceptance of the BioZ(TM) product line by the medical community

Some hemodynamic measurements using thoracic electrical bioimpedance are subject
to inaccuracies and may limit the accuracy of our products, such as:

        .  Severe septic shock;
        .  Significant pulmonary hypertension;
        .  Aortic valve regurgitation;
        .  Severe hypertension;
        .  Ventricular rhythms;
        .  Tachycardia rates greater than 180 beats per minute;
        .  Patients who are shorter than 47";*
        .  Patients who weigh less than 66 lbs.;*
        .  Extreme patient movement.*
           ___________________
           * We are currently working on algorithms that, if we succeed in
             developing them, may allow the technology to function on patients
             with these conditions.

History of Losses and Expected Continued Losses

Since its emergence from bankruptcy proceedings in 1993, we have had large
annual losses in the course of researching, developing and enhancing our
technology and products and establishing our sales, marketing, and
administrative organizations.  We anticipate that our operating expenses will
increase substantially in the foreseeable future as we increase our sales and
marketing activities, expand our operations and continue the development of our
technology.  Accordingly, we expect to incur additional losses for fiscal 1999
and it is possible that we will never achieve or sustain revenue growth or
profitability.
<PAGE>
 
Future Additional Capital Requirements; No Assurance Future Capital Will Be
Available

Our commercialization of the BioZ(TM) product line and the development and
commercialization of any additional products will require substantial
expenditures.  Our capital requirements will depend on numerous factors,
including:

        .  Our rate of sales growth--fast growth could actually increase our
           need for additional capital to hire additional staff, purchase
           additional component supplies, and supply additional support
           services;

        .  Our progress in marketing-related clinical evaluations and product
           development programs--these programs represent potential avenues for
           growth, but 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 need to support our regulatory and
           development efforts in advance of sales;

        .  Resources 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;

        .  Resources required to hire and develop medical sales representatives
           and independent distributors and to develop internal manufacturing
           capacity--requires substantial working capital;

        .  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 could
           increase our capital needs, the lack of growth and continued losses
           would also increase our need for capital; and

        .  Our ability to speed up hospitals' otherwise lengthy purchasing
           processes by offering leasing programs as an alternative to outright
           purchasing--faster decisions by purchasers will reduce our need for
           working capital.

The timing and amount of such capital requirements cannot be accurately
predicted.  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 current debt load, our history of losses or our
technology's lack of acceptance as too great a risk to bear and, as a result,
such additional funding may not be available on attractive terms, or at all.  If
we cannot obtain additional capital when needed we might be forced to agree to
unattractive finance terms.
<PAGE>
 
Competition From Other Producers; and Technological Change Which May Benefit Our
Competitors

We compete with other companies that are developing and marketing non-invasive
hemodynamic monitors.  We are also subject to competition from invasive-
technology companies, including Baxter Healthcare Corporation, which 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.  Such competitors may be able to devote greater resources to the
development, promotion and sales of their products.

The current widespread acceptance of pulmonary artery catheterization, and lack
of widespread acceptance of thoracic electrical bioimpedance, 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.  Any of these could hurt our business, results
of operations and financial condition.  It is possible that we will not be able
to compete successfully.

The introduction by others of products embodying new technologies and the
emergence of new industry standards could render our products obsolete and
unmarketable.  Other companies may develop and introduce products and processes
competitive with or superior to ours.  In addition, other technologies or
products may be developed that have an entirely different approach or means of
accomplishing the intended purposes of our products.  Accordingly, our products'
life cycles are difficult to estimate.  To compete successfully, we must
continually develop and introduce new products that keep pace with technological
advancements, respond to evolving consumer requirements and achieve market
acceptance.

We may not succeed in satisfactorily and timely developing and introducing
additional products.  Even if we succeed in developing and marketing products
that achieve market acceptance, our competitors may develop and market products
that will replace ours.

Technological Change is Difficult to Predict and to Manage

Although not in fact a new company, we currently face many of the challenges
that are typically faced by new companies just emerging from the development
phase.  The BioZ(TM) product line has required, and any future products will
require, substantial development efforts and compliance with all governmental
clearance/approval requirements.  We have to continue to build up our sales and
marketing functions.  We may encounter unforeseen technological or scientific
problems that may force abandonment or substantial change in the development of
a specific product or process.  Technological change or product developments by
others may also have a significant negative effect on us.

Ability 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 fully exploit any
future market opportunity for our products.  Our future operating results will
also depend on our ability to complete our geographic network of direct sales
persons and distributors, expand our sales and marketing organizations, and fill
out our support staff organization.  If we are unable to manage expansion
effectively, our business, results of operations and financial condition will
suffer.  However, we are not promising you that such expansion or growth will
occur.
<PAGE>
 
Control by Our Co-Chairmen

Allen E. Paulson and James C. Gilstrap, the co-chairmen of CardioDynamics,
beneficially own, directly or through CardioDynamics Holdings, LLC, which they
control, approximately 66% of the outstanding shares of our Common Stock
(including shares owned by others which CardioDynamics Holdings, LLC has the
right to vote).  In addition, Mr. Paulson's sons beneficially own another 9% of
the outstanding shares of Common Stock.  Accordingly, these persons,
individually and as a group, are able to control CardioDynamics and direct our
affairs and business, including any future issuances of Common Stock or other
securities, merger and acquisition decisions, declaration of dividends and the
election of directors.  Further, in their position as holders of our stock, they
owe us no duty.  Our stock price and our ability to raise capital could be
injured if they were to sell even a portion of their holdings on the open
market.

We May Not Continue to Receive Necessary Approvals from the Food and Drug
Administration

Our products and activities are subject to extensive regulation by the FDA and
other governmental authorities.  Delays in receipt of, or failure to obtain,
regulatory clearances and approvals, or any failure to comply with regulatory
requirements, could have a very negative effect on our business.

Our thoracic electrical bioimpedance products are subject to extensive and
rigorous regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies.  Under the federal Food, Drug, and Cosmetic Act (the "FDC
Act"), the FDA regulates the clinical testing, manufacture, labeling, packaging,
marketing, distribution and record keeping for medical devices, in order to
ensure that medical devices distributed in the United States are safe and
effective for their intended use.

Before a new device can be introduced into the market, the manufacturer
generally must obtain either FDA 510(k) clearance or approval of a pre-market
approval application.  Following submission of a 510(k) or PMA application, the
manufacturer may not market the new device until an order is issued by the FDA
granting clearance or approval, which can entail an expensive, lengthy and
uncertain process. We have received a marketing clearance for the BioZ(TM)
System, the BioZ(TM) Portable and the BioZ.com(TM). However, such clearances are
subject to continued FDA audits and can be rescinded. Further, we plan to submit
additional new products for FDA approval in the future. It is possible that our
future products might not gain FDA approval in a timely fashion, or at all. It
is also possible that our current products may someday lose their FDA approval.

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 (GMP) requirements, Medical Device Reporting requirements
and other applicable regulations.  Although we work hard at attempting to comply
with all governmental regulations, it is possible that an inspector could
someday find a violation.  Such a violation could result in government action
ranging from warning letters to fines to criminal prosecution.  Should we ever
incur a significant penalty it is possible it would be detrimental to us.  The
FDC 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

        .  any deficiencies in the manufacturing process or in the products
           produced be investigated and detailed records kept.
<PAGE>
 
Manufacturing facilities are subject to FDA inspection on a periodic basis to 
monitor compliance with current GMP requirements. Labeling and promotional 
activities are regulated by the FDA and, in certain circumstances, by the 
Federal Trade Commission. For any medical device cleared through the 510(k) 
process, modifications or enhancements that could significantly affect the 
safety or effectiveness of the 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, we may be 
prohibited from marketing the modified product until the 510(k) notice is 
cleared by the FDA.

The FDA regulates computer software that performs the function of a regulated 
device or that is intimately associated with a given device, such as control 
software for diagnostic devices like our products. The FDA is reevaluating its 
regulation of such software and if the FDA undertakes increased or more rigorous
regulation of such software, the BioZ(TM) product line and related products may 
become subject to further regulatory processes and clearance requirements.

Laws are 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, with possible retroactive effect, may adversely affect us.

We May Not Receive Approvals by Foreign Regulators Which Are Necessary for 
Foreign Sales

Sales of medical devices outside of the United States are subject to foreign 
regulatory requirements that vary from country to country. We currently rely on 
our international distributors and sub-distributors for the receipt of pre-
market approvals and compliance with clinical trial requirements in those
countries that require them, and we expect to continue to rely on them in those
countries where we continue to use distributors. If 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 cause the applicable distributor to file revised governmental notifications,
cease commerical sales of our products in the applicable countries, or otherwise
cure the problem. Such enforcement action by regulatory authorities could be
costly.

In order to sell our products within the European Economic Area, we have to 
comply with the European Commission's Medical Device Directive and to affix a 
"CE" marking on our products to attest such compliance. In November 1998 we 
received authorization from TUV Rhineland of North America to place the CE Mark 
on our BioZ.com(TM).

Third-Party Reimbursement; Pricing Pressures

Our commercial success will depend in part on the availability of adequate 
reimbursement from third-party healthcare payers, such as government and private
health insurers and managed care organizations. Third-party payers are
increasingly challenging the pricing of medical products and services. Even with
an FDA approved device, third-party payers may not cover the device and related
services, or they may place significant restrictions on the circumstances in
which coverage will be available. Medicare reimbursement for use of the Bioz(TM)
product line is now available under the heading of plethysmography, but private
third-party payers are not required to follow Medicare's lead. We may not be
able to obtain a specific code for reimbursement of thoracic electrical
bioimpedance tests in a reasonable time frame, or at all, from either Medicare
or private third-party payers. In addition, reimbursement may not be at or stay
at price levels sufficient to allow medical professionals to realize an
appropriate return on an investment in our products. Downward pricing pressure
in the industry could hurt our operations.
 
Our business plan contemplates an income stream from sales of disposable sensors
and which are compatible with an installed base of our monitors.  We may be
subject to price competition from other sensor manufacturers.

<PAGE>
 
Dependence on Management and Other Key Personnel

We are dependent upon a limited number of key management and technical personnel
and we do not have insurance on these people.  The loss of the services of one
or more of such key employees could hurt our business.  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 we may not be able to
attract and/or retain qualified personnel.

Dependence on Rivertek Medical Systems for Development Services and Other Third
Parties for Development and Manufacturing Services

Our strategy for development and commercialization of certain of our products
depends upon entering into various arrangements with third parties and upon the
subsequent success of these parties in performing their obligations.  It is
possible that we will not be able to negotiate acceptable arrangements in the
future or that our existing arrangements will not be successful.  We rely
heavily on contracted development services, particularly from Rivertek Medical
Systems, Inc

Small Market Float Can Produce Both Stock Price Volatility and a Potential Lack
of Liquidity

Market float is the aggregate value of all of a company's publicly traded stock.
Our market float is smaller than that of many other publicly traded companies.
Because our market float is smaller, changes in the opinion of one investor or
one analyst can have a significant effect on our stock price.  As a result, the
market price of our Common Stock is likely to be highly volatile and 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 thoracic electrical
           bioimpedance technology in targeted markets;

        .  timing of patent and regulatory approvals;

        .  timing and extent of technological advancements;

        .  results of clinical studies;

        .  the sales, by the Selling Shareholders or other persons, of
           derivative securities relating to CardioDynamics stock such as
           entering into short sales contracts which obligate the party to sell
           their shares for less than current market value in the future;

        .  general market conditions.

In addition, the stock market has experienced significant price and volume
fluctuations that have affected 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.  Our somewhat small market float may not be
entirely adequate to provide market liquidity and mitigate stock price
volatility.
 
<PAGE>
 
Reliance on Patents and Proprietary Technology

Although we believe that we have effective patent protection, our patents and
proprietary technology may not be able to prevent effective competition by
others and our products could possibly be found to infringe the rights of
others.  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 it may not
provide competitive advantages to us.  Further, 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
might not cover products we want to bring out in the future.  Moreover, when our
key patents expire, the inventions will enter the public domain.

Potential Drop in Stock Price Due to Conversion Feature of Preferred Stock

Our Series A Convertible Preferred Stock is convertible into Common Stock at
either a fixed conversion price or a floating conversion price, whichever is
more favorable to the holder.  The floating conversion price is tied to our
Common Stock market price.  If our Common Stock price declines, the Series A
Convertible Preferred Stock may be convertible into a substantially increased
number of shares of Common Stock, resulting in dilution to other holders of
Common Stock and a potential adverse effect on the Common Stock price
thereafter.  In addition, if the Selling Shareholders convert part of their
Series A Convertible Preferred Stock and sell the Common Stock in the market,
this could result in an unbalance of supply and demand for our Common Stock and
further reduce its price.  Because there is no lower limit on the floating
conversion price, all this could lead to a vicious cycle, driving the stock
price ever further down.  The further our stock price declines, the further the
floating conversion price will fall and the greater number of shares we will
have to issue upon conversion.  For example:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Date                                            Nov. 30, 1998      Feb. 20, 1999         sample              sample
-------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>               <C>                 <C>
Public market value                               $     2.50        $     1.88          $     1.10         $     0.90
-------------------------------------------------------------------------------------------------------------------------
Number of shares of Common Stock into                943,157         1,201,404           2,047,847          2,502,924
which the remaining Series A Stock would
convert
-------------------------------------------------------------------------------------------------------------------------
Estimate of total number of shares of              1,498,753         1,813,064           2,659,507          3,114,584
Common Stock into which Series A Stock is
convertible (including shares of Common
Stock which have already been issued upon
conversion)
-------------------------------------------------------------------------------------------------------------------------
Percentage of total shares outstanding                   4.3%              5.3%                7.6%               8.8%
that such converted shares will represent
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
Further, it is likely that we will pay dividends on the Series A Convertible
Preferred Stock in the form of Common Stock.  Such dividends would further
dilute current holders and could also lead to a drop in our stock price.
 
<PAGE>
 
We Could be Required to Issue Dilutive Series B Preferred Stock

Under certain conditions the original purchasers of our Series A Preferred Stock
can require us to sell them up to 3,000 shares of Series B Preferred Stock at a
purchase price of $1,000 per share.  They can only require this between
approximately May 23, 1999 and November 19, 1999 and they can only require it if
and when our Common Stock price exceeds $2.70 per share for ten consecutive
days.  The Series B Preferred Stock would be substantially similar to the Series
A Preferred Stock, but it would have a fixed conversion price of at least $3.10
per share which is higher than the $2.70 fixed conversion price of the Series A
Preferred Stock.  There are other technical requirements, but each of those can
be waived by the original purchasers.

If we were required to issue the Series B Preferred Stock on these terms, the
convertibility of the Series B Preferred Stock would be potentially dilutive and
could cause our Common Stock Price to drop.  This could impair our ability to
raise capital in the future.

We Could be Required to Redeem the Series A Convertible Preferred Stock

The holders of the Series A Convertible Preferred Stock can require us to redeem
for cash (at 130% of stated value) instead of conversion for shares in the event
that we are acquired by another company or in the event that we default in any
of the following four ways:

        .  If either our stock is suspended from trading on NASDAQ for more than
           five consecutive days or more than thirty days in any year-long
           period, or

        .  If the Registration statement, relating to the Preferred Stock, has
           its effectiveness or its use suspended for more than 30 days in any
           year-long period, or

        .  If our Common Stock is not listed on either NASDAQ National Market,
           NASDAQ SmallCap Market, the American Stock Exchange, or the New York
           Stock Exchange, for a period of fifteen consecutive days or thirty
           days in any year-long period, or

        .  If we fail to deliver shares of our Common Stock as required upon
           conversion.

If the event that we are required to redeem the Series A Convertible Preferred
Stock under any of these mandatory situations, it is likely that we would not
have sufficient cash available to effect the redemption.  In such case we would
be forced to attempt to find other sources of financing.  If we could find such
financing at all, it is likely that that such financing would be on unfavorable
terms.  The inability to find financing or the terms of such unfavorable
financing and our resulting lack of liquidity could force us to close portions
of, or all of, our operations.

Low Stock Price Could Result in Our Being De-Listed from NASDAQ and Subject Us
to Regulations Which 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, certain NASDAQ regulations would require
the de-listing of our shares and then our shares could no longer be traded on
NASDAQ.  In such an event, our shares could only be traded on over-the-counter
bulletin board systems.  This method of trading could significantly impair or
completely remove our ability to raise new capital.

In the event our Common Stock becomes characterized as a penny stock, our market
liquidity could be severely affected.  In such event, 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.
 
<PAGE>
 
In the event that we were de-listed from NASDAQ due to low stock price, we might
be subject to certain rules, called penny stock rules, that impose additional
sales practice requirements on broker-dealers who sell such securities.  For any
transaction involving a penny stock the rules require, among other things, the
delivery, prior to the transaction, of a disclosure schedule required by the SEC
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.

Product Liability Risk and Product Recall; Limited Insurance Coverage

The nature of our business exposes it to risks of product liability or product
recalls that are typical in the medical devices industry.  Medical devices as
complex as ours frequently contain errors or failures, especially when first
introduced or when new versions are released.  Our products are designed to be
used in certain procedures where there is a high risk of serious injury or
death.  Such 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 certain periods before May
15, 1995.  So far, this has not hurt us.  Since then, we have maintained product
liability insurance at levels that we believe are sufficient and consistent with
industry standards for companies with our current sales levels.  We intend to
increase our product liability insurance policy limits as sales grow.
Currently, our product liability insurance policy limits are $5,000,000 per
occurrence and $5,000,000 in the aggregate.  Our product liability insurance may
not be adequate and it is possible that such insurance coverage may not continue
to be available on commercially reasonable terms or at all.  In addition,
product liability claims or recalls could hurt us in various ways even if we
have adequate insurance coverage.

Uncertainty and Potential Negative Effects of Healthcare Reform

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 health care for the uninsured;

        .  Control the escalation of healthcare expenditures within the economy;

        .  Use of health care reimbursement policies to help balance the federal
           budget.

We anticipate that Congress and state legislatures will continue to review and
assess such 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 disrupt our
strategies.

No Dividends

We do not intend to pay any cash dividends on the Common Stock any time soon.
Payment of such cash dividends would, in any event, be prohibited or limited
under the terms of our bank loans and/or the Series A Convertible Preferred
Stock.
 
<PAGE>
 
Year 2000 Risks

Many computer systems experience problems handling dates beyond the year 1999.
This issue will impact virtually any business that relies on computers.  In
addition to our own potential problems, there are governmental agencies,
financial institutions, utilities and other basic service providers that may
encounter problems that are outside of our control. In order to correct this
issue, some computer hardware and software will need to be modified prior to the
year 2000 in order for it to remain functional. We have taken steps to assess
the internal readiness of our computer systems and the compatibility of our
products for handling the year 2000 issue. We have created a Year 2000 task
force and we are addressing these issues. The project has been broken down into
the following phases.

        (a)  Awareness: To create awareness of the potential business
             implications of the Year 2000 challenge within CardioDynamics. Our
             employees, when appropriate, will be kept informed of the news and
             issues related to the Year 2000 issue. We will focus on both our
             information technology systems as well as our products.

        (b)  Inventory and Assessment: We will inventory all of our computer
             software and hardware as well as facilities, telecommunications,
             and external interfaces. Significant third party vendors will be
             contacted to determine their Year 2000 readiness.

        (c)  Renovation: As problems are discovered, strategies will be
             developed to either correct the problem or determine if new
             equipment or software is necessary.

        (d)  Testing: Testing of the renovated systems will occur to determine
             whether they are performing reliably under Year 2000 conditions.

        (e)  Implementation: Upon successful completion of the testing process
             the assets will be reintroduced into production in order to allow
             adequate time to prevent any unforeseen circumstances.

        (f)  Contingency: In addition, we will develop a contingency plan in the
             event that our internal systems, products or suppliers are not Year
             2000 compliant.

Currently, we are in the inventory and assessment stage and we anticipate
completing any necessary renovation, testing and implementation within the next
nine months. It has already been determined that the internal network, and
manufacturing-requirements-planning software is certified as Year 2000
compliant. Additionally, our newest products have been specifically tested for
Year 2000 performance and no Year 2000 problems were identified.  We are still
in the early stages of contacting key third party vendors. Renovation and
testing, if required, will begin if problems are identified. We plan to have all
stages of the Year 2000 project completed no later than the fall of 1999.

Thus far, we have not had to spend significant amounts of money through this
stage of the process. We currently believe that the cost of addressing this
issue will not have a significant effect on us.  However, it is possible that
because of year 2000 problems, our vendors of our most important goods and
services, or the suppliers of our necessary energy, telecommunications and
transportation needs, could fail to provide us with the materials and services
which are necessary to produce and sell our products.
 
<PAGE>
 
ITEM 2.   DESCRIPTION  OF  PROPERTY

Our executive offices are located in an approximately 19,000 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.

ITEM 3.   LEGAL PROCEEDINGS

None.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.

                                    PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our Common Stock trades on the Nasdaq SmallCap market under the symbol CDIC.
The following table sets forth for the periods indicated the high and low
closing prices of the Common Stock as furnished by The Nasdaq Stock Market(SM).
<TABLE>
<CAPTION>
                                                                                            High     Low
                                                                                            -----   -----
         <S>                                                                               <C>     <C>
          Year Ending November 30, 1998
          Fourth Quarter.................................................................   $2.75   $1.03
          Third Quarter .................................................................    3.00    1.75
          Second Quarter.................................................................    3.94    2.19
          First Quarter .................................................................    3.31    2.38
 
          Year Ending November 30, 1997
          Fourth Quarter.................................................................   $4.63   $2.38
          Third Quarter..................................................................    4.94    3.09
          Second Quarter.................................................................    4.09    2.81
          First Quarter .............................................................        4.00    3.16
</TABLE>

On February 20, 1999 there were approximately 500 holders of record of the
Common Stock.

We have not declared or paid any cash dividends on shares of our Common Stock
and do not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. We currently intend to retain any future earnings for use in
the operation of our business.
 
<PAGE>
 
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion should be read in along with our Financial Statements
and the Notes that go along with the financial statements, as well as the other
financial information included in this Form 10-KSB.  Some of our discussion is
forward-looking and involve 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-KSB, Description of Business - Risk
Factors

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

Fiscal Year 1998 Compared to Fiscal Year 1997

In March 1998, we received FDA 510(k) marketing clearance for our next
generation monitoring system called the BioZ.com(TM). The BioZ.com(TM) is even
more compact than our BioZ(TM) Portable system and features a transport battery,
integrated blood pressure module and direct data interface to most hospital
central monitoring systems. The BioZ.com(TM) fully utilizes our DISQ(TM) 
technology that provides improved measurement of impedance waveforms and 
automatic electronic calibration.

Net sales for fiscal 1998 increased to $2,098,696, an increase of 339% over net
sales of  $477,588 recorded in fiscal 1997.  The increase in sales in 1998 is
primarily due to the transition to a domestic direct sales force, expansion of
our international distributor network, and commencement of shipments of our new
BioZ.com(TM) noninvasive cardiac function monitoring system. During fiscal 1998,
we established international distribution agreements with eleven medical
distributors to represent us in eleven European countries, Asia Pacific, the
Middle East and Latin America.

During fiscal 1998 we hired eleven direct sales representatives and our four
existing Territory Sales Managers assumed new responsibilities as direct sales
representatives.  We continue to expand our domestic direct sales force in
targeted metropolitan areas and plan to have as many as 24 by the end of 1999.
The success of the direct sales approach depends, to a large degree, on our
ability to identify, attract and retain qualified sales representatives with
successful medical device capital equipment sales experience.

We achieved a gross margin of $900,715 or 43% in fiscal 1998 compared to
negative gross margin in 1997.  We expect gross margins to continue to improve
as (i) our manufacturing capacity is more fully utilized, (ii) the BioZ.com(TM)
comprises a greater percentage of the overall product mix and (iii) as average
unit sales prices increase as a result of increasing direct sales to end users.
However, significant increases in sales will be required to enable us to
generate enough gross margin to cover our operating expenses.

Selling, general and administrative expenses in 1998 were $3,815,673, up 35%
from $2,832,908 in 1997. We increased our strategic investment in sales and
marketing related activities by 75% in fiscal 1998 over 1997. The majority of
the increase was related to the costs associated with establishment of our own
domestic direct sales force and development of selling and marketing materials
for our new BioZ.com(TM). During 1998 we hired 12 direct sales representatives
and our three existing territory sales managers assumed responsibilities as
direct sales representatives. We plan to continue to invest in sales activities
in order expand our direct sales force and develop selling and marketing
materials customized for direct sales targeted at both the hospital and
outpatient markets. As a result of ongoing cost containment efforts, we were
able to reduce general and administrative expenditures by nearly $75,000, or 5%,
compared with 1997.
 
<PAGE>
 
We continue to invest a significant portion of our resources into research,
clinical studies, further enhancements to the BioZ(TM) Systems, and new product
development.  As a result, research and development expenses increased by
$974,576, or 73%, in fiscal 1998 over fiscal 1997.  The majority of the increase
was due to costs associated with the development and regulatory approvals of our
new BioZ.com(TM).

We incurred interest expense of $109,440, net of $104,358 of interest income
earned on invested funds, compared with interest income of $179,272 and interest
expense of $5,943 in fiscal 1997.  Interest expense in fiscal 1998 increased
$207,855 mainly due to our term loan with Imperial Bank and borrowings on our
private line of credit with our Chairmen.  In 1997, we recognized a loss of
$164,853 related to the disposition of certain marketable securities.  These
securities had been held for payment to preferred shareholders upon exercise of
a right to redeem their preferred shares for Common Stock and a pro-rata portion
of the proceeds of the marketable securities.  Because the time for exercising
the redemption right had expired, we sold the securities to provide additional
cash for operating activities.

We incurred a net loss to Common shareholders in 1998 of $5,357,749 or $.17 per
Common share versus a net loss to Common shareholders of $4,278,088 or $.14 per
share in fiscal 1997. The fiscal 1998 increase in the number of Common shares
outstanding was primarily due to conversion in November 1998 of 760 shares of
Series A Preferred Stock.

Fiscal Year 1997 Compared to Fiscal Year 1996

We received FDA 510(k) marketing clearance for the BioZ(TM) System in late
November 1996. In addition, in September 1997, we received 510(k) marketing
clearance from the FDA for our Portable BioZ(TM) monitoring system and for its
proprietary Digital Impedance Signal Quantifier (DISQ(TM)) technology which
provides improved measurement of impedance waveforms and automatic electronic
calibration. These FDA clearances provide us the opportunity to commercialize
our BioZ(TM) Systems.

Net sales for fiscal 1997 increased to $477,588, up 226% from $146,655 recorded
in fiscal 1996. The increase in sales in 1997 is due to the commencement of
shipments of our BioZ(TM) noninvasive cardiac function monitoring system. Sales
in the comparable periods of 1996 were of a prior product line. During fiscal
1997, we established distribution agreements with seventeen regional specialty
distributors as our representatives in the hospital market. These distributors
collectively covered 44 states, and employed over 100 sales representatives. We
shipped $1,423,048 of BioZ(TM) Systems and disposable bioimpedance dual
electrodes in fiscal 1997, primarily to our network of specialty distributors
for demonstration and stocking units.

By the end of fiscal 1997, it was apparent that there we needed to broaden our
sales channel.  We opted to add a direct sales force targeted at both the
hospital and outpatient markets in the majority of the United States, and reduce
the number of domestic distributors. We determined that a direct sales force can
more effectively demonstrate the cost and safety advantages of the BioZ(TM) over
traditional invasive techniques by directly marketing to, and educating, health
care professionals and insurance companies, including HMOs, as to the positive
cost advantages and clinical outcome profiles of the BioZ(TM) Systems.

As we planned to expand our direct sales force in targeted metropolitan areas,
we recognized that we might not be able to maintain satisfactory relationships
with our regional specialty distributors.  Under the terms of the distribution
agreements, distributors have the right, under certain circumstances (including
placing a direct sales representative in the distributor's territory), to
terminate the distribution agreement and return demonstration and stocking
inventory purchased from us.  Because we anticipated that we may be required to
take back BioZ(TM) Systems and unused supplies and refund amounts paid by
distributors (net of contracted depreciation and restocking charges), we
established a $766,540 reserve for distributor returns.  This reserve
represented 100% of sales to domestic distributors that had not, as of November
30, 1997, been resold to end-users.
 
<PAGE>
 
We had a negative gross margin in both fiscal 1997 and 1996 primarily due to
expenses related to BioZ(TM) Systems built and shipped to distributors and to
clinical study sites for which no revenue was recognized.

Selling, general and administrative costs for the twelve-month period ended
November 30, 1997 were $2,832,908, up 68% from $1,690,710 in the comparable
period of fiscal 1996.  We increased our investment in sales and marketing
related activities by 121% in fiscal 1997 over 1996.  The majority of the
increase was related to the costs associated with establishing of a network of
specialty distributors, addition of regional sales managers, development of
advertising and marketing materials for the BioZ(TM) Systems, and the addition
in June 1997, of a Chief Operating Officer to coordinate and direct the
clinical, sales and marketing teams.

Research and development expenses increased by $654,351 or 96% in fiscal 1997
over fiscal 1996 primarily as a result of expenditures related to the
development of our new BioZ.com(TM) monitoring system.

We recorded $179,272 in interest income and $5,943 of interest expense in fiscal
1997 compared with interest income of $13,282 and interest expense of $20,796 in
fiscal 1996.  In the first fiscal quarter of 1997, we recognized a loss of
$164,853 related to the disposition of certain marketable securities.  These
securities had been held for payment to Preferred shareholders upon exercise of
a right to redeem their Preferred shares for Common Stock and a pro-rata portion
of the proceeds of the marketable securities.  Because the time for exercising
the redemption right had expired, we sold the securities to provide additional
cash for operating activities.

We incurred a net loss in 1997 of $4,278,088 or $.14 per Common share versus a
net loss of $2,510,667 or $.11 per share in fiscal 1996.  We issued
approximately 2.3 million Common shares in a private placement through EVEREN
Securities, Inc., in early 1997 and issued 183,115 Common shares in conjunction
with the automatic conversion in August 1997 of our shares of Preferred Stock
into Common Stock.

Liquidity and Capital Resources

To fund our BioZ(TM) product commercialization, ongoing research and development
efforts, direct sales force expansion and execute marketing programs for our new
BioZ.com(TM), capital expenditures and working capital requirements, we raised
gross proceeds of approximately $7.2 million in a private placement of Common
Stock in early 1997 and we raised an additional $3 million in August of 1998
through the issuance of Series A Convertible Preferred Stock.
 
In June 1997, we entered into a five-year lease for a 19,000 square-foot
manufacturing facility that also houses our research, development, marketing,
sales and administrative activities.  The lease commenced on September 1, 1997
with current lease payments of $16,486 per month.  In fiscal 1997, we invested
$217,700 in property and equipment, principally for computer equipment, and
leasehold improvements to our new manufacturing and office facility.  During
fiscal 1998, $165,989 was invested primarily in additional computer equipment.

In March 1998, we 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 we may 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 of 1998
we borrowed $1,000,000 on this line of credit and used the proceeds to reduce
outstanding borrowings under the bank term loan.  In February 1999, the line of
credit was extended to September 30, 2000.  At November 30, 1998 the Company had
$1,000,000 outstanding under his line of credit.
 
<PAGE>
 
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
loan bears interest at one percent above the Bank's Prime Rate.  In August 1998,
the Company repaid $1,000,000 of the $3,000,000, reducing the outstanding
balance to $2,000,000. In exchange, the Bank extended the term of the loan until
February 28, 1999.  On February 25, 1999 the Company entered into a three year
unsecured term loan agreement with City National Bank whereby the proceeds of
the new loan will be used to repay the Imperial Bank term loan.  Under the terms
of the City National Bank agreement the Company will borrow $2,000,000 with
monthly interest-only payments for the first year at the Bank's Prime Rate.
Beginning March 2000, the Company will commence consecutive monthly principal
installments of $83,333 each plus interest at one percent above the Bank's Prime
Rate.

In August of 1998, we completed the first phase of a $6,000,000 equity private
placement to institutional investors. The first phase provided $3,000,000
($2,882,537 net proceeds) through the issuance of Series A Convertible Preferred
Stock. The funding of the second phase is contingent upon certain conditions
being met. There can be no assurance that this second phase of financing will be
completed.

In January 1999, the Company obtained a secured revolving credit line with a
bank.  The credit line provides for borrowing up to $3,000,000 at the bank's
prime rate.  Under the terms of the agreement, the Company is required to meet
certain loan covenants, including maintenance of minimum quick ratio and maximum
quarterly losses.  The credit line is collateralized by all the assets of the
Company.

Nonetheless, without additional debt or equity financing, our ability to execute
the transition to a direct sales strategy will be constrained, due to the
strategy's higher cash requirements.  We expect our operating losses to continue
through at least the short term.  Longer term, our liquidity will depend on our
ability to successfully commercialize the BioZ(TM) Systems and other diagnostic
products and 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 federal operating loss carryforwards of approximately $20,037,800.  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 certain
occurrences, including significant ownership changes.  A valuation allowance has
been recognized for the full amount of the deferred tax asset created by these
carryforwards.
 
<PAGE>
 
Other Matters

Year 2000 Compliance

Many computer systems experience problems handling dates beyond the year 1999.
This issue will impact virtually any business that relies on computers.  In
addition to our own potential problems, there are governmental agencies,
financial institutions, utilities and other basic service providers that may
encounter problems that are outside of our control. In order to correct this
issue, some computer hardware and software will need to be modified prior to the
year 2000 in order for it to remain functional. We have taken steps to assess
the internal readiness of our computer systems and the compatibility of our
products for handling the year 2000 issue. We have created a Year 2000 task
force and we are addressing these issues. The project has been broken down into
the following phases.

        .  Awareness: To create awareness of the potential business implications
           of the Year 2000 challenge within CardioDynamics. Our employees, when
           appropriate, will be kept informed of the news and issues related to
           the Year 2000 issue. We will focus on both our information technology
           systems as well as our products.

        .  Inventory and Assessment: We will inventory all of our computer
           software and hardware as well as facilities, telecommunications, and
           external interfaces. Significant third party vendors will be
           contacted to determine their Year 2000 readiness.

        .  Renovation: As problems are discovered, strategies will be developed
           to either correct the problem or determine if new equipment or
           software is necessary.

        .  Testing: Testing of the renovated systems will occur to determine
           whether they are performing reliably under Year 2000 conditions.

        .  Implementation: Upon successful completion of the testing process the
           assets will be reintroduced into production in order to allow
           adequate time to prevent any unforeseen circumstances.

        .  Contingency: In addition, we will develop a contingency plan in the
           event that our internal systems, products or suppliers are not Year
           2000 compliant.

We are currently in the inventory and assessment stage and anticipate completing
any necessary renovation, testing and implementation within the next nine
months.  It has already been determined that the internal network, and
manufacturing requirements planning software is certified as Year 2000
complaint.  Additionally, our newest products have been specifically tested for
Year 2000 performance and no Year 2000 problems were identified.  We are still
in the early stages of contacting key third party vendors.  Renovation and
testing, if required, will begin if problems are identified.  We plan to have
all stages of the Year 2000 project completed no later than the fall of 1999.

Thus far, we have not had to spend significant amounts of money through this
phase of the process.  We currently believe that the cost of addressing this
issue will not have a material adverse effect on the our business, results of
operations, and financial condition. However, if our vendors of the most
important goods and services, or our suppliers of necessary energy,
telecommunications and transportation needs, fail to provide us with the
materials and services which are necessary to produce and sell our products,
such failure could have material adverse effect on the results of operations,
liquidity and financial condition of our Company.

<PAGE>
 
Item 7.     Financial  Statements


                          Independent Auditors' Report


The Board of Directors and Shareholders
CardioDynamics International Corporation:

We have audited the accompanying balance sheets of CardioDynamics International
Corporation as of November 30, 1998 and 1997, and the related statements of
operations, shareholders' equity (deficit), and cash flows for the years then
ended. 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 audit.

We conducted our audits in accordance with generally accepted auditing
standards. 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 audit provides 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, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.


                                                          /s/ KPMG LLP

San Diego, California
January 15, 1999,
except as to note 4, which 
is as of February 26, 1999
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION
                                 Balance Sheets

                           November 30, 1998 and 1997
<TABLE>
<CAPTION>
                     Assets (notes 4, 5, and 6)
                                                                                     1998                    1997
                                                                                  ----------              ---------- 
<S>                                                                             <C>                     <C>
Current assets:
 Cash and cash equivalents                                                      $ 2,633,086             $ 2,655,349   
 Accounts receivable, net of allowance for doubtful accounts                    
 and returns of $32,728 in 1998 and $161,824 in 1997 (note 9)                       632,190                  51,568  
 Inventory, net (notes 2 and 9 )                                                    995,364                 906,111
 Other current assets                                                                81,229                 137,735
                                                                                -----------             -----------  
          Total current assets                                                  
                                                                                  4,341,869               3,750,763
                                                                                -----------             -----------   
Property and equipment, net (note 3)                                                266,917                 244,654
Deposits                                                                             40,099                  27,788
                                                                                -----------             -----------   
          Total assets                                                          $ 4,648,885             $ 4,023,205
                                                                                ===========             ===========
                                                                                                        
                Liabilities and Shareholders' Equity                                                    
Current liabilities:                                                                                    
 Accounts payable                                                               $   577,836             $   295,524
 Accrued expenses                                                                    89,663                  25,287
 Accrued salaries, wages and benefits                                               276,179                  83,632
 Current maturities of long-term debt (note 5)                                       37,816                  11,300
 Note payable to bank (note 4)                                                    2,000,000                      --
 Provision for inventory returns (note 9)                                            23,040                 614,860
                                                                                -----------             -----------   
          Total current liabilities                                               3,004,534               1,030,603

Note payable related parties (notes 4 and 5)                                      1,000,000                      --
Long-term debt, less current maturities (note 5)                                    112,215                  26,523
                                                                                -----------             -----------    
          Total liabilities                                                       5,116,749               1,057,126

Convertible Preferred stock, no par value; 18,000,000 shares                                            
 authorized;  issued and outstanding 2,240 Series A shares at                                           
 November 30, 1998 and no shares authorized or outstanding at                                           
 November 30, 1997 (Note 7)                                                       2,152,294                      --
                                                                                                        
Shareholders' equity: (notes  5, 6, 7 and 8)                                                            
Common stock, no par value; 50,000,000 shares authorized;  issued                                       
 and outstanding 32,676,029 shares at November 30, 1998 and                                             
 32,085,743 shares at November 30, 1997                                          15,598,274              14,826,762
Accumulated deficit                                                             (17,218,432)            (11,860,683)
                                                                                -----------             -----------  
          Total shareholders' equity (deficit)                                   (1,620,158)              2,966,079
                                                                                -----------             -----------  
Commitments and contingencies (notes 9 and 11)                                                      

          Total liabilities and shareholders' equity                            $ 4,648,885             $ 4,023,205
                                                                                ============            ============
</TABLE>

See accompanying notes to financial statements.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                            Statements of Operations
                                        
                 For the years ended November 30, 1998 and 1997



<TABLE>
<CAPTION>
                                                                                   1998                       1997
                                                                             -----------------           -----------------
<S>                                                                    <C>                       <C>
Net sales                                                                      $  2,098,696            $    477,588
Cost of sales                                                                     1,197,981                 582,344
                                                                               ------------            ------------      

          Gross margin                                                              900,715                (104,756)

Operating expenses:                                                                            
 Research and development                                                         2,309,476               1,334,900
 Selling, general, and administrative expenses                                    3,815,673               2,832,908
                                                                               ------------            ------------      

          Total operating expenses                                                6,125,149               4,167,808
                                                                               ------------            ------------        
Loss from operations                                                             (5,224,434)             (4,272,564)

Other income (expense):                                                   
 Interest, net                                                                     (109,440)                173,329
 Loss on sale of securities                                                           --                   (164,853)
 Other, net                                                                            (275)                (13,200)
                                                                               ------------            ------------      

          Total other income (expense)                                             (109,715)                 (4,724)

Loss before income taxes                                                         (5,334,149)             (4,277,288) 
Income taxes (Note 10)                                                                 (800)                   (800)
                                                                               ------------            ------------      

          Net loss                                                               (5,334,949)             (4,278,088)

          Preferred stock dividends                                                 (22,800)                 --
                                                                               ------------            ------------      
          Net loss to common shareholders                                      $ (5,357,749)           $ (4,278,088)
                                                                               ============            ============

Net loss per common share, basic and diluted                                   $       (.17)           $       (.14)
                                                                               ============            ============

Weighted-average number of common shares outstanding                             32,117,853              31,385,507
                                                                               ============            ============      
</TABLE>







See accompanying notes to financial statements.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                       Statements of Shareholders' Equity (Deficit)

                 For the years ended November 30, 1998 and 1997


<TABLE>
<CAPTION>
                                                                                                                                  
                                                                                              Unrealized                          
                                                   Preferred stock         Common stock        loss on                            
                                                 -------------------  ----------------------- marketable  Accumulated           
                                                  Shares     Amount      Shares      Amount   securities    Deficit       Total  
                                                 --------  ---------  ----------- ----------- ---------- ------------- ------------
<S>                                              <C>        <C>       <C>         <C>          <C>        <C>          <C> 
Balance at November 30, 1996                      183,115  $ 457,791   29,581,696 $ 8,366,514  $(89,270) $ (7,582,595) $ 1,152,440

Issuance of common stock, net of issuance costs
   and rescinded stock purchases                       --         --    2,290,882   5,946,015        --            --    5,946,015

Issuance of common stock - upon exercise of
   stock options                                       --         --       30,000      37,600        --            --       37,600
 
Compensatory stock options granted                                --           --      18,642        --            --       18,642

Preferred shares converted                       (183,115)  (457,791)     183,115     457,791        --            --           --

Unrealized loss on marketable securities               --         --           --          --    89,270            --       89,270

Exercise of Class C warrants                           --         --           50         200        --            --          200

Net loss                                               --         --           --          --        --    (4,278,088)  (4,278,088)
                                                 --------  ---------   ---------- -----------  --------  ------------  ----------- 

Balance at November 30, 1997                           --         --   32,085,743  14,826,762        --   (11,860,683)   2,966,079

Issuance of common stock - upon exercise of
   stock options                                       --         --       28,000      29,700        --            --       29,700

Issuance of common stock - upon conversion of
   preferred stock                                     --         --      554,134     730,243        --            --      730,243

Preferred dividends paid in common stock               --         --        8,152      11,569        --       (22,800)     (11,231)

Net loss                                               --         --           --          --        --    (5,334,949)  (5,334,949)
                                                 --------  ---------   ---------- -----------  --------  ------------  ----------- 
Balance at November 30, 1998                           --  $      --   32,676,029 $15,598,274  $     --  $(17,218,432) $(1,620,158)
                                                 ========  =========   ========== ===========  ========  ============  =========== 
</TABLE>

See accompanying notes to financial statements.  31
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION
                            Statements of Cash Flows
                 For the years ended November 30, 1998 and 1997


<TABLE>
<CAPTION>
                                                                                     1998           1997
                                                                                  -----------    -----------
Cash flows from operating activities:
<S>                                                                                <C>           <C> 
 Net loss                                                                         $(5,334,949)   $(4,278,088)
 Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                        93,728         82,678
  Gain on sale of fixed assets                                                         (3,000)            --
  Loss on disposition of marketable securities                                             --        164,853
  Provision for obsolete inventory                                                     80,822        129,305
  Provision for warranty repairs                                                       53,602         11,600
  Provision for inventory returns                                                    (591,820)       614,860
  Provision for refurbishment of demonstration inventory units                        117,818         69,337
  Provision for doubtful receivables                                                   13,609        154,363
  Compensatory stock options granted                                                       --         18,642
  Changes in operating assets and liabilities:
   Accounts receivable                                                               (594,231)      (181,006)
   Inventory                                                                         (287,895)      (822,724)
   Other current assets                                                                56,505        (69,399)
   Deposits                                                                           (12,311)       (23,538)
   Accounts payable                                                                   282,312        170,139
   Accrued expenses                                                                      (456)       (64,989)
   Accrued salaries, wages and related benefits                                       192,547         54,750
                                                                                ---------------  -------------
         Net cash used in operating activities                                     (5,933,719)    (3,969,217)
                                                                                ---------------  ------------- 
Cash flows from investing activities:
 Purchases of property and equipment                                                  (58,771)      (217,700)
 Proceeds from sale of fixed assets                                                    53,000             --
 Proceeds from sale of marketable securities                                               --        164,360
                                                                               ---------------  -------------
          Net cash used in investing activities                                        (5,771)       (53,340)
                                                                               ---------------  -------------
Cash flows from financing activities:
 Repayment of long-term debt                                                          (27,260)       (12,099)
 Borrowing of long-term debt                                                           32,250             --
 Proceeds from debt issuance to related parties                                     1,000,000             --
 Proceeds from note payable to bank                                                 3,000,000             --
 Repayment of note payable to bank                                                 (1,000,000)            --
 Issuance of preferred stock                                                        3,000,000             --
 Preferred stock insurance costs                                                     (117,463)            --
 Issuance of common stock                                                              29,700      5,983,815
                                                                                ---------------  ------------ 
          Net cash provided by financing activities                                 5,917,227      5,971,716
                                                                                ---------------  ------------ 
Net (decrease) increase in cash and cash equivalents                                  (22,263)     1,949,159
Cash and cash equivalents at beginning of year                                      2,655,349        706,190
                                                                                ---------------  ------------- 
Cash and cash equivalents at end of year                                      $     2,633,086    $ 2,655,349
                                                                                ==============   ============
</TABLE>

See accompanying notes to financial statements.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION
                                        
                     Statements of Cash Flows, (Continued)

                           November 30, 1998 and 1997
<TABLE>
<CAPTION>
 
                                                                                   1998                   1997   
                                                                                ----------             ---------- 
<S>                                                                              <C>                   <C>       
Supplemental disclosures of cash flow information:                                                               
 Cash paid for interest                                                         $  213,798             $    5,943
 Cash paid for income taxes                                                     $      800             $      800 

Supplemental disclosures of non-cash investing and financing activities:
 Common stock issued upon redemption or conversion of preferred stock           $  730,243             $  457,791 
 Decrease in unrealized loss on marketable securities                           $       --             $   89,270 
 Fixed assets acquired by capital lease                                         $  107,218             $       -- 
 Preferred stock dividends paid in common stock                                 $   22,800             $       -- 
</TABLE>

See accompanying notes to financial statements.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997


(1) Summary of Significant Accounting Policies

    Description of Business

    CardioDynamics International Corporation (the "Company") was incorporated in
    California in June 1980 as Bomed Medical Manufacturing, Ltd., and changed
    its name to CardioDynamics International Corporation in October 1983. The
    Company develops, manufactures and markets noninvasive digital heart
    monitoring devices which provide continuous data on a wide range of
    hemodynamic parameters (measurements of the heart's ability to deliver
    oxygen-rich blood throughout the body). The Company's primary products, the
    BioZ(TM) System, BioZ(TM) Portable, BioZ.com(TM) use Thoracic Electrical
    Bioimpedance (TEB) technology to obtain data which is typically obtained
    only through a time-consuming, costly, and potentially dangerous invasive
    procedure called Pulmonary Artery Catheterization (PAC). The BioZ(TM)
    product line uses the Company's core technology, the proprietary DISQ(TM)
    (Digital Impedance Signal Quantifier) Technology, and the Z MARC(TM)
    (Modulating Aortic Compliance) algorithm, which together provide improved
    measurements of impedance waveforms and automatic electronic calibration,
    thereby increasing the repeatability and reliability of TEB technology.
    Since TEB monitoring is noninvasive, it eliminates procedure risk and
    potentially decreases the length of a hospital stay, thereby reducing
    patient cost.

    Liquidity

    The Company has incurred significant operating losses and negative cash
    flows from operations. Continuation of the Company's operations is dependent
    upon the success of the Company's current and follow-on products. The market
    for the Company's products is in a relatively early stage of development,
    and there can be no assurance that the market will ultimately develop or
    that the Company will be successful in marketing its products.

    Until such time, if ever that the Company is able to successfully market
    its products and attain positive cash flow and profitability, the Company
    will be dependent on outside financing sources to meet its liquidity needs.
    There can be no assurance that such additional future funding will be
    available on terms attractive to the Company, or at all.

    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 which are financially stable. At
    November 30, 1998, the Company has cash deposits in excess of federally
    insured limits totaling $505,107.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997


   Investments in Marketable Securities

   In accordance with Statement of Financial Accounting Standards ("SFAS") No.
   115, Accounting for Certain Investments in Debt and Equity Securities,
   management classified the Company's investments as available-for-sale
   securities. Available-for-sale securities are carried at fair-value, with the
   unrealized gains and losses, net of tax (if applicable). Realized gains and
   losses and declines in value deemed to be other-than-temporary are charged to
   operations, and a new cost basis for the security is established. The cost of
   securities sold is based on the specific identification method. Interest on
   securities available-for-sale is included in other expense, net. During
   fiscal 1997, certain equity securities were sold for a loss of $164,853. The
   Company had no investments in marketable securities at November 30, 1998 or
   November 30, 1997.

   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 reserves for
   obsolete, slow-moving and non-saleable inventory.

   Property and Equipment

   Property and equipment are stated at cost.  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.

   Revenue Recognition

   Revenue is recognized when a product is shipped or a service is provided to
   the customer with appropriate provisions for returns and allowances.  During
   the first three quarters of 1997, the Company recognized revenue upon
   shipment to distributors. As a result of the Company's decision to sell its
   products primarily through a direct sales force (Note 9), a 100% provision
   for inventory returns was established for sales to distributors which had
   not, as of November 30, 1997, been resold to end users. During fiscal 1998,
   $591,820 of product had been returned against this provision.

   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.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997

   Advertising

   All advertising costs are expensed in the period incurred.  Advertising
   costs, including trade show expenses, amounted to $339,470 and $329,354 in
   1998 and 1997, respectively.

   Patents

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

   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

   Effective December 1, 1997, the Company adopted Financial Accounting
   Standards Board Statement No. 128 (SFAS 128). Net loss per common share is
   computed by dividing the net loss to common shareholders by the weighted
   average number of shares outstanding during the period. Diluted loss per
   share, calculated by including the additional common shares issuable upon
   exercise of outstanding options and warrants in the weighted average share
   calculation. Basic and diluted loss per common share are the same for the
   years ended November 30, 1998 and 1997 as all potentially dilutive securities
   are antidilutive. For the year ended November 30, 1998, 3,550,000 options and
   447,848 warrants, each convertible into one share of common stock, were not
   included in the diluted earnings per share calculation as their effect was
   antidilutive. All current and prior period information presented conforms to
   the provisions of SFAS 128.

   Significant Customers

   During fiscal years 1998 and 1997, the Company's sales to customers and
   distributors outside of the United Stated accounted for 25% and 30% of net
   sales, respectively. One distributor, Landice International, accounted for 7%
   of net sales in fiscal 1998, and 29% in 1997. One end user that accounted 
   for 12% of net sales in 1997, accounted for no sales during fiscal 1998. As a
   result of the Company's decision to direct it's sales efforts to the end user
   market, no one customer represented more than 10% of net sales in fiscal
   1998.

   Fair Value of Financial Instruments

   The carrying amount of cash and cash equivalents, accounts receivable,
   accounts payable and accrued expenses, 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 the
   note payable to bank and 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. It is not practical to estimate the fair value of Notes
   payable to related parties because of the related party nature.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997

   Stock-Option Plan

   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 Statement of Financial
   Accounting Standards ("SFAS") No. 123, which established accounting and
   disclosure requirements using fair-value-based method of accounting for stock
   based employee compensation plans.

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

   In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
   Assets and for Long-Lived Assets to be Disposed of, the Company reviews long-
   lived assets and certain identifiable intangibles for impairment whenever
   events or changes in circumstances indicate that the carrying amount of an
   asset may not be recoverable. Impairment losses for long-lived assets to be
   held and used are recorded by reducing the carrying value, to the fair value
   of the asset. Assets to be disposed of are reported at the lower of the
   carrying amount or fair value, less costs to sell.

   Use of 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 generally accepted accounting
   principles.  Actual results could differ from those estimates.

   Reclassifications

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

(2) Inventory

   Inventory at November 30, 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                                      1998                   1997
                                                                   ---------              ---------- 
<S>                                                               <C>                 <C>
Electronic components and subassemblies                            $ 497,050              $ 420,481
Finished goods                                                       410,191                  70,226
Demonstration units                                                  547,101                 346,398
Distributor inventory to be returned (note 9)                         38,025                 367,367
Less provision for obsolete inventory                               (296,885)               (155,258)
Less provision for demonstration inventory                          (200,118)               (143,103)
                                                                   ---------              ---------- 
                                                                   $ 995,364              $  906,111
                                                                   =========              ==========
</TABLE>

   In 1998 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, it would be able to obtain alternate suppliers within a
   reasonable amount of time to meet production demands. During fiscal 1997 the
   Company purchased most electronic components and subassemblies from three
   suppliers.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997

(3) Property and Equipment

    Property and equipment at November 30, 1998 and 1997 consist of the
    following:


<TABLE>
<CAPTION>
                                                          1998         1997
                                                       ---------     ---------
        <S>                                            <C>           <C> 
        Furniture                                      $  85,362     $  82,840
        Exhibit booth                                      4,800        48,013
        Other equipment                                  120,579        91,924
        Lab equipment                                     68,122        68,122
        Manufacturing equipment and fixtures              26,429        13,532
        Sales equipment                                  106,853        55,040
        Computer software and equipment                   27,429        10,814
        Leasehold improvements                           115,885       113,196
                                                       ---------     ---------
 
                                                         555,459       483,481
        Less accumulated depreciation and amortization  (288,542)     (238,827)
                                                       ---------     ---------
                                                       $ 266,917     $ 244,654
                                                       =========     =========
</TABLE>

    At November 30, 1998, the Company had $107,218 of property and equipment
    under capital lease with accumulated amortization of $19,677. The Company
    had no property and equipment under capital lease at November 30, 1997.

(4) Financing Agreements

    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
    loan bears interest at one percent above the Bank's Prime Rate, and is
    guaranteed by the co-chairmen of the Company's Board of Directors. In August
    1998, the Company repaid $1,000,000 of the $3,000,000, reducing the
    outstanding balance to $2,000,000. In exchange, the Bank extended the term
    of the loan until February 28, 1999. 

    On February 26, 1999 the Company and City National Bank signed a commitment
    letter to enter into a three year unsecured term loan agreement. The
    proceeds of the new loan will be used to repay the Imperial Bank term loan.
    Under the terms of the City National Bank agreement the Company will borrow
    $2,000,000 with monthly interest-only payments for the first year at the
    Bank's Prime Rate and is guaranteed by the Co-chairmen of the Company's
    Board of Directors. Beginning March 2000, the Company will commence
    consecutive monthly principal installments of $83,333 each plus interest at
    one percent above the Bank's Prime Rate.
    
    In March 1998, the Company entered into an 18 month unsecured private line
    of credit agreement with the co-chairmen of the Company's Board of
    Directors. Under the terms of the agreement the Company may borrow up to
    $3,000,000 on an as-needed basis at an annual interest rate of 10.0%. In
    August of 1998 the Company borrowed $1,000,000 on this line of credit and
    used the proceeds to reduce outstanding borrowings under the bank term loan.
    In February 1999, the line of credit was extended to September 30, 2000.

    In January 1999, the Company obtained a secured revolving credit line with a
    bank. The credit line provides for borrowing up to $3,000,000 at the bank's
    prime rate. Under the terms of the agreement, the Company is required to
    meet certain loan covenants, including maintenance of minimum quick ratio
    and maximum quarterly losses. The credit line is collateralized by all the
    assets of the Company.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION


                         Notes to Financial Statements

                           November 30, 1998 and 1997

(5)   Long-term Debt

      Long-term debt at November 30 , 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                                                1998                     1997
                                                                             ----------               ---------
<S>                                                                          <C>                      <C> 
Prepetition and postpetition payroll taxes payable in
 installments including interest at 8% through March 1999                     $  33,793                $ 12,823

Capital lease obligations payable in monthly installments
 between $182 and  $1,192, bearing interest at rates between
 10% and 17.2%, maturing from December 2000 to February 2003.                    91,238                     --

Note payable to CardioDynamics Holdings, LLC, a related party,
 collateralized by a subordinate interest in substantially all 
 assets of the Company, bearing interest at 7.5% per annum with 
 interest-only payments due quarterly, maturing March 31, 2000. 
 Convertible into common stock at a rate of $.25 per share.                      25,000                  25,000
                                                                               --------                 --------   
Less current maturities of long-term debt                                       150,031                  37,823
                                                                                (37,816)                (11,300)
                                                                               --------                 --------
                                                                               $112,215                 $ 26,523
                                                                               ========                 ========
</TABLE>

   The aggregate maturities of long-term debt subsequent to November 30, 1998
   are as follows:  1999, $37,816; 2000, $66,404; 2001, $29,818; 2002, $12,517
   and 2003 $3,476.

(6) Shareholders' Equity

    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
    is collateralized by a subordinated interest in substantially all of the
    assets of the Company. Advances under the CDH note accrue interest at 7.5%
    with interest-only payable quarterly through maturity at March 31, 2000. At
    November 30, 1998 and 1997, $25,000 was outstanding under this note. (See
    note 5).

    On March 6, 1997, the Company sold 2,527,102 shares of common stock in a
    $7.2 million private placement.  EVEREN Securities, Inc. served as placement
    agent for 2,298,950 shares and another 228,152 shares were sold pursuant to
    a related offering.  After issuance costs of approximately $550,000, the
    Company received net proceeds of approximately $6,650,000. In August 1997
    the Company registered such common stock for public resale.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997


    In accordance with the terms of their stock purchase agreements, several
    private investors rescinded their purchases of a total of 236,220 shares of
    common stock (purchased in fiscal 1996 for $0.6 million cash) and reinvested
    the $0.6 million in 228,152 shares of common stock, issued under and subject
    to the terms of the offering, at a price of $2.85 per share.

    The Company converted all previously outstanding preferred stock to common
    stock during 1997.

    All Series C warrants outstanding at November 30, 1997 expired unexercised
    on December 31, 1997.

    In connection with the March 6, 1997 private placement the Company issued
    276,514 common stock purchase warrants. 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 6, 2002.

    On May 15, 1998 in connection with the completion of the bank financing
    agreement 33,334 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 $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 represents the right to purchase one share
    of the Company's common stock at an exercise price of $2.00, until the
    expiration date of August 21, 2003.

    On August 21, 1998 the Company sold 3,000 shares of Series A convertible
    preferred stock to institutional investors. In conjunction with this
    financing 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.
    
(7) Convertible Preferred Stock

    On August 21, 1998, the Company sold 3,000 shares of Series A convertible
    preferred stock and 123,000 warrants to institutional investors for
    $3,000,000, net of issuance costs of $117,463. The Series A preferred stock
    is 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 has a cumulative dividend of 3% per year, which can be paid
    in cash or the Company's common stock at the discretion of the Company. For
    the year ended November 30, 1998, the Company issued 8,152 shares of
    common stock as dividends to the preferred shareholders.

    All Series A convertible preferred stock still outstanding on August 21,
    2002, will automatically be converted to common stock. The holders of the
    Series A preferred stock can require redemption for cash (at 130% of the
    stated value) instead of conversion for shares in the event that the Company
    is acquired or defaults in certain ways, such as: NASDAQ delisting, NASDAQ
    extended suspension, or failure to deliver common stock as required upon
    conversion.
    
    During fiscal 1998, the preferred shareholders converted 760 shares of
    Series A preferred stock in exchange for 554,134 shares of common stock. The
    original purchasers of the Series A preferred stock can, under certain
    conditions, require the Company to sell them up to 3,000 shares of Series B
    preferred stock. They can only require this between May 23, 1999 and
    November 19, 1999 and they can only require it if and when the Company's
    common stock exceeds $2.70 per share for ten consecutive days. The Series B
    preferred stock would be substantially similar to the Series A preferred
    stock, but it would have a fixed conversion price of at least $3.10 per
    common share.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997


(8) 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 1998, 4,000,000 shares of common stock have
    been reserved for granting of options at 100% 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 1998 and
    1997, 100,000 and 156,000 options were granted to the Board of Directors.

    The Option Plan also provides for grants of options and issuances of stock
    in exchange for professional services. During 1998, the Company did not
    grant any stock options in exchange for professional services. In 1997, the
    Company granted 35,000 stock options to four individuals in exchange for
    professional services.

    At November 30, 1998, there were 1,967,000 shares available for grant under
    the Option Plan. The per share weighted-average fair value of stock options
    granted during 1998 and 1997 was $1.22 and $1.81 on the date of grant using
    the Black Scholes option-pricing model with the following weighted-average
    assumptions: 1998 - expected dividend yield 0%, risk-free interest rate of
    4.86%, expected volatility of 74.5% and an expected life of 4 years; 1997 -
    expected dividend yield 0%, risk-free interest rate of 6.26%, expected
    volatility of 67% and an expected life of 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
    indicated below:
<TABLE>
<CAPTION>
                                                                     1998                  1997
                                                               -----------------     -----------------
<S>                                                               <C>                  <C>
Net loss to common shareholders, as reported                     $(5,357,749)          $(4,278,088)
Pro forma net loss to common shareholders                        $(6,595,785)          $(4,627,069)
Net loss per share to common shareholders, basic and
  diluted, as reported                                           $      (.17)          $      (.14)
Pro forma net loss per share to common shareholders
  basic and diluted                                              $      (.21)          $      (.15)
</TABLE>

   Pro forma net loss reflects only options granted since November 30, 1995.
   Therefore, the full impact of calculating compensation cost for stock options
   under SFAS No. 123 is not reflected in the pro forma net income amounts
   presented above because compensation cost is reflected over the options'
   vesting period of up to 4 years, and compensation cost for options granted
   prior to December 1, 1995 is not considered.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997

   Stock option activity during the periods indicated is as follows:
<TABLE> 
<CAPTION> 
 
                                                              Weighted-
                                            Number of          average 
                                             shares         exercise price 
                                       -------------       ----------------
                                       
<S>                                    <C>                        <C>       
Balance at November 30, 1996                681,000    $         1.60       
Granted                                     829,000              3.23       
Exercised                                   (30,000)             1.25       
Forfeited                                   (28,000)             3.12       
Expired                                      (8,000)             3.44       
                                       --------------      -----------------
Balance at November 30, 1997              1,444,000    $         2.50       
                                                                              
Granted                                   1,464,000              1.99       
Exercised                                   (28,000)             1.06       
Cancelled                                       -0-               -0-       
Forfeited                                  (537,832)             2.85       
Expired                                    (337,168)             3.32       
                                       --------------      ---------------
                                                                              
Balance at November 30, 1998              2,005,000    $         1.91       
                                       ==============      ===============
</TABLE>                                                                 


   At November 30, 1998, the range of exercise prices and weighted-average
   remaining contractual life of outstanding options was $0.95 - $4.56 and 8.7
   years.  At November 30, 1998 and 1997, the number of options exercisable was
   604,002 and 534,500, respectively, and the weighted-average exercise price of
   those options was $2.21 and $2.25, respectively.

   The following table sets forth information regarding options outstanding at
   November 30, 1998:


<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>
          $    0.95 - 1.31        565,000           7.4            $ 1.12         271,000       $     1.16
               1.50 -  2.25       983,000           9.7              1.80          30,000             1.89
               2.34 - 3.50        410,000           8.2              3.07         266,002             3.09 
               3.57 - 4.56         47,000           6.3              3.85          37,000             3.87
                               ------------                                      ---------- 
                                2,005,000           8.7            $  1.92        604,002       $     2.21
                               ============                                      ==========
</TABLE>
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997


   On October 16, 1998, the Company adopted a Stock Option Cancellation/Regrant
   program. Each employee was given the opportunity to exchange their existing
   options for new options, exercisable at $1.625 per share, the fair value of
   common stock on October 16, 1998. All accrued vesting under the old stock
   options was forfeited, and the new options began a new vesting schedule (over
   the same number of years as the old option's vesting schedule). For all
   employees other than executive officers, the new options were granted for the
   same number of shares as the old options. For executive officers, the new
   options were granted for a fewer number of shares. The reduction in option
   shares for the executive officers was calculated by a formula based on the
   Black-Scholes option valuation model.

   Under the program 537,832 Plan options were forfeited with an average
   exercise price of $2.74. 673,000 new options were granted under the Plan with
   an exercise price of $1.625 per share and 135,168 options were forfeited.
   Eligible optionees representing 678,000 options with an average price $1.75
   elected not to participate in the program.

   In June 1995, the Company entered into an employment agreement with its then
   Chief Executive Officer, Richard Otto. Under the terms of the agreement, Mr.
   Otto was granted 500,000 non-transferable stock options (not under the Option
   Plan) at an exercise price of $0.50 per share. The options vest if the quoted
   market price of the Company's stock attains specified levels. Upon the
   attainment of the specified levels, the Company will record compensation
   cost. During 1997, Mr. Otto voluntarily agreed to reduce the number of
   options to 250,000. At November 30, 1998, none of the criteria have been met
   whereby these options would vest. The options expire June 15, 2005.

   On March 23, 1998, the Company entered into an employment agreement with
   Michael Perry who succeeds 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 the 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.  Under the October 16, 1998 Stock Option Cancellation/Regrant
   program, 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
   a four-year period with a commencement date of October 16, 1998.  At
   November 30, 1998, none of the options are vested.  The options expire on
   October 15, 2008.

(9) Revenue Recognition and Distributor Agreements

   During fiscal 1997, the Company established exclusive distribution agreements
   with seventeen regional specialty distributors to represent the Company in
   the U.S. hospital market.  Together these distributors covered 44 states and
   employed over 100 sales representatives.  During the third quarter of fiscal
   1997, the Company terminated three of these distributor agreements and
   established a provision for returns of $168,920 for anticipated returns of
   demonstration and stocking units from these underperforming distributors.  By
   the end of fiscal 1997, it was apparent that there was a need to broaden the
   sales channel.  The Company opted to add a direct sales force targeted at
   both the hospital and outpatient markets in the majority of the U.S.  The
   Company believes that in many situations, a direct sales force can more
   effectively leverage the cost and safety advantages of the BioZ over
   traditional invasive techniques by marketing to and educating health care
   professionals and third-party payers, including HMOs, as to the positive cost
   advantages and positive clinical outcome profiles of the BioZ.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997

   Despite the significant benefits of the BioZ Systems and their numerous
   applications, it is a "concept sale" that requires physicians to change old
   habits (some of which are reimbursed at a higher rate than the BioZ System).
   In addition, the hospital buying cycle can be long and difficult,
   particularly for a product that is unbudgeted.  Consequently, the amount of
   time and effort required to penetrate these markets is often greater than the
   time and effort many of the distributor sales representatives were and are
   willing to invest.

   As the Company planned to expand its direct sales force in targeted
   metropolitan areas, it recognized that it may not be able to maintain
   satisfactory relationships with its current regional specialty distributors.
   Under the terms of the domestic distribution agreements, distributors have
   the right, under certain circumstances (including the Company placing a
   direct sales representative in the distributor's territory), to terminate the
   distribution agreement and return demonstration and stocking inventory
   purchased from the Company.  Because the Company anticipated that it may be
   required to take back BioZ Systems and unused supplies, and refund amounts
   paid by distributors (net of contracted depreciation and restocking charges),
   the Company established a $776,540 provision for distributor returns which
   represented 100% of sales to domestic distributors which had not, as of
   November 30, 1997 been resold to end users. At November 30, 1997, $161,680 of
   the provision for returns was applied against distributor accounts receivable
   as an allowance for returns with the $614,860 balance classified as a
   provision for inventory returns. At November 30, 1998, $20,492 remained as an
   allowance against accounts receivable and $23,040 as a provision for
   inventory returns.


(10)   Income Taxes

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

<TABLE>      
<CAPTION> 
                                                   1998                 1997
                                       -----------------     -----------------
     <S>                            <C>                     <C>
     Federal                        $          --           $        --
     State                                    800                    800
                                       -----------------      -----------------
                                    $         800           $        800
                                       =================      =================

</TABLE>
                                        
At November 30, 1998, the Company had federal net operating loss carryforwards
of approximately $20,037,800, expiring as follows:

<TABLE> 
<CAPTION> 
          <S>           <C>               <C>          <C>
          1999          $1,342,000        2008         $433,300
          2000             328,900        2009          513,000
          2001             442,500        2010        2,376,000
          2002           1,284,000        2011        2,445,000
          2005             752,600        2012        3,201,100
          2006             787,400        2013        5,575,400
          2007             556,600
</TABLE> 
<PAGE>
 
                   CARDIODYNAMICS INTERNATIONAL CORPORATION


                         Notes to Financial Statements

                          November 30, 1998 and 1997



   These amounts may be subject to significant limitations under IRC Section
   382. 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 certain occurrences, including significant ownership changes.  A
   valuation allowance has been recognized for the full amount of the deferred
   tax asset created by these carryforwards.

   At November 30, 1998, the Company had state net operating loss carryforwards
   of approximately $13,596,000 that expire in years 1999 to 2002.



   The tax effects of temporary differences that give rise to significant
   portions of the deferred tax assets as of November 30, 1998 and 1997 are as
   follows:


<TABLE>
<CAPTION>
                                                            1998                 1997     
                                                         -----------          -----------
<S>                                                      <C>                  <C>        
    Deferred tax assets:                                                                 
      Net operating loss carryforwards                   $ 8,076,500          $ 5,208,800 
      Inventory principally due to the provision             150,400              346,207 
      Accrued expenses                                       219,100                   --
      Other                                                   18,500              164,193
                                                         -----------          -----------
           Total gross deferred tax assets                 8,464,500            5,719,200
    Valuation allowance                                   (8,464,500)          (5,719,200)
                                                         -----------          -----------
           Net deferred tax assets                       $        --          $        --
                                                         ===========          =========== 
</TABLE>


   A 100% valuation allowance has been applied to these net deferred tax assets.
   Accordingly, no tax benefit has been recorded for the years ended November
   30, 1998 and 1997.


(11)  Leases


   In June 1997, the Company entered into a five-year operating lease for a
   19,000 square-foot manufacturing facility which also houses the Company's
   research, development, marketing, sales and administrative activities. Rent
   expense for the operating lease was $291,214 and $114,102 during 1998 and
   1997, respectively.

   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,
   1998 are:


<TABLE>
<CAPTION>
               Year ending November 30,
     ----------------------------------------
           <S>                                       <C>    
           1999                                      $    266,115
           2000                                           255,444    
           2001                                           230,140
           2002                                           179,600 
                                                     -------------
           Total minimum lease payments              $    931,299
                                                     =============
</TABLE>


(12) 401K Plan


    Effective April 1996 the Company established a qualified savings plan under 
    Section 401(k) of the Internal Revenue Code. Employees who have completed
    three months of service and are 21 years of age are eligible to participate.
    Eligible employees may contribute up to 20% of annual compensation, subject
    to limitations. The Company may make discretionary contributions to the
    plan. The Company made no contributions to the plan during 1997 and
    contributed $7,035 to the plan during fiscal 1998.
<PAGE>
 
                    CARDIODYNAMICS INTERNATIONAL CORPORATION

                         Notes to Financial Statements

                           November 30, 1998 and 1997



(12) 401k Plan

     Effective April 1996 the Company established a qualified savings plan under
     Section 401(k) of the Internal Revenue Code. Employees who have completed
     three months of service and are 21 years of age are eligible to
     participate. Eligible employees may contribute up to 20% of annual
     compensation, subject to limitations. The Company may make discretionary
     contributions to the plan. The Company made no contributions to the plan
     during 1997 and contributed $ 7,035 to the plan during fiscal 1998.
<PAGE>
 
ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

In June 1997, the Audit Committee of the Board of Directors recommended, and the
Board of Directors approved, the engagement of the independent certified public
accounting firm of KPMG LLP to audit the financial statements of our Company for
the fiscal year ended November 30, 1997.  Accordingly, that firm was so engaged
on June 26, 1997 and the engagement of Peterson & Co. as our independent
auditors was discontinued on June 26, 1997.

The report of Peterson & Co. on our financial statements for the fiscal year
ended November 30, 1995 did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified as to audit scope or accounting
principles.  The report did contain, however, an explanatory paragraph regarding
our ability to continue as a going concern.  Our financial statements for the
fiscal year ended November 30, 1996 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.

We had no disagreements with Peterson & Co. on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to the satisfaction of Peterson & Co., would
have caused Peterson & Co. to make reference to the matter in their reports, and
Peterson & Co. never advised us of any event of the kind mentioned in Item
304(d)(1)(iv)(B) of Regulation S-B.

We had not consulted with KPMG LLP during the prior two years or subsequent
interim period prior to June 26, 1997 on either the application of accounting
principles to a specific completed or contemplated transaction, or the type of
opinion KPMG LLP might issue on our financial statements.  No written or oral
advice was provided to us by KPMG LLP that was an important factor considered by
us in reaching a decision as to any accounting, auditing or financial reporting
issues.

We requested Peterson & Co. to furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not Peterson & Co. agrees
with the above statements.  The furnished letter states that Peterson & Co.
agrees with the above statements.
<PAGE>
 
                                    PART III


ITEM 9.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
              COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

The names of our directors and executive officers, together with certain
information regarding them, as of February 20, 1999 are as follows:
<TABLE>
<CAPTION>
 
               Name                       Age                    Position                                  
               ----                       ---                    --------                                  
<S>                                       <C>        <C>                                                   
Allen E. Paulson                          76         Co-Chairman of the Board of Directors                 
James C. Gilstrap                         62         Co-Chairman of the Board of Directors                 
Michael K. Perry                          38         Chief Executive Officer and Director                  
Rhonda F. Pederson                        38         President                                             
Stephen P. Loomis                         38         Chief Financial Officer                               
Richard E. Trayler                        48         Chief Operating Officer                               
Dennis G. Hepp                            50         Chief Technology Officer                              
Stephenson M. Dechant                     43         Director                                              
Nicholas V. Diaco, M.D. (1)               59         Director                                              
Louis P. Ferrero                          56         Director                                              
Cam L. Garner                             50         Director                                              
Richard O. Martin, Ph.D.                  59         Director                                              
Richard E. Otto                           49         Director                                              
Michael D. Padilla                        50         Director                                               
</TABLE>
___________________
(1)   Chairman of our Medical Advisory Board

During the past five years, the business experience, principal occupations and
employment of our directors and executive officers have been as follows:

Allen E. Paulson.  Mr. Paulson has been Co-Chairman of our Board since June 1996
and Director since February 1995.  Mr. Paulson owns numerous companies having
substantial investments in diverse industries, including aircraft; energy
exploration; horse breeding, training, and racing; automobile dealerships;
gaming and entertainment; and real estate and resorts.  Mr. Paulson is the
founder and Chairman Emeritus of Gulfstream Aerospace Corporation, the world's
leading designer, manufacturer and marketer of large corporate jets.  He has
earned numerous awards including the Horatio Alger Award for Distinguished
Americans, and the American Academy of Achievement's Golden Plate Award, as well
as five honorary doctorates.

James C. Gilstrap.  Mr. Gilstrap served as Chairman of the Board of our Company
from May 1995 to June 1996, and has been Co-Chairman of the Board since June
1996.  Mr. Gilstrap is retired from Jefferies & Company, where he served as
Senior Executive Vice President, Partner, and Member of the Executive Committee.
Mr. Gilstrap serves on the Board of Full House Resorts, Inc. and 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.
<PAGE>
 
Michael K. Perry.  Mr. Perry has been our Chief Executive Officer and a Director
of our Company since April 1998.  From November 1994 until June 1996, Mr. Perry
served as Vice President of Operations at Pyxis Corporation, a publicly traded
company that provides healthcare automation and information management services
as well as pharmacy management services to hospitals and outpatient facilities.
In 1996, Pyxis was acquired by Cardinal Health, Inc.  Prior to that, Mr. Perry
held the positions of Director of Quality for the Hewlett Packard DeskJet Group
and Business Manager for the Hewlett Packard Medical Products Group.  Mr. Perry
holds a Bachelor of Science in Mechanical Engineering from General Motors
Institute and a Masters in Business Administration from Harvard Business School.

Rhonda F. Pederson.  Ms. Pederson has been the President of our Company since
June 1997.  She served as Vice President of Operations from June 1995 to January
1996 and as Chief Operating Officer from February 1996 to May 1997.  Ms.
Pederson has over 15 years of healthcare experience, including medical product
development, rapid growth transitions, sales and marketing, and executive
management.  From July 1992 until May 1995, Ms. Pederson held the positions of
President/Chief Executive Officer, Vice President of Sales and Marketing, and
Board member at Culture Technology, Inc., a privately held biotechnology company
specializing in culturing autologous skin for burn patients.  Ms. Pederson has
also held positions at General Electric Medical Systems and Quinton Instrument
Company, both medical device subsidiaries of publicly held companies.  Ms.
Pederson holds a Bachelor of Pharmacy from Washington State University and is
completing a Masters in Business Administration, Executive Program, from UCLA
Anderson School of Business in Los Angeles.

Stephen P. Loomis.  Mr. Loomis joined our Company in September 1996 as Vice
President of Finance and has held the positions of Vice President of Finance,
Chief Financial Officer and Corporate Secretary since April 1997.  Mr. Loomis is
a Certified Public Accountant with more than 13 years experience in finance and
business development with both publicly traded and privately held companies.
From 1993 until joining CardioDynamics, he served as Director of Financial
Reporting at the Kinko's Inc. group of companies.  From 1988 to 1993, Mr. Loomis
was the Chief Financial Officer for Terminal Data Corporation, a publicly traded
high-speed document imaging company.  Prior to that, Mr. Loomis was with Peat
Marwick Main & Co.  He earned his Bachelor of Science Degree in Business
Administration from California State University at Northridge.

Richard E. Trayler.  Mr. Trayler joined our Company in July 1997 as Chief
Operating Officer.  From 1982 to 1997, Mr. Trayler held positions of regional
and divisional sales manager at Quinton Instrument Company, a medical device
subsidiary of American Home Products Corporation.  He has also held positions at
the Heart Institute for CARE, the University of Washington, and the Boeing
Company where he assisted cardiologists in the clinical assessment of cardiac
patients.  Mr. Trayler was also the founder of the Health Enrichment Institute
and the Amarillo Cardiopulmonary Rehabilitation Program, specializing in
cardiology/health hazard appraisals and the development of cardiopulmonary
exercise programs.  Mr. Trayler earned a Bachelor of Science Degree from Texas
A&M University, a Master of Science Degree from the University of Washington,
and a Master of Christian Leadership Degree from Western Conservative Baptist
Seminary (Phoenix Seminary).

Dennis G. Hepp.  Mr. Hepp was appointed Chief Technology Officer of our Company
in June 1997.  Mr. Hepp has served as a consultant to us since July 1995.  He
has over 29 years experience in cardiovascular clinical medicine and the medical
device industry.  From 1974 to 1986, Mr. Hepp held various engineering and
management positions at Medtronic, Inc.  In 1989, Mr. Hepp founded and he
continues to serve as Managing Director of Rivertek Medical Systems, Inc.,
Minneapolis, Minnesota, which serves as an engineering consulting firm to
medical device manufacturers, including Guidant Corporation and Medtronic, Inc.,
as well as emerging medical technology companies such as CardioDynamics. Mr.
Hepp holds a Bachelor of Electrical Engineering from the University of Detroit.
<PAGE>
 
Stephenson M. Dechant.  Mr. Dechant has been a Director of our Company since
February 1995 and served as Chief Financial Officer of our Company from February
1995 to March 1997 and Corporate Secretary from February 1995 to July 1997.  Mr.
Dechant has been Chief Financial Officer for many of Mr. Allen Paulson's
companies since 1992.  His previous experience involves financial management and
reporting for high net worth individuals and companies primarily involved in the
food industry, including Dole Fresh Fruit and Chart House Enterprises.  Mr.
Dechant graduated from the University of Southern California with a Bachelor of
Science in Business Administration and from the University of San Diego with a
Masters in Business Administration.

Nicholas V. Diaco, M.D.  Dr. Diaco has served as a Director of our Company and
Chairman of our Medical Advisory Board since February 1995.  Currently, 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. He is a
Fellow of the American College of Cardiology and is board certified in
Cardiovascular Disease.  He serves as a Clinical Assistant Professor of Medicine
at the University of California, Los Angeles.  Dr. Diaco was a Chief of Internal
Medicine in the U.S. Air Force and has published numerous articles on the
effects of exercise on the heart.  He received his M.D. with honors from
Hahnemann Medical College and Hospital in Pennsylvania.

Louis P. Ferrero.  Mr. Ferrero has served as a Director of our Company since
July 1997.  Mr. Ferrero has been Chairman and Chief Executive Officer of Conseco
Global Investments since 1991.  Conseco Global Investments is an investment
company, which identifies emerging investment opportunities for Conseco, Inc., a
major insurance holding company.  Before joining Conseco Global Investments, Mr.
Ferrero was Chairman and Chief Executive Officer of Anacomp, Inc., a full-
service provider of computer and micrographics equipment, service and supplies.
Mr. Ferrero holds a Bachelor of Economics and Marketing degree from the
University of Florida.

Cam L. Garner.  Mr. Garner has served as a Director of our Company since July
1997.  Mr. Garner has been Chairman, President and Chief Executive Officer of
Dura Pharmaceuticals, Inc., a respiratory products company, since 1990.  Prior
to joining Dura Pharmaceuticals, Inc., Mr. Garner was Senior Vice President of
Sales and Marketing with Hybritech, Inc., a division of Eli Lilly & Co.  Mr.
Garner serves as Director for Trega Biosciences, Inc., Nanogen, Inc., Safeskin
Corporation and Spiros Development Corporation as well as for Dura
Pharmaceuticals.  Mr. Garner earned a Masters Degree in Business Administration
from Baldwin-Wallace College and a Bachelor of Arts degree in Biology from
Virginia Wesleyan.

Richard O. Martin, Ph.D.  Dr. Martin has served as a Director of our Company
since July 1997.  Dr. Martin is currently President of Medtronic-Physio-Control
Corporation, a medical device company which designs, manufactures and sells
external defibrillators and heart monitors.  Until Medtronic's acquisition in
1998 of Physio-Control Corporation, Dr. Martin was Chairman and CEO. Prior to
that he was Vice President of Cardiovascular Business Development with Sulzer
Medica and has held several management positions at Intermedics, Inc. and
Medtronic, Inc.  Dr. Martin serves on the Boards of Maxxim Medical, Inc., SeaMED
Corporation and Encore Medical.  Dr. Martin earned a Doctorate in Electrical/
Biomedical Engineering at Duke University.

Richard E. Otto.  Mr. Otto has been a Director of our Company since September
1996 and served as Chief Executive Officer of our Company from June 1995 until
April 1998.  Mr. Otto is currently providing consulting services to various
small businesses in the area of financial investments.  From September 1987 to
May 1994, Mr. Otto was with Sensor Technology, Inc., a privately held medical
distribution company, of which he was a founder.  In 1994, Sensor Technology,
Inc. was sold to a division of Eli Lilly and Company.  Prior to that time, Mr.
Otto held positions with Medtronic, Inc., Cardiac Pacemakers, Inc., Intermedics,
Inc. and Eli Lilly & Company.  Mr. Otto serves on the Board of Endeavor
Technologies Inc.  Mr. Otto holds a Bachelor of Science degree from the
University of Georgia.
<PAGE>
 
Michael D. Padilla.  Mr. Padilla has served as a Director of our Company since
1995.  Mr. Padilla is a partner with the law firm Thorsnes, Bartolotta, McGuire
& Padilla.  He has practiced law in San Diego since 1972, specializing in
personal injury, product liability and medical malpractice litigation.  He is a
member of the Consumer Attorney Associations in both California and the local
branch in San Diego.  Mr. Padilla received his J.D. from the University of San
Diego School of Law.

Section 16(a) Beneficial Ownership Reporting Compliance

We believe that each person who, at any time during the fiscal year ended
November 30, 1998, 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.
<PAGE>
 

ITEM 10.       EXECUTIVE COMPENSATION


Summary of Cash and Certain Other 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, 1996, 1997 and 1998 of those persons who
were, at November 30, 1998 (i) the Chief Executive Officer and (ii) the other
executive officers of CardioDynamics whose aggregate direct remuneration from
CardioDynamics during the fiscal year ended November 30, 1998 exceeded $100,000
("Named Officers").


                                         SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
 
                                                              Long-Term Compensation
                                                              ----------------------
                                                                 Awards       Payouts
                                                                 ------       -------
                                                               Securities
                                                               Underlying
Name and                         Annual Compensation/(1) /      Options/         LTIP           All other
Principal Position       Year     Salary ($)     Bonus ($)      SARs (#)       Payouts($)    Compensation($)
----------------------   ----   -------------    ---------    -------------    ----------    ------------------
<S>                      <C>    <C>              <C>          <C>             <C>         <C>
Michael K. Perry         1998    $    1           $   750       1,295,000       $   -0-      $    4,000/(2)/
 Chief Executive         1997     n/a                 n/a             n/a           n/a                n/a
 Officer/(3)/            1996     n/a                 n/a             n/a           n/a                n/a

Rhonda F. Pederson       1998    127,833              751             -0-           -0-          18,000/(4)/
 President               1997    111,308           17,228          75,000           -0-          15,000/(4) /
                         1996     95,000            -0-           150,000           -0-          -0-
 
Stephen P. Loomis        1998     116,583           1,663         120,000/(5)/      -0-           6,000/(2)/
 Chief Financial         1997     103,416          22,849          70,000/(6)/      -0-           3,000/(2)/
 Officer                 1996      18,025/(7)/      -0-            80,000/(6)/      -0-          -0-
 
Richard. E. Trayler      1998     123,750           1,502          80,000/(5)/      -0-           6,000/(2)/
 Chief Operating         1997      60,000/(8)/      -0-           100,000/(6)/      -0-           3,000/(2)/
 Officer                 1996      n/a                n/a             n/a           n/a                n/a
</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.

(2)    Amount represents Company paid allowance for automobile expenses.

(3)    Represents compensation earned by Mr. Perry from his employment with our
       Company commencing April of 1998.

(4)    Amounts represent Company paid lodging of $12,000 in each year and the
       balance is for automobile expenses.

(5)    Options granted under Company Stock Option cancellation/regrant program.

(6)    In conjunction with a Stock Option cancellation/regrant program in 1998,
       previously granted options were cancelled.

(7)    Represents compensation earned by Mr. Loomis from his employment with our
       Company commencing September of 1996.

(8)    Represents compensation earned by Mr. Trayler from his employment with
       our Company commencing July of 1997.
<PAGE>
 
The following table provides information regarding option exercises during the
fiscal year ended November 30, 1998, as well as information with respect to
unexercised options to purchase our Company's Common Stock granted to the Named
Officers in fiscal 1998. None of the Named Officers exercised any stock options
during fiscal 1998.


                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
 
                                          Individual Grants              
                      ------------------------------------------------------------
                                       % of Total
                                    Options Granted
                         Options      to Employees      Exercise     Expiration
Name                     Granted     in Fiscal 1998     Price(1)        Date         
---------------------------------   ----------------   -----------   -----------   
<S>                     <C>              <C>                <C>           <C>          
Michael K. Perry        1,295,000        46%             $1.625       10/16/2008  
Rhonda F. Pederson        250,000         9%             $2.250        3/19/2008  
Stephen P. Loomis         120,000         4%             $1.625       10/16/2008  
Richard E. Trayler         80,000         3%             $1.625       10/16/2008  
</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).

The following table provides further information regarding the Named Officers'
outstanding stock options as of November 30, 1998.  No stock appreciation rights
were granted or exercised, and no stock options were exercised during fiscal
1998.

                    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                  - 0 -                     - 0 -                 -0- / 1,295,000           - 0 - / 1,214,063
Rhonda F. Pederson                - 0 -                     - 0 -                25,000 / 450,000             - 0 - / 312,500
Stephen P. Loomis                 - 0 -                     - 0 -                   -0- / 120,000              - 0 - /112,500
Richard E. Trayler                - 0 -                     - 0 -                  - 0-  / 80,000              - 0 - / 75,000
</TABLE>
_________________
(1)   Represents the difference between the closing sale price of our Common
      Stock on the NASDAQ/AMEX Stock Market on November 30, 1998 and the
      exercise price of the options.

 (2)  The respective Named Officers as of November 30, 1998 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 three additional years.
<PAGE>
 
Stock Options

On October 16, 1998, we adopted a Stock Option Cancellation/Regrant program.
Each employee was given the opportunity to exchange his or her existing options
for new options, exercisable at $1.625 per share.  All accrued vesting under the
old stock options was forfeited, and the new optionee began a new vesting
schedule (over the same number of years as the old option's vesting schedule).
For all employees other than executive officers, the new options were granted
for the same number of shares as the old options.  For executive officers, the
new options were granted for a fewer number of shares.  The reduction in option
shares for the executive officers was calculated by a formula based on the
Black-Scholes option valuation model.

Under the program 2,267,000 options were cancelled with an average exercise
price of $2.74.  1,968,000 new options were granted with an exercise price of
$1.625 per share and 299,000 were forfeited with an average price of $2.75.
Eligible optionees representing 678,000 options with an average price $1.75
elected not to participate in the program.

Employment Agreement

On March 23, 1998, we entered into an employment agreement with Michael Perry
who succeeds 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 the 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.  Under the October
16, 1998 Stock Option Cancellation/Regrant program, 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, 1998, none of the
options are vested.  The options expire on October 15, 2008.

We entered into a Compensation and Employment Agreement, dated June 16, 1995,
with its then Chief Executive Officer, Richard E. Otto.  Under the terms of the
agreement Mr. Otto was granted 500,000 non-transferable stock options (not under
the 1995 Plan) at an exercise price of $0.50 per share. The Agreement provided
for a salary of $150,000 per year and standard fringe benefits.  In January
1996, Mr. Otto and the Company agreed to reduce his annual salary to $120,000
per year and then again in June 1997, they agreed to reduce it to $72,000 per
year and reduced the number of stock options to 250,000.  The options vest when
and if the quoted market price of our Common Stock attains and holds the
following stock prices:

               50,000 vest at $5.00
               50,000 vest at $6.00
               50,000 vest at $7.00
               50,000 vest at $8.00
               50,000 vest at $9.00

At November 30, 1998, none of the options were vested. The options expire June
15, 2005.  Upon the appointment of Mr. Perry as Chief Executive Officer in April
of 1998 Mr. Otto's salary ceased and he and the Company agreed that the 250,000
stock options would continue to be outstanding, subject to the same vesting
requirements.

Long Term Incentive Plans

We do not have any long-term incentive plans (as defined in the Securities and
Exchange Commission regulations).
<PAGE>
 
Directors' Fees

Each non-employee director who has not been employed by us during the proceeding
two years receives 1,000 automatic monthly stock options granted at fair market
value (or, in the case of 10% shareholders Mr. Paulson and Mr. Gilstrap, at 110%
of fair market value) on the last day of the month for each full month of
service as a director of our Company.  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 $2,083.33 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 1997
were $8,333.32 and $24,999.96 in fiscal 1998.

ITEM 11.  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
February 20, 1999, five percent (5%) or more of the outstanding shares of its
Common Stock.

<TABLE>
<CAPTION>
 
Name and Address of                        Shares Beneficially Owned
                                       -----------------------------
Beneficial Owner                       Number  (1)        Percentage (2)
------------------------------------   -----------        ----------
<S>                                    <C>                <C>
 
Allen E. Paulson (3)                   17,901,342          54.4%             
P.O. Box 9660                                                                
Rancho Santa Fe, CA  92067                                                   
                                                                             
James C. Gilstrap (4)                   8,003,253          24.3%             
5067 Shore Drive                                                             
Carlsbad, CA  92008                                                          
                                                                             
Nicholas V. Diaco, M.D. (5)             4,817,905          14.6%             
1302 - 20th Street, Suite 400                                                
Santa Monica, CA  90404                                                      
                                                                             
Joseph F. Diaco, M.D. (6)               4,566,905          13.9%             
4700 North Habana Ave., Suite 403                                            
Tampa, FL  33614                                                             
                                                                             
CardioDynamics Holdings, LLC (7)        4,161,599          12.4%             
P.O. Box 9660                                                                
Rancho Santa Fe, CA  92067                                                   
                                                                             
Edge Financial Group, Inc. (8)          2,213,559           6.7%             
16225 Park Ten Place, Suite 380                                              
Houston, TX  77084                                                           
                                                                             
Joe C. Richardson, Jr. (9)              1,994,038           6.0%              
P.O. Box 8246
Amarillo, TX  79114
</TABLE> 
______________________

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 4,161,599 shares of Common Stock beneficially owned by 
    CardioDynamics Holdings, LLC ("CDH"), of which Mr. Paulson is a member with
    a majority interest. Mr. Paulson disclaims beneficial ownership of these
    shares except to the extent of his individual ownership interest in CDH. See
    footnote (7). Also includes 40,000 shares of Common Stock Mr. Paulson
    beneficially owns, by virtue of his right to acquire such shares from
    CardioDynamics under stock options now exercisable or exercisable within 60
    days. Excludes 3,000,000 shares of Common Stock owned by Mr. Paulson's sons;
    Mr. Paulson disclaims beneficial ownership of such shares.

4)  Includes 4,161,599 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 ownership interest in CDH. See footnote (7). Includes 1,015,000
    shares held in the Jim and Sue Gilstrap Family Limited Partnership.
    Mr.Gilstrap disclaims beneficial ownership of these shares except to the
    extent of his and his wife's ownership interest in the Jim and Sue Gilstrap
    Family Limited Partnership. Also includes 40,000 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. Excludes 65,000 shares of Common Stock owned by Mr.
    Gilstrap's daughters; Mr. Gilstrap disclaims beneficial ownership of such
    shares.

5)  Includes 4,161,599 shares of Common Stock beneficially owned by CDH, of 
    which Dr. Nicholas Diaco is a member with a minority interest. Dr. Diaco
    disclaims beneficial ownership of these shares except to the extent of his
    individual ownership interest in CDH. See footnote (7). Also includes
    145,000 shares of Common Stock Dr. Diaco beneficially owns, by virtue of his
    right to acquire such shares from CardioDynamics under stock options now
    exercisable or exercisable within 60 days.

6)  Includes 4,161,599 shares of Common Stock beneficially owned by CDH, of 
    which Dr. Joseph Diaco is a member with a minority interest. Dr. Diaco
    disclaims beneficial ownership of these shares except to the extent of his
    individual ownership interest in CDH. See footnote (7).

7)  Includes 2,243 shares of Common Stock over which CDH exercises sole voting 
    and investment power, and 4,059,356 shares of Common Stock over which CDH
    exercises sole voting power, but no investment power. Also includes 100,000
    shares of Common Stock issuable upon conversion of a Note issued by
    CardioDynamics.

8)  Includes 1,208,549 shares of Common Stock beneficially owned by Medical 
    Assets, LLC, of which Edge Financial Group, Inc. is a member. Edge Financial
    Group, Inc. disclaims beneficial ownership of these shares except to the
    extent of its ownership interest in Medical Assets, LLC. Medical Assets, LLC
    exercises sole investment power, but no voting power, over all its shares of
    Common Stock. See footnote (9). Edge Financial Group, Inc. has investment
    power, but not voting power, with respect to all its shares.

9)  Includes 1,208,549 shares of Common Stock beneficially owned by Medical 
    Assets, LLC, of which Mr. Richardson is a member. Mr. Richardson disclaims
    beneficial ownership of these shares except to the extent of his ownership
    interest in Medical Assets, LLC. Also includes 25,109 shares held by Vital
    Energy, Inc. of which Mr. Richardson is CEO and majority shareholder. See
    footnote (8). Mr. Richardson has investment power, but not voting power,
    with respect to all his shares.
<PAGE>
 
3) Includes 4,161,599 shares of Common Stock beneficially owned by
   CardioDynamics Holdings, LLC ("CDH"), of which Mr. Paulson is a member with a
   majority interest. Mr. Paulson disclaims beneficial ownership of these shares
   except to the extent of his individual ownership interest in CDH. See
   footnote (7). Also includes 40,000 shares of Common Stock Mr. Paulson
   beneficially owns, by virtue of his right to acquire such shares from
   CardioDynamics under stock options now exercisable or exercisable within 60
   days. Excludes 3,000,000 shares of Common Stock owned by Mr. Paulson's sons;
   Mr. Paulson disclaims beneficial ownership of such shares.

4) Includes 4,161,599 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
   ownership interest in CDH. See footnote (7). Includes 1,015,000 shares held
   in the Jim and Sue Gilstrap Family Limited Partnership. Mr. Gilstrap
   disclaims beneficial ownership of these shares except to the extent of his
   and his wife's ownership interest in the Jim and Sue Gilstrap Family Limited
   Partnership. Also includes 40,000 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. Excludes 65,000 shares of Common Stock owned by Mr. Gilstrap's
   daughters; Mr. Gilstrap disclaims beneficial ownership of such shares.

5) Includes 4,161,599 shares of Common Stock beneficially owned by CDH, of which
   Dr. Nicholas Diaco is a member with a minority interest. Dr. Diaco disclaims
   beneficial ownership of these shares except to the extent of his individual
   ownership interest in CDH. See footnote (7). Also includes 145,000 shares of
   Common Stock Dr. Diaco beneficially owns, by virtue of his right to acquire
   such shares from CardioDynamics under stock options now exercisable or
   exercisable within 60 days.

6) Includes 4,161,599 shares of Common Stock beneficially owned by CDH, of which
   Dr. Joseph Diaco is a member with a minority interest. Dr. Diaco disclaims
   beneficial ownership of these shares except to the extent of his individual
   ownership interest in CDH. See footnote (7).

7) Includes 2,243 shares of Common Stock over which CDH exercises sole voting
   and investment power, and 4,059,356 shares of Common Stock over which CDH
   exercises sole voting power, but no investment power. Also includes 100,000
   shares of Common Stock issuable upon conversion of a Note issued by
   CardioDynamics.

8) Includes 1,208,549 shares of Common Stock beneficially owned by Medical
   Assets, LLC, of which Edge Financial Group, Inc. is a member. Edge Financial
   Group, Inc. disclaims beneficial ownership of these shares except to the
   extent of its ownership interest in Medical Assets, LLC. Medical Assets, LLC
   exercises sole investment power, but no voting power, over all its shares of
   Common Stock. See footnote (9). Edge Financial Group, Inc. has investment
   power, but not voting power, with respect to all its shares.

9) Includes 1,208,549 shares of Common Stock beneficially owned by Medical
   Assets, LLC, of which Mr. Richardson is a member. Mr. Richardson disclaims
   beneficial ownership of these shares except to the extent of his ownership
   interest in Medical Assets, LLC. Also includes 25,109 shares held by Vital
   Energy, Inc. of which Mr. Richardson is CEO and majority shareholder. See
   footnote (8). Mr. Richardson has investment power, but not voting power, with
   respect to all his shares.
<PAGE>
 
Common Stock - Management

The following table sets forth the beneficial ownership of Common Stock of
CardioDynamics as of February 20, 1999 by each director and 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

<TABLE>
<CAPTION>
 
                                             Shares  Beneficially  Owned
                                             ----------------------------
Name                                         Number (1)       Percent (2)
------------------------------------------   ---------        -----------
<S>                                            <C>              <C>
  
Stephenson M. Dechant (3)                     50,000               *
 
Nicholas V. Diaco, M.D. (4)                4,817,905              14.6%
 
Louis P. Ferrero (5)                          19,334               *
 
Cam L. Garner (6)                             29,001               *
 
James C. Gilstrap (7)                      8,003,253              24.3%
 
Dennis G. Hepp                                   -0-               *
 
Stephen P. Loomis                                -0-               *
 
Richard O. Martin, Ph.D. (8)                  19,334               *
 
Richard E. Otto (9)                           63,333               *
 
Michael D. Padilla (10)                       51,000               *
 
Allen E. Paulson (11)                     17,864,233              54.6%
 
Rhonda F. Pederson (12)                       91,250               *
 
Michael Perry                                  7,000              *
 
Richard E. Trayler                             1,000              *
 
All Directors and executive
officers as a group - (14 persons) (13)   22,730,554             68.2%
</TABLE>
----------------
*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 50,000 shares of Common Stock Mr. Dechant beneficially owns,
    by virtue of his right to acquire such shares under stock options now
    exercisable or exercisable within 60 days.


<PAGE>
 
(4)  Includes 4,161,599 shares of Common Stock beneficially owned by CDH, of
     which Dr. Nicholas Diaco is a member with a minority interest.  Dr. Diaco
     disclaims beneficial ownership of these shares except to the extent of his
     individual ownership interest in CDH.  See footnote (13).  Also includes
     145,000 shares of Common Stock Dr. Diaco beneficially owns, by virtue of
     his right to acquire such shares from CardioDynamics under stock options
     now exercisable or exercisable within 60 days.

(5)  Includes 19,334 shares of Common Stock Mr. Ferrero beneficially owns, by
     virtue of his right to acquire such shares under stock options now
     exercisable or exercisable within 60 days.

(6)  Includes 29,001 shares of Common Stock Mr. Garner beneficially owns, by
     virtue of his right to acquire such shares under stock options now
     exercisable or exercisable within 60 days.

(7)  Includes 4,161,599 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 ownership interest in CDH. See footnote (13). Includes 1,015,000
     shares held in the Jim and Sue Gilstrap Family Limited Partnership. Mr.
     Gilstrap disclaims beneficial ownership of these shares except to the
     extent of his and his wife's ownership interest in the Jim and Sue Gilstrap
     Family Limited Partnership. Also includes 40,000 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. Excludes 65,000 shares of Common Stock owned by Mr.
     Gilstrap's daughters; Mr. Gilstrap disclaims beneficial ownership of such
     shares.

(8)  Includes 19,334 shares of Common Stock Dr. Martin beneficially owns, by
     virtue of his right to acquire such shares under stock options now
     exercisable or exercisable within 60 days.

(9)  Includes 23,333 shares of Common Stock Mr. Otto beneficially owns, by
     virtue of his right to acquire such shares under stock options now
     exercisable or exercisable within 60 days.

(10) Includes 40,000 shares of Common Stock Mr. Padilla beneficially owns, by
     virtue of his right to acquire such shares under stock options now
     exercisable or exercisable within 60 days.

(11) Includes 4,161,599 shares of Common Stock beneficially owned by CDH, of
     which Mr. Paulson is a member with a majority interest. Mr. Paulson
     disclaims beneficial ownership of these shares except to the extent of his
     individual ownership interest in CDH. See footnote (13). Also includes
     40,000 shares of Common Stock Mr. Paulson beneficially owns, by virtue of
     his right to acquire such shares from CardioDynamics under stock options
     now exercisable or exercisable within 60 days. Excludes 3,000,000 shares of
     Common Stock owned by Mr. Paulson's sons; Mr. Paulson disclaims beneficial
     ownership of such shares.

(12) Includes 87,500 shares of Common Stock Ms. Pederson beneficially owes by
     virtue of her right to acquire shares under stock options now exercisable
     or exercisable within 60 days.

(13) Shares beneficially owned include shares held by entities affiliated with
     certain directors and named Officers as described above in the footnotes.
<PAGE>
 
Preferred Stock

All previously outstanding Preferred Stock was converted to Common Stock during
fiscal 1997. In August of 1998 we issued 3,000 shares of Series A Convertible
Preferred Stock. At September 30, 1998 we paid a Preferred Stock dividend by
issuing of 6,691 shares of Common Stock. In November 1998, in accordance with
the conversion provisions, 760 shares of Series A Preferred Stock including
accumulated dividends were converted into 555,595 shares of our Common Stock.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During fiscal 1996, CardioDynamics Holdings, LLC and its members engaged in
several significant transactions with us, substantially all resulting in the
issuance of unregistered Common Stock or convertible note amounts convertible
(and later converted) into Common Stock.  Of the outstanding shares of Common
Stock, currently CDH owns 2,243 shares and has the right under a $25,000 Note
bearing interest at 7.5% to obtain an additional 100,000 shares upon conversion.
Members of CDH individually own 18,643,009 shares of Common Stock of
CardioDynamics (aside from CDH's own holdings); of the members' shares, Allen E.
Paulson owns 13,739,743, James C. Gilstrap owns 3,841,654 and Nicholas V. Diaco,
M.D. owns 656,306.  At February 20, 1999, CDH and its members together are the
beneficial owners of 69.7% of our Common Stock.

In March 1998, we entered into an 18 month unsecured private line of credit
agreement with Allen E. Paulson and James C. Gilstrap.  Under the terms of the
agreement we can 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 February 1999,
the term was extended one year, to September 2000.

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 1997 and fiscal 1998,
we paid $238,278 and $454,801, respectively, to Rivertek.
<PAGE>
 
ITEM 13.  EXHIBITS  AND  REPORTS  ON  FORM 8-K


(a)    Exhibit Index

       The following exhibits are attached to this Report and are incorporated
       herein by reference:

<TABLE>                       
     
Exhibit              Title
-------              -----
<C>                 <S> 
2.1                  Fourth Amended Plan of Reorganization. (Incorporated by
                     reference from November 30, 1994 Form 10-KSB.)

2.2                  Purchase Agreement dated February 7, 1995 between
                     CardioDynamics and CardioDynamics Holdings, LLC.
                     (Incorporated by reference from February 28,1995 Form 10-
                     QSB.)

2.3                  Amendment to Purchase Agreement, dated March 31, 1996,
                     between the Company and CardioDynamics Holdings, LLC,
                     (Incorporated by reference from May 31, 1996 Form 10-QSB.)

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

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

3.3                  Certificate of Determination of Preferences of Series A
                     Convertible Preferred Stock. (Incorporated by reference to
                     Form 8-K for the event of August 21, 1998, filed September
                     3, 1998.)

4.1                  Secured Convertible Promissory Note, dated February 7,
                     1995, in favor of CardioDynamics Holdings, LLC.
                     (Incorporated by reference from February 28,1995 Form 10-
                     QSB.)

4.2                  First Amended and Restated Secured Convertible Promissory
                     Note, dated March 30, 1995 in favor of CardioDynamics
                     Holdings, LLC. (Incorporated by reference from May 31, 1995
                     Form 10-QSB.)

4.3                  Second Amended and Restated Secured Convertible Promissory
                     Note, dated May 19, 1995 in favor of CardioDynamics
                     Holdings, LLC. (Incorporated by reference from May 31, 1995
                     Form 10-QSB.)

4.4                  Third Amended and Restated Secured Convertible Promissory
                     Note, dated March 31, 1996 in favor of CardioDynamics
                     Holdings, LLC. (Incorporated by reference from May 31, 1996
                     Form 10-QSB.)

4.5                  Fourth Amended and Restated Secured Convertible Promissory
                     Note, dated June 30, 1996 in favor of CardioDynamics
                     Holdings, LLC. (Incorporated by reference from August 31,
                     1996 Form 10-QSB.)

4.6                  Fifth Amended and Restated Secured Convertible Promissory
                     Note, dated February 1, 1997 in favor of CardioDynamics
                     Holdings, LLC. (Incorporated by reference from February 28,
                     1997 Form 10-QSB.)
</TABLE> 
<PAGE>
 
(a)                      Exhibit Index (Continued)


Exhibit                  Title
-------                  -----
<TABLE> 
<C>               <S> 
4.7                Sixth Amended and Restated Secured Convertible Promissory
                   Note, dated August 15, 1998 in favor of CardioDynamics
                   Holdings, LLC. (Incorporated by reference from August 31,
                   1998 Form 10-QSB.)

10.1               Security Agreement, dated February 7, 1995 between the
                   Company and CardioDynamics Holdings, LLC. (Incorporated by
                   reference from February 28,1995 Form 10-QSB.)

10.2               Patent Security Agreement, dated February 7, 1995 between the
                   Company and CardioDynamics Holdings, LLC. (Incorporated by
                   reference from February 28, 1995 Form 10-QSB. )

10.3               Offer to Grant Irrevocable Proxy and Agreement and Mutual
                   General Release, dated February 2, 1995 between the Company
                   and DaVinci Scientific Corporation. (Incorporated by
                   reference from February 28, 1995.)

10.3.1             February 3, 1995 extension letter. (Incorporated by reference
                   from February 29, 1995 Form 10-QSB.)

10.3.2             Notice to DaVinci Scientific Corporation, dated February 7,
                   1995. (Incorporated by reference from February 28, 1995 Form
                   10-QSB.)

10.4*              Compensation and Employment Agreement with Richard E. Otto.
                   (Incorporated by reference from August 31, 1995 Form 10-QSB.)

10.4.1*            Amendment to Compensation and Employment Agreement, dated
                   April 5, 1998, between the Company and Richard E. Otto.
                   (Incorporated by reference from May 31, 1998 Form 10-QSB.)

10.5               International Distribution Agreement, dated June 20, 1996,
                   between the Company and Landice International Corporation
                   (Incorporated by reference from August 31, 1996 Form 10-QSB.)

10.6               Engagement letter with EVEREN Securities, Inc., dated
                   November 15, 1996. (Incorporated by reference from November
                   30, 1996 Form 10-KSB.)

10.7               Warrants to purchase 276,514 shares of CardioDynamics
                   International Corporation Common Stock to EVEREN Securities,
                   Inc. dated February 26, 1997 and March 6, 1997. (Incorporated
                   by reference from February 28, 1997 Form 10-QSB.)

10.8               Form of Stock Purchase Agreement for 1997 EVEREN private
                   placement. (Incorporated by reference from February 28, 1997
                   Form 10-QSB.)

10.9               Amendment No. 1 to Service Agreement among Rivertek Medical
                   Systems, Inc., Dennis G. Hepp and the Company, dated July 25,
                   1997. (Incorporated by reference from August 31, 1997 Form 10-
                   QSB.)

10.9.1             Amendment No. 2 to Service Agreement among Rivertek Medical
                   Systems, Inc., Dennis G. Hepp and the Company, dated October
                   16,1998.
</TABLE> 

<PAGE>
 
(a)              Exhibit Index (Continued)

<TABLE> 
<CAPTION> 

Exhibit          Title
-------          -----
<C>             <S> 

10.10*          Consulting Services Agreement, dated August 1, 1997, between Cam
                L. Garner and the Company. (Incorporated by reference from
                November 30, 1997 Form 10-KSB.)

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

10.12           Private Line of Credit Agreement, dated March 11, 1998, between
                Allen Paulson, James C. Gilstrap and the Company. (Incorporated
                by reference from May 31, 1998 Form 10-QSB.)

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

10.14           Distribution Agreement dated March 31, 1998 between the Company
                and Cardiomedics, Inc. (Incorporated by reference from August
                31, 1998 Form 10-QSB.)

10.15           Warrants to purchase 33,334 shares of CardioDynamics
                International Corporation Common Stock to Imperial Bank dated
                May 14, 1998. (Incorporated by reference from August 31, 1998
                Form 10-QSB.)

10.16           Promissory Note and Credit Agreement dated May 14, 1998, between
                Imperial Bank and the Company. (Incorporated by reference from
                May 31, 1998 Form 10-QSB.)

10.16.1         Promissory Note and Credit Agreement, dated August 19, 1998
                between Imperial Bank and the Company. (Incorporated by
                reference from August 31, 1998 Form 10-QSB. )

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

10.18           Warrants to purchase 15,000 shares of CardioDynamics
                International Corporation Common Stock to Imperial Bank dated
                August 21, 1998. (Incorporated by reference from August 31, 1998
                Form 10-QSB.)

10.19           Securities Purchase Agreement dated August 21, 1998 between the
                Company and certain Selling Shareholders. (Incorporated by
                reference to Form 8-K for event of August 21, 1997, filed
                September 3, 1998.)

10.20           Form of Warrant issued August 21, 1998 to certain Selling
                Shareholders. (Incorporated by reference to Form 8-K for event
                of August 21, 1998, filed September 3, 1998.)

10.21           Registration Rights Agreement dated August 21, 1998 between the
                Company and certain Selling Shareholders. (Incorporated by
                reference to Form 8-K for event of August 21, 1998, filed
                September 3, 1998.)

10.22           Certificate of Determination of Preferences of Series A
                Convertible Preferred Stock. (Incorporated by reference to Form
                8-K for event of August 21, 1998, filed September 3, 1998.)
</TABLE> 
<PAGE>
 
(a)                      Exhibit Index (Continued)



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



16.1  Letter dated June 26, 1997 from Peterson & Co. (Incorporated by reference
      from June 26, 1997 Form 8-K.)

23.1  Consent of Independent Auditors, KPMG LLP

27.0  Financial Data Schedule
  ____________________
*     This management contract or compensatory plan or arrangement is required
      to be filed as an exhibit.

(b)    Reports on Form 8-K:

       None.
<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, 1999     CARDIODYNAMICS  INTERNATIONAL  CORPORATION

 

                              By: /s/ Michael K. Perry
                                  --------------------         
                              Michael K. Perry
                              Director and 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              Director and Chief               February 28, 1999
-------------------------------   Executive Officer
Michael K. Perry                  
 
/s/ Stephen P. Loomis             Vice President, Finance,         February 28, 1999
-------------------------------   Chief Financial Officer and  
Stephen P. Loomis                 Corporate Secretary (Principal
                                  Accounting Officer)           
                                  
/s/ Stephenson M. Dechant         Director                         February 28, 1999
-------------------------------
Stephenson M. Dechant
 
/s/ Nicholas V. Diaco, M.D.       Director                         February 28, 1999
-------------------------------
Nicholas V. Diaco, M.D.
 
/s/ Louis P. Ferrero              Director                         February 28, 1999
-------------------------------
Louis P. Ferrero
 
/s/ Richard E. Otto               Director                         February 28, 1999
-------------------------------
Richard E. Otto
 
/s/ Cam L. Garner                 Director                         February 28, 1999
-------------------------------
Cam L. Garner
 
/s/ James C. Gilstrap             Director                         February 28, 1999
-------------------------------
James C. Gilstrap
 
/s/ Richard O. Martin, Ph.D.      Director                         February 28, 1999
-------------------------------
Richard O. Martin, Ph.D.
 
/s/ Michael D. Padilla            Director                         February 28, 1999
-------------------------------
Michael D. Padilla
 
/s/ Allen E. Paulson              Director                         February 28, 1999
-------------------------------
Allen E. Paulson

</TABLE>