CAMBRIDGE HEART INC, 10-K405, 1997-03-31

CAMBRIDGE HEART INC
10-K405, 1997-03-31
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 1996

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the Transition period from to .

COMMISSION FILE NO. 0-20991

CAMBRIDGE HEART, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 13-3679946
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

1 OAK PARK DRIVE, BEDFORD, MA 01730
(Address of Principal Executive (Zip Code)
Offices)

(617) 271-1200
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, $0.001 PAR VALUE NASDAQ NATIONAL MARKET
Title of each class Name of each Exchange on Which
Registered

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

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

The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was $52,619,766, based on the last reported sale price of the
Common Stock on the Nasdaq National Market on March 26, 1997.

Indicate the number of shares outstanding of each class of Common Stock:
10,360,795 shares of $.001 par value Common Stock as of March 26, 1997.

DOCUMENTS INCORPORATED BY REFERENCE:

DOCUMENT DESCRIPTION 10-K PART
Portions of the Registrant's Proxy Part III
Statement for the Annual Meeting of
Shareholders to be held June 23 ,
1997

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PART I

ITEM 1. BUSINESS

Cambridge Heart, Inc. ("Cambridge Heart" or the "Company") is engaged in the
research, development and commercialization of products for the non-invasive
diagnosis of cardiac disease. Using innovative technologies, including
proprietary disposable electrodes, the Company is addressing such key problems
in cardiac diagnosis as (i) the identification of those at risk of sudden
cardiac death, accounting for approximately 50% of all deaths due to heart
attack, (ii) the early detection of coronary artery disease and (iii) the
prompt and accurate diagnosis of heart attack. The Company's lead product, the
CH 2000 System, is designed to perform conventional cardiac stress tests as
well as to incorporate the Company's proprietary technology to non-invasively
measure extremely low levels of T-wave alternans, a beat-to-beat alternation
in a portion of the electrocardiogram. Clinical research published to date has
demonstrated that T-wave alternans is associated with vulnerability to
ventricular arrhythmias responsible for sudden cardiac death to a degree
comparable to electrophysiology ("EP") testing, the most accurate invasive
test.

HEART DISEASE

Cardiac disease is the leading cause of death in the United States and many
other developed countries. According to the American Heart Association, in
1993 cardiovascular disease accounted for 42% of all deaths in the United
States. Approximately 1.5 million people suffered heart attacks in the United
States in 1993, resulting in 500,000 deaths. Approximately half of these
deaths were sudden, generally the result of ventricular arrhythmias, which
cause the heart to beat in an abnormal and ineffective manner.

COMPANY OVERVIEW

The Company has developed an innovative, proprietary non-invasive cardiac
diagnostic system which the Company believes will address shortcomings in
currently available cardiac diagnostic procedures. The Company's initial
product, the CH 2000 System, is designed to perform a broad range of cardiac
stress tests as well as to incorporate the Company's T-wave alternans
technology. Current clinical research into T-wave alternans has demonstrated
an association between T-wave alternans and vulnerability to ventricular
arrhythmia.

The Company's research on its CH 2000 System, using T-wave alternans
technology and Hi-Res electrodes to diagnose ventricular arrhythmias,
indicates that the Company's system has the following potential advantages:

. Accuracy--Clinical studies to date indicate that the detection of T-wave
alternans can identify vulnerability to ventricular arrhythmias more
accurately than other non-invasive tests and with results comparable to
those of EP studies.

. Non-invasive--Unlike EP studies which require the insertion of
electrical catheters into the patient's heart and the administration of
local anesthesia, the CH 2000 System requires only the placement of
electrodes on the patient's chest.

. Broad Applicability--Six million standard stress tests and three million
imaging stress tests were performed in the United States in 1995. The CH
2000 System, incorporating the Company's proprietary T-wave alternans
technology, is designed to simultaneously detect coronary artery disease
and assess the risk of sudden cardiac death due to ventricular
arrhythmias and with only a modest increase--estimated to be less than
$100--in the total cost of the procedure.

. Non-Hospital Setting--Unlike EP studies and other tests which require a
hospital setting, the CH 2000 System can be used in a physician's
office.

. Procedure Cost Advantages--The Company anticipates that a stress test
with the CH 2000 System utilizing T-wave alternans technology will cost
approximately $400 per procedure, compared with approximately $3,000 to
$4,000 for an EP study.

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. System Affordability--Starting at under $30,000, the CH 2000 System is
only moderately more expensive than standard stress test systems and
only 10% to 30% the cost of certain other equipment, such as ultrasound
or nuclear imaging equipment.

The Company is also conducting research into the detection of ischemic heart
disease using its cardiac electrical imaging technology ("CEI"). CEI provides
an image of the electrical activity of the heart that is highly sensitive to
changes resulting from ischemia, the lack of oxygen caused by coronary artery
disease or acute myocardial infarction. The Company intends to pursue
application of this technology (i) to provide for enhanced detection and
localization of coronary artery disease during a standard exercise stress test
and (ii) to provide faster and more accurate diagnosis of acute myocardial
infarction in patients who arrive at hospital emergency rooms with acute chest
pain.

The CH 2000 System and the Hi-Res electrodes have received 510(k) clearance
from the FDA for sale in the United States. The 510(k) clearance for the CH
2000 System includes the claim that the CH 2000 System can measure T-wave
alternans but no claim about the applicability or prognostic use of the
alternans measurement. The Company is currently conducting further clinical
studies and expects to make a subsequent 510(k) submission to the FDA with
additional clinical data in order to obtain a subsequent clearance with
broader claims. This submission is expected to be made in the first half of
1997, with clearance possible by early 1998, but there can be no assurance
that such clearance will be obtained on a timely basis, if at all. Until
clearance or approval of the broader prognostic claims is obtained, the
Company may not publicize the prognostic capabilities of its T-wave alternans
technology.

Internationally, the Company received the CE mark for sale in Europe for the
CH 2000 System in April 1996, and was approved by the Ministry of Health in
Japan in August 1996.

PRODUCTS AND APPLICATIONS

The CH 2000 System is designed to perform conventional cardiac stress tests
as well as to incorporate the Company's proprietary T-wave alternans
technology. Current clinical research into T-wave alternans has demonstrated
an association between certain T-wave alternans and vulnerability to
ventricular arrhythmias. The Company's proprietary T-wave alternans technology
permits evaluation, computation and recording of T-wave alternans during
bicycle exercise, atrial pacing or pharmacological stress. Because of the need
to record very small variations in electric signals for precise T-wave
alternans measurement, the CH 2000 System incorporates proprietary Hi-Res
electrodes and proprietary signal processing algorithms to minimize noise
levels resulting from patient movement.

THE CH 2000 SYSTEM

The Company's CH 2000 System is a fully-featured diagnostic system that
includes a cart-mounted computer with proprietary software, integral ECG
system, display, keyboard and output devices which can be configured for both
hospital and office settings. This system is designed to support a broad range
of standard and physician-customized protocols for the conduct and measurement
of cardiac stress tests and is compatible with both standard electrodes and
with the Company's Hi-Res electrodes for T-wave alternans analysis. The CH
2000 System is capable of controlling both treadmill and bicycle ergometers
and is well suited for standard, nuclear or echocardiogram stress tests.

In addition to the incorporation of T-wave alternans technology, the CH 2000
System has been designed to provide a broad range of special features,
including the following:

. A 15-inch high-resolution color monitor for the display of critical data
and parameters, including the display of full 12-lead output, or that of
any specific lead, as required.

. The capacity to generate printed output including 12-lead reports, a
summary of an entire stress test on one page, and alternans levels
versus normal heart rate for an entire study.

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. The incorporation of hard disk and optional optical disk storage of data
acquired during the stress test, facilitating both post-test analysis
and post-test annotation of results.

. A modular design using standard computer components for easy maintenance
and upgrade.

Although the Company's strategic focus is on its proprietary T-wave
alternans and CEI technologies, the Company expects that its international
distribution partners, Kontron Instruments Ltd. ("Kontron") and Fukuda Denshi
Co., Ltd. ("Fukuda Denshi"), will market the base CH 2000 System as their top-
end offering in the stress test market.

ASSOCIATION OF T-WAVE ALTERNANS AND VENTRICULAR ARRHYTHMIAS

The association between ventricular arrhythmia and extremely low levels of
T-wave alternans (not detectable by visual inspection of the electrocardiogram
("ECG")) was unknown until recently. Research conducted in Dr. Richard J.
Cohen's laboratory at the Massachusetts Institute of Technology ("MIT")
beginning in the early 1980's indicated that analysis of microvolt (one-
millionth of a volt) levels of T-wave alternans was predictive of
vulnerability to ventricular arrhythmias responsible for sudden cardiac death.
Dr. Cohen, a founder, director of, and consultant to, the Company, and his
associates at MIT developed the technology to quantify this electrical
conduction pattern which has been exclusively licensed to the Company and
which forms the basis of the Company's proprietary technology.

In a collaborative study of 83 patients conducted at Massachusetts General
Hospital ("MGH") in collaboration with Dr. Cohen's laboratory at MIT, which
was published in the New England Journal of Medicine in December 1994, the
detection of T-wave alternans at certain levels in patients referred for EP
studies was shown to be as accurate as invasive EP testing in predicting
sudden cardiac death and life-threatening ventricular arrhythmias. In the high
risk population studied for up to 20 months following the procedure, an
actuarial analysis involving 66 patients indicated that 81% of those testing
positive for T-wave alternans died or suffered a life-threatening arrhythmia
within 20 months of the test; only 6% of the patients testing negative for T-
wave alternans did so. These results were comparable to those obtained with
invasive EP testing and were more predictive than those which have been
reported using other non-invasive methods.

The Company has sponsored and is continuing to sponsor a number of clinical
studies relating to the
CH 2000 System, its T-wave alternans technology and its Hi-Res electrodes to
establish the prognostic value of T-wave alternans technology. There can be no
assurance that the results of such studies will confirm earlier studies, or
that regulatory clearance will be received.

CARDIAC ELECTRICAL IMAGING FOR ISCHEMIC HEART DISEASE

The Company is conducting research into systems to detect ischemic heart
disease based upon its CEI technology, which provides an image of the
electrical activity of the heart. Animal studies and an initial human study
indicate that CEI is highly sensitive to changes resulting from ischemia, the
lack of oxygen caused by coronary artery disease or acute myocardial
infarction. The Company intends to pursue application of this technology (i)
to provide for enhanced detection and localization of coronary artery disease
during a standard exercise stress test and (ii) to provide faster and more
accurate diagnosis of acute myocardial infarction in patients who arrive at
hospital emergency rooms with acute chest pain.

Cardiac electrical imaging utilizes the Company's own signal processing
software and a proprietary array of disposable "Laplacian" electrodes. Each
electrode is focused in that it provides signals from a highly localized
region of the heart, in contrast to standard electrodes which record signals
from all regions of the heart. An array of Laplacian electrodes provides a
highly sensitive means of detecting the presence of ischemia and localizing
the regions of ischemia within the heart.

The Company is evaluating the incorporation of CEI technology into the CH
2000 System, and intends to initiate additional clinical studies of this
technology in the second quarter of 1997. In addition, the Company is

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evaluating the commercial feasibility of a portable system incorporating CEI
technology for hospital emergency room use to detect acute myocardial
infarction.

MARKETING AND SALES

The Company is targeting the market for cardiac stress systems with its CH
2000 System. In 1996, approximately 3,000 cardiac stress systems were sold in
the United States, and the Company believes that the total installed U.S. base
of cardiac stress systems is approximately 22,000 units.

The Company believes that the key to the adoption of the CH 2000 System and
market acceptance of its proprietary technologies to diagnose heart disease
will be continued clinical development and positive clinical experience with
the CH 2000 System, together with the publication of these results in medical
journals. The commercial success of the CH 2000 System will require marketing,
educational and sales efforts to encourage cardiologists and other medical
professionals to utilize T-wave alternans testing and, eventually, CEI, in
their medical practices. The Company plans to establish centers of excellence
at leading cardiology medical centers, fund studies to further demonstrate the
efficiency of its technologies, support seminars and symposiums and
participate in industry trade shows and academic conferences.

The Company intends to market its products in the United States primarily
through a direct sales force in major urban areas and through independent
distributors elsewhere. The Company has hired a Vice President of Sales and
Business Development to lead its sales and marketing organization and is in
the process of hiring additional sales and support personnel as it introduces
the CH 2000 System in the U.S. market. The Company has also entered into
agreements with several regional independent distributors.

The Company intends to market its products internationally through
independent distributors. The Company has entered into distribution agreements
with Kontron for the sale of the CH 2000 System in Europe and the Middle East,
and with Fukuda Denshi for the sale of the CH 2000 System in Japan. The
Company sold a limited number of demonstration units to Fukuda Denshi in 1995.
The Company began commercial shipment of complete CH 2000 Systems, including
Hi-Res electrodes, to Kontron in April 1996, and commercial shipments to
Fukuda Denshi began in August 1996 following the approval of the Japanese
Ministry of Health.

During the year ended December 31, 1996, sales to Kontron and Fukuda Denshi
comprised approximately 76% of the Company's revenue.

MANUFACTURING

The Company performs final assembly, including hardware and software
components, and testing of its products, at its corporate headquarters in
Bedford, Massachusetts. The Company believes its facility will be adequate to
meet its needs through 1997. The Company will be required to meet and adhere
to all applicable requirements of U.S. and international regulatory agencies,
including GMP standards. The Company's manufacturing facilities are subject to
periodic inspection by both U.S. and international regulatory agencies.

The manufacturing process consists primarily of final assembly of purchased
components, testing operations and packaging. Components are purchased
according to the Company's specifications and are inspected and tested by the
Company. The Company relies on outside vendors to manufacture certain major
components used in the CH 2000 System, including its Hi-Res electrodes. A
number of components are currently supplied by sole source vendors, although
the Company believes that alternative sources of supply could be identified on
a timely basis, if necessary.

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RESEARCH AND DEVELOPMENT

The Company has licensed four different product technologies from MIT,
including the technology underlying T-wave alternans and CEI, which were
developed at MIT over a period of approximately ten years at a cost of over
five million dollars. The Company also has rights to any follow-on
technologies developed at MIT which are derived from the four original
technologies. The Company is actively engaged in commercializing the CH 2000
System, and is conducting research and development with respect to its CEI
technology, which is investigational. The Company is evaluating this
technology both for incorporation into the CH 2000 System and for stand-alone
use in hospital emergency rooms.

The Company believes that its technology base will permit it to develop
additional products for use in the diagnosis and treatment of cardiac disease.
Other cardiac diagnostic and treatment areas the Company intends to
investigate include monitoring of blood flow from the heart as a method of
measuring hemodynamic deterioration and the measurement of beat-to-beat
fluctuation in heart rate, blood pressure and respiration rate to measure and
quantify directly the functioning of the body's regulatory mechanisms. These
technologies will require significant additional research and development
expenditures by the Company in the event it should elect to pursue any of
these technologies and the Company has not yet commenced any product
development or clinical testing of these technologies.

The Company's research and development expenses were $1,124,000 in 1994,
$1,560,000 in 1995 and $2,255,000 in 1996. The Company expects research and
development expenses to increase significantly in the future as it develops
additional products and funds clinical trials on its products. As of December
31, 1996, the Company had 15 employees engaged in research and development
activities.

PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS

The computer algorithms that allow the CH 2000 System to measure T-wave
alternans and certain aspects of the Company's CEI technology, including the
CEI electrodes, are covered by U.S. patents issued to MIT that are licensed
exclusively to the Company. The Company has applied for a U.S. patent covering
the use of exercise or physiological stress in the measurement of T-wave
alternans, which has been allowed, and corresponding foreign patents are
pending. The Company has also applied for U.S. and foreign patents covering
additional proprietary signal processing algorithms and its Hi-Res electrodes
for use in the measurement of T-wave alternans. The failure to obtain such
patents could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company owns or is the
exclusive licensee of seven patents issued or allowed and six patents pending
in the United States, with 17 corresponding foreign patents issued or pending
with respect to its technology.

The Company and MIT have entered into four license agreements (the "MIT
License Agreements"), pursuant to which the Company is the exclusive licensee
of certain technologies upon which the Company's current and future products
are based, including certain patents associated therewith. Two of the MIT
License Agreements that cover the T-wave alternans analysis technology
incorporated in the Company's CH 2000 System and that relate to cardiac
electrical imaging are of material importance to the Company. These licenses
are exclusive until 2007; thereafter, each license will convert to a
nonexclusive license, and will last for the life of the applicable patents,
unless extension of exclusivity is agreed to by MIT. In addition, the Company
has entered into a license agreement with Dr. Cohen, (the "Cohen License
Agreement"), pursuant to which the Company is the exclusive licensee of
certain technology developed by Dr. Cohen which the Company may include in its
future products. These license agreements impose various commercialization,
sublicensing, insurance, royalty, product liability indemnification and other
obligations on the Company. Failure by the Company to comply with these
requirements could result in conversion of the licenses from being exclusive
to nonexclusive in nature or, in some cases, termination of the license. The
loss of the Company's exclusive rights to the T-wave alternans and cardiac
electrical imaging technologies, licensed under two of the MIT License
Agreements, or the termination of either or both of such agreements would have
a material adverse effect on the Company's business, financial condition and
results of operations.

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The Company believes that its intellectual property and expertise, as
originally licensed from MIT and thereafter developed at the Company,
constitute an important competitive resource, and the Company intends to
continue to aggressively evaluate markets and products which are most
appropriate to exploit the expertise licensed by, and developed at, the
Company. In addition, the Company intends to maintain an active program of
intellectual property protection, both to assure that the proprietary
technology developed by the Company is appropriately protected, and, where
necessary, to assure that there is no infringement of the Company's
proprietary technology by competitive technologies.

The Company's future success will depend, in part, on its ability to
continue to develop patentable products, enforce its patents and obtain patent
protection for its products both in the United States and in other countries.
However, the patent positions of medical device companies, including the
Company, are generally uncertain and involve complex legal and factual
questions. No assurance can be given that patents will issue from any patent
applications owned by or licensed to the Company or that, if patents do issue,
the claims allowed will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any issued patents
owned by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.

The commercial success of the Company will also depend in part on its
neither infringing patents issued to others nor breaching the licenses upon
which the Company's products are based. The Company has licensed significant
technology and patents from third parties, including patents and technology
relating to T-wave alternans and CEI licensed from MIT. The Company's licenses
of patents and patent applications impose various commercialization,
sublicensing, insurance, royalty and other obligations on the Company. Failure
of the Company to comply with these requirements could result in conversion of
the licenses from being exclusive to nonexclusive in nature or, in some cases,
termination of the license.

The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology
or disclose such technology or that the Company can ultimately protect
meaningful rights to such unpatented proprietary technology. The Company
relies on confidentiality agreements with its collaborators, employees,
advisors, vendors and consultants to protect its trade secrets. There can be
no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. Failure to obtain or maintain patent and trade secret protection
for the Company's products, for any reason, would have a material adverse
effect on the Company's business, financial condition and results of
operations.

COMPETITION

The medical device market is characterized by intensive development efforts
and rapidly advancing technology. The future success of the Company will
depend, in large part, upon its ability to anticipate and keep pace with
advancing technology and competitive innovations. However, there can be no
assurance that the Company will be successful in identifying, developing and
marketing new products or enhancing its existing products. In addition, there
can be no assurance that new products or alternative diagnostic techniques
will not be developed that will render the Company's current or planned
products obsolete or inferior. Rapid technological development by competitors
may result in the Company's products becoming obsolete before the Company
recovers a significant portion of the research, development and
commercialization expenses incurred with respect to such products. Alternative
technologies exist today in each of the areas being addressed by the Company,
including ECGs, Holter monitors, ultrasound tests and systems for measuring
cardiac late potentials.

Competition from medical devices which help to diagnose cardiac disease is
intense and likely to increase. The Company's competitors include
manufacturers of ECG stress test equipment, including major multinational
companies. Many of the Company's competitors and potential competitors have
substantially greater capital resources, name recognition, research and
development experience and regulatory, manufacturing and marketing

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capabilities. Many of these competitors offer well established, broad product
lines and ancillary services not offered by the Company. Some of the Company's
competitors have long-term or preferential supply arrangements with hospitals
that may act as a barrier to market entry. Other large health care companies
may enter the non-invasive cardiac diagnostic product market in the future.
Competing companies may succeed in developing products that are more
efficacious or less costly than any that may be developed by the Company, and
such companies also may be more successful than the Company in producing and
marketing such products or their existing products. Competing companies may
also introduce competitive pricing pressures that may adversely affect the
Company's sales levels and margins. There can be no assurance that the Company
will be able to compete successfully with existing or new competitors.

GOVERNMENT REGULATION

The manufacture and sale of medical devices intended for commercial
distribution are subject to extensive governmental regulation in the United
States. Medical devices are regulated in the United States by the U.S. Food
and Drug Administration (the "FDA") and generally require pre-market clearance
or pre-market approval prior to commercial distribution. In addition, certain
material changes or modifications to medical devices also are subject to FDA
review and clearance or approval. The FDA regulates the research, testing,
manufacture, safety, labeling, storage, record keeping, advertising and
distribution of medical devices in the United States. Noncompliance with
applicable requirements can result in failure of the government to grant pre-
market clearance or approval for devices, withdrawal of approval, total or
partial suspension of production, fines, injunctions, civil penalties, recall
or seizure of products, and criminal prosecution.

Medical devices are classified into one of three classes, Class I, II or
III, on the basis of the controls deemed by the FDA to be necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject
to general controls (e.g., labeling, pre-market notification and adherence to
GMP standards). Class II devices are subject to general controls and special
controls (e.g., performance standards, post-market surveillance, patient
registries and FDA guidelines). Generally, Class III devices are those that
must receive pre-market approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable or new
devices which have not been found to be substantially equivalent to legally
marketed devices), and require clinical testing to ensure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA
also has the authority to require clinical testing of Class I and Class II
devices. A pre-market approval application ("PMA") must be filed if a proposed
device is not substantially equivalent to a legally marketed predicate device
or if it is a Class III device for which the FDA has called for such
application.

Generally, before a new device can be introduced into the market in the
United States, the manufacturer or distributor must obtain FDA clearance of a
pre-market notification ("510(k) notification") submission or approval of a
PMA application. If a medical device manufacturer or distributor can establish
that a device is "substantially equivalent" to a legally marketed Class I or
Class II device, or to a Class III device for which the FDA has not called for
PMAs, the manufacturer or distributor may seek clearance from the FDA to
market the device by filing a 510(k) notification. The 510(k) notification may
need to be supported by appropriate data establishing the claim of substantial
equivalence to the FDA. The FDA recently has been requiring a more rigorous
demonstration of substantial equivalence.

Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until an
order clearing the 510(k) is issued by the FDA. At this time, the FDA
typically responds to the submission of a 510(k) notification within 90 to 200
days. An FDA order may declare that the device is substantially equivalent to
a legally marketed device and allow the proposed device to be marketed in the
United States. The FDA, however, may determine that the proposed device is not
substantially equivalent or requires further information, including clinical
data, to make a determination regarding substantial equivalence. Such
determination or request for additional information generally delays market
introduction of the product that is the subject of the 510(k) notification.

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All clinical investigations involving the use of an unapproved or uncleared
device on humans to determine the safety or effectiveness of the device must
be conducted in accordance with the FDA's investigational device exemption
("IDE") regulations. If the device presents a "significant risk," the
manufacturer or distributor of the device is required to file an IDE
application with the FDA prior to commencing human clinical trials. The IDE
application must be supported by data, typically the result of animal and,
possibly, mechanical testing. If the IDE application is approved by the FDA,
human clinical trials may begin at a specific number of investigational sites
with a maximum number of patients, as approved by the FDA. If the device
presents a "non-significant risk," approval by an Institutional Review Board
prior to commencing human clinical trials is required.

If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek pre-market approval of the proposed
device through submission of a PMA application. A PMA application must be
supported by extensive data, including preclinical and clinical trial data, as
well as an extensive literature review to prove the safety and effectiveness
of the device. Following receipt of a PMA application, if the FDA determines
that the application is sufficiently complete to permit a substantive review,
the agency will "file" the application. The FDA has 180 days to review a PMA
application, although the review of an application more often occurs over a
protracted time period, and generally takes two years or more from the filing
date to complete.

The PMA approval process can be expensive, uncertain and lengthy. A number
of devices for which pre-market approval has been sought have never been
approved for marketing. The review time is often significantly extended by the
FDA, which may require more information or clarification of information
already provided in the submission. During the review period, an advisory
committee likely will be convened by the FDA to review and evaluate the
application and provide recommendations to the agency as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing
facility to ensure compliance with the GMP regulations for medical devices
prior to approval of the PMA application. If granted, the approval may include
significant limitations on the indicated uses for which a product may be
marketed.

Any products manufactured or distributed by the Company are subject to
pervasive and continuing regulation by the FDA including record keeping
requirements, reporting of adverse experience with the use of the device,
post-market surveillance, post-market registry and other actions deemed
necessary by the FDA. A 510(k) submission is also required when a medical
device manufacturer makes a change or modification to a legally marketed
device that could significantly affect the safety or effectiveness of the
device, or where there is a major change or modification in the intended use
of the device. When any change or modification is made to a device or its
intended use, the manufacturer is expected to make the initial determination
as to whether the change or modification is of a kind that would necessitate
the filing of a new 510(k) application. The FDA's regulations provide only
limited guidance for making this determination. The FDA's regulations also
require agency approval of a PMA or 510(k) supplement for certain changes to a
PMA device if they affect the safety and effectiveness of the device,
including, but not limited to, new indications for use, labeling changes, the
use of a different facility to manufacture, process or package the device,
changes in manufacturing methods or quality control systems and changes in
performance or design specifications. Failure by the Company to receive
approval of a PMA supplement regarding the use of a different manufacturing
facility or any other change affecting the safety or effectiveness of an
approved or cleared device on a timely basis, or at all, would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary from country to country. The time
required to obtain approvals required by foreign countries may be longer or
shorter than that required for FDA approval, and requirements for licensing
may differ from FDA requirements. Failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. The current regulatory
environment in Europe for medical devices differs significantly from that in
the United States. There is currently no universally accepted definition of a
medical device in Europe and there is no common approach to medical device
regulation among the various countries. There are several different regulatory
regimes operating within the different European

9
<PAGE>

countries. Regulatory requirements for medical devices range from no
regulations in some countries to rigorous regulations approaching the
requirements of the FDA's regulations for Class III medical devices. Several
countries require that device safety be demonstrated prior to approval for
commercialization. The regulatory environment in certain European countries is
expected to undergo major changes as a result of the creation of medical
directives by the European Union.

Internationally, the Company received the CE mark for sale in Europe for the
CH 2000 System in April 1996, and was approved by the Ministry of Health in
Japan in August 1996.

EMPLOYEES

As of December 31, 1996, the Company has 33 full-time employees, of whom 5
hold Ph.D. degrees and 7 hold other advanced degrees. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company believes that its relations
with its employees are good.

REIMBURSEMENT

Suppliers of health care products and services are greatly affected by
Medicare, Medicaid and other government insurance programs, as well as by
private insurance reimbursement programs. Third party payors (Medicare,
Medicaid, private health insurance, health administration authorities in
foreign countries and other organizations) may affect the pricing or relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided for by such payors to the physicians and clinics
utilizing the
CH 2000 System or by taking the position that such reimbursement is not
available at all.

The Company believes that the availability and level of third party
reimbursement will influence the decisions of physicians, clinics and
hospitals to purchase and use the Company's products and thereby affect the
pricing of the Company's products. The Company's strategy to obtain approval
of payments to physicians using its products includes (i) enlisting the
assistance of leading cardiac specialists in making presentations to health
care administrators to inform them of the benefits of the additional data
provided by the CH 2000 System, and of the potential pharmacoeconomic benefits
resulting from the use of the products and (ii) working with professional
organizations to foster awareness and support for its products.

Several states and the federal government are investigating a variety of
alternatives to reform the health care delivery system and reduce and control
health care spending. These reform efforts include proposals to limit spending
on health care items and services, limit coverage for new technology and limit
or control directly the price health care providers and drug and device
manufacturers may charge for their services and products. The scope and timing
of such reforms cannot be predicted, but if adopted and implemented, such
reforms could have a material adverse effect on the Company's business,
financial condition and results of operations.

10
<PAGE>

ITEM 2. PROPERTIES

The Company's facilities consist of approximately 11,000 square feet of
office, research and manufacturing space located at 1 Oak Park Drive, Bedford,
Massachusetts pursuant to a lease which expires in the year 2000. The Company
believes that suitable additional space will be available to it, when needed,
on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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

No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1996.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth the names, ages and positions of the current
executive officers of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jeffrey M. Arnold....... 47 President, Chief Executive Officer and Director
Thomas V. Hennessey,
Jr..................... 48 Vice President of Operations, Treasurer and Chief Financial Officer
Paul Albrecht, Ph.D..... 40 Vice President of Engineering and Secretary
J. Alex Martin.......... 43 Vice President of Sales and Business Development
Robert T. Miragliuolo... 44 Vice President of Clinical and Regulatory Affairs
</TABLE>

Jeffrey M. Arnold. Mr. Arnold has been President and Chief Executive Officer
of the Company since September 1993. From 1990 to January 1992, Mr. Arnold was
President and Chief Executive Officer and a director of Molecular Simulations
Inc., formerly Polygen Corporation, a leading supplier of software for
rational drug design. From January 1992 until September 1993, Mr. Arnold was
an independent management consultant providing interim executive management to
high technology companies. Mr. Arnold is a director of Momentum Software
Corporation. Mr. Arnold received a B.S. in Electrical Engineering from MIT.

Thomas V. Hennessey, Jr. Mr. Hennessey has been Vice President of Operations
and Chief Financial Officer since November 1995. From October 1992 to July
1995, Mr. Hennessey was the Chief Financial Officer at AutoImmune, Inc., a
biotechnology company. From July 1991 to October 1992 he was Vice President
and Chief Financial Officer of Medical Diagnostics, Inc., a provider of
medical imaging services. Mr. Hennessey received a B.S. and an M.S. in
Mechanical Engineering from MIT and an M.B.A. from the Harvard Graduate School
of Business Administration.

Paul Albrecht, Ph.D. Dr. Albrecht has been Vice President of Engineering
since June 1993. From February 1991 to June 1993, Dr. Albrecht was Engineering
Manager at Cerner Corporation, where he previously served as Director of
Research and Development and Principal of Intellimetrics Corporation (which
was acquired by Cerner in 1991). Dr. Albrecht received a B.A. in Physics from
Dartmouth College, an M.S. in Electrical Engineering from MIT and a Ph.D. in
Medical Engineering from the Harvard-MIT Division of Health Sciences and
Technology.

J. Alex Martin. Mr. Martin has been Vice President of Sales and Business
Development since June 1995. From March 1989 to June 1995, Mr. Martin was
employed by the USCI Division of C.R. Bard Inc., during which time he served
in various positions, including Director of Marketing for the Angioplasty
Division and National Sales Manager for USCI. Mr. Martin received a B.G.S.
from the University of Kentucky.

11
<PAGE>

Robert T. Miragliuolo. Mr. Miragliuolo has been Vice President of Regulatory
and Clinical Affairs since April 1996. From November 1987 until April 1996,
Mr. Miragliuolo was employed by C.R. Bard, Inc. During this time he served in
several positions, including Corporate Director of Scientific Affairs and then
Director of Regulatory Affairs for Cardiology. Mr. Miragliuolo has a B.S. in
Biology from Providence College and an M.S. in Biostatistics from the
University of Vermont.

Executive officers of the Company are elected by and serve at the discretion
of the Board of Directors. Dr. Marlene Krauss, a director of the Company, is
married to another director of the Company, Dr. Zachary Berk. There are no
other family relationships among any executive officers or directors of the
Company.

12
<PAGE>

PART II

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

MARKET INFORMATION AND HOLDERS

Shares of the Company's Common Stock have been traded on the Nasdaq National
Market under the symbol "CAMH" since August 2, 1996, prior to which time such
shares were not publicly traded. The Common Stock is not traded on any market,
foreign or domestic, other than the Nasdaq National Market. The following
table sets forth, for the periods indicated, the high and low sales prices of
the Common Stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
1996 HIGH LOW
---- ------ -------
<S> <C> <C>
Third Quarter............................ $12.00 $ 7.156
(August 2, 1996 through
September 30, 1996)
Fourth Quarter........................... $12.75 $10.375
</TABLE>

The depositary for the Common Stock is American Stock Transfer and Trust
Company (the "Depositary"), 40 Wall Street, New York, New York 10005. On March
26, 1997, the Company had approximately 125 holders of Common Stock of record.
On March 26, 1997, the closing price of the Company's Common Stock on the
Nasdaq National Market was $11.50.

DIVIDENDS

The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain all future earnings to finance
future operations and therefore does not anticipate paying any cash dividends
in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993(/1/) 1994 1995 1996
--------- ------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product revenue....................... $ -- $ -- $ 68 $ 842
Revenue from research and option
agreement............................ -- 25 -- 25
----- ------- --------- ---------
Total revenue....................... $ -- $ 25 $ 68 $ 867
Cost of goods sold.................... -- -- 141 884
----- ------- --------- ---------
Gross profit (loss)................... $ -- $ 25 $ (73) $ (17)
Costs and expenses:
Research and development............ $ 589 $ 1,124 $ 1,560 $ 2,255
Selling, general and administrative. 321 724 1,110 2,270
----- ------- --------- ---------
Total costs and expenses.......... $ 910 $ 1,848 $ 2,670 $ 4,525
----- ------- --------- ---------
Loss from operations.................. $(910) $(1,823) $ (2,743) $ (4,542)
Interest income, net.................. 27 164 246 507
----- ------- --------- ---------
Net loss............................ $(883) $(1,659) $ (2,497) $ (4,035)
===== ======= ========= =========
Pro forma net loss per share.......... $ (0.32) $ (0.45)
========= =========
Pro forma weighted average common and
common
equivalent shares outstanding(/2/)... 7,727,524 8,928,603
========= =========
</TABLE>

13
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993(/1/) 1994 1995 1996
--------- ------ ------ -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $5,029 $3,329 $3,948 $18,589
Working capital.............................. 4,865 3,081 3,849 19,146
Total assets................................. 5,060 3,421 4,277 20,229
Total liabilities............................ 166 266 266 500
Accumulated deficit.......................... (925) (2,584) (5,081) (9,116)
Stockholders' equity......................... 4,813 3,155 4,011 19,730
</TABLE>
- --------
(1) The Company's operations during the period from inception (January 16,
1990) through December 31, 1992 were minimal, consisting primarily of
business establishment and planning. During the period from inception
(January 16, 1990) through December 31, 1991, the Company's only activity
consisted of incorporation and the sale of 50 shares of its Common Stock
for an aggregate of $1. No expenses were recorded during this period.
During the year ended December 31, 1992, the Company's activities were
comprised of initial start up expenses totalling $41,888 (current
liabilities related to these expenses totaled $37,310 at December 31, 1992)
and the issuance of additional Common Stock for cash proceeds of $5,599.
Due to the immaterial nature of these activities, the statement of
operations data for the year ended December 31, 1992, and balance sheet
data as of December 31, 1992 have been omitted from the table above.
(2) For the years ended December 31, 1995 and 1996, pro forma weighted average
common and common equivalent shares outstanding consist of 7,233,875 and
8,701,280 shares of common stock, respectively, after giving effect to the
reverse stock split and the conversion of preferred stock upon the
completion of the Company's intitial public offering and 493,649 and
227,323 shares, respectively, attributable to options granted and common
stock sold at prices below the offering price in the twelve months
preceding the initial filing of the Company's registration statement on
Form S-1 and through the effective date of the Company's initial public
offering using the if-converted method.

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

OVERVIEW

The Company is engaged in the research, development and commercialization of
products for the non-invasive diagnosis of cardiac disease. The Company has
generated limited revenues from the shipment of its first product and has
experienced substantial net losses since its inception, and expects to incur
substantial and increasing net losses for the foreseeable future. The Company
believes that its research and development expenses will increase significantly
in the future as it develops additional products and funds clinical trials of
its products. The Company's research and development expenses may also increase
in the future as it supplements its internal research and development with
third party technology licenses and potential product acquisitions. The Company
also expects that its selling, general and administrative expenses will
continue to increase in connection with the Company's continued expansion of
its sales and marketing activities. Revenues generated from the sale of the
Company's products will depend upon numerous factors, including the timing of
regulatory actions, progress of product development, the extent to which the
Company's products gain market acceptance, varying pricing promotions and
volume discounts to customers, competition and the availability of third party
reimbursement. The Company has incurred cumulative net losses since inception
through December 31, 1996 of approximately $9,116,000.

RESULTS OF OPERATIONS

FISCAL 1995 COMPARED TO FISCAL 1996

The Company had $68,047 of product revenue in the fiscal year ended December
31, 1995 ("Fiscal 1995") and product revenue of $841,942 in the fiscal year
ended December 31, 1996 ("Fiscal 1996"). This increase in product revenue
reflects the first full year of product sales and FDA clearance to sell the
Company's products in the United States. Approximately 80% of these revenues
reflect sales to foreign distributors. The Company also had $25,000 of contract
revenue income in Fiscal 1996, but none in Fiscal 1995.

14
<PAGE>

Cost of goods sold was $141,312 in Fiscal 1995 and $884,229 in Fiscal 1996,
representing 208% and 105%, respectively, of product sales. These expenses
reflect a number of fixed costs that were incurred as the Company expanded
manufacturing operations in anticipation of commercializing its products.

The Company's research and development expenses were $1,559,915 in Fiscal
1995 and $2,254,884 in Fiscal 1996. This increase was due to staffing
increases, clinical trial expansion and patent legal expenses.

The Company's selling, general and administrative expenses increased from
$1,109,724 in Fiscal 1995 to $2,269,532 in Fiscal 1996. The increase was
primarily attributable to the development of the Company's field sales force
and administrative infrastructure upon commencement of commercial sales of the
Company's products.

Interest income was $245,946 in Fiscal 1995, compared to $506,824 in Fiscal
1996. This increase reflects the increase in invested funds due to the
Company's initial public offering in August 1996.

FISCAL 1994 COMPARED TO FISCAL 1995

The Company had no product revenue in the fiscal year ended December 31, 1994
("Fiscal 1994") and product revenue of $68,047 in Fiscal 1995. This revenue
reflects the initial sales of demonstration units to foreign distributors. The
Company had $25,000 of contract research revenue in Fiscal 1994, but none in
Fiscal 1995.

There was no cost of goods sold in Fiscal 1994 compared to $141,312 in Fiscal
1995, representing 208% of product sales. These expenses reflect a number of
fixed costs that were incurred as the Company expanded manufacturing operations
in anticipation of commercializing its products.

The Company's research and development expenses were $1,123,752 in Fiscal
1994 and $1,559,915 in Fiscal 1995. This increase was principally due to
staffing increases.

The Company's selling, general and administrative expenses increased from
$723,918 in Fiscal 1994 to $1,109,724 in Fiscal 1995. The increase was
primarily attributable to staffing increases and administrative infrastructure.

Interest income was $163,957 in Fiscal 1994, compared to $245,946 in Fiscal
1995. This increase reflects the increase in invested funds as a result of a
private placement of the Company's securities in April 1995.

INFLATION AND INCOME TAXES

Inflation did not have a significant effect on the Company's results of
operations for any of the three years in the period ended December 31, 1996.

The Company recorded no provision for income taxes for 1994, 1995 and 1996
because it incurred net losses in each of such years. At December 31, 1996, the
Company had net operating loss carryforwards of $9,462,000 as well as $314,000
of tax credit carryforwards available to offset future taxable income and
income tax liabilities, respectively. These carryforwards generally expire in
the years 2007 through 2011 and may be subject to annual limitations as a
result of changes in the Company's ownership. There can be no assurance that
changes in ownership in future periods or continuing losses will not
significantly limit the Company's use of net operating loss and tax credit
carryforwards.

15
<PAGE>

evidence, the Company has provided a full valuation allowance ($4,037,000 at
December 31, 1996) for its deferred tax assets since, in the opinion of
management, realization of these future benefits is not sufficiently assured
(defined as a likelihood of slightly more than 50 percent).

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed operations primarily from the sale
of equity securities. As of December 31, 1996, the Company had raised
$28,742,000 (net of stock issuance costs) from the sales of equity securities,
with net proceeds of $5,697,000 received in 1993, $3,353,000 received in 1995
and $19,686,000 received in 1996.

As of December 31, 1996, the Company had cash and cash equivalents of
$18,589,000. The proceeds of the equity offerings have been used primarily to
fund operating losses of $9,116,000, reflecting expenditures made primarily to
support research and development activities, to form a marketing and sales
organization, and to support an administrative infrastructure, and the
investment of approximately $580,000 in property and equipment as of December
31, 1996. In 1996, the Company used $4,674,000 to fund operating activities.

The Company expects its capital expenditures to increase as it continues to
commercialize its products, particularly in connection with the manufacture of
its proprietary Hi-Res electrodes. The Company does not expect capital
expenditures to exceed an aggregate $3,000,000 over the next two years.

Under the terms of various license, consulting and technology agreements,
the Company is required to pay royalties on sales of its products, as further
described in Notes 10 and 11 of the Company's financial statements and related
notes thereto. Minimum license maintenance fees under these license
agreements, which are creditable against royalties otherwise payable for each
year, range from $20,000 to $45,000 per year in total through 2008. The
Company is committed to pay an aggregate of $470,000 of such minimum license
maintenance fees subsequent to December 31, 1996. As part of these agreements,
the Company is also committed
to meet certain development and sales milestones, including a requirement to
spend a minimum of $200,000 in any two-year period for research and
development, clinical trials, marketing, sales and/or manufacturing of
products related to certain technology covered by the consulting and
technology agreements.

The Company anticipates that its existing capital resources, including the
proceeds of its initial public offering in 1996 and the interest earned
thereon, will be adequate to satisfy its capital requirements for at least the
next two years. There may be circumstances, however, that would accelerate the
Company's use of such funds. If this occurs, the Company, may, from time to
time, incur additional indebtedness or issue, in public or private
transactions, equity or debt securities. However, there can be no assurance
that suitable debt or equity financing will be available to the Company on
acceptable terms, if at all.

RECENTLY ENACTED ACCOUNTING STANDARD

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies modifications to the calculation of earnings per share from
that currently used by the Company. Under SFAS 128, "basic earnings per share"
will be calculated based upon the weighted average number of common shares
actually outstanding, and "diluted earnings per share" will be calculated
based upon the weighted average number of common shares, common share
equivalents and other convertible securities outstanding. SFAS 128 is
effective in the Company's fourth quarter of 1997 and will be adopted at that
time. The Company has not yet determined the impact, if any, of SFAS 128 on
its reported results of operations. The adoption of SFAS 128 will have no
effect on the Company's financial position or cash flows.

FACTORS WHICH MAY AFFECT FUTURE RESULTS

This Annual Report on Form 10-K (the "Annual Report") contains forward-
looking statements. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects,"

16
<PAGE>

"intends" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those
set forth below and elsewhere in this Annual Report.

The Company since inception has engaged primarily in research, development,
testing and obtaining regulatory clearances for its products. The Company
expects to incur substantial and increasing net losses for the foreseeable
future as a result of sales and marketing, research and product development,
manufacturing and other expenses expected to be incurred as the Company
further commercializes the CH 2000 System and expands its product offerings.
There can be no assurance that the Company will ever generate substantial
revenues or achieve profitability.

The Company believes that its future success substantially depends upon
successful commercialization and market acceptance of the CH 2000 System
incorporating the Company's T-wave alternans technology. The analysis of T-
wave alternans to diagnose ventricular arrhythmias is a new diagnostic
approach that is currently investigational. The Company has not yet applied
for clearance from the FDA for a labelling claim covering the applicability or
prognostic use of its T-wave alternans technology. Acceptance will depend upon
the Company's ability to obtain regulatory clearance or approval for claims
covering the applicability or prognostic use of T-wave alternans measurement,
as well as its ability to demonstrate the diagnostic advantages, cost-
effectiveness and performance features of the CH 2000 System. There can be no
assurance that the Company will be able to successfully commercialize or
achieve market acceptance of the CH 2000 System or that the Company's
competitors will not develop competing technologies that are superior to those
of the Company.

The Company has sponsored and is continuing to sponsor a number of clinical
studies relating to the CH 2000 System, its T-wave alternans technology and
its Hi-Res electrodes to establish the prognostic value of its T-wave
alternans technology. While these studies and third-party studies on high risk
patients to date have indicated that T-wave alternans is associated with
ventricular arrhythmia to a degree comparable to EP testing, there can be no
assurances that the results of such studies will continue to do so. Any
results of clinical studies or trials which fail to demonstrate that T-wave
alternans is comparable in accuracy to alternative diagnostic tests, or which
otherwise call into question the cost-effectiveness, efficacy or safety of
this, or other Company technologies, would have a material adverse effect on
the Company's business, financial condition and results of operations.

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

A significant portion of the Company's revenue will be dependent upon sales
of its products outside the United States. Foreign regulatory bodies have
established varying regulations governing product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. Specifically, the European Union has promulgated
rules which require that medical products receive the right to affix the CE
mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. There is no
assurance that the Company will be able to obtain CE approval for its future
products. The inability or failure of the Company or its international
distributors to comply with varying foreign regulations or the imposition of
new regulations could restrict or, in certain countries, result in the
prohibition of the sale of the Company's products internationally and thereby
adversely affect the Company's business, financial condition and results of
operations.

17
<PAGE>

Competition from medical devices which help to diagnose cardiac disease is
intense and likely to increase. The Company competes with manufacturers of ECG
stress tests, the conventional method of diagnosing ischemic heart disease,
and may compete with manufacturers of other non-invasive tests, including
ECGs, Holter monitors, ultrasound tests and systems for measuring cardiac late
potentials. Many of the Company's competitors and potential competitors have
substantially greater capital resources, name recognition, research and
development experience and regulatory, manufacturing and marketing
capabilities. Many of these competitors offer well established, broad product
lines and ancillary services not offered by the Company. Some of the Company's
competitors have long-term or preferential supply arrangements with physicians
and hospitals which may act as a barrier to market entry.

The Company intends to market its products in the United States primarily
through its own direct sales force and, to a lesser extent, distributors.
Significant expenditures, management resources and time will be required for
the Company to develop a successful domestic direct sales force. There can be
no assurance that the Company will be able to recruit and retain skilled sales
management, direct salespersons or distributors, or that the Company's sales
efforts will be successful. The Company intends to market its products
internationally through independent distributors. These distributors may also
distribute competing products under certain circumstances. The loss of a
significant international distributor could have a material adverse effect on
the Company's business if a new distributor, sales representative or other
suitable sales organization cannot be found on a timely basis in the relevant
geographic market. To the extent that the Company relies on sales in certain
territories through distributors, any revenues the Company receives in those
territories will depend upon the efforts of its distributors. Furthermore,
there can be no assurance that a distributor will market the Company's
products successfully or that the terms of its distribution arrangements will
be acceptable to the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's financial statements filed as part of this Report are listed
and indexed on page F-1. The Company does not meet the requirements to include
supplementary data.

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is contained in part under the caption "EXECUTIVE
OFFICERS OF THE COMPANY" in Part I hereof, and the remainder is contained in
the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on June 23, 1997 (the "1997 Proxy Statement") under the caption "Election
of Directors" and is incorporated herein by reference.

18
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The response to this item is contained in the 1997 Proxy Statement under the
captions "Directors' Compensation" and "Executive Compensation," and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is contained in the 1997 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is contained in the 1997 Proxy statement under the
caption "Transactions with Directors," and is incorporated herein by
reference.

19
<PAGE>

PART IV

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

(a)1.FINANCIAL STATEMENTS

The Company's financial statements are indexed on page F-1.

(a)2.FINANCIAL STATEMENT SCHEDULES

All applicable information is readily determinable from the notes to
the Company's financial statements.

(a)3.LISTING OF EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
##3.1 Certificate of Incorporation, as amended, of the Registrant.
##3.2 Form of Restated Certificate of Incorporation of the Registrant to
be filed upon the closing of the public offering.
##3.3 By-Laws of the Registrant, as amended.
##4.1 Specimen Certificate for shares of Common Stock, $.001 par value,
of the Registrant.
##10.1 1993 Incentive and Non-Qualified Stock Option Plan, as amended.
##10.2 1996 Equity Incentive Plan.
##10.3 1996 Employee Stock Purchase Plan.
##10.4 1996 Director Stock Option Plan.
##10.5 Consulting and Technology Agreement between the Registrant and Dr.
Richard J. Cohen, dated February 8, 1993.
##10.6 Employment Agreement between the Registrant and Jeffrey M. Arnold,
dated September 1, 1993.
##10.7 Employment Agreement between the Registrant and Paul Albrecht,
Ph.D., dated April 27, 1993.
##10.8 License Agreement By and Between the Registrant and Dr. Richard J.
Cohen, dated February 8, 1993.
##10.9 Lease By and Between the Registrant and R.W. Connelly, dated June
1, 1995.
##10.10* Exclusive distribution agreement by and between the Registrant and
Kontron Instruments Ltd., dated December 28, 1995.
##10.11* Exclusive Distributorship Agreement by and between the Registrant
and Fukuda Denshi Co., Ltd.
##10.12 License Agreement by and between the Registrant and the
Massachusetts Institute of Technology, dated September 28, 1993,
relating to the technology of "Assessing Myocardial Electrical
Stability".
##10.13 License Agreement by and between the Registrants and the
Massachusetts Institute of Technology, dated September 28, 1993,
relating to the technology of "Cardiac Electrical Imaging".
##10.14 License Agreement by and between the Registrant and the
Massachusetts Institute of Technology, dated September 28, 1993,
relating to the technology of "Pacing Technology For Prevention of
Cardiac Dysrhythmias".
##10.15 License Agreement by and between the Registrant and the
Massachusetts Institute of Technology, dated September 28, 1993,
relating to the technology of "Cardiovascular System
Identification", as amended on July 9, 1996.
##10.16 Investors' Rights Agreement by and among the Company, Financial
Strategic Portfolios, Inc.--Health Sciences Portfolio and the
Global Health Sciences Fund, dated September 29, 1993.
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
##10.17 Investors' Rights Agreement by and among the Company and Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital
Fund II, C.V. and Morgan Stanley Venture Investors, L.P., dated April
19, 1995.
##10.18 Warrant to Purchase Shares of common Stock of the Company in favor of
Richard J. Cohen, dated September 29, 1993.
##10.19 Form of additional warrant to purchase shares of Common Stock of the
Company.
##10.20 Form of Registration Rights Agreement by and between the Company and
various Founders, each dated March 29, 1993.
#11.1 Computation of Pro Forma Net Loss Per Share.
#23.1 Consent of Price Waterhouse LLP.
#27 Financial Data Schedule.
</TABLE>
- --------
#Filed herewith.
##Incorporated by reference from the Company's Registration Statement on Form
S-1 dated August 2, 1996.
*Confidential treatment has been granted as to certain portions.

(b) No Current Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.

21
<PAGE>

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 31st day of
March, 1997.

CAMBRIDGE HEART, INC.

By: /s/ Jeffrey M. Arnold
------------------------------------
Jeffrey M. Arnold, President
and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
President, Chief Executive March 31, 1997
/s/ Jeffrey M. Arnold Officer and Director
- --------------------------------- (Principal Executive
Jeffrey M. Arnold Officer)

/s/ Thomas V. Hennessey, Jr. Chief Financial Officer, March 31, 1997
- --------------------------------- Vice President of Operations
Thomas V. Hennessey, Jr. and Treasurer (Principal
Financial and Accounting
Officer)

/s/ Marlene Krauss Chairperson and Director March 31, 1997
- ---------------------------------
Marlene Krauss

Director March 31, 1997
/s/ Zachary C. Berk
- ---------------------------------
Zachary C. Berk

/s/ Laurence J. Blumberg Director March 31, 1997
- ---------------------------------
Laurence J. Blumberg

/s/ Richard J. Cohen Director March 31, 1997
- ---------------------------------
Richard J. Cohen

/s/ J. Daniel Cole Director March 31, 1997
- ---------------------------------
J. Daniel Cole

/s/ M. Fazle Husain Director March 31, 1997
- ---------------------------------
M. Fazle Husain

/s/ David F. Rollo Director March 31, 1997
- ---------------------------------
David F. Rollo

Director March 31, 1997
/s/ Rolf S. Stutz
- ---------------------------------
Rolf S. Stutz
</TABLE>

22
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
##3.1 Certificate of Incorporation, as amended, of the Registrant.
##3.2 Form of Restated Certificate of Incorporation of the Registrant to be filed upon the
closing of the public offering.
##3.3 By-Laws of the Registrant, as amended.
##4.1 Specimen Certificate for shares of Common Stock, $.001 par value, of the Registrant.
##10.1 1993 Incentive and Non-Qualified Stock Option Plan, as amended.
##10.2 1996 Equity Incentive Plan.
##10.3 1996 Employee Stock Purchase Plan.
##10.4 1996 Director Stock Option Plan.
##10.5 Consulting and Technology Agreement between the Registrant and
Dr. Richard J. Cohen, dated February 8, 1993.
##10.6 Employment Agreement between the Registrant and Jeffrey M. Arnold,
dated September 1, 1993.
##10.7 Employment Agreement between the Registrant and Paul Albrecht, Ph.D.,
dated April 27, 1993.
##10.8 License Agreement By and Between the Registrant and Dr. Richard J. Cohen,
dated February 8, 1993.
##10.9 Lease By and Between the Registrant and R.W. Connelly, dated June 1, 1995.
##10.10* Exclusive distribution agreement by and between the Registrant and Kontron
Instruments Ltd., dated December 28, 1995.
##10.11* Exclusive Distributorship Agreement by and between the Registrant and
Fukuda Denshi Co., Ltd.
##10.12 License Agreement by and between the Registrant and the Massachusetts Institute
of Technology, dated September 28, 1993, relating to the technology of "Assessing
Myocardial Electrical Stability".
##10.13 License Agreement by and between the Registrants and the Massachusetts Institute of
Technology, dated September 28, 1993, relating to the technology of
"Cardiac Electrical Imaging".
##10.14 License Agreement by and between the Registrant and the Massachusetts Institute
of Technology, dated September 28, 1993, relating to the technology of
"Pacing Technology For Prevention of Cardiac Dysrhythmias".
##10.15 License Agreement by and between the Registrant and the Massachusetts Institute
of Technology, dated September 28, 1993, relating to the technology of
"Cardiovascular System Identification", as amended on July 9, 1996.
##10.16 Investors' Rights Agreement by and among the Company, Financial Strategic Portfolios,
Inc.Health Sciences Portfolio and the Global Health Sciences Fund, dated
September 29, 1993.
##10.17 Investors' Rights Agreement by and among the Company and Morgan Stanley Venture
Capital Fund II, L.P., Morgan Stanley Venture Capital Fund II, C.V. and Morgan Stanley
Venture Investors, L.P., dated April 19, 1995.
##10.18 Warrant to Purchase Shares of common Stock of the Company in favor of
Richard J. Cohen, dated September 29, 1993.
##10.19 Form of additional warrant to purchase shares of Common Stock of the Company.
##10.20 Form of Registration Rights Agreement by and between the Company and
various Founders, each dated March 29, 1993.
#11.1 Computation of Pro Forma Net Loss Per Share.
#23.1 Consent of Price Waterhouse LLP.
#27 Financial Data Schedule.
</TABLE>
- --------
#Filed herewith.
## Incorporated by reference from the Company's Registration Statement on Form
S-1 dated August 2, 1996.
*Confidential treatment has been granted as to certain portions.

23
<PAGE>

CAMBRIDGE HEART, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheet at December 31, 1995 and 1996............................... F-3
Statement of Operations for the three years ended December 31, 1996....... F-4
Statement of Changes in Stockholders' Equity for the three years ended De-
cember 31, 1996.......................................................... F-5
Statement of Cash Flows for the three years ended December 31, 1996....... F-6
Notes to Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Cambridge Heart, Inc.

In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Cambridge Heart,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

Price Waterhouse LLP

Boston, Massachusetts
February 12, 1997

F-2
<PAGE>

CAMBRIDGE HEART, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 3,948,147 $18,588,583
Accounts receivable................................ -- 420,984
Inventory.......................................... 118,865 251,788
Prepaid expenses and other current assets.......... 48,370 384,423
----------- -----------
Total current assets............................. 4,115,382 19,645,778
Fixed assets, net.................................... 161,978 423,158
Other assets......................................... -- 160,523
----------- -----------
$ 4,277,360 $20,229,459
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 108,471 $ 202,377
Accrued expenses................................... 126,738 283,333
License fees payable............................... 31,212 14,011
----------- -----------
Total current liabilities........................ 266,421 499,721
----------- -----------
Commitments (Notes 10 and 11)
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock, $0.001 par
value; 2,500,000 shares authorized; 2,333,333 and
0 shares issued and outstanding at December 31,
1995 and December 31, 1996, respectively.......... 2,333 --
Series A convertible preferred stock, $0.001 par
value; 6,900,000 shares authorized; 6,578,083 and
0 shares issued and outstanding at December 31,
1995 and December 31, 1996, respectively.......... 6,578 --
Common stock, $0.001 par value; 25,000,000 shares
authorized; 3,163,163 and 10,214,783 shares issued
and outstanding at December 31, 1995 and 1996, re-
spectively........................................ 3,163 10,215
Additional paid-in-capital......................... 9,079,671 29,216,646
Accumulated deficit ............................... (5,080,806) (9,115,685)
----------- -----------
4,010,939 20,111,176
Less: deferred compensation........................ -- (381,438)
----------- -----------
Total stockholders' equity....................... 4,010,939 19,729,738
----------- -----------
$ 4,277,360 $20,229,459
=========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>

CAMBRIDGE HEART, INC.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Product revenue......................... $ -- $ 68,047 $ 841,942
Revenue from research and option agree-
ment................................... 25,000 -- 25,000
----------- ----------- -----------
Total revenue......................... 25,000 68,047 866,942
Cost of goods sold...................... -- 141,312 884,229
----------- ----------- -----------
25,000 (73,265) (17,287)
Cost and expenses:
Research and development............... 1,123,752 1,559,915 2,254,884
Selling, general and administrative.... 723,918 1,109,724 2,269,532
----------- ----------- -----------
Loss from operations.................. (1,822,670) (2,742,904) (4,541,703)
Interest income......................... 163,957 245,946 506,824
----------- ----------- -----------
Net loss................................ $(1,658,713) $(2,496,958) $(4,034,879)
=========== =========== ===========
Pro forma net loss per share............ $ (0.32) $ (0.45)
=========== ===========
Pro forma weighted average common shares
outstanding............................ 7,727,524 8,928,603
=========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>

CAMBRIDGE HEART, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
SERIES A
SERIES B CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- --------------------- -------------------- ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN ACCUMULATED DEFERRED
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT COMPENSATION
---------- --------- ---------- --------- ---------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993............ -- $ -- 6,578,083 $6,578 3,000,000 $ 3,000 5,728,839 $ (925,135) $ --
Issuance of
common stock
through exercise
of stock
options......... 30,833 31 181
Net loss........ (1,658,713)
---------- ------ ---------- ------ ---------- ------- ----------- ----------- ---------
Balance at
December 31,
1994............ -- -- 6,578,083 6,578 3,030,833 3,031 5,729,020 (2,583,848) --
Issuance of
Series B
convertible
preferred stock
in April 1995,
net of issuance
costs of
$149,487
(including
$87,500 paid to
a related
party--see Note
11)............. 2,333,333 2,333 3,348,180
Issuance of
common stock
through exercise
of stock
options......... 132,330 132 2,471
Net loss........ (2,496,958)
---------- ------ ---------- ------ ---------- ------- ----------- ----------- ---------
Balance at
December 31,
1995............ 2,333,333 2,333 6,578,083 6,578 3,163,163 3,163 9,079,671 (5,080,806) --
Issuance of
common stock
through initial
public offering. 2,437,750 2,438 19,651,447
Conversion of
preferred stock
into common
stock........... (2,333,333) (2,333) (6,578,083) (6,578) 4,455,708 4,456 4,455
Issuance of
common stock
through exercise
of stock
options......... 156,250 156 29,325
Deferred
compensation
related to
common stock
options
granted......... 448,750 (448,750)
Issuance of
common stock
through exercise
of warrants..... 1,912 2 2,998
Amortization of
deferred
compensation.... 67,312
Net loss........ (4,034,879)
---------- ------ ---------- ------ ---------- ------- ----------- ----------- ---------
Balance at
December 31,
1996............ -- $ -- -- $ -- 10,214,783 $10,215 $29,216,646 $(9,115,685) $(381,438)
========== ====== ========== ====== ========== ======= =========== =========== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1993............ $ 4,813,282
Issuance of
common stock
through exercise
of stock
options......... 212
Net loss........ (1,658,713)
-------------
Balance at
December 31,
1994............ 3,154,781
Issuance of
Series B
convertible
preferred stock
in April 1995,
net of issuance
costs of
$149,487
(including
$87,500 paid to
a related
party--see Note
11)............. 3,350,513
Issuance of
common stock
through exercise
of stock
options......... 2,603
Net loss........ (2,496,958)
-------------
Balance at
December 31,
1995............ 4,010,939
Issuance of
common stock
through initial
public offering. 19,653,885
Conversion of
preferred stock
into common
stock........... --
Issuance of
common stock
through exercise
of stock
options......... 29,481
Deferred
compensation
related to
common stock
options
granted......... --
Issuance of
common stock
through exercise
of warrants..... 3,000
Amortization of
deferred
compensation.... 67,312
Net loss........ (4,034,879)
-------------
Balance at
December 31,
1996............ $19,729,738
=============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>

CAMBRIDGE HEART, INC.

STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(1,658,713) $(2,496,958) $(4,034,879)
Adjustments to reconcile net loss to net
cash used for operating activities:....
Depreciation........................... 12,786 30,392 98,328
Loss on disposal of fixed assets....... -- -- 12,178
Amortization of deferred compensation.. -- -- 67,312
Changes in assets and liabilities:
Increase in accounts receivable....... -- -- (420,984)
Increase in inventory................. -- (118,865) (132,923)
Increase in prepaid expenses and other
current assets....................... (16,010) (30,160) (336,053)
(Increase) decrease in other assets... 2,800 -- (160,523)
Increase in accounts payable and ac-
crued expenses....................... 107,027 71,876 250,501
Decrease in license fees payable...... (71,680) (71,680) (17,201)
Decrease in due to related party...... (15,878) -- --
----------- ----------- -----------
Net cash used for operating activi-
ties................................ (1,639,668) (2,615,395) (4,674,244)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets............... (60,284) (119,064) (371,686)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net of issuance costs.................. 212 2,603 19,686,366
Proceeds from issuance of Series B pre-
ferred stock, net of issuance costs.... -- 3,350,513 --
----------- ----------- -----------
Net cash provided by financing activ-
ities............................... 212 3,353,116 19,686,366
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (1,699,740) 618,657 14,640,436
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR................................... 5,029,230 3,329,490 3,948,147
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.. $ 3,329,490 $ 3,948,147 $18,588,583
=========== =========== ===========
</TABLE>

See supplemental disclosure of non-cash financing activitiy in Note 5.

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY

Cambridge Heart, Inc. (the "Company") was incorporated in Delaware on
January 16, 1990 and is engaged in the research, development and
commercialization of products for the non-invasive diagnosis of cardiac
disease. The Company sells its products primarily to hospitals, research
institutions and cardiovascular specialists.

During the period from inception (January 16, 1990) through December 31,
1995, the Company devoted substantially all of its efforts to business
planning, raising financing, recruiting personnel, research and development
and obtaining regulatory approval for its products. Although the Company
commenced its planned principal activities and began selling its products in
1995, it had not generated significant revenue therefrom. Accordingly, the
Company was considered to be in the development stage, as defined in Statement
of Financial Accounting Standards No. 7, at December 31, 1995.

During the year ended December 31, 1996, the Company received regulatory
approval for certain of its products and began selling products on a
commercial basis. Accordingly, the Company is no longer considered to be in
the development stage at December 31, 1996.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies followed by the Company in the preparation
of its financial statements are as follows:

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company
invests its excess cash primarily in money market accounts, securities of
state government agencies and short-term commercial paper of companies with
strong credit ratings and in diversified industries. The securities of state
government agencies are reedemable at their face value, and bear interest at
variable rates which are adjusted on a frequent basis. Accordingly, these
investments are subject to minimal credit and market risk. The money market
accounts and short-term commercial paper, totaling $10.5 million at December
31, 1996, are classified as held to maturity. The securities of state
government agencies, totaling $8.0 million at December 31, 1996, are
classified as available for sale. These investments have been recorded at
amortized cost, which approximates fair market value. No realized or
unrealized gains or losses have been recognized.

FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and license fees payable, approximate their fair values at December
31, 1995 and 1996.

INVENTORIES

Inventories, consisting primarily of purchased components, are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
(FIFO) method.

FIXED ASSETS

Fixed assets are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method based on estimated
useful lives. Repair and maintenance costs are expensed as incurred.

REVENUE RECOGNITION

Revenue is recognized upon shipment of goods. Revenue from a research and
option arrangement is recognized pursuant to the agreement as the work is
performed.

F-7
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

RESEARCH AND DEVELOPMENT

Research, engineering and product development costs are expensed as
incurred. Software development costs that would otherwise be capitalizable
under Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," have
not been material to date.

LICENSING FEES AND PATENT COSTS

The Company has entered into licensing agreements which give the Company
the exclusive rights to certain patents and technologies and the right to
market and distribute any products developed, subject to certain covenants.
Payments made under these licensing agreements and costs associated with
patent application have generally been expensed as incurred, because recovery
of these costs is uncertain. However, certain costs associated with patent
applications for products and processes which have received regulatory
approval and are available for commercial sale have been capitalized and are
being amortized over their estimated economic life of 5 years. Amounts
capitalized at December 31, 1996 totaled $54,000 ($0 at December 31, 1995),
net of $6,000 of accumulated amortization, which is included in other assets
in the accompanying balance sheet.

STOCK-BASED COMPENSATION

The Company accounts for employee awards under its stock plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations. The Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), during 1996 for disclosure purposes only
(Note 6).

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingencies at December 31, 1995 and 1996, and the reported
amounts of revenues and expenses during the three years in the period ended
December 31, 1996. Actual results could differ from these estimates.

PRO FORMA NET LOSS PER SHARE

Pro forma net loss per share is determined by dividing net loss by the
weighted average number of common shares and common share equivalents
outstanding during the period. Common share equivalents, comprised of common
stock options and warrants and convertible preferred stock, have been
excluded from the calculation as their effect is anti-dilutive, except that,
pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common share equivalents issued and common stock sold at prices below the
offering price in the twelve months preceding the initial filing of the
Company's Registration Statement on Form S-1 and through the effective date
of its initial public offering have been included in the calculation as if
outstanding through June 30, 1996.

As described in Note 5, conversion of all convertible preferred stock
occurred upon the closing of the public offering of the Company's common
stock in August 1996. The pro forma net loss per share information included
in the accompanying statement of operations for the years ended December 31,
1995 and 1996 reflects the impact on pro forma net loss per share of such
conversion as of the beginning of each period or date of issuance, if later,
using the if-converted method.

F-8
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Historical net loss per share has not been presented on the basis that it
is irrelevant due to the significant change in the Company's capital
structure and resultant loss per share which resulted upon conversion of the
convertible preferred stock.

RECENTLY ENACTED ACCOUNTING STANDARD

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies modifications to the calculation of earnings per share
from that currently used by the Company. Under SFAS 128, "basic earnings per
share" will be calculated based upon the weighted average number of common
shares actually outstanding, and "diluted earnings per share" will be
calculated based upon the weighted average number of common shares, common
share equivalents and other convertible securities outstanding. SFAS 128 is
effective in the Company's fourth quarter of 1997 and will be adopted at that
time. The Company has not yet determined the impact, if any, of SFAS 128 on
its reported results of operations. The adoption of SFAS 128 will have no
effect on the Company's financial position or cash flows.

3. FIXED ASSETS

Fixed assets consist of the following:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31,
LIFE -----------------
(YEARS) 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Computer equipment............................... 5 $100,554 $206,756
Manufacturing equipment.......................... 5 24,508 55,965
Office furniture................................. 7 18,095 64,923
Sales display and clinical research equipment.... 3 64,731 220,252
-------- --------
207,888 547,896
Less--accumulated depreciation................... 45,910 124,738
-------- --------
$161,978 $423,158
======== ========
</TABLE>

4. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Accrued bonus............................................. $ 66,540 $140,000
Accrued professional fees................................. 24,094 69,016
Employee stock purchase plan withholdings................. -- 26,779
Accrued other............................................. 36,104 47,538
-------- --------
$126,738 $283,333
======== ========
</TABLE>

F-9
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. STOCKHOLDERS' EQUITY

REVERSE COMMON STOCK SPLIT

On May 29, 1996, the Board of Directors authorized a 1-for-2 reverse stock
split of the Company's common stock which was effective on July 8, 1996. All
shares of common stock, common stock options and warrants, preferred stock
conversion ratios and per share amounts included in the accompanying
financial statements have been adjusted to give retroactive effect to the
reverse stock split for all periods presented.

PUBLIC OFFERING OF COMMON STOCK

On August 2, 1996, the Company completed its initial public offering for
the sale of 2,437,750 shares of common stock. The Company received
approximately $19,654,000 from the sale of the shares, net of underwriting
discounts and expenses associated with the offering.

CONVERTIBLE PREFERRED STOCK

The Company had authorized 10,400,000 shares of preferred stock, of which
6,900,000 shares had been designated as Series A convertible preferred stock
("Series A Preferred Stock") and 2,500,000 shares had been designated as
Series B convertible preferred stock ("Series B Preferred Stock"). The
remaining authorized shares have not been designated. The designated
preferred stock had the following characteristics:

Conversion

Each share of preferred stock was convertible at any time at the option of
the holder into shares of common stock pursuant to a ratio of one share of
common stock for two shares of preferred stock, subject to certain stock
split and stock dividend adjustments. In addition, the conversion ratio was
subject to adjustment, as defined in the respective agreements, in the event
that the Company issued common stock at a per share price less than $3.00 and
$2.00 per share for the Series B Preferred Stock and the Series A Preferred
Stock, respectively.

In conjunction with the Company's initial public offering in August 1996,
all shares of Series A Preferred Stock and Series B Preferred Stock were
converted into 3,289,041 and 1,166,667 shares of common stock, respectively.

Dividends

Dividends on the preferred stock were payable prior and in preference to
any declaration or payment of any dividend on the common stock of the Company
when, as and if declared by the Board of Directors of the Company. Through
December 31, 1996, no dividends had ever been declared or paid by the
Company.

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the affairs
of the Company, the holders of the Series B Preferred Stock were entitled to
receive in preference to the holders of the Series A Preferred Stock and the
common stock an amount per share equal to $1.50. Subsequent to the repayment
of the holders of the Series B Preferred Stock, the holders of the Series A
Preferred Stock were entitled to receive in preference to the holders of the
common stock an amount per share equal to $1.00.

Voting Rights

Each holder of preferred stock was entitled to the number of votes equal to
the number of shares of common stock into which such holder's shares were
convertible at the date such vote is taken.

F-10
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)

WARRANTS

In connection with the Series A Preferred Stock issuance, warrants to
purchase 328,904 shares of common stock were issued to the Company's selling
agent, a related party (Note 11). The warrants were issued with an exercise
price of $2.00 per share and expire in September 1998. The warrants contain a
cashless exercise provision whereby the warrant holder can surrender in-the-
money warrants in exchange for a net number of shares of Common Stock based
on the fair market value of the Common Stock at the date of exercise. During
1996, 2,000 warrants were exercised, resulting in the issuance of 1,912
shares of common stock. At December 31, 1996, the Company has reserved
326,904 shares of common stock for issuance upon the exercise of these
warrants.

In addition, warrants to purchase 109,634 shares of common stock were
issued in February 1993 to a related party who provides consulting services
to the Company (Note 11). These warrants were issued with an exercise price
of $2.00 per share and expire on September 24, 1998. At December 31, 1996,
the Company has reserved 109,634 shares of common stock for issuance upon the
exercise of these warrants.

The value of the above warrants at the time of issuance was estimated by
management and determined not to be material to the Company's results of
operations and financial position.

In conjunction with certain license agreements entered into during 1996
(Note 10), the Company issued warrants to purchase 25,000 shares of common
stock to an unrelated party. The warrants were issued with an exercise price
of $11.00 per share, are exercisable beginning in December 1999 and expire in
March 2000. However, the warrants terminate if the related license agreements
are terminated prior to exercise. The warrants contain a cashless exercise
provision whereby the warrant holder can surrender in-the-money warrants in
exchange for a net number of shares of common stock based on the fair market
value of the common stock at the date of exercise. At December 31, 1996, the
Company has reserved 25,000 shares of common stock for issuance upon the
exercise of these warrants. As these warrants are effectively terminable by
the Company without cause prior to their exercise, the value of these
warrants has not yet been measured.

NEWLY AUTHORIZED COMMON AND PREFERRED STOCK

On May 29, 1996, the Company's Board of Directors increased the number of
authorized shares of the Company's $0.001 par value common stock to
25,000,000 and authorized an additional 2,000,000 shares of the Company's
$0.001 par value preferred stock. The newly authorized preferred stock may be
issued at the discretion of the Board of Directors of the Company (without
stockholder approval) with such designations, rights and preferences as the
Board of Directors may determine from time to time. This preferred stock may
have dividend, liquidation, redemption, conversion, voting or other rights
which may be more expansive than the rights of the holders of the common
stock.

F-11
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK PLANS

1993 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN

During 1993, the Company adopted the 1993 Incentive and Non-Qualified Stock
Option Plan (the "1993 Plan"). The 1993 Plan provides for the granting of
incentive and non-qualified stock options to management, other key employees,
consultants and directors of the Company. The total number of shares of
common stock that may be issued pursuant to the exercise of options granted
under the 1993 Plan is 1,688,663. Incentive stock options may not be granted
at less than fair market value of the Company's common stock at the date of
grant and for a term not to exceed ten years. For holders of more than 10% of
the Company's total combined voting power of all classes of stock, incentive
stock options may not be granted at less than 110% of the fair market value
of the Company's common stock at the date of grant and for a term not to
exceed five years. The exercise price under each non-qualified stock option
shall be specified by the stock option committee, but shall in no case be
less than the par value of the common stock subject to the non-qualified
stock option.

1996 EQUITY INCENTIVE PLAN

During 1996, the Board of Directors authorized the 1996 Equity Incentive
Plan (the "Incentive Plan"). The Incentive Plan provides for the issuance of
up to 1,000,000 shares of the Company's common stock to eligible employees,
officers, directors, consultants and advisors of the Company. Under the
Incentive Plan, the Board of Directors may award incentive and non-qualified
stock options, stock appreciation rights, performance shares and restricted
and unrestricted stock.

Incentive stock options may not be granted at less than fair market value
of the Company's common stock at the date of grant and for a term not to
exceed ten years. For holders of more than 10% of the Company's total
combined voting power of all classes of stock, incentive stock options may
not be granted at less than 110% of the fair market value of the Company's
common stock at the date of grant and for a term not to exceed five years.
The exercise price under each non-qualified stock option shall be specified
by the stock option committee, but shall in no case be less than the par
value of the common stock subject to the non-qualified stock option. Grants
of stock appreciation rights, performance shares, restricted stock and
unrestricted stock may be made at the discretion of the Board of Directors
with terms to be defined therein except that the exercise and transfer of
stock appreciation rights granted in tandem with stock options is limited by
the terms of the related options.

Transactions under the 1993 Plan and the Incentive Plan during the years
ended December 31, 1994, 1995 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at begin-
ning of year.......... 1,016,162 $0.29 1,032,829 $0.31 1,284,499 $0.47
Granted................ 578,125 0.20 396,500 0.74 224,500 6.92
Exercised.............. (30,833) 0.01 (132,330) 0.02 (156,250) 0.16
Canceled............... (530,625) 0.18 (12,500) 0.20 (18,500) 0.72
--------- ----- --------- ----- --------- -----
Outstanding at end of
year.................. 1,032,829 $0.31 1,284,499 $0.47 1,334,249 $1.44
========= ===== ========= ===== ========= =====
Exercisable at end of
year.................. 388,548 $0.33 365,741 $0.34 593,964 $0.41
========= ===== ========= ===== ========= =====
Weighted average fair
value of options
granted during the
year.................. $0.26 $6.26
===== =====
</TABLE>

F-12
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK PLANS--(CONTINUED)

All options granted during 1995 have exercise prices equal to the fair
market value of the common stock at the date of grant. The weighted average
exercise price and weighted average fair value of options granted during 1996
at exercise prices less than the market price of the common stock at the date
of grant were $1.59 and $6.97, respectively. The weighted average exercise
price and weighted average fair value of options granted during 1996 at
exercise prices equal to the market price of the common stock at the date of
grant were $9.33 and $5.94, respectively. No options were granted during 1996
with exercise prices that exceeded the market price of the common stock at
the date of grant.

During 1996, the Company repriced approximately 107,000 options granted to
employees prior to the Company's initial public offering from an exercise
price of $10.00 per share to an exercise price of $8.13 per share, the fair
market value of the Company's common stock at the time of the repricing.

The following table summarizes information about stock options outstanding
under the 1993 Plan and the Incentive Plan at December 31, 1996:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING WEIGHTED EXERCISE
CONTRACTUAL AVERAGE NUMBER OF PRICE OF
RANGE OF EXERCISE NUMBER LIFE, IN EXERCISE OPTIONS EXERCISABLE
PRICES OUTSTANDING YEARS PRICE EXERCISABLE OPTIONS
----------------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$.002 - $.020.......... 229,320 6.56 $0.01 109,070 $0.02
$.20 - $.50............ 603,267 6.97 0.29 390,697 0.23
$1.00 - $2.00.......... 348,412 8.12 1.26 94,197 1.58
$4.00 - $8.125......... 120,750 9.46 7.66 -- --
$10.625 - $12.00....... 32,500 9.86 10.97 -- --
--------- ---- ----- ------- -----
1,334,249 7.52 $1.44 593,964 $0.41
========= ==== ===== ======= =====
</TABLE>

At December 31, 1996, 2,369,250 shares of common stock are reserved for
issuance upon exercise of the options issued under the 1993 Plan and the
Incentive Plan, and there are 1,035,000 options available for future grant.
Outstanding options generally vest on a pro rata basis over a period of three
to five years.

During 1996, the Company granted stock options to purchase 13,750 and
56,250 shares of its common stock, respectively, at exercise prices of $4.00
and $1.00 per share, respectively, to certain employees. The Company has
recorded deferred compensation of $448,750, representing the difference
between the estimated fair market value of the common stock on the date of
grant ($8.00) and the exercise price. Deferred compensation related to these
options is recorded as a reduction of stockholders' equity and is being
amortized ratably over the option vesting period of five years. Compensation
cost associated with these options recorded in 1996 was $67,312.

1996 DIRECTOR OPTION PLAN

During 1996, the Board of Directors authorized the issuance of up to
100,000 shares of the Company's common stock pursuant to its 1996 Director
Option Plan (the "Director Plan"). Under the Director Plan, outside directors
of the Company who are not otherwise affiliated with the Company are entitled
to receive options to purchase 10,000 shares of common stock upon their
initial election to the Board of Directors. All option grants made under the
Director Plan have exercise prices equal to the fair market value of the
Company's common stock on the date of grant, and will vest in three annual
installments on the anniversary date of the grant. Director options will
become immediately exercisable upon the occurrence of a change in control (as
defined in the Director Plan). During 1996, options to purchase a total of
20,000 shares of common stock at an exercise price of $8.38 were granted to
existing outside directors, in conjunction with the Company's initial public
offering.

F-13
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK PLANS--(CONTINUED)

1996 EMPLOYEE STOCK PURCHASE PLAN

During 1996, the Board of Directors authorized the 1996 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan provides for the
issuance of up to 100,000 shares of the Company's common stock to eligible
employees. Under the Purchase Plan, the Company is authorized to make one or
more offerings during which employees may purchase shares of common stock
through payroll deductions made over the term
of the offering. The term of individual offerings, which are set by the Board
of Directors, may be for periods of twelve months or less and may be
different for each offering. The per-share purchase price at the end of each
offering is equal to 85% of the fair market value of the common stock at the
beginning or end of the offering period (as defined by the Purchase Plan),
whichever is lower. The first offering period commenced in October 1996.

FAIR VALUE DISCLOSURES

As discussed in Note 2, the Company has elected to adopt SFAS 123 through
disclosure only. Had compensation cost for the Company's option plans been
determined based on the fair value of the options at the grant dates, as
prescribed in SFAS 123, for options granted in 1995 and 1996, the Company's
net loss and net loss per share would have been as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net loss:
As reported................................... $2,496,958 $4,034,879
Pro forma..................................... $2,505,931 $4,161,030
Net loss per share:
As reported................................... $ 0.32 $ 0.45
Pro forma..................................... $ 0.32 $ 0.47
</TABLE>

The fair value of each option grant under SFAS 123 was estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1995 and 1996, respectively: (i) dividend
yield of 0% for both periods; (ii) expected volatility of 0% and 0%-50%;
(iii) risk free interest rates of 6.1%-7.8% for the year ended December 31,
1995 and 5.8%-6.8%% for the year ended December 31, 1996; and (iv) a weighted
average expected option term of 7 years for both periods. SFAS 123 requires
that volatility be considered in the calculation of the fair value of an
option grant only for grants made when an entity has publicly traded
securities or has filed a registration statement to do so. Accordingly, a
volatility of 0% was utilized for options granted by the Company prior to the
initial filing of its Registration Statement on Form S-1.

The above pro forma disclosures reflect options granted during 1995 and
1996 only. Because additional option grants are expected to be made each year
and options vest over several years, the above pro forma disclosures are not
necessarily representative of pro forma effects of reported net income (loss)
for future years.

7. RESEARCH AND OPTION AGREEMENT

In April 1994, the Company entered into a research and option agreement
with a third party whereby the third party has agreed to fund $50,000 for
certain research and development activities. Under this agreement, which has
multiple phases to be perfomed by both the Company and the third party, the
third party has the option to obtain an exclusive or non-exclusive license to
sell products using technology developed by the

F-14
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RESEARCH AND OPTION AGREEMENT--(CONTINUED)

Company, at which time the third party would be obligated to pay royalties to
the Company on sales of the related products. Royalty rates would range from
.375% to .75% of net sales of the related products (depending upon whether
the license is non-exclusive or exclusive, respectively) with various minimum
and maximum amounts. Amounts received relating to this agreement have been
included as revenue in the statement of operations and the related costs have
been included in research and development expense. This agreement may be
terminated by the third party at any time.

8. INCOME TAXES

The income tax benefit consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit:
Federal............................ $ 646,000 $ 880,000 $ 1,393,000
State.............................. 112,000 162,000 249,000
--------- ----------- -----------
758,000 1,042,000 1,642,000
Deferred tax asset valuation
allowance........................... (758,000) (1,042,000) (1,642,000)
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>

Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................ $ 1,932,000 $ 3,776,000
Research and development tax credit
carryforwards.................................. 203,000 275,000
Deferred start up and organizational expenses... 40,000 25,000
Other........................................... 33,000 9,000
----------- -----------
Gross deferred tax assets....................... 2,208,000 4,085,000
Fixed assets.................................... (8,000) (26,000)
Patent costs.................................... -- (22,000)
----------- -----------
Net deferred tax assets......................... 2,200,000 4,037,000
Deferred tax asset valuation allowance.......... (2,200,000) (4,037,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>

The Company has generated taxable losses from operations since inception
and, accordingly, has no taxable income available to offset the carryback of
net operating losses. In addition, although management's operating plans
anticipate taxable income in future periods, such plans provide for taxable
losses over the near term and make significant assumptions which cannot be
reasonably assured including approval of the Company's products and labelling
claims by the U.S. Food and Drug Administration and market acceptance of the
Company's products by customers. Based upon the weight of all available
evidence, the Company has provided a full valuation allowance for its
deferred tax assets since, in the opinion of management, realization of these
future benefits is not sufficiently assured (defined as a likelihood of
slightly more than 50 percent).

F-15
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

8. INCOME TAXES--(CONTINUED)

Approximately $195,000 of the deferred tax asset attributable to net
operating loss carryforwards was generated by the exercise of certain non-
qualified stock options. Any future utilization of this amount will be
credited directly to additional paid-in-capital, and not the income tax
provision.

Income taxes computed using the federal statutory income tax rate differs
from the Company's effective tax rate primarily due to the following:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. federal
tax rate............... (35.0)% (35.0)% (35.0)%
State taxes, net of fed-
eral tax benefit....... (7.5) (7.2) (6.2)
Non-deductible ex-
penses................. 2.2 0.8 1.3
Federal research and de-
velopment credits...... (4.3) (2.0) (1.6)
Other................... (1.1) 1.6 0.8
Valuation allowance on
deferred tax assets.... 45.7 41.8 40.7
----- ----- -----
-- -- --
===== ===== =====
</TABLE>

As of December 31, 1996, the Company has net operating loss carryforwards
and research and development credits which may be used to offset future
federal and state taxable income and tax liabilities as follows:

<TABLE>
<CAPTION>
RESEARCH AND
DEVELOPMENT TAX
CREDIT
YEAR OF NET OPERATING -----------------
EXPIRATION LOSS FEDERAL STATE
---------- ------------- -------- --------
<S> <C> <C> <C>
2007...................................... $ 14,000 $ -- $ --
2008...................................... 678,000 19,000 2,000
2009...................................... 1,707,000 69,000 28,000
2010...................................... 2,555,000 43,000 60,000
2011...................................... 4,508,000 67,000 26,000
---------- -------- --------
$9,462,000 $198,000 $116,000
========== ======== ========
</TABLE>

An ownership change, as defined in the Internal Revenue Code, resulting from
the Company's issuance of additional stock may limit the amount of net
operating loss and tax credit carryforwards that can be utilized annually to
offset future taxable income and tax liabilities. The amount of the annual
limitation is determined based upon the Company's value immediately prior to
the ownership change. The Company has determined that ownership changes have
occurred at the time of the Series A Preferred Stock issuance in 1993 and the
Series B Preferred Stock issuance in 1995, but has not yet determined the
amount of the annual limitations. However, management does not believe that
such limitations would materially impact the Company's ability to ultimately
utilize its carryforwards, provided sufficient taxable income is generated in
future years, although they may impact the timing of such utilization.
Subsequent significant changes in ownership could further affect the
limitations in future years.

9. SAVINGS PLAN

In January 1995, Cambridge Heart adopted a retirement savings plan for all
employees pursuant to Section 401 (k) of the Internal Revenue Code. Employees
become eligible to participate on the first day of the calendar quarter
following their hire date. Employees may contribute any whole percentage of
their salary, up to a maximum annual statutory limit. The Company is not
required to contribute to this plan. The Company made no contributions to this
plan in 1995 or 1996.

F-16
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS

OPERATING LEASES

On June 1, 1995, the Company entered into a lease for its office space. The
term of this operating lease is five years and is cancelable by the Company
at the end of the fourth year by providing six months notice and payment of a
$22,000 penalty. The Company also has various noncancelable operating leases
for office equipment and furniture which expire through 1999. Total rent
expense under all operating leases was approximately $24,800, $68,100 and
$98,700 for the years ended December 31, 1994, 1995 and 1996, respectively.

At December 31, 1996, future minimum rental payments under the
noncancelable leases are as follows:

<TABLE>
<S> <C>
1997.............................................................. $135,000
1998.............................................................. 117,000
1999.............................................................. 66,000
--------
$318,000
========
</TABLE>
LICENSE MAINTENANCE FEES

Pursuant to certain license arrangements, the Company must pay license
maintenance fees ranging from $5,000 to $20,000 per year through 2008 to
maintain its license rights. The Company is also required to meet certain
development and sales milestones as specified in the agreements. Should the
Company fail to meet such milestones, the license arrangements may be
terminated at the sole option of the licensor. License maintenance fees paid
during 1995 and 1996 amounted to $20,000 in each year. No license maintenance
fees were paid during 1994. The future minimum license maintenance fee
commitments at December 31, 1996 are approximately as follows:

<TABLE>
<S> <C>
1997.............................................................. $ 20,000
1998.............................................................. 20,000
1999.............................................................. 25,000
2000.............................................................. 45,000
Thereafter........................................................ 360,000
--------
$470,000
========
</TABLE>

During the term of these license agreements, the Company is obligated to
pay a royalty (ranging from 1 1/2% to 2%) based on net sales of any products
developed from the licensed technologies. The license maintenance fees
described above are creditable against royalties otherwise payable for such
year.

In December 1996, the Company entered into two exclusive license agreements
with an unrelated third party. One license agreement requires payment of an
annual fee of $30,000 for ten years in order to maintain the license rights.

The other license agreement requires payment of a perpetual annual license
maintenance fee of $30,000. In order to maintain the exclusivity of this
second license agreement, the Company must meet certain development
milestones within three years (five years if the Company agrees to increase
the annual license maintenance fee to $50,000). During the term of this
license agreement, the Company is also obligated to pay a royalty (ranging
from 2% to 3 1/2%) based on net sales of any products developed from the
licensed technology. The annual maintenance fees for this license are
creditable against royalties otherwise payable for such year.

F-17
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

10. COMMITMENTS--(CONTINUED)

If the Company chooses to sublicense the technologies covered by these two
license agreements to an unrelated party, the Company must also pay a royalty
equal to 33% of the gross revenue received from the unrelated party for
products developed from such technologies.

These two license agreements are terminable by the Company without cause.

In connection with these license agreements, a warrant to purchase 25,000
shares of common stock was issued to the third party (Note 5).

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with two employees which
expire on June 15, 1998 and September 1, 1998, respectively. These agreements
provide that if employment is terminated without cause, the employees will
receive a severance equal to six months and nine months of their respective
salaries.

11. RELATED PARTY TRANSACTIONS, INCLUDING ROYALTY OBLIGATIONS

CONSULTING FEES AND PREFERRED STOCK ISSUANCE COSTS

In February 1993, the Company entered into a consulting and financial
advisory agreement with the selling agent involved with the Company's Series
A Preferred Stock issuance (Note 5). The Chief Executive Officer of the
selling agent is Chairperson of the Company's Board of Directors. Total cash
fees paid under this agreement during 1994 were approximately $41,000.

During 1995, the Company entered into an additional agreement with the
selling agent. Under this agreement, the Company obtained consulting and
financial advisory services in relation to the issuance of the Company's
Series B Preferred Stock issuance (Note 5). Total fees paid under this
agreement during 1995 amounted to $87,500.

LICENSE AGREEMENT/CONSULTING AND TECHNOLOGY AGREEMENT

In February 1993, the Company entered into a license agreement with a
member of the Company's Board of Directors. This individual is also Chairman
of the Company's Scientific Advisory Board and a faculty member at the
institution with which the Company has entered into certain other license
agreements. In exchange for exclusive patented technology licensing rights,
the Company is required to pay this individual a royalty based on 3% of net
sales of products developed from such technology. If the Company chooses to
sublicense this product to an unrelated party, the royalty will be based on
20% of the gross revenue received from the unrelated party for products
developed from such technology. Additionally, the Company is required to
spend a minimum of $200,000 in each two-year period for research and
development, clinical trials, marketing, sales and/or manufacturing of
products related to this technology. Should the Company fail to meet this
requirement, the license agreement may be terminated at the sole option of
the licensor.

Also in February 1993, the Company entered into a consulting and technology
agreement with this individual. This agreement, which expires in February
1998, requires the Company to pay monthly consulting fees of either $7,500 or
$12,500, as stipulated in the agreement. Total payments made during 1994,
1995 and 1996 were approximately $142,000, $100,000 and $106,000,
respectively, and are included in research and development expense. The
Company is also required to remit to this individual a royalty of 1% of net
sales of products developed from certain other technology licensed from the
institution described above. If the Company chooses to sublicense such
products to an unrelated party, the royalty will be based on 7% of the gross
revenue received from the unrelated party for products developed from such
technology. In connection

F-18
<PAGE>

CAMBRIDGE HEART, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS, INCLUDING ROYALTY OBLIGATIONS--(CONTINUED)

with this consulting and technology agreement, a warrant to purchase 109,634
shares of common stock was issued to this individual (Note 5).

Operations through December 31, 1996 did not result in the recognition of
any material royalty expense in connection with these agreements.

12. MAJOR CUSTOMERS AND EXPORT SALES

During 1995, the Company derived all product revenues from a distributor of
the Company's products in Japan. During 1996, the Company derived 34% and 42%
of its product revenues from two distributors of the Company's products in
Japan and Europe, respectively. These same two distributors accounted for 39%
and 40% of the Company's accounts receivable at December 31, 1996. Company
policy does not require collateral on accounts receivable balances. There was
no product revenue prior to 1995.

F-19

<PAGE>

EXHIBIT 11.1

CAMBRIDGE HEART, INC.
COMPUTATION OF PRO FORMA NET LOSS PER SHARE

<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER DECEMBER
31, 1995 31, 1996
----------- -----------
<S> <C> <C>
Net Loss............................................. $(2,496,958) $(4,034,879)
=========== ===========
Weighted average shares outstanding:
Shares attributable to common stock outstanding...... 3,126,569 6,073,865
Shares attributable to certain common stock op-
tions(1)............................................ 493,649 227,323
Shares attributable to the assumed conversion of Se-
ries A and B convertible preferred stock outstanding
upon closing of initial public offering............. 4,107,306 2,627,415
----------- -----------
Pro forma weighted average common and common equiva-
lent shares outstanding............................. $ 7,727,524 $ 8,928,603
=========== ===========
Pro forma net loss per share......................... $ (0.32) $ (0.45)
=========== ===========
</TABLE>

(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock options issued during the twelve months prior to the
Company's initial registration statement on Form S-1 have been included in
the above computation as if outstanding for periods through June 30, 1996,
even if such impact is anti-dilutive.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Cambridge Heart, Inc. of our report dated February
12, 1997 appearing on page F-2 of this Annual Report on Form l0-K.

PRICE WATERHOUSE LLP

Boston, Massachusetts
March 26, 1997

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,588,583
<SECURITIES> 0
<RECEIVABLES> 420,984
<ALLOWANCES> 0
<INVENTORY> 251,788
<CURRENT-ASSETS> 19,645,778
<PP&E> 423,158
<DEPRECIATION> 124,738
<TOTAL-ASSETS> 20,229,454
<CURRENT-LIABILITIES> 499,721
<BONDS> 0
0
0
<COMMON> 10,215
<OTHER-SE> 19,719,523
<TOTAL-LIABILITY-AND-EQUITY> 20,229,459
<SALES> 841,942
<TOTAL-REVENUES> 866,942
<CGS> 884,229
<TOTAL-COSTS> 884,229
<OTHER-EXPENSES> 4,524,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,034,879)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,034,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,034,879)
<EPS-PRIMARY> (0.45)<F1>
<EPS-DILUTED> 0
<FN>
<F1>UNAUDITED PRO FORMA NET LOSS PER SHARE
</FN>

</TABLE>