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

FORM 10-Q

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

For the quarterly period ended June 30, 2004

Commission File Number 0-20991

CAMBRIDGE HEART, INC.
(Exact name of Registrant as specified in its charter)

781-271-1200
(Registrant's telephone number, including area code)

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

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        Number of shares outstanding of each of the issuer's classes of common stock as of August 10, 2004:

CAMBRIDGE HEART, INC.

INDEX

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CAMBRIDGE HEART, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)

See accompanying notes to condensed financial statements.

3

CAMBRIDGE HEART, INC.

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

See accompanying notes to condensed financial statements.

4

CAMBRIDGE HEART, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

See accompanying notes to condensed financial statements.

Supplemental Disclosure of Cash Flow Information

        The Company paid $8,872 and $333 in interest expense for the six-month periods ended June 30, 2003 and June 30, 2004, respectively.

        During the six month period ended June 30, 2004, investors exercised their rights to convert 825,762 shares of Series A Redeemable Convertible Preferred Stock into 10,734,896 shares of the Company's Common Stock.

        During the six month period ended June 30, 2004, the Company issued restricted stock to members of its Board of Directors and recorded non-cash deferred compensation amounting to $49,340, of which $21,752 have been recognized as stock based compensation expense in the statement of operations. The Company recorded non-cash deferred compensation to members of its Board of Directors of $49,340 during the six month period ended June 30, 2003.

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CAMBRIDGE HEART, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1. NATURE OF BUSINESS

        Cambridge Heart, Inc. (the "Company") was incorporated in Delaware on January 16, 1990 and is engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. The Company sells its products primarily to cardiology group practices, hospitals and research institutions. The Company is subject to risks common to companies in the biotechnology, medical device and diagnostic industries, including but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with governmental regulations.

        Our financial statements have been prepared on a going concern basis, which assumes we will realize our assets and discharge our liabilities in the normal course of business. We have experienced recurring losses from operations of $1,032,877 and $1,205,606 for the three month periods ended June 30, 2003 and 2004, respectively and $2,276,059 and $2,227,015 for the six month periods ended June 30, 2003 and 2004, respectively and recurring negative cash flow from operations for the six month periods ended June 30, 2003 and 2004 of $1,932,856 and $1,854,725, respectively. In addition, we have an accumulated deficit of $54,623,511 at June 30, 2004. If we are unable to generate sufficient revenue to sustain operations we may need to seek additional sources of financing. There is no certainty that such efforts would be successful.

        In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows of the Company. The Company's accounting policies are described in the Notes to the Consolidated Financial Statements in the Company's 2003 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. Interim results are not necessarily indicative of the operating results for the full year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Significant accounting policies followed by the Company are as follows:

Cash Equivalents and Marketable Securities

        The Company considers all highly liquid debt instruments purchased with remaining maturity of three months or less to be cash equivalents. Marketable securities consist of cash invested in municipal bonds with triple "A" credit rating. In accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," these investments have been classified as available-for-sale securities and have been reported at fair value, with unrealized gains or losses, if any, excluded from earnings and reported as a separate component of shareholders' equity. These securities are redeemable 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. These securities amount to $0 and $1,200,000 at December 31, 2003 and June 30, 2004, respectively and no realized or unrealized gains or losses have been recognized during the periods presented. The short-term commercial paper, short-term securities of state government agencies with maturities less than three months from date of purchase and money market securities, totaling $5,609,244 and $2,898,901 at December 31, 2003 and June 30, 2004, respectively, are classified as cash equivalents. All of the Marketable Securities have been recorded at amortized cost, which approximates fair market value.

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Stock-Based Compensation

        Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," requires that companies either recognize compensation expense for grants of stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income (loss) and net income (loss) per share in the notes to the financial statements. At December 31, 2003 and June 30, 2004, the Company has four stock-based compensation plans. The Company accounts for employee awards under those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation cost has been recognized under SFAS 123 as amended by SFAS 148—"Accounting for Stock-Based Compensation—Transition and Disclosure" for the Company's employee stock option plans. Had compensation cost for the awards under those plans been determined based on the grant date fair values, consistent with the method required under the recognition provisions of SFAS 148, the Company's net loss and net loss per share would have been reduced to the pro forma amounts indicated below:

        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 2003 and 2004, respectively: (i) dividend yield of 0% for all periods; (ii) expected volatility of 50% for all periods; (iii) risk free interest rates of 2.46% and 2.43%; and (iv) expected option terms of 4 years for 2003 and 2004.

Use of Estimates

        The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to incentive compensation, revenue recognition, product returns, allowance for doubtful accounts, inventory valuation, investments valuation, intangible assets, income taxes, warranty obligations, the fair value of preferred stock and warrants, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are

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believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Net Loss Per Share

        Consistent with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," basic loss per share amounts are based on the weighted average number of shares of common stock outstanding during the period. Diluted loss per share amounts are based on the weighted average number of shares of common stock and potential dilutive common stock outstanding during the period. The impact of options to purchase 4,571,893 and 4,759,875 shares of common stock, warrants for the purchase of 1,386,362 and 1,319,695 shares of common stock, warrants for the purchase of 982,771 and 471,703 shares of Series A Redeemable Convertible Preferred Stock, and 696,825 and 565,605 shares of Series A Redeemable Convertible Preferred Stock have been excluded from the calculation of diluted weighted average share amounts as their inclusion would have been anti-dilutive for the three and six month period ended June 30, 2003 and 2004, respectively.

        Emerging issues Task Force ("EITF") 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share ("EITF 03-6"), was issued in March 2004. EITF 03-6 is intended to clarify what is a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-6 is effective for reporting periods beginning after March 31, 2004. The adoption of this pronouncement did not have an impact on our consolidated financial position, results of operations or cash flows as the Company incurred a net loss for the three and six month period ended June 30, 2003 and 2004. This pronouncement will have an impact when the Company incurs a net income and at that time, we will evaluate whether our existing securities meet the definition of a "participating security" under the provisions of EITF 03-6.

Comprehensive Income (Loss)

        Comprehensive income (loss) is comprised of net income (loss) and unrealized gains or losses associated with securities held by the Company as defined in SFAS 115. The Company has no other items of comprehensive income for all periods presented.

3. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

        One customer of the Company accounted for 9% of total revenues for the six month period ended June 30, 2004 and 9% of the accounts receivable balance as of June 30, 2004. For the six month period ended June 30, 2003, this same customer accounted for 18% of total revenue and 13% of the accounts receivable balance at June 30, 2003.

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4. INVENTORY

        Inventories consisted of the following at December 31, 2003 and June 30, 2004:

5. SALE OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK

        The Company's Board of Directors has authorized 2,000,000 shares of the Company's $0.001 par value preferred stock. The 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. At June 30, 2004, the Company had 565,605 shares of Series A Redeemable Convertible Preferred Stock outstanding.

        On May 12, 2003, the Company entered into an agreement for the sale of up to $6.5 million of Series A Redeemable Convertible Preferred Stock ("preferred stock") to Medtronic, Inc. and a group of private investors. Under the terms of the financing, the Company issued and sold 696,825 shares of preferred stock at a purchase price of $4.42 per share, for total gross proceeds of $3,079,967. Each share of the preferred stock is convertible into 13 shares of the Company's common stock.

        As part of the financing, the Company issued to the investors, other than Medtronic, short-term warrants exercisable for a total of 705,852 shares of the preferred stock. There were six tranches of the short-term warrants that expired in equal monthly intervals starting September 1, 2003. The exercise price per share of these warrants was $4.42. At June 30, 2004, 100% of the short-term warrants have been exercised by the investors at a price of $4.42 per share providing the Company with additional gross proceeds of $3,119,866.

        The Company also issued to both Medtronic and the private investors long-term warrants exercisable for 30% of the total number of shares of preferred stock purchased through the initial investment and the exercise of the short-term warrants. The exercise price of Medtronic's long-term warrant is $4.42 and the exercise price per share of the long-term warrants issued to the other investors is $5.525. These long-term warrants expire on January 1, 2009. At June 30, 2004, long-term warrants for the purchase of 67,873 and 352,926 shares of preferred stock have been issued and are outstanding to Medtronic and the investors, respectively.

        In connection with this financing and in order to address certain payment obligations in existing agreements with The Tail Wind Fund Ltd. and a private investor, the Company issued to Tail Wind short-term warrants exercisable for 67,872 shares of the preferred stock and a long-term warrant exercisable for 75% of the total number of shares of the preferred stock purchased through the exercise of Tail Wind's short-term warrants. The exercise prices and the expiration dates of Tail Wind's warrants are consistent with the warrants issued to the other private investors. At June 30, 2004,

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short-term warrants for the purchase of 67,872 shares of preferred stock have been exercised by Tail Wind at a price of $4.42 per share providing the Company with additional gross proceeds of $299,994. In addition, on May 12, 2003, the Company agreed to adjust the original exercise price of $2.28 per share of previously issued warrants, acquired pursuant to a previously completed private equity transaction, for the purchase of 459,770 and 172,414 shares of the Company's common stock issued to Tail Wind and a private investor to $0.285 per share.

        The Company filed a registration statement with the Securities and Exchange Commission to register all of the shares of common stock issuable upon conversion of the preferred stock and upon exercise of all of the warrants. This registration statement was declared effective on June 20, 2003.

        The net proceeds from the sale of the securities have been allocated between the preferred stock and the warrants based on their relative fair values, on the Company's Balance Sheet. The terms of the financing provide that the conversion price of the preferred stock and warrants is subject to adjustment in certain circumstances. Therefore, the actual conversion price may be below the market price of the Company's common stock at the time of conversion. The final closing price of the Company's common stock as listed on the National Association of Securities Dealers' OTC Bulletin Board on May 12, 2003 was $0.46 per share and as a result, the Company has valued the warrants and the beneficial conversion feature reflecting the May 12, 2003 commitment date and the most beneficial per share discount available to the preferred shareholders and warrant holders. A beneficial conversion feature was recorded as of the original transaction date as the consideration allocated to the convertible security, divided by the number of common shares into which the security converts, was below the fair value of the common stock at the convertible instruments issuance. The value of the beneficial conversion feature recorded related to the preferred stock financing was $1,533,280. The amount of the beneficial conversion feature was immediately accreted and the accretion resulted in a deemed dividend as the preferred stock does not have a redemption term. The deemed dividend was reflected as an adjustment to net loss applicable to common stockholders on the Company's Statement of Operations for the three and six month period ended June 30, 2003. The issuance of additional shares of preferred stock or warrants under this financing may result in an additional beneficial conversion feature being recorded.

        During the three and six month periods ended June 30, 2004, respectively, short-term warrants for the purchase of 0 and 109,725 shares of preferred stock were exercised at a price of $4.42 per share providing the Company with gross proceeds of $0 and $484,985. The Company has issued a total of 1,470,549 shares of preferred stock as of June 30, 2004, which has provided total gross proceeds of $6,499,827. During the three and six month periods ended June 30, 2004, respectively, investors exercised their rights to convert 299,767 and 825,762 shares of preferred stock into 3,896,971 and 10,734,906 shares of the Company's Common Stock.

6. COMMITMENTS

Guarantor Arrangements

        The Company enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners and customers. Under these provisions the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities. These indemnification

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provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company maintains a products liability insurance policy that limits its exposure. Based on the Company's historical activity in combination with its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.

        The Company warrants all of its non-disposable products as to compliance with their specifications and that the products are free from defects in material and workmanship for a period of 12 months from date of delivery. The Company maintains a reserve for the estimated costs of potential future repair of its products during this warranty period. The amount of reserve is based on the Company's actual return and repair cost experience. The Company has $34,677 of accrued warranties at June 30, 2004 ($58,202 at December 31, 2003).

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

Overview

        We are engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. Using innovative technologies, we are addressing the key problem of identification of those at risk of sudden cardiac death. Our proprietary technology and products are the only diagnostic tools approved by the U.S. Food and Drug Administration to non-invasively measure microvolt levels of T-Wave Alternans, an extremely subtle beat-to-beat fluctuation in a patient's heartbeat.

        Our Microvolt T-Wave Alternans Test is performed using our primary products, the Heartwave System and our single use Micro-V Alternans Sensors. We sell both products in the U.S. primarily through our 15 person direct sales force supplemented in selected territories by independent manufacturers' representatives. Outside the U.S. we sell our products through independent distributors. Profitability for our business requires that we are successful in our efforts to expand the installed base of our Heartwave units in the U.S. and continually increase the number of Microvolt T-Wave Alternans Tests being performed in order to increase the usage of our Micro-V Alternans Sensors. In addition to our own direct sales efforts in the U.S., we utilize our relationships with established strategic partners to assist us in gaining access to our primary customer, the clinical cardiologist, to inform them of the large amount of clinical data that has been presented and published on the value and importance of Microvolt T-Wave Alternans to their patients.

        In June 2004, we were issued a patent from the U.S. Patent and Trademark Office entitled "Analytical Signal Method for Analysis of T-wave Alternans." In addition, we also received a Notice of Allowance for the same patent from the European Patent Office. These key patents cover our proprietary Analytical Spectral Method of digital signal processing, which is a corner stone of our Microvolt T-Wave Alternans technology.

        In July 2004, Kenneth Hachikian and Reed Malleck were elected to the Board of Directors to replace Louis Perlman and Robert DePasqua both of whom resigned earlier this year. Daniel Mulvena retired from the Board of Directors effective July 1, 2004. Mr. Mulvena was elected to the board in December 1999 and was appointed to the role of Chairman of the Board in March 2002. David Chazanovitz, our President and CEO was appointed Chairman to replace Mr. Mulvena effective July 1, 2004.

Critical Accounting Policies and Estimates

        Management's discussion and analysis of the financial condition and results of operations is based upon the financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The notes to the financial statements contained in our Annual Report on Form 10-K include a summary of our significant accounting policies and methods used in the preparation of our financial statements. The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to incentive compensation, revenue recognition, product returns, allowance for doubtful accounts, inventory valuation, investments valuation, intangible assets, income taxes, warranty obligations, the fair value of preferred stock and warrants, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition

        Revenue from the sale of product to all of the Company's customers is recognized upon shipment of goods provided that risk of loss has passed to the customer, all of the Company's obligations have been fulfilled, persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectibility is reasonably assured. Revenue from the sale of product to all of our third party distributors with whom we have a relationship is subject to the same recognition criteria. These distributors provide all direct repair and support services to their customers. Under Emerging Issue Task Force ("EITF") 00-21, in multiple element arrangements, separate elements can be considered separate units of accounting when the delivered unit has value to a customer on a stand alone basis and there is objective and reliable evidence of the fair value of the undelivered element. We regularly sell maintenance agreements with the Heartwave System. Revenue from maintenance contracts is recognized separately based on amounts charged when sold on a stand alone basis and is recognized over the term of the underlying agreement. Additionally, revenue associated with the in- service of new systems sold is recognized in the period in which the service is provided. Revenue of $183,389 at June 30, 2004 ($146,915 at December 31, 2003) associated with these activities is recorded as deferred revenue and included in current liabilities in the accompanying balance sheet.

Allowance for Doubtful Accounts

        We maintain an allowance for doubtful accounts for estimated losses resulting from the non-payment of outstanding amounts due to us from our customers. We determine the amount of the allowance by evaluating the customer's credit history, current financial condition and payment history. We make a judgment as to the likelihood we will experience a loss of all or some portion of the outstanding balance. Our estimate of $140,000 represents 33% of the total unpaid balance in excess of 90 days past due date and 13% of our total accounts receivable at June 30, 2004. Our actual experience of customer receivables written off during the three and six month periods ended June 30, 2004 was immaterial. Accordingly, we believe we have an adequate allowance, however, additional write-offs could occur if future results significantly differ from our expectations.

Inventory Valuation

        We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required that could materially affect our results.

Capitalized Software

        The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require that we exercise considerable judgment with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. The cost of consultants utilized in the development of new features and functionality of our Microvolt T-Wave Alternans software is capitalized as incurred and amortized on a straight-line basis over its estimated life upon release to the market. The estimated life used for the amortization of the costs is three years. At each balance sheet date, these costs are evaluated for impairment by comparing the net realizable value of the product containing the software to the unamortized capitalized cost of that software. The amount by which the unamortized capitalized cost of the software exceeds this net realizable value, if

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any, is written off. As of June 30, 2004, no such write-offs have been made. The net realizable value is determined as the estimated future gross revenue from that product containing the software reduced by the estimated future costs of completing and disposing of that product. If no future revenues were achieved, then we would be required to write off the balance of the unamortized software costs, which is $89,465 at June 30, 2004.

Product Warranty

        We warrant all of our non-disposable products as to compliance with their specifications and that the products are free from defects in material and workmanship for a period of 12 months from the date of delivery. We maintain a reserve for the estimated costs of potential future repair of our products during this warranty period. The amount of reserve is based on our actual return and repair cost experience. If the rate and cost of future warranty activities materially differs from our historical experience, additional costs would have to be reserved that could materially effect our results.

Results of Operations

        The following table presents, for the periods indicated, our revenue by product line and geographic region. This information has been derived from our Statement of Operations included elsewhere in this Quarterly Report on Form 10-Q. You should not draw any conclusions about our future results from our revenue for any period.

Revenues:

Three and Six Month Periods ended June 30, 2003 and 2004

REVENUE

        Total revenue for the three month period ended June 30, 2003 and 2004 was $1,627,236 and $1,168,494, respectively, a decrease of 28%. Revenue from the sale of our Microvolt T-Wave Alternans products, which we call our Alternans products, was $1,277,544 during the three month period ended June 30, 2003 compared to $807,889 during the same period of 2004, a decrease of 37%. Our Alternans products accounted for 78% and 69% of total revenue for the three month period ended June 30, 2003 and 2004, respectively. The average selling price of our Heartwave System in the U.S. increased 12% during the three month period ended June 30, 2004 compared to the three month

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period ended June 30, 2003, while the average selling price of our Micro-V Alternans Sensors increased 5% during the same period. During the three month period ended June 30, 2003, our revenue from the sale of Alternans product included approximately $358,000 from the sale of our Heartwave System to customers participating in the MASTER Study sponsored by Medtronic, Inc. The balance of the net decrease in our revenue from the sale of Alternans Products is from the reduced sales volume of our Heartwave System and disposable Alternans Sensors which we believe is primarily as a result of the effect that limited reimbursement coverage for our Microvolt T-Wave Alternans test by non-Medicare payers has on the purchasing decisions of potential new customers and the frequency of Alternans testing by existing customers.

        Total revenue for the six month period ended June 30, 2003 and 2004 was $2,730,811 and $2,434,298, respectively, a decrease of 11%. Revenue from the sale of our Alternans products was $2,019,066 during the six month period ended June 30, 2003 compared to $1,828,702 during the same period of 2004, a decrease of 9%. Our Alternans products accounted for 74% and 75% of total revenue for the six month period ended June 30, 2003 and 2004, respectively. The average selling price of our Heartwave System in the U.S. increased 20% during the six month period ended June 30, 2004 compared to the six month period ended June 30, 2003, while the average selling price of our Micro-V Alternans Sensors increased 8% during the same period. Revenue from the sale of our Heartwave System to customers participating in the MASTER Study during the six month period ended June 30, 2003 represented approximately $394,000.

        Revenue from the sale of non-Alternans products for the three month period ended June 30, 2003 and 2004 was $349,692 and $360,605, respectively, an increase of 3%. As reported previously, our distribution agreement with Philips Medical Systems (Philips) expired at the end of fiscal 2003. This agreement granted them exclusive rights to distribute our CH 2000 stress test system in the U.S. and non-exclusive rights outside the U.S. Revenue from the sale of products to Philips for the three month period ended June 30, 2003 and 2004 was $237,000 and $120,000, respectively. For the six month period ended June 30, 2003 and 2004, revenue from the sale of non-Alternans products was $711,745 and $605,596, respectively, a decrease of 15%. Revenue from the sale of non-Alternans product to Philips was approximately $492,000 and $120,000, respectively, during the six month period ended June 30, 2003 and 2004.

GROSS PROFIT

        Gross profit for the three month period ended June 30, 2003 and 2004 was 55% and 50% of total revenue, respectively. The decline in the profit as a percentage of total sales is primarily attributed to the decrease in sales volume of Alternans products. Gross profit for the six month period ended June 30, 2003 and 2004 was 47% and 53% of total revenue, respectively. Increases in average selling prices of our Alternans products in the U.S. contributed a modest favorable impact on gross profit.

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OPERATING EXPENSES

        The following table presents, for the periods indicates our operating expenses. This information has been derived from our Statement of Operations included elsewhere in this Quarterly Report on Form 10-Q. Our operating expenses for any period are not necessarily indicative of future trends.

RESEARCH AND DEVELOPMENT

        Research and development expenses for the three month period ended June 30, 2003 and 2004 were $330,390 and $172,296, respectively, a decrease of 48%. Research and development expenses for the six month periods ended June 30, 2003 and 2004 were $551,321 and $334,986, respectively, a decrease of 39%. Lower costs for outside consulting services, decrease in compensation associated with the accounting for stock options grant to non-employees and reduction in costs due to completion of clinical studies account for the majority of the expense reduction. We anticipate that our research and development expenses will increase modestly during the remainder of 2004.

SELLING, GENERAL AND ADMINISTRATIVE

        Selling, general and administrative, or SG&A expenses, for the three month period ended June 30, 2003 and 2004 were $1,599,348 and $1,615,452, respectively, an increase of 1%. Selling, general and administrative, or SG&A expenses, for the six month period ended June 30, 2003 and 2004 were $3,014,508 and $3,175,268, respectively, an increase of 5%. Selling and marketing accounted for 59% and 66% of total SG&A for the three month period ended June 30, 2003 and 2004, respectively. These expenses increased 14% for the three month period ended June 30, 2004 when compared to the same period of 2003 primarily as a result of costs associated with our increased efforts directed toward both private and Medicare reimbursement for our Microvolt T-Wave Alternans test and expansion of our sales effort in the U.S. Administrative expenses decreased 17% for the three month period ended June 30, 2004 when compared to the same period of 2003 due primarily to decline in compensation costs associated with employee severance payments and lower legal expenses partially offset by a 41% ($28,339) increase in business insurance costs. We anticipate that administrative expenses will remain at current levels for the balance of fiscal 2004, while selling expenses will increase modestly during the remainder of the year.

INTEREST INCOME/INTEREST EXPENSE

        Interest income for the three month period ended June 30, 2003 and 2004 was $3,122 and $8,420, respectively, an increase of 170% while interest income for the six month period ended June 30, 2003 and 2004 was $8,313 and $15,761, respectively, an increase of 90%. The increase is the result of higher amounts of invested cash and improved interest rates. Interest expense for the three month period ended June 30, 2003 and 2004 was $3,181 and $200, respectively, a decrease of 94% while interest expense for the six month period ended June 30, 2003 and 2004 was $8,872 and $333, respectively, a decrease of 96%. The decrease is the result of the repayment of our credit line with Silicon Valley Bank in October 2003. The outstanding balance on the credit line at June 30, 2003 was $520,566.

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NET LOSS

        As a result of the factors described above, net loss attributable to common stockholders for the three month period ended June 30, 2003 and 2004 was $2,566,216 and $1,197,386, respectively. The net loss for the three month period ended June 30, 2003 included a beneficial conversion feature of $1,533,280 associated with the sale of our Series A Convertible Preferred Stock. Net loss attributable to common stockholders for the six month period ended June 30, 2003 and 2004 was $$3,809,898 and $2,211,587. The net loss for the six month period ended June 30, 2003 includes the same beneficial conversion feature.

Liquidity and Capital Resources

        Cash, cash equivalents and marketable securities were $4,098,901 at June 30, 2004 compared to $5,609,244 at December 31, 2003, a decrease of $1,510,343. This net decrease primarily reflects net proceeds from the exercise of warrants to purchase preferred stock of $484,985 less our use of cash in support of normal operations of $1,854,725. Accounts receivable, net of allowance for doubtful accounts at June 30, 2004 decreased by $859,813, or 49%, primarily reflecting the lower sales volume for the three month period ended June 30, 2004 compared with sales for the fourth quarter of fiscal 2003. Inventory at June 30, 2004 increased $95,830, or 20% compared to December 31, 2003, primarily as a result of the lower volume of customer shipments than planned for the three-month period ended June 30, 2004. Prepaid expenses and other current assets at June 30, 2004 decreased $71,711, or 44%, compared to December 31, 2003. Fixed asset additions during the six month period ended June 30, 2004 totaled $139,606.

        On May 12, 2003, we entered into an agreement for the sale of up to $6.5 million of Series A Redeemable Convertible Preferred Stock to Medtronic, Inc. and a group of private investors. Under the terms of the financing, we issued and sold 696,825 shares of preferred stock at a purchase price of $4.42 per share, for total gross proceeds of $3,079,967. Each share of the preferred stock is convertible into 13 shares of our common stock.

        As part of the financing, we issued to the investors, other than Medtronic, short-term warrants exercisable for a total of 705,852 shares of the preferred stock. There were six tranches of the short-term warrants that expired in equal monthly intervals starting September 1, 2003. The exercise price per share of these warrants was $4.42. All of the short-term warrants had been exercised by the investors at a price of $4.42 per share providing us with additional gross proceeds of $3,119,866.

        We also issued to both Medtronic and the private investors long-term warrants exercisable for 30% of the total number of shares of preferred stock purchased through the initial investment and the exercise of the short-term warrants. The exercise price of Medtronic's long-term warrant is $4.42 and the exercise price per share of the long-term warrants issued to the other investors is $5.525. These long-term warrants expire on January 1, 2009. At June 30, 2004, long-term warrants for the purchase of 67,873 and 352,926 of preferred stock have been issued and are outstanding to Medtronic and the investors, respectively.

        In connection with this financing and in order to address certain payment obligations in existing agreements with The Tail Wind Fund Ltd. and a private investor, we issued to Tail Wind short-term warrants exercisable for 67,872 shares of the preferred stock and a long-term warrant exercisable for 75% of the total number of shares of the preferred stock purchased through the exercise of Tail Wind's short-term warrants. The exercise prices and the expiration dates of Tail Wind's warrants are consistent with the warrants issued to the other private investors. At June 30, 2004, short-term warrants for the purchase of 67,872 shares of preferred stock have been exercised by Tail Wind at a price of $4.42 per share providing us with additional gross proceeds of $299,994. In addition, we agreed to adjust the original exercise price of $2.28 per share of previously issued warrants, acquired pursuant to a

17

previously completed private equity transaction, for the purchase of 459,770 and 172,414 shares of our common stock issued to Tail Wind and a private investor to $0.285 per share.

        We anticipate that our existing cash resources will be sufficient to satisfy our cash requirements for at least the next twelve months.

        Our financial statements have been prepared on a going concern basis, which assumes we will realize our assets and discharge our liabilities in the normal course of business. We have experienced recurring losses from operations of $1,032,877 and $1,205,606 for the three month periods ended June 30, 2003 and 2004, respectively and $2,276,059 and $2,227,015 for the six month periods ended June 30, 2003 and 2004, respectively and recurring negative cash flow from operations for the six month periods ended June 30, 2003 and 2004 of $1,932,856 and $1,854,725, respectively. In addition, we have an accumulated deficit of $54,623,511 at June 30, 2004. If we are unable to generate sufficient revenue to sustain operations we may need to seek additional sources of financing. There is no certainty that such efforts would be successful.

        Under the terms of our license, consulting and technology agreements, we are required to pay royalties on sales of our products. Minimum license maintenance fees under these license agreements, which are creditable against royalties otherwise payable for each year, are $10,000 per year through 2007. We are committed to pay an aggregate of $30,000 of such minimum license maintenance fees subsequent to June 30, 2004. As part of these agreements, we are 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. As of June 30, 2004, we believe we were in full compliance with all requirements of these agreements.

Contractual Obligations and Commercial Commitments

        Our contractual obligations as of June 30, 2004 are included in the table below.

Off-Balance Sheet Arrangements

        We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Factors Which May Affect Future Results

        This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. 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", "intends" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause our 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 Quarterly Report on Form 10-Q.

Risks Related to our Operations

We depend on our Microvolt T-Wave Alternans technology for a significant portion of our revenues and if it does not achieve broad market acceptance, our growth will be limited.

        We believe that our future success will depend, in large part, upon the successful commercialization and market acceptance of our Microvolt T-Wave Alternans technology. Market acceptance will depend upon our ability to demonstrate the diagnostic advantages and cost-effectiveness of this technology. The failure of our Microvolt T-Wave Alternans technology to achieve broad market acceptance, the failure of the market for our products to grow or to grow at the rate we anticipate, or a decline in the price of our products would reduce our revenues and limit our growth. This could have a material adverse effect on the market price of our common stock. We can give no assurance that we will be able to successfully commercialize or achieve market acceptance of our Microvolt T-Wave Alternans technology or that our competitors will not develop competing technologies that are superior to our technology.

We have not been able to fund our operations from cash generated by our business, and if we cannot meet our future capital requirements, we may not be able to continue as a going concern, develop or enhance our technology, take advantage of business opportunities and respond to competitive pressures.

        We have principally financed our operations over the past three years through the private placement of shares of our common stock and preferred stock. If we do not generate sufficient cash from our business to fund operations, or if we cannot obtain additional capital through equity or debt financings, we will be unable to continue as a going concern, to grow as planned and may not be able to take advantage of business opportunities, develop new technology or respond to competitive pressures. This could have a material adverse effect on our operations and the market price of our common stock. In the current economic environment, financing for technology and medical device companies has become increasingly difficult to obtain. Any additional financing we may need in the future may not be available on terms favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of Cambridge Heart by our stockholders would be reduced and the securities issued could have rights, preferences and privileges more favorable than those of our current stockholders.

Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in volatility in our stock price.

        Our quarterly revenues and operating results have varied in the past and are likely to continue to vary significantly from quarter to quarter. This may lead to volatility in our stock price. These fluctuations are due to several factors relating to the sale of our products, including:

•

the timing, of our sales transactions,



•

unpredictable sales cycles,

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•

the timing of introduction and market acceptance of new products or product enhancements by us or our competitors,



•

changes in our operating expenses,



•

product quality problems, and



•

personnel changes and fluctuations in economic and financial market conditions.

        We believe that period-to-period comparisons of our results of operations are not necessarily meaningful. There can be no assurance that future revenues and results of operations will not vary substantially. It is also possible that in future quarters, our results of operations will be below the expectations of investors, analysts or our announced guidance, if any. In any case, the price of our common stock could be materially adversely affected.

We have a history of net losses, we expect to continue to incur net losses and may not achieve or maintain profitability.

        We are engaged primarily in the commercialization, manufacture, research and development of products for the non-invasive diagnosis of heart disease. We have incurred substantial net losses through June 30, 2004. We may never generate substantial revenues or achieve profitability on a quarterly or annual basis. We expect that our selling, general and administrative expenses will increase significantly in connection with the expansion of our sales and marketing activities. Revenue generated from the sale of our products will depend upon numerous factors, including:

•

the extent to which our products gain market acceptance;



•

varying pricing promotions and volume discounts to customers;



•

competition; and



•

the availability and amount of third-party reimbursement.

We could issue additional shares of common stock, which might dilute the book value of our common stock.

        We have authorized 75,000,000 shares of our common stock, of which 32,211,093 shares were issued and outstanding as of June 30, 2004. Our board of directors has the authority, without action or vote of our stockholders in most cases, to issue all or a part of any authorized but unissued shares of our common stock. Such stock issuances may be made at a price, which reflects a discount from the then-current trading price of our common stock. In addition, in order to raise capital that we may need at today's stock prices, we would likely need to issue securities, which are convertible into or exercisable for a significant number of shares of our common stock. These issuances would dilute your percentage ownership interest, which will have the effect of reducing your influence on matters on which our stockholders vote, and might dilute the book value of our common stock. You may incur additional dilution of net tangible book value if holders of stock options or warrants, whether currently outstanding or subsequently granted, exercise their options or warrants to purchase shares of our common stock.

        As of June 30, 2004, we had issued a total of 1,470,549 shares of our preferred stock to private investors. These shares were initially convertible into up to 19,117,137 shares of our common stock. At June 30, 2004, 565,605 shares of our preferred stock were outstanding, which are convertible into 7,352,865 shares of our common stock. At June 30, 2004, investors hold warrants to acquire an additional 471,703 shares of our preferred stock, which is convertible into 6,132,139 shares of our common stock. You would incur additional dilution of net tangible book value if the holders of preferred stock convert these shares of preferred stock into shares of our common stock. As of

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June 30, 2004, investors had exercised their rights to convert 904,944 shares of preferred stock into 11,764,272 shares of our common stock.

The sale of a large number of shares of our common stock could depress our stock price.

        As of June 30, 2004, we have reserved 6,079,570 shares of common stock for issuance upon the exercise of stock options and warrants and 1,306,764 shares for future issuances under our stock plans. We have also reserved 13,485,004 shares of common stock for issuance upon conversion of our preferred stock. As of June 30, 2004, holders of warrants and options to purchase an aggregate of 9,918,214 shares of our common stock may exercise those securities and transfer the underlying common stock at any time subject, in some cases, to Rule 144. In accordance with registration rights that we have granted to various individuals and entities requiring us to register their shares of common stock for public resale, we also have resale registration statements in effect registering 27,595,776 shares of our common stock. Included in the shares registered are the shares of common stock issuable upon conversion of the preferred stock that we issued and sold in the May 2003 financing and that are issuable upon exercise of the warrants issued in connection with the financing. Assuming no adjustments to the conversion price of the preferred stock, the shares of preferred stock (including the shares of preferred stock issuable upon exercise of the warrants issued in the financing) are initially convertible into 25,249,276 shares of our common stock. In addition, as in the case of the May 2003 financing, in order to raise capital that we may need at today's stock prices, we will likely need to issue securities which are convertible into or exercisable for a significant amount of our common stock. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities in the future at a price that we think is appropriate, or at all.

Financial investors may have interests different than you or Cambridge Heart, and may be able to impact corporate actions requiring stockholder approval because they own a significant amount of our common stock.

        In connection with the May 2003 financing, we issued securities, which were initially convertible into approximately 51% of the number of shares of our outstanding common stock. In future financings, we may also issue securities, which are convertible into or exercisable for a significant number of shares of our outstanding common stock. Financial investors may have short-term financial interests different from Cambridge Heart's long-term goals and the long-term goals of our management and other stockholders. In addition, based on the significant ownership of our outstanding common stock, financial investors may be able to impact corporate actions requiring stockholder approval.

We may need additional financing for our future capital needs and may not be able to raise additional funds on terms acceptable to us, or at all.

        We believe that the financial resources available to us, including our current working capital, will be sufficient to finance our planned operations and capital expenditures for the next 12 months. If we are unable to increase our revenue and achieve positive cash flow, we will need to raise additional funds. We may also need additional financing if:

•

we need additional cash to fund research and development costs of products currently under development,



•

we decide to expand faster than currently planned,



•

we develop new or enhanced services or products ahead of schedule,



•

we decide to undertake new sales and/or marketing initiatives,

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•

we are required to defend or enforce our intellectual property rights,



•

sales of our products do not meet our expectations in the United States or internationally,



•

we need to respond to competitive pressures, or



•

we decide to acquire complementary products, businesses or technologies.

        We can provide no assurance that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs which would significantly limit our ability to implement our business plan. In addition, we may have to issue securities that may have rights, preferences and privileges senior to our common stock. If we are unable to obtain sufficient additional funding when needed, we may have to significantly cut back our operations, sell some or all of our assets, license potentially valuable technologies to third parties and/or cease operations. In addition, if we raise additional capital by issuing additional equity or convertible debt securities, our existing stockholders would suffer significant dilution.

The results of future clinical studies may not support the usefulness of our technology.

        We have sponsored and are continuing to sponsor clinical studies relating to our Microvolt T-Wave Alternans technology and Micro-V Alternans Sensors to more firmly establish the predictive value of such technology. Although studies on high risk patients to date have indicated that the measurement of Microvolt T-Wave Alternans to predict the vulnerability to ventricular arrhythmia and sudden death is excellent in various cardiac populations, we do not know whether the results of such studies will continue to be favorable. Any clinical studies or trials which fail to demonstrate that the measurement of Microvolt T-Wave Alternans is at least comparable in accuracy to alternative diagnostic tests, or which otherwise call into question the cost-effectiveness, efficacy or safety of our technology, would have a material adverse effect on our business, financial condition and results of operations.

We may have difficulty responding to changing technology.

        The medical device market is characterized by rapidly advancing technology. Our future success will depend, in large part, upon our ability to anticipate and keep pace with advancing technology and competitive innovations. However, we may not be successful in identifying, developing and marketing new products or enhancing our existing products. In addition, we can give no assurance that new products or alternative diagnostic techniques may be developed that will render our current or planned products obsolete or inferior. Rapid technological development by competitors may result in our products becoming obsolete before we recover a significant portion of the research, development and commercialization expenses incurred with respect to such products.

We depend exclusively on third parties to support the commercialization of our products internationally.

        We market our products internationally through independent distributors. These distributors also distribute competing products under certain circumstances. The loss of a significant international distributor could have a material adverse effect on our business if a new distributor, sales representative or other suitable sales organization can not be found on a timely basis in the relevant geographic market. Because we rely on distributors for international sales, any revenues we receive in those territories will depend upon the efforts of our distributors. Furthermore, we cannot be sure that a distributor will market our products successfully or that the terms of any future distribution arrangements will be acceptable to us. In the three and six month periods ended June 30, 2004, 13% of our revenue came from the sale of product to international distributors.

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We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

        Competition from competitors' medical devices that diagnose cardiac disease is intense and likely to increase. Our success will depend on our ability to develop products and apply our technology and our ability to establish and maintain a market for our products. We compete with manufacturers of electrocardiogram stress tests, the conventional method of diagnosing ischemic heart disease, as well as with manufacturers of other invasive and non-invasive tests, including EP testing, electrocardiograms, Holter monitors, ultrasound tests and systems of measuring cardiac late potentials. GE Medical Systems has introduced an analysis system it claims can measure t-wave alternans. GE Medical Systems has received concurrence from the FDA of its 510(k) allowing it to distribute the product in the U.S. The FDA concurrence does not include approval of any predictive claims regarding their measurement of t-wave alternans. Many of our competitors and prospective competitors have substantially greater capital resources, name recognition, research and development experience and regulatory, manufacturing and marketing capabilities. Many of these competitors offer broad, well-established product lines and ancillary services not offered by Cambridge Heart. Some of our competitors have long-term or preferential supply arrangements with physicians and hospitals which may act as a barrier to market entry.

We obtain critical components and subassemblies for the manufacture of our products from a limited group of suppliers, and if our suppliers fail to meet our requirements, we may be unable to meet customer demand and our customer relationships would suffer.

        We do not have long-term contracts with our suppliers. Our dependence on a single supplier or limited group of smaller suppliers for critical components and subassemblies exposes us to several risks, including:

•

a potential for interruption, or inconsistency in the supply of components or subassemblies, leading to backorders and product shortages,



•

a potential for inconsistent quality of components or subassemblies supplied, leading to reduced customer satisfaction or increased product costs and delays in shipments of our products to customers and distributors, and



•

inconsistent pricing.

        Disruption or termination of the supply of these components and subassemblies could cause delays in the shipment of our products, resulting in potential damage to our customer relations and reduced revenue. From time to time in the past, we have experienced temporary difficulties in receiving timely shipment of key components from our suppliers. We can give no assurance that we would be able to identify and qualify additional suppliers of critical components and subassemblies in a timely manner. Further, a significant increase in the price of one or more key components or subassemblies included in our products could seriously harm our results of operations.

Risks Related to the Market for Cardiac Diagnostic Equipment

If we are not able to maintain adequate levels of third-party reimbursement, it would have a material adverse affect on our business.

        Our revenues currently depend and will continue to depend, to a significant extent, on sales of our Heartwave and Micro-V Alternans Sensors. Our ability to successfully commercialize these systems depends in part on maintaining adequate levels of third-party reimbursement for use of these systems by our customers. The amount of reimbursement in the United States that is available for clinical use of the Microvolt T-Wave Alternans Test may vary. In the United States, the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and

23

private and corporate health insurance plans. Third-party payers may deny reimbursement if they determine that a prescribed device is not used in accordance with cost-effective treatment methods as determined by the payer, or is experimental, unnecessary or inappropriate. Our ability to commercialize the Heartwave system successfully will depend, in large part, on the extent to which appropriate reimbursement levels for the cost of performing a Microvolt T-Wave Alternans Test continue to be available from government authorities, private health insurers and other organizations, such as health maintenance organizations. We do not know whether the reimbursement level in the United States for the Microvolt T-Wave Alternans Test will increase in the future or that reimbursement amounts will not reduce the demand for, or the price of, the Heartwave system. Difficulties in obtaining reimbursement, or the inadequacy of the reimbursement obtained, for Microvolt T-Wave Alternans Tests using the Heartwave system could have a material adverse effect on our business.

We could be exposed to significant liability claims if we are unable to obtain insurance at acceptable costs and adequate levels or otherwise protect ourselves against potential product liability claims.

        The testing, manufacture, marketing and sale of medical devices entails the inherent risk of liability claims or product recalls. Although we maintain product liability insurance in the United States and in other countries in which we conduct business, including clinical trials and product marketing and sales, such coverage may not be adequate. Product liability insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product liability claim or product recall could inhibit or prevent commercialization of the CH 2000 and the Heartwave systems, or cause a significant financial burden on Cambridge Heart, or both, and could have a material adverse effect on our business, financial condition, and ability to market both systems as currently contemplated.

We may not be able to obtain or maintain patent protection for our products.

        Our success will depend, in large part, on our ability to develop patentable products, enforce our patents and obtain patent protection for our products both in the United States and in other countries. However, the patent positions of medical device companies, including Cambridge Heart, are generally uncertain and involve complex legal and factual questions. We can give no assurance that patents will issue as a result of any patent applications we own or license or that, if patents do issue, the claims allowed will be sufficiently broad to protect our proprietary technology. In addition, any issued patents we own or license may be challenged, invalidated or circumvented, and the rights granted under issued patents may not provide us with competitive advantages. We also rely on unpatented trade secrets to protect our proprietary technology, and we can give no assurance that others will not independently develop or otherwise acquire substantially equivalent techniques, or otherwise gain access to our proprietary technology, or disclose such technology or that we can ultimately protect meaningful rights to such unpatented proprietary technology.

Others could claim that we infringe their intellectual property rights.

        Our commercial success will depend in part on our ability to avoid infringing patents issued to others and breaching the licenses upon which our products are based. We have licensed significant technology and patents from third parties, including patents and technology relating to Microvolt T-Wave Alternans licensed from The Massachusetts Institute of Technology. Our license of patents and patent applications impose various commercialization, sublicensing, insurance, royalty and other obligations on our part. If we fail to comply with these requirements, licenses could convert from being exclusive to nonexclusive in nature or could terminate.

We could become involved in litigation over intellectual property rights.

        The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Litigation, which would likely result in substantial cost to us, may be

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necessary to enforce any patents issued or licensed to us and/or to determine the scope and validity of others' proprietary rights. In particular, our competitors and other third parties hold issued patents and are assumed to hold pending patent applications, which may result in claims of infringement against us or other patent litigation. We also may have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could result in substantial cost, to determine the priority of inventions. Furthermore, we may have to participate at substantial cost in International Trade Commission proceedings to abate importation of products, which would compete unfairly with our products.

If we are not able to keep our trade secrets confidential, our technology and information may be used by others to compete against us.

        We rely on unpatented trade secrets to protect our proprietary technology. We can give no assurance that others will not independently develop or acquire substantially equivalent technologies or otherwise gain access to our proprietary technology or disclose such technology or that we can ultimately protect meaningful rights to such unpatented proprietary technology. We rely on confidentiality agreements with our collaborators, employees, advisors, vendors and consultants. We may not have adequate remedies for any breach by a party to these confidentiality agreements. Failure to obtain or maintain patent and trade secret protection, for any reason, could have a material adverse effect on us.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We own financial instruments that are sensitive to market risk as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is used to fund operations, including research and development activities. None of these market-risk sensitive instruments are held for trading purposes. We invest our cash primarily in money market mutual funds and U.S. government and other investment grade debt securities. We evaluate these investments quarterly to determine the fair value of the portfolio. Our investment portfolio includes only marketable securities with active secondary or resale markets to help assure liquidity. We have implemented policies regarding the amount and credit ratings of investments. Due to the conservative nature of these policies, we do not believe our portfolio has a material exposure due to market risk.

        See Note 2 to our Unaudited Condensed Financial Statements in this Quarterly Report on Form 10-Q for a description of our other financial instruments. We carry the amounts reflected in the balance sheet of cash, cash equivalents, marketable securities, trade receivables, and trade payables at fair value at June 30, 2004 due to the short maturities of these instruments.

        We have not had any material exposure to factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As our sales are made in U.S. dollars, a strengthening of the U.S. dollar could cause our products to be less attractive in foreign markets.

ITEM 4. CONTROLS AND PROCEDURES.

(a)

Evaluation of Disclosure Controls and Procedures.

        Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of June 30, 2004. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to Cambridge Heart is made known to our Chief Executive Officer and Chief Financial Officer by others within Cambridge Heart, particularly during the period in which this report

25

was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

(b)

Changes in Disclosure Controls and Internal Controls.

        In connection with the audit of our financial statements for the year ended December 31, 2003, the independent auditors informed us that they had discovered a number of issues that constituted a material weakness in our internal control over financial reporting. Management and the Audit Committee identified conditions relating primarily to our product return and sales order processing policies and procedures that were considered to be a material weakness in our disclosure controls and our internal controls for the year ended December 31, 2003 under standards established by the American Institute of Certified Public Accountants. In particular, the weaknesses in both our disclosure controls and internal controls pertained to the following areas:

•

proper authorization of exceptions to the company's product return policy to include the appropriate finance personnel,



•

compliance with company policies requiring the inclusion of all agreements and commitments with customers on the customer's order documents, and



•

as a consequence, the failure, in a limited number of instances, to properly integrate and evaluate product returns and non-standard conditions of sale as part of the revenue recognition review process

        Management and the Audit Committee have taken actions with respect to these weaknesses, including (1) retraining all sales personnel on the company's polices regarding product returns and sales order processing, (2) establishment of mandatory procedures for authorization of exceptions to the company's product returns policy to insure inclusion of appropriate financial personnel, (3) requiring all sales personnel to certify, on a quarterly basis, that no terms or conditions of sale exist beyond those contained in the applicable executed customer purchase order, and (4) implementing a policy to ensure that the appropriate sales personnel receive a copy of executed customer purchase orders, (5) adopting a code of business conduct and ethics which applies to all of our employees, and (6) enhanced training of sales, operations and finance personnel regarding the foregoing.

        In addition, management believes that the corrective actions taken have provided us with reasonable assurance that the identified issues will not limit the effectiveness of our disclosure controls or internal controls. Management believes that we implemented procedures addressing the weakness in our controls.

        Other than as described above, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934 occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        On May 12, 2003, we issued and sold to Medtronic, Inc. and a group of private investors 696,825 shares of Series A Redeemable Convertible Preferred Stock ("preferred stock') at a purchase price of $4.42 per share, for total proceeds of approximately $3.1 million. Each share of the preferred stock is convertible into 13 shares of our common stock. The conversion price of the preferred stock is subject to adjustments in certain circumstances. As part of the financing, we issued to the investors, other than Medtronic, short-term warrants exercisable for a total of 705,852 shares of the preferred stock. There were six tranches of the short-term warrants that expired in equal monthly intervals starting September 1, 2003. The exercise price of these warrants was $4.42. We also issued to both Medtronic and the private investors long-term warrants exercisable for 30% of the total number of shares of preferred stock purchased through the initial investment and the exercise of the short-term warrants. The exercise price of Medtronic's long-term warrant is $4.42 and the exercise price of the long-term warrants issued to the other investors is $5.525. These long-term warrants expire on January 1, 2009. In connection with this financing and in order to address certain payment obligations in existing agreements with The Tail Wind Fund Ltd., we issued to Tail Wind short-term warrants exercisable for 67,872 shares of the preferred stock and a long-term warrant exercisable for 75% of the total number of shares of the preferred stock purchased through the exercise of Tail Wind's short-term warrants. The exercise prices and the expiration dates of Tail Wind's warrants are consistent with the warrants issued to the other private investors. We subsequently filed a registration statement with the Securities and Exchange Commission to register for resale all of the shares of common stock issuable upon conversion of the preferred stock and upon exercise of all of the warrants. This registration statement was declared effective on June 20, 2003.

        During the six month period ended June 30, 2004, short-term warrants for the purchase of 109,725 shares of preferred stock were exercised at a price of $4.42 per share providing us with gross proceeds of $484,984. As of June 30, 2004, 100% of the outstanding short-term warrants for the purchase of shares of preferred stock have been exercised. We have issued a total of 1,470,549 shares of preferred stock as of June 30, 2004, which has provided us with total gross proceeds of $6,499,827. During the three month period ended June 30, 2004, investors exercised their rights to convert 299,767 shares of preferred stock and were issued 3,896,971 shares of our common stock at $0.34 per share.

        The shares of preferred stock, the warrants and the shares of common stock issuable upon conversion of the shares of preferred stock were issued without registration under the Securities Act of 1933 in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933.

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

        Our Annual Meeting of Stockholders was held on June 9, 2004 (the "Annual Meeting"). At the Annual Meeting, David A. Chazanovitz and Richard J. Cohen, M.D., Ph.D. were elected as Class II Directors for a three year term. The other directors whose terms of office continued after the meeting are as follows: Jeffrey J. Langan, Daniel M. Mulvena, Robert P. Khederian and Eric M. Hecht, M.D.

        The following is a summary of each matter voted at the meeting and the number of votes cast for, against or withheld and abstentions as to each such matter:

1.

To elect the following Class I Director to serve for the ensuing three years.

David A. Chazanovitz:    For:    29,758,399    Withheld:    573,421    Abstain:    0
Richard J. Cohen, M.D., Ph.D.:    For:    29,722,548    Withheld:    609,272    Abstain:    0

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2.

To ratify and approve an amendment to the Company's 1996 Employee Stock Purchase Plan, increasing from 300,000 to 600,000 the number of shares of Common Stock of the Company authorized for issuance under that plan

For:    16,825,181    Against:    1,805,244    Abstain:    9,590

3.

To ratify the appointment of PricewaterhouseCoopers, LLP as independent auditors for the year ended December 31, 2004.

For:    29,878,716    Against:    429,776    Abstain:    23,328

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

The exhibits listed in the Exhibit Index filed as part of this report are filed as part of or are included in this report.

(b)

Reports on Form 8-K

On August 5, 2004 we furnished a Current Report on Form 8-K to the Securities and Exchange Commission announcing our financial results for the quarter and year to date ended June 30, 2004. The date of this Current Report on Form 8-K is August 5, 2004.

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SIGNATURE

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

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EXHIBIT INDEX

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