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

FORM 10-K

(Mark One)

Commission file number:  0-11868

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

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $111,813,000 based on the average bid and asked price of such Common Stock, as of the last business day of the registrant’s most recently completed second fiscal quarter as reported for such date on the Nasdaq Stock Market.  For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by directors and officers of the registrant have been excluded because such persons may be deemed to be affiliates.  

At February 15, 2003, 46,186,297 shares of registrant’s Common Stock were outstanding.

Documents Incorporated by Reference:  None

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 this Form 10-K. x

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CardioDynamics
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This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These statements include statements regarding our plans, goals, strategies, intent, beliefs or current expectations.  These statements are expressed in good faith and we believe had a reasonable basis when expressed, but there can be no assurance that these expectations will be achieved or accomplished.  Sentences in this document containing verbs such as “plan”, “intend”, “anticipate”, “target”, “estimate”, “expect”, etc., and/or future-tense or conditional constructions (“will”, “may”, “could”, “should”, etc.) constitute forward-looking statements that involve risks and uncertainties.  Items contemplating, or making assumptions about, actual or potential future sales, market size, collaborations, trends or operating results also constitute such forward-looking statements.  These statements are only predictions and actual results could differ materially.  Certain factors that might cause such a difference are discussed throughout this Form 10-K, including the section entitled “Risk Factors” on pages 22 to 29 of this document.  Any forward-looking statement speaks only as of the date we made the statement, and we do not undertake to update the disclosures contained in this document or reflect events or circumstances that occur subsequently or the occurrence of unanticipated events.

PART I

ITEM 1.           BUSINESS

CardioDynamics International Corporation (“CardioDynamics”, or “CardioDynamics - The ICG Company”) is the innovator and market leader of a breakthrough technology called Impedance Cardiography (ICG).  We develop, manufacture, and market noninvasive heart-monitoring devices using our proprietary ICG technology.

Our proprietary, patented technology non-invasively monitors the heart’s ability to deliver blood to the body and the amount of fluid in the chest.  Our products measure 12 hemodynamic (blood flow) parameters, the most significant of which is cardiac output, or the amount of blood pumped by the heart each minute.  Our lead product, the BioZ^® ICG Monitor (previously know as the BioZ.com^®), has been cleared by the Federal Drug Administration (FDA) and carries the CE mark.  We sell to physicians and hospitals in the United States through our own direct sales force and distribute our products to domestic hospitals and targeted international markets through a strategic alliance with GE Medical Systems Information Technologies (GEMS-IT) and a network of international distributors.  In November 1998, Health Care Finance Administration (HCFA), now known as the Center for Medicare & Medicaid Services (CMS), mandated Medicare reimbursement for our BioZ^® procedures and in January 2001, implemented national uniform pricing throughout the United States.  To date, we have sold over 2,200 ICG systems to over 1,500 physician offices and hospital sites throughout the world.

Our products help physicians assess, diagnose, and treat cardiovascular disease, which is the number one killer of adults in the United States.  According to the American Heart Association (AHA), approximately one in five Americans has some form of cardiovascular disease.  The AHA estimated that over $329 billion would be spent in the United States during 2002 as a result of cardiovascular disease and stroke.  This figure includes both the direct costs associated with physicians and other professionals, hospital and nursing home services and medication and the indirect costs associated with lost productivity resulting from morbidity and mortality.

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Electrocardiogram (ECG) is a widely used noninvasive assessment of the electrical characteristics of the heart. Our ICG technology non-invasively quantifies the mechanical functioning of the heart.  Conditions that can interfere with the proper mechanical functioning of the heart include hypertension, congestive heart failure, pulmonary disease, high-risk pregnancy and kidney dysfunction. Our technology complements ECG and supplements information obtained through five vital signs – heart rate, respiration rate, body temperature, blood pressure and oxygen saturation – immediately, safely and cost effectively.  Our customers have suggested noninvasive cardiac output to be the “Sixth Vital Sign.”

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

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

During ICG monitoring using our BioZ^® ICG systems, an undetectable electrical signal is sent through our proprietary sensors on the patient’s neck and chest.  Our sophisticated DISQ^® (Digital Impedance Signal Quantifier) processing and Z MARC^® Algorithm analyze and record significant hemodynamic parameters.  Based on this data, a physician can quickly and safely identify underlying cardiovascular disorder, assess and diagnose, customize and target treatment, monitor the effectiveness of prescribed medications and more accurately identify potential complications.

Our objective is to establish our BioZ^® ICG technology as a standard of care in cardiovascular medicine.  Key elements of our strategy include:

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

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Industry Overview and Company History

Cardiovascular disease is the number one killer of adults in the United States and in 31 of the 35 countries reporting mortality statistics.  In the United States alone, the AHA estimated that there were 65 million physician office visits, another 7 million outpatient visits, and over 4 million emergency room visits in 2000 with a primary diagnosis of cardiovascular disease.  In 1999, $26 billion in payments were made to Medicare beneficiaries for hospital expenses due to cardiovascular problems.  Our proprietary technology provides medical professionals in the hospital and physician’s office with noninvasive access to the objective patient data they need to effectively assess, diagnose and treat congestive heart failure and hypertension, and to evaluate emergency, pacemaker and dialysis patients. 

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

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

Potential Annual Noninvasive Monitoring Procedures
US Patients

Strategy

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

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          Accelerate market penetration through our direct sales force

We intend to utilize our direct sales force to capitalize on our first-to-market position in the United States and to further penetrate the physician office market.  We believe that a strong direct sales force is best suited to educate the medical community about how the various applications of our technology improve patient outcomes and decrease costs.  We currently have 45 direct sales representatives who focus exclusively on our products.  During fiscal 2000 we began recruiting clinical application specialists to supplement our field sales team by enhancing customer understanding, usage and satisfaction.  We currently have 13 clinical application specialists onboard.  We believe that the resulting improved device utilization will strengthen customer loyalty and increase recurring revenue from our proprietary sensors.

          Broaden our distribution channels through strategic relationships

We intend to establish strategic relationships with major patient monitoring and diagnostic cardiology companies, pacemaker manufacturers and other medical products and technology companies to increase the availability of our proprietary technology.  We believe that strategic relationships can accelerate market penetration of BioZ^® ICG technology in markets not served by our direct sales team and provide us with access to large installed bases of patient monitoring, cardiology and other complementary medical equipment.  We believe that these strategic relationships can provide increased distribution capabilities and collaborative product development programs.

          Grow recurring revenue through increased use of our proprietary disposable sensors 

During fiscal 2000 we successfully developed and received FDA 510(k) clearance on our proprietary BioZtect^® sensor technology that provides notable improvements in performance and features.  Its unique shape and chemical composition, adhesion characteristics and more user-friendly design optimize signal transmission and detection sensitivity.  The new sensor and cable system has a proprietary interface, which promotes the exclusive use of our proprietary sensors with our equipment.  As our installed base of BioZ^® products grows, we expect that the recurring revenue stream from our proprietary sensors could account for as much as 30% to 40% of our total net sales within five years.  For the fiscal year ended November 30, 2002, recurring revenue accounted for approximately 12% of our total net sales.

          Maintain market leadership through product improvements and extensions

We intend to advance the development of our core algorithms to provide physicians with improved cardiac function measurement capabilities on a broad class of patients.  We believe that continued advances in our ICG technology will increase physician usage and loyalty and strengthen our industry position.  We will capitalize on our expertise in ICG signal processing and sensor technology to improve system performance in the presence of noise and patient movement and that these improvements will lead to additional applications for cardiovascular disease management.  In the future, we also plan to adapt our current measurement algorithm and to develop a smaller BioZtect^® sensor tailored for pediatric patients weighing less than 66 pounds.

In 2001, we released the BioZ^® ICG Module for GEMS-IT bedside monitoring systems.  This product is distributed worldwide by GEMS-IT for their Solar^® 7000, 8000, 8000M, and DASH 3000, 4000 patient monitors.  Currently, our domestic direct sales force sells the GEMS-IT module to the installed base. Current products in development include a joint ECG-ICG device with Philips Medical Systems.

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          Target new market opportunities through technology development

We will continue to focus on new applications for our core technology.  Advances in ICG technology could be applied in the areas of pacemaker optimization, fluid management (including dialysis), oncology, drug noncompliance, and pharmaceutical development and testing.  Pharmaceutical companies such as GlaxoSmithKline, Eli Lilly and Co. and Pfizer Inc. are currently using our technology to document the cardiovascular effects of their pharmaceutical agents in both animals and humans. 

In July 2002, the Company signed a Co-Development and OEM Agreement with Philips Medical Systems (Philips), a worldwide leader in clinical measurement and diagnostic solutions for the healthcare industry and a division of Royal Philips Electronics (AEX: PHI, NYSE: PHG).  The joint product development will combine CardioDynamics’ proprietary ICG technology with Philips’ diagnostic 12-lead ECG.  Both companies will market the combined ICG/ECG product after completion.

Continued innovation and commercialization of new proprietary products are essential elements in our long-term growth strategy.  We also intend to maintain our competitive advantage through acquisitions of new technologies, and to seek additional patents and other proprietary rights, as we deem appropriate.

ICG Technology

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

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

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

Our BioZ^® ICG Monitor generates the impedance signal with CS2™ (Crystal Signal Stabilization) Technology and after the signal travels harmlessly through the body, our proprietary DISQ^® processing measures the changes in impedance to the electrical signal.  The changes in impedance are then applied to the Z MARC^® Algorithm to provide the following 12 hemodynamic parameters:

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

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

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

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

Our Products, Services and Solutions

          Pricing

Our stand-alone BioZ^®ICG Monitors, as sold to end users, range in list price from $36,710 to $38,710 depending upon configuration. We discount the list prices of our products in some circumstances based primarily upon volume commitments.  We also provide discounts on the purchase of demo equipment and to distributors who perform sales and customer service functions for us.  The list price for our sensors is $10.95 for the BioZ^® ICG Monitor and $19.95 per set for the BioZ^® ICG Module.  We offer a sensor auto-ship program that allows discounts on sensor purchases based on minimum monthly volume commitments.

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          BioZ® ICG Monitor

Our lead noninvasive cardiac function monitoring device features a portable design, transport battery and integrated blood pressure.  New BioZ^® ICG Monitors are sold with a pole cart, printer and keyboard for end user data entry and include a standard five-year warranty. 

          BioZtect® Sensors

We also market disposable sensors designed specifically for use with the BioZ^® products.  With each monitoring session, four dual sensors are utilized.  The proprietary sensor and cable system provides enhanced features to our customers and promotes the exclusive use of our proprietary sensors with our equipment.

          BioZ^® ICG Module

The BioZ^® ICG Module was jointly developed with GEMS-IT.  The module integrates our proprietary BioZ^®  ICG technology  into GE’s Solar and Dash patient monitoring systems.  We commenced shipments of the BioZ^®  ICG Module in May 2001. 

          BioZ.sim^® ICG Simulator

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

          BioZ^® System  & BioZ.pc System

The BioZ^® system is our original noninvasive cardiac ICG monitoring device.  It consists of a Pentium-based central processing unit, 15-inch high-resolution medical grade color monitor and keyboard.  Included in the central processing unit is our proprietary digital signal processing circuit board and software. The BioZ.pc system is a customized noninvasive ICG monitoring device that we developed through a collaborative research and development program with Profiles in Health, Inc. These systems are no longer in production.

          Z Care^®

In addition to our standard warranty, we offer extended service agreements, called Z Care^®.  This extended service agreement covers hardware and software maintenance beyond the warranty period.  Also included in the agreement is a next-day loaner unit while a device is under repair, free shipping for the loaner unit and repaired device, and free software upgrades.

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Sales and Distribution

The United States medical marketplace consists of two distinct segments: the hospital market and the outpatient market.  The outpatient market for BioZ^® products include physician offices and hospital-based and free-standing outpatient facilities.  Our direct sales force is targeted at both the hospital and outpatient markets in the majority of the United States.  During fiscal 2000, we began hiring clinical application specialists to supplement our field sales team and to enhance customer understanding, usage and satisfaction.  We believe that the resulting improved device utilization strengthens customer loyalty and increases our recurring revenue from proprietary sensors.

The majority of our direct sales force penetration is in the outpatient market.  In contrast to the hospital market, there are few, if any, formal capital equipment budget processes and purchasing decisions can therefore be made more quickly.  Consequently, we focused our direct sales force primarily on the outpatient markets and sought an alliance with a hospital-based industry leader, GEMS-IT, to penetrate the hospital market.  Currently, we have a U.S. direct sales force of 45 territory managers focused primarily on the outpatient market.

Strategic Relationships

From August 1999 through September 2000, we entered into several strategic distribution agreements with GEMS-IT for exclusive distribution of our BioZ^® ICG Monitor to select countries around the world.  Through GEMS-IT and our other international distributors, ICG technology is now represented in over 70 countries throughout Europe, Asia Pacific, Africa, the Middle East, Australia, New Zealand and Latin America.  In May 2001, GEMS-IT, GmbH, agreed to provide up to $600,000 of funding over the next twenty months (May 2001 to December 2002) to support ICG clinical application specialists in Germany, Benelux and the Middle East.

In October 1999, we entered into an agreement with GEMS-IT for distribution of the BioZ^® ICG Monitors in the domestic hospital market.  The agreement gave GEMS-IT exclusive rights through July 2001, to market and sell our BioZ^® ICG Monitors in hospitals with over 100 beds, a market in which GEMS-IT has a significant presence.

During the fourth quarter of fiscal 2000, we entered into an agreement with GEMS-IT for the development of a custom plug-in module for the GEMS-IT series of bedside monitors.  This product was introduced to the market in June 2001 and extends the capabilities of the GEMS-IT Solar product family to provide all of the hemodynamic parameters of the BioZ^® ICG Monitor to GEMS-IT’s installed customer base of over 30,000 units. This product is distributed worldwide by GEMS-IT for their Solar^® 7000, 8000, 8000M, and DASH 3000, 4000 patient monitors.  We believe that other patient monitoring companies could benefit from the addition of similar modules to their estimated installed base of over 300,000 modular bedside monitors.

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

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In April 2001, we entered into a co-promotional agreement with Vasomedical, Inc. (Vasomedical) which allows our direct sales force, along with Vasomedical’s sales force, to jointly market our BioZ^® ICG Monitors and Vasomedical’s EECP^® enhanced external counterpulsation systems to physicians and hospitals throughout the United States.  That same month, we entered into an agreement with Spacelabs Medical, Inc. (Spacelabs) for development of an interface using Spacelabs’ Universal Flexport^® to integrate and display our ICG technology on their Ultraview Care Network Ô monitoring system.

On March 22, 2002, we announced an agreement between our company and Medtronic, Inc. (Medtronic) that provided for the evaluation of clinical utility of our proprietary ICG technology in optimizing the programming of Medtronic’s implantable device for Cardiac Resynchronization Therapy (CRT).  The six-month research project, now concluded, involved a collaborative effort of the two companies and University of Kentucky Medical Centers and Iowa Heart Center.  While they maintain a willingness to reconsider their decision in the future, Medtronic has chosen not to integrate this technology into current pacemaker programmers at this time due to other priorities within their organization.

In July 2002, the Company signed a Co-Development and OEM Agreement with Philips a worldwide leader in clinical measurement and diagnostic solutions for the healthcare industry and a division of Royal Philips Electronics.  The joint product development will combine CardioDynamics’ proprietary ICG technology with Philips’ diagnostic 12-lead electrocardiograph. Both companies will market the combined ICG/ECG product when available.

In August 2002, the Company signed an Agreement to integrate CardioDynamics’ proprietary BioZ^® ICG technology into Vasomedical’s EECP^® enhanced external counterpulsation systems. By monitoring cardiac output before and after EECP therapy, physicians will have objective data to ascertain treatment effectiveness.  Recent research supports this combined approach as a useful tool.  Under the terms of the agreement, CardioDynamics would receive a licensing fee for each Original Equipment Manufacturer (OEM) board purchased by Vasomedical.

In November 2002, the Company signed a Distribution Agreement with SunTech Medical Instruments, Inc. (SunTech), the world leader in motion-tolerant noninvasive blood pressure monitoring products and technology.  Under the terms of the Agreement, SunTech’s new ambulatory blood pressure (ABP) monitor will be sold by CardioDynamics’ U.S. direct sales force and it’s distributors throughout North, Central, and South America.

Medicare and Other Third-Party Reimbursement

In the outpatient market, most medical procedures are reimbursed by a variety of insurance sources, including Medicare, Medicaid and private insurers.  The Center for Medicare & Medicaid Services (CMS), which is the governmental body that approves medical services for financial reimbursement under Medicare determines whether to reimburse for a given procedure and assigns an amount allowed.  In September 1998, the CMS mandated Medicare coverage of Electrical Bioimpedance services, such as the CardioDynamics BioZ^® on a national basis.  The established Medicare coverage for BioZ^® ICG systems has improved our ability to penetrate the outpatient market, as Medicare provides health insurance to some 75 million people in the United States.  In November 2000, the CMS established a uniform national pricing level for the use of our equipment.  In January 2002, the American Medical Association issued a formal Level I HCPCS procedure code for BioZ^® ICG technology. The 2003 national average allowable by the CMS for BioZ^® ICG is $ 46.01 per procedure, adjusted geographically based on pre-determined cost of living factors.

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

Marketing

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

Our primary prospects in the outpatient market include cardiologists, internal medicine physicians and family practitioners caring for congestive heart failure, hypertension and pacemaker patients.  Patients in the United States who may benefit from our technology include the 50 million hypertension patients, five million congestive heart failure patients, over one million pacemaker patients, 20 million emergency patients and many patients requiring fluid management.  The AHA estimates that over $329 billion will be spent in the United States during 2002 as a result of cardiovascular disease and stroke. Our marketing strategy is designed to:

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

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

We actively support research utilizing the BioZ^® ICG systems to provide further clinical validation for ICG.  We seek to have these studies published in a peer-reviewed journal or presented at a major medical conference.  Clinical publications and presentations at major medical conferences provide us with increased exposure necessary to establish credibility for ICG technology and the BioZ^® ICG systems.

Research and Development

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

We continue to upgrade the software of our core product, the BioZ^® ICG Monitor, as new applications arise.  Our hospital module, the BioZ ICG^® Module, was market released in 2001 and a new product platform is under development in a joint partnership with Philips to provide combined ECG and ICG patient assessment. Our research staff consists of both scientific and engineering professionals.  They have investigated the physiologic mechanisms underlying our ICG signal as a means of developing new diagnostic parameters.  They have also utilized digital signal processing methodology to improve the quality of signal acquisition and analysis algorithms.  The results of some of this research are included in several United States pending patents that will issue in 2003.

To supplement our engineering staff, we utilize Rivertek Medical Systems, Inc. (Rivertek), located in Minneapolis, Minnesota, as an adjunct to our internal research and development team.  Rivertek serves as an engineering consulting firm for medical device manufacturers, including Guidant Corporation and Medtronic, Inc., as well as emerging medical technology companies.  Dennis Hepp, our chief technology officer, founded Rivertek in 1988.  Rivertek employs 11 full time medical hardware, software and biomedical engineers.

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          Previous generation technology

More than 200 research papers on ICG technology have been published since 1993.  In general, these studies reported favorable results when comparing cardiac output measurements with those of other techniques, such as PAC.

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

          New technology

As studies are conducted with our new technology, their results are summarized first as abstracts, and then as manuscripts that move through the peer review process towards publication.  This process can take two years or more to complete.  In 2002, several BioZ^® manuscripts began to reach the end of this process.  Studies detailing favorable comparisons with PAC and utility in hypertension monitoring were published in the Journal of Cardiothoracic and Vascular Anesthesia, the American Journal of Cardiology, and Hypertension.  Another comparison study will be published in Chest in 2003.

Clinical Studies

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

We are committed to supporting well-designed clinical research studies utilizing ICG technology that demonstrate validity, reproducibility, clinical utility and cost-effectiveness.  The results of several major studies addressing each of these areas have been released with positive results.  In May 2001, the results of a significant 100+ patient Mayo Clinic study was released at the American Society of Hypertension meeting held in San Francisco.  In May 2002, the study was published in the peer-review journal, Hypertension, and demonstrated a 70% superiority in effectively treating previously-uncontrolled hypertension patients when our BioZ^® ICG was used as compared to traditional management by high blood pressure specialist physicians.  In the study, one-half of the 104 resistant (uncontrolled) hypertension patients were treated with prescribed drugs based on traditional hypertension specialist evaluation and one-half of the patients were treated with prescribed drugs based upon the BioZ^®’s hemodynamic data.  The BioZ^® augmented-patient group reached goal (140/90 mm Hg) blood pressure 70% more often than the patients being treated without BioZ^® data.  The study’s investigators concluded, “noninvasive hemodynamic management achieved superior blood pressure levels and control rates, when compared to management by experienced hypertension clinicians.”

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

PREDICT - Prospective Evaluation and Identification of Cardiac Decompensation in Heart Failure by Impedance Cardiography Test.  Twenty-one research sites participated in this company-sponsored study with over 200 patients that have completed six months of monitoring.  The study design of PREDICT includes serial blinded measurements of ICG that are performed at two week intervals for 26 weeks.  All patients are managed according to the judgment of physicians and nurses responsible for the patients care, who are not aware of the ICG data.  The statistical analyses are underway and involve determining if changes in specific ICG variables reliably precede the development of worsening heart failure and also characterize how ICG hemodynamic parameters track with medication changes.

ESCAPE BIG - Evaluation Study of Congestive Heart Failure and Pulmonary Artery Catheterization Effectiveness Bio-Impedance Cardiography in Advanced Heart Failure.  We are participating as a sub-study with a primary objective of evaluating how accurately hemodynamics parameters obtained from ICG predict clinical outcomes and to evaluate the relationship between hemodynamic data derived from ICG with hemodynamic data obtained from invasive monitoring.  There are currently 139 patients enrolled in this sub-study, with a study goal of 300.

ED-IMPACT - Impedance Cardiography-Aided Assessment Changes Therapy in Emergent Dyspnea.  We are sponsoring an Emergency-Department-based study to show the impact upon diagnosis and treatment following the addition of BioZ^® data to the physician’s initial clinical impression and therapeutic plan.  Secondary endpoints will include an analysis of the changes in cost that resulted as a consequence of learning the hemodynamic data.  We also anticipate evaluating ICG data corresponding to initial chest x-ray, echocardiography, and BNP (B-type Natriuretic Peptide) diagnostic results.

CONTROL - Consideration Of Noninvasive Hemodynamic Monitoring to Target Reduction Of Blood Pressure Levels.  We are sponsoring a community-based study to replicate the results of our significant Mayo Clinic Study in a non-hypertension-specialist environment.  We are comparing the amount of time it takes to control blood pressure and the number and cost of hypertensive medications required.  This study is being conducted in two groups within each of four physicians’ patient populations where each physician has access to the BioZ^® data in only half of the study patients.

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Medical Advisory Board

We have established a distinguished medical advisory board consisting of 19 physicians, many of whom are affiliated with prestigious universities and well-known medical institutions throughout the United States such as Stanford University School of Medicine, Cleveland Clinic, Scripps Clinic, University of California, San Diego and Christ Hospital and Medical Center.  Our members, who have expertise in disciplines such as; cardiology, electrophysiology, anesthesiology, hypertension, pulmonary and critical care, internal medicine, heart failure and emergency medicine, are as follows: 

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Medical Advisory Board -continued

Our medical advisory board provides guidance regarding clinical trials, technological improvements and potential uses for our products.  Members of the medical advisory board receive reimbursement for their expenses in attending CardioDynamics-sponsored meetings and, in some cases, receive consulting fees for time spent working on our behalf.  No fees were paid to the members during fiscal 2002, 2001 or 2000 for services on our medical advisory board, however, in some cases, members received options to purchase shares of our common stock for participating in meetings and studies.

Manufacturing

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

Our production process for the BioZ^® ICG Monitors consists primarily of final assembly, integration and testing of standard and custom components. We currently outsource to a third-party the production of our BioZtect^® sensors and patient boards to qualified subcontractors, who have met our supplier certification process and are placed on an approved vendor list.

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

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

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Warranty and Service

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

Competition

          Direct competition

We are aware of three domestic and two international manufacturers of ICG monitors.  Since all five companies are privately held, sales and financial figures for these competitors are not available.  We believe that our BioZ^® products provide the most advanced ICG monitoring and commercially attractive designs, at prices that are competitive.  Thus far, we have not observed sales and marketing efforts by  these companies in the market place and to our knowledge we have not lost a single sale in direct competition with any of these competitors.

          Indirect competition

          PAC

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

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

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

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

          Echocardiography

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

Limitations in measuring cardiac output via echo include: