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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: November 30, 2003

OR

For the transition period from              to             

Commission file number: 0-11868

CARDIODYNAMICS INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value

(Title of Class)

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  x    No  ¨

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant was approximately $124,494,000 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, 2004, 46,571,764 shares of registrant’s Common Stock were outstanding.

Documents Incorporated by Reference: None

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CardioDynamics International Corporation

Form 10-K

TABLE OF CONTENTS

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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 based upon reasonable assumptions when made, 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,” and the like, 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 Annual Report on Form 10-K, including the section entitled “Risk Factors” on pages 20 to 28 of this document. Any forward-looking statement speaks only as of the date we made the statement, and we do not undertake to update the disclosures contained in this document or reflect events or circumstances that occur subsequently or the occurrence of unanticipated events.

PART I

CardioDynamics International Corporation (“CardioDynamics,” or “the Company”) is the innovator and market leader of a breakthrough technology called Impedance Cardiography (ICG). We develop, manufacture and market noninvasive diagnostic and monitoring technologies.

Our proprietary, patented ICG technology non-invasively monitors the heart’s ability to deliver blood to the body and the amount of fluid in the chest. Our systems provide 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 known as the BioZ.com^®), has been approved by the U.S. Federal Drug Administration (FDA) and carries the CE mark, which is a required certification of essential environmental and safety compliance by the European Community for sale of electronic equipment. 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 network of 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 3,000 ICG systems to over 2,000 physician offices and hospital sites in more than 30 countries throughout the world.

Our products help physicians assess, diagnose, and treat cardiovascular disease, which is the leading 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 was 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.

Electrocardiography (ECG) is a widely used noninvasive process to assess the electrical characteristics of the heart. Our ICG technology non-invasively quantifies the mechanical functioning of the heart. Conditions related to the improper 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 the five vital signs—heart rate, respiration rate, body temperature, blood pressure and oxygen saturation—immediately, safely and cost effectively.

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

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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 typically include irregular heartbeats or infection, but in some cases, pulmonary artery rupture or even 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, a physician seeking to diagnose cardiovascular disease normally must assess the patient’s hemodynamic status through indirect means, such as 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 (without cutting into the body) 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 placed on the patient’s neck and chest. Our 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 fundamentally change drug management and make a genuine contribution to healthcare economics with our noninvasive technologies. Key elements of our strategy include efforts to:

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, 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. Our website address is www.cdic.com. Information on our website is not incorporated into this Annual Report.

Industry Overview and Company History

Cardiovascular disease is the leading killer of adults in the United States and in 31 of the 35 countries reporting mortality statistics. In the United States, the AHA estimated that there were 65 million physician office visits, another seven million outpatient visits, and over four million emergency room visits in 2000 with a primary diagnosis of cardiovascular disease. In 2004, the estimated direct and indirect cost of cardiovascular disease is $368 billion. 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, the 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 worldwide market opportunity is over five billion dollars for our BioZ product line.

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We envision expanding the domestic market from the current 2 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 figures do not include home healthcare monitoring, which we believe could, if implemented, significantly increase demand for our technology.

Potential Annual Noninvasive Monitoring Procedures

Patients in the United States

Strategy

Our objective is to fundamentally change patient care and make a genuine contribution to healthcare economics with our noninvasive technologies. 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 for assessing and treating congestive heart failure, hypertension, pacemaker, emergency, critically ill, surgical, high-risk obstetric, dialysis and home healthcare. Key elements of our corporate strategy include:

Accelerate market penetration through our direct sales force.

We intend to leverage our direct sales force to capitalize on our first-to-market position in the United States to further penetrate the physician office market. We believe that a strong direct sales force supplemented by our clinical application specialists are best suited to educate the medical community about how our technology can improve patient outcomes and decrease costs. We currently have 47 domestic direct sales representatives who sell our products. In addition, we have 16 clinical application specialists to supplement our field sales team by enhancing customer understanding, usage and satisfaction. By improving device utilization, we believe we can 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 the 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 patented 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

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and detection sensitivity. The new sensor and cable system has a proprietary interface, which promotes the exclusive use of our sensors with our ICG equipment. As our installed base of BioZ products grows, we expect that the recurring revenue stream from our sensors could account for as much as 30% to 40% of our total net sales within the next five years.

Expand evidence of the technology’s validity and clinical application in our target markets.

While a significant amount of evidence substantiating ICG’s validity and clinical application is now available, we will continue to invest in supporting clinical trials to further expand this evidence and provide prospective customers with data regarding the efficacy of ICG. We have several multi-center clinical trials the results of which are expected to be available in 2004. They include studies in outpatient heart failure (PREDICT), hospitalized heart failure (BIG-ESCAPE), and emergency department shortness of breath (ED-IMPACT).

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 signal noise and patient movement thereby leading to additional applications for cardiovascular disease management. In 2001, we released the BioZ^® ICG Module for the GE Medical Systems Information Technologies (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. In July 2002, we signed a Co-Development and OEM Agreement with Philips Medical Systems, a division of Royal Philips Electronics (Philips), a worldwide leader in clinical measurement and diagnostic solutions for the healthcare industry.

Target new market opportunities through acquisitions of complementary technologies and 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.

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 by acquiring complementary technologies and obtaining additional patents and other proprietary rights, as we deem appropriate.

ICG Technology

While 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, safe, painless 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 an electrically conductive substance. Blood volume and velocity change with each heartbeat 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

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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.

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

Some physical and medical conditions may diminish the accuracy of the measurements provided by our products; therefore, use of our BioZ ICG products in such cases is not appropriate. We believe that inaccuracies are most likely to 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 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 hemodynamic parameters:

Of these parameters, the ones most widely used by physicians are cardiac output, systemic vascular resistance and thoracic fluid content. Our BioZ ICG Monitor also measures blood pressure and heart rate.

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Our Products

Pricing

Our stand-alone BioZ ICG Monitors have an end-user list price of $38,710. We discount the list prices of our products in some circumstances based primarily upon volume commitments or seasonal promotions. We also provide discounts on the purchase of refurbished demonstration equipment and to distributors who perform sales and customer service functions for us. The list price for our BioZtect sensors is $10.95 per application for the BioZ ICG Monitor and $19.95 per set for the BioZ ICG Module. We offer a DSP (Discount Sensor Program—formerly Auto-Ship Sensor Program) that allows significant discounts on sensor purchases based on minimum monthly volume commitments.

BioZ^® ICG Monitor

Our lead noninvasive cardiac function monitoring device, the BioZ^® ICG Monitor, features a portable design, transportable battery and integrated blood pressure. The BioZ^® ICG Monitor incorporates our Z MARC^® algorithm, which allows the system to sense and modulate values on patients with over-compliant or under-compliant aortas. 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.

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.

BioZtect^® Sensors

We market disposable sensors designed specifically for use with our BioZ^® products. Four of our patented dual sensors are used in each monitoring session. Our proprietary sensor and cable systems provide enhanced features to our customers and promote the exclusive use of our proprietary sensors with our equipment.

Z Care^®

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

Sales and Distribution

We view the United States medical marketplace as two distinct segments: the outpatient market and the hospital market. In the outpatient market, we target physician offices and hospital-based and freestanding outpatient facilities for our stand-alone BioZ^® products through our direct sales force. 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, our direct sales force is focused primarily on the outpatient markets.

We continue to believe that the hospital market represents a large and viable market for our products. In the latter part of 2003, we piloted a program targeted to increase hospital market penetration. We intend to expand this program in 2004 by employing direct sales representatives to focus on this segment of the market.

Internationally, we sell our products through local medical distributors. Currently, we have distribution partners and end-users in more than thirty countries around the world. Additionally, our international sales team supports GEMS-IT sales teams in selling our ICG Module that interfaces with the GEMS-IT Solar and DASH monitoring systems. We do not offer product return rights to our distributors.

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We provide 24-hour on-call technical support and offer field clinical support specialists on a limited basis for our products. In addition, we added an international service center in China to fulfill the needs of the growing Asian market for ICG in 2003.

Strategic Relationships

In 1999 and 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 30 countries throughout Europe, Asia Pacific, Africa, the Middle East, Australia, New Zealand and Latin America.

During the fourth quarter of fiscal 2000, we entered into an agreement with GEMS-IT for the development of a custom plug-in module for the GEMS-IT Solar^® and DASH 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 CardioDynamics and 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 200,000 modular bedside monitors. We have an agreement with Spacelabs Medical, Inc. for development of an interface using Spacelabs’ Universal Flexport^® to integrate and display our ICG technology on their Ultraview Care Network^™ monitoring system, although development efforts for this interface have not been initiated.

In July 2002, we signed a Co-Development and OEM Agreement with Philips Medical Systems, 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 ECG. In addition, we will be able to offer an ICG-only monitor on the Philips platform that is targeted for the end of 2004. The Co-Development and OEM agreement will allow both companies to market the combined ICG/ECG product.

In August 2002, we entered into an Agreement to integrate our 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. As a result of Vasomedical internal restructuring, this development project has been placed on hold. Under the terms of the agreement, we will receive a licensing fee for each Original Equipment Manufacturer (OEM) board purchased by Vasomedical if the program is reinstated.

In November 2002, we entered into a Distribution Agreement with SunTech Medical Instruments, Inc. (SunTech), the world leader in motion-tolerant noninvasive blood pressure monitoring products and technology. Through this Distribution Agreement, we obtained the right to sell SunTech’s new ambulatory blood pressure (ABP) throughout North, Central, and South America. Our sales of the ABP’s in 2003 were nominal and are not expected to comprise a significant portion of future revenue.

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 approximately 50 million people in the United States. In November 2000, the CMS established a uniform national pricing level for the use of our equipment. In

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January 2002, the American Medical Association issued a formal Level I HCPCS procedure code, (also referred to as a CPT Code) for BioZ ICG technology. The 2004 national average allowable by the CMS for BioZ ICG is $45.55 per procedure, adjusted geographically based on pre-determined cost of living factors. This amount represents a 30% increase in reimbursement over the level two years prior.

In 2002, CMS initiated a reconsideration of ICG’s indications for use. In January of 2004, CMS issued an updated national coverage determination. Of the six indications previously indicated, five are substantially unchanged. One indication, “suspected or known cardiovascular disease,” has been revised to specifically allow CMS carrier coverage of resistant hypertension. Resistant hypertension is defined by CMS to include patients with uncontrolled blood pressure (less than or equal to 140 mm Hg systolic blood pressure and/or 90 mm Hg diastolic blood pressure) on 3 or more anti-hypertensive medications. The other current CMS indications are as follows:

Some private insurers cover the BioZ ICG test, including Aetna, Cigna, and BlueCross BlueShield (in select states). We continue active discussions with CMS and private insurers to maintain and expand reimbursement indications for ICG.

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 use 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, shortness of breath, 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 $368 billion will be spent in the United States during 2004 as a result of cardiovascular disease and stroke. Our marketing strategy is designed to:

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

Research and Development

Our research and development team, which consists of both scientific and engineering professionals, 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 products 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 team continues to investigate the physiologic mechanisms underlying our ICG signal as a means of developing new diagnostic parameters. In addition, we are continuously researching the application of digital signal processing methodologies to improve the quality of signal acquisition and analysis algorithms. Some of this research has resulted in several U.S. patents issued and patents pending.

To supplement our internal research and development team, we retain 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.

Intellectual Property

Our success, to some extent, depends on our ability to maintain patent protection for our products and processes, to preserve our trade secrets and proprietary technology and to operate without infringing upon the patents or proprietary rights of others. We have developed proprietary software for which we have not filed patents. We generally file patent applications in the United States and foreign countries where patent protection for our technology is appropriate and available. We have filed seven U.S. utility patent applications and three design patent applications, six of which issued in 2003. Of the three utility patients that issued, a key patent is U.S. Patent Number 6,561,986, “Method and Apparatus for Hemodynamic Assessment Including Fiducial Point Detection”, which contains 46 claims and is a strategic patent underlying the Company’s novel AERIS^™ (Adaptive Extraction & Recognition of Impedance Signals) processing. AERIS utilizes breakthrough techniques in time-scale signal processing to filter and accurately determine key ICG and ECG waveform characteristics, known as “fiducial points.” ICG and ECG fiducial points form the core measurements from which BioZ parameters are determined. AERIS processing provides enhanced stability, accuracy, and reproducibility in a broader range of patient monitoring conditions.

Another utility patent, U.S. 6,636,754, is the foundation of our electrode technology protection. Our three design patents that issued in 2003, cover various design aspects of the Company’s BioZtect sensors. The intellectual property protection applies to sensors for use with both its BioZ ICG Monitor and BioZ ICG Module. The BioZtect sensors offer notable improvements in safety and signal transmission and detection, which are critical for device performance.

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There can be no assurance that pending patent applications will result in issued patents, that patents issued to or licensed by us will not be challenged or circumvented by competitors or that such patents will be found to be valid or sufficiently broad to protect our technology or to provide us with a competitive advantage.

We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect trade secrets and other proprietary technology. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that others will not independently develop equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets and proprietary knowledge.

Clinical Studies

We are committed to supporting well-designed clinical research studies utilizing ICG technology that demonstrate validity, reproducibility, clinical utility and cost-effectiveness. Our clinical research team participates in monitoring and analysis of company-sponsored clinical trials, for which we employ clinical research associates. Each of these individuals has a strong clinical research background and is responsible for monitoring clinical studies and assisting in research and customer training.

Previous generation technology

Several hundred 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 acquired by CardioDynamics in 1993 worked reasonably well in a select group of patients. However, significant technological limitations 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, CardioDynamics has 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. The results of several major studies addressing each of these areas have been released with positive results.

In May 2002, the results of a significant Mayo Clinic study were published in the peer-review journal, Hypertension. The results of the study demonstrated 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 addition, several ICG manuscripts were published in journals such as Academic Emergency Medicine, Chest, and Congestive Heart Failure in 2003.

The results of the ED-IMPACT trial (Impedance Cardiography-Aided Assessment Changes Therapy in Emergent Dyspnea) were presented at the America College of Emergency Physicians. The study demonstrated the impact of ICG data upon diagnosis and treatment in patients short of breath in the emergency department. The results demonstrated a 24% change in therapeutic plan and 5% change in diagnosis, which were considered very significant findings. The final results of this study with additional subjects are expected to be published by early 2005.

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Ongoing active trials

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. 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 patient’s care, who are not aware of the ICG data. The statistical analyses are finalized and in investigator review. Results are expected to be made available by the end of 2004 and may determine whether ICG variables reliably precede the development of worsening heart failure.

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 of this National Institutes for Health trial 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. Enrollment is complete, with study results expected by the end of 2004.

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 as well as 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. Enrollment is approximately 50% completed, and results are expected in 2006.

Medical Advisory Board

We have established a distinguished medical advisory board consisting of 17 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, and the University of California, San Diego. Our members, who possess 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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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 consulting fees were paid to the members during fiscal 2003, 2002 or 2001 for services on our medical advisory board; however, in some cases, certain members received compensation in the form of options to purchase shares of our common stock for participating in meetings and studies.

Manufacturing

We manufacture our products at our manufacturing facility in San Diego, California. 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 Quality System Regulation (21 CFR Part 820).

In addition to our compliance to domestic regulations, the quality management system meets international regulations for the design, development, production, distribution and servicing of our medical device products. We hold valid certificates to the European Medical Device Directive, ISO-13485 for Quality Management Systems and Canadian CMDCAS Registration.

Our production process for the BioZ ICG Monitors consists primarily of final assembly, integration and testing of standard and custom components. We currently outsource 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 are committed to providing high quality products to our customers. Our quality management system ensures that products are designed to meet customer requirements and are manufactured within the design specifications. Our quality management procedures include employee training, product development, production controls, corrective and preventive actions, handling of customer feedback, management responsibilities, and resource management. In addition, documentation of in-process and final testing results is maintained in the

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device history records for every unit. Customer inputs are captured, monitored and addressed to ensure that our products and support services meet or exceed our customers’ requirements. Identifying and implementing improvement opportunities are an output of our quality management system.

We purchase the components and raw materials used in manufacturing our products from various suppliers. Our suppliers are evaluated, qualified, selected, monitored and maintained on a list of approved vendors. We work closely with our suppliers to assure continuity of supply while maintaining high quality and reliability. All purchased materials also are inspected to assure their acceptance for use in manufacturing. Documentation of in-process and final testing results is maintained in device history records for every unit.

Warranty and Repair

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. In 2003, we added an International service center in China to fulfill the needs of the growing Asian market for ICG.

We provide 24-hour on-call technical support and, on occasion, offer field clinical support specialists. In addition to our standard warranty, we offer Z Care^® extended warranty agreements for hardware and software maintenance beyond the standard warranty period. We repair equipment that is out of warranty 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.

Indirect competition

PAC

Also known as thermodilution, right heart catheterization or Swan-Ganz^™ catheterization, the PAC procedure was in