Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements as a result of any number of factors. Factors that may cause or contribute to such differences include failure to achieve broad market acceptance of the Company's MTWA technology, failure of our sales and marketing organization or partners to market our products effectively, inability to hire and retain qualified clinical applications specialists in the Company's target markets, failure to obtain or maintain adequate levels of third-party reimbursement for use of the Company's MTWA test, customer delays in making final buying decisions, decreased demand for the Company's products, failure to obtain funding necessary to develop or enhance our technology, adverse results in future clinical studies of our technology, failure to obtain or maintain patent protection for our technology, overall economic and market conditions. Many of these factors are more fully discussed, as are other factors, in Part I, Item 1A. "Risk Factors".

Overview

We are engaged in the research, development and commercialization of products for the non-invasive diagnosis of cardiac disease. Using innovative technologies, we are addressing a key problem in cardiac diagnosis-the identification of those at risk of sudden cardiac death (SCD). Our proprietary technology and products are the first diagnostic tools cleared by the FDA to non-invasively measure Microvolt levels of T-Wave Alternans or MTWA, an extremely subtle beat-to-beat fluctuation in the T-Wave portion of a patient's electrocardiogram. Our MTWA Test is performed using our primary product, the Heartwave II System in conjunction with our single patient use Micro-V Alternans Sensors.

On March 21, 2007, we entered into a Co-Marketing Agreement with St. Jude Medical granting St. Jude Medical the exclusive right to market and sell the Company's Heartwave II System and other Microvolt T-Wave Alternans products to cardiologists and electrophysiologists in North America. The initial term of the Co-Marketing Agreement was set to expire on April 30, 2010. On June 18, 2007, the Co-Marketing Agreement was amended, effective March 21, 2007, to enable St. Jude Medical to also market the products to North American primary care and internal medicine physicians and to enable our sales team to support St. Jude Medical's field sales force in all physician markets in North America.

During the first portion of 2008, we continued to allocate substantial resources toward supporting the St. Jude Medical Co-Marketing Agreement. However, continued sales related challenges, that led to sales under the arrangement not meeting the Company's expectations, and heightened economic pressure led us to make changes in our go-to-market approach. In May 2008, we launched the Technology Placement Program ("TPP") which allows customers to acquire our MTWA technology for a quarterly fee. In May 2008, the Company reached agreement with St. Jude Medical to amend the Co-Marketing Agreement to a non-exclusive arrangement, which enabled the Company to assume complete sales responsibility. Effective as of May 5, 2008, the Restated Co-Marketing Agreement granted St. Jude Medical the non-exclusive right to market and sell our Heartwave System and other Microvolt T-Wave Alternans products to physicians in North America. Pursuant to the Restated Co-Marketing Agreement, we retained full sales responsibility and could approach and deal directly with any account. We agreed to collaborate in the development and implementation of co-marketing programs with respect to marketing the products that may involve co-branding marketing materials, co-sponsoring of educational events and joint presence at industry conventions and trade shows. The Restated Co-Marketing Agreement expired on November 5, 2008. We continue to work with St. Jude Medical on educational symposia, marketing initiatives and other events, as well as supporting existing customers and identifying new opportunities.

Subsequent to amending the Co-Marketing Agreement with St. Jude Medical in May 2008, we worked to reinforce our own sales organization and rebuild our sales pipeline.

In addition to the economic challenges, the sales process for our products continued to be hindered by the results of the MASTER I clinical trial presented in November 2007. However, in May 2008, a meta-analysis, conducted by a group led by Stefan Hohnloser, MD, FHRS, of the JW Goethe University Division of Cardiology in Frankfurt, Germany, assessed 13 MTWA clinical studies involving approximately 6,000 cardiac patients. This analysis, along with 4 other articles supporting the use of MTWA testing, was then published in a supplement to the March 2009 issue of the Heart Rhythm journal. One of the key conclusions from this work was that in clinical trials, appropriate ICD shocks are an unreliable surrogate endpoint for SCA and can skew results of risk stratification studies.

During the year, we obtained additional private reimbursement coverage from Premera Blue Cross and Blue Cross Blue Shield of Arizona. In February 2009, Harvard Pilgrim Health Care also initiated reimbursement for the MTWA test. Additionally, in 2008, we worked on educating our customers on reimbursement issues.

In February 2008, in response to a filing by GE Medical of a formal request for reconsideration of the National Coverage Determination (NCD) for Microvolt T-Wave Alternans to include GE's Modified Moving Average (MMA) methodology, the Centers for Medicare and Medicaid Services (CMS) released a Proposed Decision Memo stating that CMS proposes that there is insufficient evidence to conclude that the MMA method of determining MTWA is reasonable and necessary for the evaluation of Medicare beneficiaries at risk for sudden cardiac death (SCD) under Section 1862(a)(1)(A) of the Social Security Act, and, therefore, CMS proposed to continue national non-coverage for the MMA method of determining MTWA. After careful examination, CMS found that the evidence base supporting the MMA method of measuring MTWA is limited, and though suggestive of benefit, is not yet convincing. CMS requested public comments on the proposed determination pursuant to Section 1862(1) of the Social Security Act. In particular, CMS was interested in comments that include new evidence that they had not reviewed in past considerations of the NCD. CMS requested public comment on the reported findings of the MASTER I trial, specifically with regard to whether CMS should continue to cover MTWA in general, regardless of the method used. In May 2008, CMS issued a Final Decision Memorandum reaffirming coverage of MTWA using the spectral analysis method and found insufficient evidence for coverage of MTWA using any other method.

In November 2006, CMS issued a ruling that changed the methodology used to calculate all physician reimbursement codes. This ruling, if not changed, will result in reductions in all categories of reimbursement levels through 2010. Effective January 1, 2008, the Centers for Medicare and Medicaid Services ("CMS"), reduced the Medicare payment amount for the CPT code for a MTWA Test from $252 in 2008 to $214 in 2009. See further discussion regarding reimbursement in Item 1A. Risk Factors.

In June 2008, we entered into a license agreement with the Massachusetts Institute of Technology pursuant to which we acquired an exclusive license to United States Patent 7,336,995 "Method and Apparatus for Tachycardia Detection and Treatment." This broad patent covers the use of implantable devices such as pacemakers and defibrillators to measure T-Wave Alternans from intra-cardiac signals and to initiate subsequent therapy in order to prevent the development of arrhythmias which may lead to sudden cardiac death. Implantable defibrillators currently treat such arrhythmias only after they have been initiated, typically with a high-energy shock. A strategy to predict such rhythms before they occur could allow for preventive strategies, potentially avoiding imminent symptomatic episodes with the delivery of painless therapies.

In 2009, we intend to broaden our distribution channels through strategic alliances with medical device companies that offer synergistic opportunities and offer large established distribution networks. This will enable

us to focus our resources on enhancing utilization of our MTWA Test and increasing awareness of our technology in the medical community through marketing initiatives and education programs.

Also, we will continue to seek additional third party payer reimbursement from other third party insurers that currently do not cover MTWA Testing.

At December 31, 2008, we had 39 full time and 5 part time employees, of which 24 full time and 1 part time employee were engaged in sales, marketing and clinical support activities, 5 full time and 1 part time employee involved in manufacturing and operations, 2 full time employees engaged in research and development, and 8 full time and 3 part time employees dedicated to administrative support. See Note 17 for further details regarding our headcount.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of the financial condition and results of operations is based upon the financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. Note 2 of the notes to the financial statements contained in this Annual Report on Form 10-K includes a summary of our significant accounting policies and methods used in the preparation of our financial statements. The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the fair value of preferred stock and warrants, revenue recognition, incentive compensation, product returns, bad debt allowances, inventory valuation, investments, intangible assets, income taxes, warranty obligations, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition

Revenue from the sale of product to all of our customers is recognized upon shipment of goods provided that risk of loss has passed to the customer, all of our obligations have been fulfilled, persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of product to all of our third party distributors with whom we have a relationship is subject to the same recognition criteria. These distributors provide all direct repair and support services to their customers. Under EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables", in multiple element arrangements, separate elements can be considered separate units of accounting when the delivered unit has value to a customer on a stand alone basis and there is objective and reliable evidence of the fair value of the undelivered element. We regularly sell maintenance agreements with the Heartwave System. Revenue from maintenance contracts is recognized separately based on amounts charged when sold on a stand alone basis and is recognized over the term of the underlying agreement. Additionally, revenue associated with the service of new systems sold is recognized in the period in which the service is provided. Payments of $362,938 at December 31, 2008 ($290,979 at December 31, 2007) received in advance of services being performed is recorded as deferred revenue and included in current liabilities in the accompanying balance sheet. In May 2008, we launched the Technology Placement Program ("TPP") which allows customers to acquire our MTWA technology for a quarterly fee. Revenue recognition in connection with transactions under TPP is recognized over the term of the arrangements (generally three months).

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the non-payment of outstanding amounts due to us from our customers. We determine the amount of the allowance by evaluating the customer's credit history, current financial condition and payment history. We make a judgment as to the likelihood we will experience a loss of all or some portion of the outstanding balance.

As of December 31, 2008, our allowance for doubtful accounts was $283,576. We believe we have an adequate allowance; however, additional write-offs could occur if future results significantly differ from our expectations.

Inventory Valuation

We regularly assess the value of our inventory for estimated obsolescence or unmarketable inventory. If necessary, we write-down our inventory value to the estimated fair market value based upon assumptions about future demand and market conditions. In December 2008, we recorded a charge of $920,787 for excess inventory that was built up in order to satisfy our contractual obligations to St. Jude Medical. The provision is due to the uncertainty of realizing the value of the excess inventory. We do not believe that the inventory is exposed to obsolescence risk. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required from time to time that could adversely affect our operating results for the fiscal period in which such write-downs are affected.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123R, "Share Based Payment," ("FAS 123R"). FAS 123R establishes the accounting required for share-based compensation, and requires that companies recognize and measure compensation expense for all share-based payments at the grant date based on the fair market value of the award. This stock-based compensation expense must be included in the statement of operations over the requisite service period. We used the Black Scholes and Monte Carlo Simulation option pricing model to compute the fair value of our stock options. The use of these models require us to make assumptions regarding the expected term of the options, forfeiture rate and volatility of the underlying stock. The provisions of FAS 123R apply to new stock options and stock options outstanding but not yet vested on the effective date. We incurred $3,731,127 in non-cash stock-based compensation expense for the year ended December 31, 2007, or $.06 per share. The Company incurred $2,540,810 in non-cash stock-based compensation expense for year ended December 31, 2008, or $0.04 per share.

Product Warranty

We warrant all of our non-disposable products as to compliance with their specifications and that the products are free from defects in material and workmanship for a period of 13 months from the date of delivery. We maintain a reserve for the estimated cost of potential future repair of our products during this warranty period. The amount of the reserve is based on our actual return and repair cost experience. If the rate and cost of future warranty activities materially differs from our historical experience, additional costs would have to be reserved that could materially affect our operating results.

Results of Operations

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

                                         %                          %         % Inc./(Dec.)
                           2007       of Total        2008       of Total     2008 vs 2007
 Alternans Products:
 U.S.                  $  8,549,295         85 %   $ 2,847,509         67 %             -67 %
 Rest of World              360,890          4 %       287,865          7 %             -20 %

 Total                    8,910,185         88 %     3,135,374         74 %             -65 %

 Stress Products:
 U.S.                       895,523          9 %       721,319         17 %             -19 %
 Rest of World              300,700          3 %       382,050          9 %              27 %

 Total                    1,196,223         12 %     1,103,369         26 %              -8 %

 Total Revenues        $ 10,106,408        100 %   $ 4,238,743        100 %             -58 %

2008 Compared to 2007

REVENUE

Total revenue for 2008 and 2007 was $4,238,743 and $10,106,408, respectively, a decrease of 58%. Revenue from the sale of our MTWA product line, which we call our Alternans Products, was $3,135,374 during 2008 compared to $8,910,185 during 2007, a decrease of 65%. Alternans Products accounted for 74% and 88% of total revenue for 2008 and 2007, respectively. System placements in 2008 were 70 compared to 214 in 2007. In 2008 we sold fewer Heartwave II Systems compared to 2007, due to a number of factors including the release of the MASTER I trial results, and challenges associated with the Company's co-marketing agreement with St. Jude Medical. Moreover, weak economic conditions had a significant adverse impact on medical capital equipment sales in 2008 as a whole.

GROSS PROFIT

Gross Profit was 25% of total revenue in 2008 compared to 65% of total revenue in 2007. This decrease in gross margin is primarily due to a provision of $920,787 for excess inventory built up in order to satisfy our contractual obligations to St. Jude Medical intended to fulfill expected sales under the arrangement. The provision is based on the uncertainty of realizing the value of the excess inventory. We do not believe that the inventory is exposed to obsolescence risk. Excluding the provision for excess inventory, the proforma gross margin percent was 47%. On a comparable basis, the decrease in gross margin percent compared to the same period in 2007 is attributable to the lower sales volume relative to our fixed costs in manufacturing.

OPERATING EXPENSES

The following table presents, for the periods indicated, our operating expenses.
This information has been derived from our statement of operations included
elsewhere in this Annual Report on Form 10-K. Our operating expenses for any
period are not necessarily indicative of future trends.



                                                   % of                           % of
                                                   Total                          Total        % Inc/(Dec)
                                     2007         Revenue           2008         Revenue       2008 vs 2007
Operating Expenses:
Research and development         $    515,182           5 %     $    542,102          13 %                5 %
Selling, general and
administrative                     15,902,866         157 %       10,861,678         256 %              -32 %

Total                            $ 16,418,048         162 %     $ 11,403,780         269 %              -31 %

RESEARCH AND DEVELOPMENT

Research and development expenses were $542,102 in 2008 compared to $515,182 in 2007, an increase of 5%. The increase is primarily attributable to costs related to adding features to our Heartwave II System. In 2009, we intend to continue to make product improvements and work to identify new applications for our technology.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative (SG&A) expenses were $10,861,678 in 2008 compared to $15,902,866 in 2007, a decrease of 32%. Selling and marketing costs, which accounted for 48% of total SG&A in 2008, decreased 41% from 2007. The decrease in selling expense from 2007 was primarily driven by lower variable selling expenses as a result of lower sales of commissionable products in the U.S. Administrative costs accounted for 52% of total SG&A compared to 45% in 2007. SG&A costs for 2008 included $2,418,122 in non-cash stock-based compensation expense, compared to $3,655,026 in 2007. In 2007 SG&A costs included $1,287,841 of non-cash stock-based compensation expense related to the contractual relationship with the Company's Vice President-Business Development that expired on March 31, 2007. We anticipate that SG&A expenses will decrease in 2009 due to our cost cutting initiatives. See Note 17 for further details regarding headcount.

INTEREST INCOME/INTEREST EXPENSE

Interest income was $356,941 in 2008 compared to $698,807 in 2007, a decrease of 49%. The decrease is primarily the result of lower amounts of invested cash and declining short-term interest rates. Interest expense was $43,144 in 2008 compared to $13,417 in fiscal year 2007, an increase of 222%, due to costs associated with our line of credit from Citigroup, which was paid off completely in the fourth quarter of 2008.

NET LOSS

Net loss attributable to common stockholders was $10,030,089 in 2008 as compared to a net loss of $9,209,955 in 2007.

Liquidity and Capital Resources

Cash, cash equivalents were $6,207,074 and marketable securities were $0 at December 31, 2008, compared to $866,510 and $11,200,000, respectively, at December 31, 2007. At December 31, 2008, investments consist of money market funds, and at December 31, 2007, investments consisted of money market funds and marketable securities. The money market funds are readily convertible into known amounts of cash, and, therefore, are classified as cash equivalents. The marketable securities at December 31, 2007, consisted of municipal bonds with long-term nominal maturities that are triple "A" credit rated debt instruments collateralized by student loans and guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program ("FFELP") up to 98%. The interest rates on the municipal bonds reset through an auction process every 28 - 30 days and referred to as auction rate securities (ARSs). Our intent was not to hold the securities to maturity, but rather to use the interest rate reset feature to maximize interest yield while maintaining liquidity. In November 2008, Citigroup liquidated all of the Company's investments in ARSs at par value totaling $9,250,000. Citigroup's agreement to liquidate the Company's ARSs was the result of a larger settlement between Citigroup, the United States Securities and Exchange Commission and the Attorney General of New York announced on August 7, 2008.

Prior to February 2008, we generally had the opportunity to sell the ARSs during such periodic auctions subject to the availability of buyers, thereby providing high liquidity and maximized interest yields. Starting in February 2008, credit and liquidity issues in the financial markets led to failed auctions with respect to these ARSs. In most cases where auctions failed, the investments earned higher interest rates to compensate for the lack of liquidity as per the investment offering statements. At that time, based on discussions with the Company's investment advisor, review of market research reports and pending legislative initiatives, we believed that the credit and illiquidity conditions presented temporary liquidity risk as of March 31, 2008. Further, at that time, we believed that the investments were not exposed to risk of default of the underlying securities nor exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, or other similar risks. Subsequently, given the on-going market dynamics and liquidity uncertainties, we reclassified the investments in ARSs from current to long-term assets as of June 30, 2008. Furthermore, based on the results of our fair market valuations, we recorded a charge to comprehensive income (loss). See Note 2 for further details. As a result of this liquidity issue, in June 2008 we entered into a revolving credit facility with Citigroup Global Markets, Inc. for borrowings of up to 50% of the failing ARSs par value of $9,250,000. The credit facility was secured by 50% of par value of our long-term investments and contains no financial covenants. Any borrowings under the revolving credit facility accrued interest at a variable rate based on short-term market interest rates plus 1.75%. At September 30, 2008, $4,086,143 was outstanding under the revolving credit facility bearing an annual interest rate of 3.175%.

Subsequent to the sale of the Company's investments in ARS's in November 2008, the Company reversed the temporary unrealized loss and repaid the total amount outstanding under the Company's revolving line of credit with Citigroup, resulting in net proceeds of $5,175,000.

The overall decrease in the Company's cash, cash equivalents is primarily attributable to cash used by operations. Our financial statements have been prepared on a "going concern basis," which assumes we will realize our assets and discharge our liabilities in the normal course of business. We have experienced recurring losses from operations of $9,895,345 and $10,343,886 for the years ended December 31, 2007 and 2008, respectively. In 2008, the net loss we incurred included non-cash stock-based compensation expense of $2,540,810. The main changes in operating assets and liabilities in 2008 were a decrease in accounts receivable, net of allowance for doubtful accounts, of $1,181,013, or 61%, as a result of cash collection efforts and lower sales volume, and a decrease in inventory, net of reserve, of $949,814, or 39%, primarily attributable to a provision of $920,787 for excess inventory built up in order to satisfy our contractual obligations to St. Jude Medical. The provision is based on the uncertainty of realizing the value of the excess inventory. We do not believe that the inventory is exposed to obsolescence risk. Prepaid expenses and other current assets at December 31, 2008 increased $52,354 compared to December 31, 2007. Fixed assets at December 31, 2008 increased $225,863 compared to December 31, 2007, primarily due to capitalized costs associated with our new facility and Heartwave II Systems sold through our Technology Placement Program where we retain title to the equipment. Accounts Payable and Accrued Expenses at . . .