<PAGE>

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

                                   FORM 10-Q

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934. For the quarterly period ended September 30, 2000

                                                        or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934.
     For the transition period from _________________ to _____________________.

                        Commission File Number: 0-22419
                                                -------

                                 CARDIMA, INC.

            (Exact name of registrant as specified in its charter)


            Delaware                                            94-3177883
---------------------------------                           -------------------
(State or Other Jurisdiction                                 (I.R.S. Employer
 of Incorporation or Organization)                          Identification No.)


47266 Benicia Street, Fremont, CA                                94538-7330
(Address of  Principal Executive Offices)                        (Zip Code)

Registrant's telephone number, including area code:  (510) 354-0300

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) had been subject to such filing
requirements for the past 90 days.    X     Yes _____ No
                                   -------

As of October 31, 2000, there were 21,579,093 shares of Registrant's Common
Stock outstanding.

                                       1
<PAGE>

                                 CARDIMA, INC.

                                     INDEX

<TABLE>
<S>                                                                                                                         <C>
PART I................................................................................................................      3
-------

   ITEM 1.  FINANCIAL STATEMENTS......................................................................................      3
   -----------------------------
     CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999..........................................      3
     -----------------------------------------------------------------------
     CONDENSED STATMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000.........................      4
     ----------------------------------------------------------------------------------------
     CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.........................      5
     ----------------------------------------------------------------------------------------
     NOTES TO CONDENSED FINANCIAL STATEMENTS..........................................................................      6
     ---------------------------------------

RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED September 30, 2000 AND 1999.......................................     10
-------------------------------------------------------------------------------


LIQUIDITY AND CAPITAL RESOURCES.......................................................................................     11
-------------------------------

   ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................     26
   -------------------------------------------------------------------

PART II.       OTHER INFORMATION......................................................................................     27
--------       -----------------

   ITEM 1.     LEGAL PROCEEDINGS......................................................................................     27
   -------     -----------------
   ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS..............................................................     27
   -------     -----------------------------------------
   ITEM 3.     DEFAULTS UPON SENIOR SECURITIES........................................................................     27
   -------     -------------------------------
   ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................     27
   -------     ---------------------------------------------------
   ITEM 5.     OTHER INFORMATION......................................................................................     27
   -------     -----------------
   ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K.......................................................................     27
   -------     --------------------------------

SIGNATURES............................................................................................................     28
----------

INDEX TO EXHIBITS FOR FORM 10-Q.......................................................................................     29
-------------------------------
</TABLE>

                                       2
<PAGE>

PART I.

ITEM 1.  FINANCIAL STATEMENTS

                                 CARDIMA, INC.
                           CONDENSED BALANCE SHEETS
              (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>

                                                                               September 30,                 December 31,
ASSETS                                                                             2000                          1999
                                                                             ------------------            -----------------
Current assets:                                                                 (unaudited)
<S>                                                                          <C>                           <C>
   Cash and cash equivalents...............................................  $           1,217             $            423
   Short-term investments..................................................                ---                          497
   Accounts receivable, net of allowances for doubtful accounts
       of $122 at September 30, 2000 and $92 at December 31, 1999..........                307                          669
   Inventories.............................................................              1,855                        1,268
   Other current assets....................................................                292                          251
                                                                             -----------------             ----------------
       Total current assets................................................              3,671                        3,108
Property and equipment, net................................................              2,078                        2,512
Notes receivable...........................................................                494                          365
Other assets...............................................................                168                          104
                                                                             -----------------             ----------------
                                                                             $           6,411                        6,089
                                                                             =================             ================
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
   Accounts payable........................................................  $           1,233             $          1,436
   Accrued compensation....................................................                794                        1,041
   Other current liabilities...............................................                 47                           60
   Capital lease obligation - current portion..............................                655                          776
   Line of credit obligation - current portion.............................              1,379                        1,088
                                                                             -----------------             ----------------
       Total current liabilities...........................................              4,108                        4,401

Deferred rent..............................................................                 18                            1
Capital lease obligation - noncurrent portion..............................                697                        1,012
Line of credit obligation - noncurrent portion.............................                ---                        1,095

Stockholders' equity (net capital deficiency):
     Common stock, $0.001 par value; 50,000,000 shares authorized,
      21,578,664 shares issued and outstanding at September 30, 2000;
      16,356,355 as of December 31, 1999; at amount paid in................             71,430                       60,441
Deferred compensation......................................................                (75)                        (225)
Accumulated deficit........................................................            (69,767)                     (60,636)
                                                                             -----------------             ----------------
   Total stockholders' equity (net capital deficiency).....................              1,588                         (420)
                                                                             -----------------             ----------------
                                                                             $           6,411             $          6,089
                                                                             =================             ================
</TABLE>


            See accompanying notes to condensed financial statements

                                       3
<PAGE>

                                 CARDIMA, INC.
                      CONDENSED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                  Three months ended             Nine months ended
                                                    September 30,                  September 30,
                                               -----------------------         --------------------
                                                2000            1999            2000         1999
                                               -------         -------         -------     --------
<S>                                            <C>             <C>             <C>         <C>
Net sales                                      $   425         $   913         $ 1,839     $  2,544
Cost of goods sold                                 889             731           2,411        1,984
                                               -------         -------         -------     --------
      Gross profit (loss)                         (464)            182            (572)         560

Operating expenses:
      Research and development                   1,373           1,415           3,647        4,609
      Selling, general and administrative        1,498           1,897           4,789        5,804
                                               -------         -------
      Total operating expenses                   2,871           3,312           8,436       10,413
                                               -------         -------         -------     --------
Operating loss                                  (3,335)         (3,130)         (9,008)      (9,853)

Interest and other income                           38              53             182          236
Interest expense                                   (91)           (129)           (305)        (400)
                                               -------         -------         -------     --------
Net loss                                       $(3,388)        $(3,206)        $(9,131)    $(10,017)
                                               =======         =======         =======     ========

Basic and diluted net loss per share           $ (0.16)        $ (0.20)        $ (0.44)    $  (0.64)
                                               =======         =======         =======     ========
Shares used in computing basic and diluted
 net loss per share                             21,547          16,272          20,564       15,566
                                               =======         =======         =======     ========
</TABLE>

            See accompanying notes to condensed financial statements

                                       4
<PAGE>

                                 CARDIMA, INC.
                      CONDENSED STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                Nine months ended September 30,
                                                                           ---------------------------------------
                                                                                 2000                   1999
                                                                           -----------------      ----------------
<S>                                                                        <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                             ($9,131)             ($10,017)
Adjustments to reconcile net loss to net cash provided by operations:
  Depreciation and amortization                                                          769                   907
  Amortization of deferred compensation                                                  150                   190
  Loss on disposal of assets                                                               2                     7
  Changes in operating assets and liabilities:
    Accounts receivable                                                                  362                  (106)
    Inventories                                                                         (587)                  397
    Other current assets                                                                 (41)                   66
    Restricted cash                                                                      ---                    50
    Notes receivable                                                                    (129)                  (40)
    Other assets                                                                        (118)                 (423)
    Accounts payable                                                                    (203)               (1,133)
    Accrued compensation                                                                (247)                 (117)
    Other current liabilities                                                            (13)                   10
    Deferred rent                                                                         17                   (37)
                                                                           -----------------      ----------------
       Net cash used in operating activities                                          (9,169)              (10,246)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments                                                       --               (19,044)
Maturities and sales of short-term investments                                           497                17,057
Capital expenditures                                                                    (250)                  102
Proceeds from disposal of assets                                                          --                     2
                                                                           -----------------      ----------------
       Net cash (used) provided in investing activities                                  247                (1,883)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases                                                 (615)                 (760)
Principal payments under credit line                                                    (804)                 (563)
Net proceeds from sale of common stock and warrant exercises                          10,989                14,440
Proceeds from sale/leaseback of capital equipment                                        146                   627
                                                                           -----------------      ----------------
       Net cash provided by financing activities                                       9,716                13,744
                                                                           -----------------      ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                794                 1,615
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                           423                   645
                                                                           -----------------      ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                   $           1,217      $          2,260
                                                                           =================      ================
</TABLE>

                                       5
<PAGE>

                                 CARDIMA, INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS
                              September 30, 2000
                                  (Unaudited)

1.  BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by
the Company according to the rules and regulations of the Securities and
Exchange Commission for interim financial information and in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they
do not include all of the financial information and footnotes required by
generally accepted accounting principles for complete financial statements.  In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.

The operating results for the three and nine-month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2000 or for future operating results.  The
accompanying financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.  The accompanying
balance sheet at December 31, 1999 has been derived from these audited financial
statements.

2.  MANAGEMENT'S PLANS

On January 26, 2000, the Company signed an exclusive three year distribution
agreement with St. Jude Medical Corporation, or St. Jude, whereby St. Jude's
Daig Division will distribute Cardima's diagnostic products in the United
States.  The distribution agreement included an equity investment by St. Jude.
If St. Jude does not meet its minimum annual purchase quota under the
distribution agreement, St. Jude could lose its right to exclusively
distribute the Company's diagnostic products in the United States.  To date the
results of the distribution agreement with St. Jude has not met the Company's
expectations.  Assuming the Company can raise additional capital, the Company
plans to gear up its own sales force in the United States.  The Company retains
the rights for all other geographic areas and maintains worldwide control of
its therapeutic products.

As of September 30, 2000 the Company has approximately $1,217,000 in cash and
cash equivalents, a working capital deficit of $437,000 and an accumulated
deficit of $69,767,000.  Assuming the Company has adequate funding to continue
the course of its development activities, the Company expects such losses to
continue for at least the next two years.  Management is seeking to continue
to finance operations with a combination of revenue from product sales, funds
from equity or debt offerings, funds from potential corporate alliances and
technology licenses.  The Company expects its existing capital resources will
permit it to meet its capital and operational requirements through November
2000.

In order to commercialize our products and continue operations, we will
need to raise additional capital by the end of November 2000. Our failure to
raise additional capital to develop and market our products will cause our
business to suffer and would cause the Company to cease operations.

3.  PRIVATE PLACEMENT

                                       6
<PAGE>

In February 2000, the Company sold a total of 4,666,611 shares of common stock
at $2.25 per share in a private placement transaction to accredited investors.
The transaction included warrants to investors exercisable for 933,322 shares of
common stock at an exercise price of $2.48 per share.  As commission for the
transaction, the Company paid approximately $525,000 in cash.  In addition, the
Company issued warrants, exercisable for 233,329 shares of common stock at an
exercise price of $2.48 per share as commission for the transaction.  The
Company's net proceeds, after expenses of the placement, were approximately
$9,900,000.

4.  BALANCE SHEET COMPONENTS

Certain balance sheet components are as follows (in thousands):

                                        September 30,         December 31,
                                            2000                  1999
                                     ------------------     ------------------
Inventories:
    Raw materials                       $   729                  $   616
    Work-in-process                         120                      107
    Finished goods                        1,006                      545
                                     ------------------     ------------------
                                        $ 1,855                  $ 1,268
                                     ==================     ==================
Property and equipment:
    Equipment                             5,807                    5,492
    Leasehold improvements                  108                      109
                                     ------------------     ------------------
                                        $ 5,915                  $ 5,601
    Less accumulated depreciation        (3,837)                  (3,089)
                                     ------------------     ------------------
                                        $ 2,078                  $ 2,512
                                     ==================     ==================


5.  NET LOSS PER SHARE

Basic and diluted net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period. The
Company has excluded all convertible debt, convertible preferred stock,
warrants, and stock options from the computation of basic and diluted earnings
per share because all such securities are antidilutive for all periods
presented.

6.  COMPREHENSIVE INCOME (LOSS)

During the three months ended September 30, 2000 and 1999, total comprehensive
loss was $3,388,000 and $3,206,000, respectively.  For the nine months ended
September 30, 2000 and 1999, total comprehensive loss was $9,131,000 and
$10,017,000.


______________________
/1/ The information in this column was derived from the Company's audited
    financial statements as of December 31, 1999.

                                       7
<PAGE>

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

This Form 10-Q, including management's discussion and analysis of financial
condition and results of operations, contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding regulatory approvals, operating results
and capital requirements.  Except for historical information, the matters
discussed in this Form 10-Q, are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected.  Such factors include the Company's ability to
obtain adequate funding, conduct successful clinical trials, obtain timely
regulatory approvals and gain acceptance from the marketplace for its products,
as well as the risk factors discussed below in "Additional Factors Affecting
Future Results" and those listed from time to time in the Company's SEC reports.
The Company assumes no obligation to update the forward-looking statements
included in this Form 10-Q.


OVERVIEW

Since its incorporation in November 1992, Cardima has been engaged in the
design, research, development, manufacturing and testing of microcatheter
systems for the mapping (diagnosis) and ablation (treatment) of cardiac
arrhythmias.  Cardima has generated revenues of approximately $10.1 million from
inception to September 30, 2000.  Until January 1997, these revenues were
primarily in Europe and Japan from sales of the Cardima Pathfinder and Tracer
microcatheter systems for diagnosing VT and the Revelation microcatheter system
for diagnosing AF, as well as ancillary products such as the Venaport guiding
catheters.  Subsequent to 1997, United States sales consist primarily of
Pathfinder and Revelation lines of microcatheters for diagnosis of VT and AF
following FDA 510(k) clearance using a small direct sales force in the United
States.  In January 2000, the company signed an exclusive three year
distribution agreement with St. Jude Medical Corporation, or St. Jude, whereby
St. Jude's Diag Division will distribute Cardima's diagnostic products in the
United States.  To date, the Company's international sales have been made
primarily through distributors who sell the Company's products to physicians and
hospitals. European sales consist primarily of the Pathfinder line of
microcatheters for diagnosis of VT and AF.

The Company has obtained the right to affix the CE Mark to its Cardima
Pathfinder, Pathfinder mini and Tracer microcatheter systems for mapping VT and
its Revelation, Revelation Tx and Revelation T-Flex microcatheter systems for
both mapping and ablation of AF, permitting the Company to market these products
in the member countries of the EU.  The Company received 510(k) clearances for
the Revelation microcatheter for mapping of AF, the Pathfinder mini
microcatheter and the Tracer microcatheter for mapping VT, for the Vueport
balloon guiding catheter in July 1998 and for the Naviport deflectable guiding
catheter in August 1999.  The Company will be required to conduct clinical
trials, demonstrate safety and effectiveness and obtain PMA approval from the
FDA in order to sell any of the Company's products designed for

                                       8
<PAGE>

treatment of AF or VT in the United States. Specifically, PMA approval will be
required prior to the introduction in the United States of the Revelation Tx
microcatheter system for treatment of AF or Therastream microcatheter system for
treatment of VT.

The Company has a limited history of operations and has experienced significant
operating losses since inception.  Assuming receipt of adequate funding to
continue operations, the Company expects that its operating losses will continue
for the foreseeable future as the Company continues to invest substantial
resources in product development, preclinical and clinical trials, obtaining
regulatory approval, sales and marketing and manufacturing.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement No. 133.
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
This statement will require that companies recognize all derivatives on the
balance sheet at fair value.  Derivatives that are not hedges must be adjusted
to fair value through income.  If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings.  The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
SFAS No. 133 is required to be adopted for fiscal years beginning after June 15,
1999.  In June 1999, Statement No. 137 effectively deferred the effective date
of SFAS No. 133 for one year.  The Company is in the process of determining what
effect the adoption of SFAS No. 133 will have on the Company's results of
operations, financial position and cash flow.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 - "Revenue Recognition in Financial Statements," or SAB 101.
The bulletin draws on existing accounting rules and provides specific guidance
on how those accounting rules should be applied and specifically addresses
revenue recognition for non-refundable technology access fees in the
biotechnology industry.  Adoption of SAB 101 is required in the fourth quarter
of fiscal year 2000. We are evaluating the effects, if any, that the adoption of
SAB 101 may have on the results of our operations or our financial position.

In April 2000, FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25" ("FIN
44") was issued.  FIN 44 clarifies he application of APB 25 for only certain
issues.  Among other issues, FIN 44 clarifies the definition of employee for
purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination.  FIN 44 is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000.  The Company believes that upon implementation, FIN 44 will
not have a significant effect on its financial condition or results of
operations.

                                       9
<PAGE>

RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED September 30, 2000 AND 1999

Net Sales

Net sales for the quarter ended September 30, 2000 decreased 53% to $425,000
from $913,000 for the same period in 1999.  Net sales for the nine month period
ended September 30, 2000 decreased 28% to $1,839,000 from $2,544,000 for the
same period in 1999.  The decrease in net sales was attributable to the
Company's transitioning from a direct sales force to using distributors,
particularly in the United States, where a sales and distribution agreement was
announced with St. Jude Medical, Inc in January 2000.  United States sales for
the quarter ended September 30, 2000 decreased 58% to $220,000 from $529,000 in
the same period in 1999.  United States sales for the nine month period ended
September 30, 2000 decreased 30% to $925,000 from $1,330,000 in the same period
in 1999.  International sales for the quarter ended September 30, 2000 decreased
47% to $205,000 from $384,000 in the same period in 1999 as the Company
transitioned some of its direct selling efforts to distributors in certain
European countries.  International sales for the nine month period ended
September 30, 2000 decreased 25% to $914,000 from $1,214,000 in the same period
in 1999.

Cost of Goods Sold

Cost of goods sold primarily includes raw materials costs, catheter fabrication
costs, system assembly, test costs and manufacturing overhead.  Cost of goods
sold for the quarter ended September 30, 2000 increased 22% to $889,000 from
$731,000 for the same period in 1999.  Cost of goods sold for the nine month
period ended September 30, 2000 increased 22% to $2,411,000 from $1,984,000.
The increase was due primarily to the additional hiring and training of
manufacturing personnel.



Research and Development Expenses

Research and development expenses include product development, clinical testing
and regulatory expenses.  Research and development expenses for the quarter
ended September 30, 2000 decreased 3% to $1,373,000 from $1,415,000 for the same
period in 1999.  Research and development expenses for the nine month period
ended September 30, 2000 decreased 21% to $3,647,000 from $4,609,000 for the
same period in 1999.  The decrease was due primarily to staff reductions in
research and development as a result of the Company's restructuring in January
1999 and the Company's efforts to focus on key research and development
projects.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended September 30,
2000 decreased 21% to $1,498,000 from $1,897,000 for the same period in 1999.
Selling, general and administrative expenses for the nine month period ended
September 30, 2000 decreased 17% to

                                       10
<PAGE>

$4,789,000 from $5,804,000 for the same period in 1999. Selling expenses for the
quarter ended September 30, 2000 decreased 45% to $552,000 from $1,002,000 for
the same period in 1999. Selling expenses for the nine month period ended
September 30, 2000 decreased 36% to $1,941,000 from $3,016,000 for the same
period in 1999. The decrease was due primarily to the reduction in workforce in
January 1999 and the reduction in direct sales expenses due to the United States
distribution agreement with St. Jude signed in January 2000. General and
administrative expenses for the quarter ended September 30, 2000 increased 9% to
$796,000 from $729,000 for the same period in 1999. General and administrative
expenses for the nine month period ended September 30, 2000 increased 8% to
$2,249,000 from $2,077,000 for the same period in 1999. The increase was due
primarily to additional accrued compensation over the three and nine month
periods. Marketing expenses for the quarter ended September 30, 2000 decreased
10% to $150,000 from $166,000 for the same period in 1999. Marketing expenses
for the nine month period ended September 30, 2000 decreased 16% to $596,000
from $710,000 for the same period in 1999. The decrease was due primarily to the
reduction in workforce in January 1999, decreased expenses for trade shows and
the reduction in direct marketing expenses due to the United States distribution
agreement with St. Jude signed in January 2000.

Interest and Other Income

Interest and other income for the quarter ended September 30, 2000 decreased to
$38,000 from $53,000 for the same period in 1999.  Interest and other income for
the nine month period ended September 30, 2000 decreased to $182,000 from
$236,000 in the same period in 1999.  The decrease was due primarily to lower
cash balances and balances in short term investments.

Interest Expense

Interest expense for the quarter ended September 30, 2000 decreased to $91,000
from $129,000 for the same period in 1999.  Interest and other income for the
nine month period ended September 30, 2000 decreased to $305,000 from $400,000
in the same period in 1999.  The decrease was primarily due the expiration of
four capital equipment leases and the reduced interest rate on the re-lease of
this equipment.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date principally through private
placements of equity securities, an initial public offering of Common Stock in
June 1997, borrowings under a $3,000,000 line of credit and equipment leases to
finance certain capital equipment which have provided proceeds in the amount of
$4,700,000.  As of September 30, 2000, the Company had approximately $1,217,000
in cash and cash equivalents.

Net cash used in operating activities was approximately $9,169,000 and
$10,246,000 for the nine months ended September 30, 2000 and 1999, respectively.
The decrease was primarily due from the decrease of operating losses incurred
and the decrease in the disbursement of accounts payable over the same period
last year.  Net cash provided by investing activities of $247,000, for the nine
months ended September 30, 2000, was primarily provided by the maturities and

                                       11
<PAGE>

sales of short-term investments.  Net cash used in investing activities was
$1,883,000, for the nine months ended September 30, 1999, used primarily for
purchases of short-term investments.  Net cash provided by financing activities
was approximately $9,716,000 and $13,744,000 for the nine months ended September
30, 2000 and 1999, respectively, resulting primarily from the sale of equity
securities in private placement transactions during such periods.

In May 1999, the Company entered into an equipment lease that permits the
Company to borrow up to $1,000,000 for the purchase of office and manufacturing
equipment, software and custom-built equipment.  As of September 30, 2000 the
Company has drawn $687,000 against the equipment leaseline.  In January and
February 1999, the Company sold a total of 7,500,000 shares of common stock at
$2.00 per share in a private placement transaction to accredited investors.  As
commission, the Company issued 354,806 shares of its common stock to the
placement agent and paid approximately $490,000 in cash.  In addition the
Company issued warrants, exercisable for 750,000 shares of common stock at an
exercise price of $2.20 as a commission for the transaction.  The Company's net
proceeds, after expenses of the placement, were approximately $14,300,000.  In
February 2000, the Company sold a total of 4,666,611 shares of common stock at
$2.25 per share in a private placement transaction to accredited investors.  The
transaction included warrants to investors exercisable for 933,322 shares of
common stock at an exercise price of $2.48 per share.  As commission for the
transaction, the Company paid approximately $525,000 in cash.  In addition, the
Company issued warrants, exercisable for 233,329 shares of common stock at an
exercise price of $2.48 per share as commission for the transaction.  The
Company's net proceeds, after expenses of the placement, were approximately
$9,900,000.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including receipt of adequate funding, sales and marketing
activities, the progress of the Company's product development efforts, the
progress of the Company's clinical trials, actions relating to regulatory
matters, the costs and timing of expansion of product development,
manufacturing, the extent to which the Company's products gain market acceptance
and competitive developments.  The Company believes that available cash will be
sufficient to meet the Company's cash requirements through November 2000.  The
Company will require additional financing.  There can be no assurance however,
that such additional financing will be available on terms acceptable to the
Company, if at all.  The Company may seek to raise additional funds through
public or private financing, collaborative relationships or other arrangements.
Furthermore, any additional equity financing is expected to be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants.  Collaborative arrangements, if necessary to raise additional funds,
may require the Company to relinquish its rights to certain of its technologies,
products or marketing territories.  The failure of the Company to raise capital
when needed will have a material adverse effect on the Company's business,
financial condition and would cause the Company to cease operations.

ADDITIONAL FACTORS AFFECTING FUTURE RESULTS

We need to raise capital and that could have a dilutive effect on your
investment.

                                       12
<PAGE>

As of September 30, 2000, cash, cash equivalents, short-term investments and
long-term restricted cash totaled $1.2 million. We believe that our existing
cash, cash equivalents and short-term investments, along with cash generated
from the sales of our products and from financings, will be sufficient to fund
our operating expenses, debt obligations and capital requirements through
November 2000.

In order to commercialize our products and continue operations, we will need to
raise additional capital by the end of November 2000. One possibility for
raising additional capital would be the public or private sale of our shares of
stock. Any sale by us of additional shares of stock will dilute your percentage
ownership in us.

Our failure to raise additional capital to develop and market our microcatheter
systems will cause our business to suffer and would cause the Company to cease
operations.

We need to raise additional capital in order to market our microcatheter
systems. In addition, we may have to spend additional funds if unforeseen
difficulties arise in the course of developing our products, performing clinical
trials, obtaining necessary regulatory clearances and approvals or other aspects
of our business. We cannot be certain that additional funding will be available
to us when needed, if at all, or, if available, on terms attractive to us. Our
inability to obtain sufficient funds may require us to delay, scale back or
eliminate some or all of our research and product development programs, to limit
the marketing of our microcatheter products, or to license to third parties the
rights to commercialize products or technologies that we would otherwise try to
develop and market ourselves or to cease operations. Our failure to raise this
additional capital when needed would harm our business.

Debt financing, if available, may involve restrictive covenants. We have
financed our operations to date primarily through private sales of equity
securities, proceeds from our initial public offering in June 1997, equipment
lease lines and loan-facilities.

We rely on our contractual rights to access third-party data. Our inability to
either access this data or the FDA's refusal to accept it in a filing, will
delay the commercialization of our products and cause our business results to
suffer.


We often rely on our contractual rights to access data collected by others in
phases of our clinical trials. We depend on the continued performance by these
third-parties of their contractual obligations to provide access and cooperate
with us in completing filings with the FDA. We cannot be certain that the FDA
will permit our reliance on these parties. If we are unable to rely on clinical
data collected by others, or if these parties do not perform their contractual
duties, we may be required to repeat clinical trials which could significantly
delay commercialization of our products, require us to spend more money on our
clinical trials and cause our business results to suffer. We cannot assure the
safety or effectiveness of our products. We are in an early stage of our product
development.

To date, we have completed two clinical trials and have received 510(k) pre-
market clearances from the FDA with respect to our Cardima Pathfinder,
Pathfinder mini and Tracer microcatheter

                                       13
<PAGE>

systems for venous mapping of VT, and our Revelation microcatheter system for
mapping and pacing of the atria. We also received FDA 510(k) clearance for the
Venaport fixed-curve guiding catheter, Vueport balloon-tipped fixed curve
guiding catheter, and for our Naviport deflectable tip guiding catheter. Our
inability to timely obtain clearances for our other diagnostic products and
therapeutic catheters under development would have a material adverse effect on
our business, financial condition and results of operations.

We are in the early stage of developing, testing and obtaining regulatory
approval for our microcatheter systems designed for ablation of AF and VT. We
are currently developing the Revelation Tx microcatheter system for ablation of
AF and the Therastream microcatheter system for ablation of VT. We are required
to obtain an Investigational Device Exemption, or IDE, from the FDA prior to
conducting human clinical trials of our microcatheter systems for ablation. We
completed the mapping phase of this feasibility study in August 1997 and an
early AF ablation feasibility study in December 1998. We received approval of an
IDE supplement on December 1998 allowing us to expand the AF feasibility study.
We completed the expanded AF feasibility study and received IDE approval to
begin a pivotal (final) AF clinical study in June 2000. We received approval for
an IDE to begin clinical testing of our Therastream microcatheter system for VT
ablation in December 1999 and approvals to expand this feasibility study both in
November and in June 2000. We must complete these feasibility and pivotal
clinical trials for both AF and VT indications, in order to gather data for pre-
market approval application, or PMA's to the FDA for these ablation products. We
must receive PMA approvals prior to marketing such products for ablation in the
United States. Clinical trials of our microcatheter systems will require
substantial financial and management resources and the completion of such trials
will take several years. There can be no assurance that:

   .  necessary IDEs will be granted by the FDA,

   .  human clinical trials, if initiated, will be completed,

   .  human clinical studies will validate the results of our pre-clinical
      studies, or

   .  human clinical trials will demonstrate that our products are safe and
      effective.

In addition, the clinical trials may identify significant technical or other
obstacles to be overcome prior to obtaining necessary regulatory approvals or
market acceptance. Our failure to initiate and complete clinical trials,
demonstrate product safety and clinical effectiveness, and obtain regulatory
approval for the use of our microcatheter systems for the ablation of AF or VT
would have a material adverse effect on our business, financial condition and
results of operations.

Our microcatheter products and their related procedures are novel to the market
and will require the special training of physicians. If the market does not
accept our products and procedures, our revenues will decline.

Our microcatheter systems represent a novel approach to diagnosing and treating
atrial fibrillation and ventricular tachycardia. Acceptance of our products and
procedures by physicians, patients and health care payors will be necessary in
order for us to be successful.  If

                                       14
<PAGE>

our products and procedures are not accepted by the market, our business could
be harmed and our revenues would decline.

Our microcatheter products must be safe, effective and cost efficient in order
for them to effectively compete against more established treatments. If we
cannot compete with these treatments, our revenues will decline. The market for
catheters to diagnose or treat AF and VT is highly competitive. Our
microcatheter systems for the mapping and ablation of AF and VT are new
technologies. Safety, cost efficiency and effectiveness are the primary
competitive elements in our market. In addition, the length of time required for
products to be developed and to receive regulatory and, in some cases,
reimbursement approval are important competitive factors. Existing treatments
with which we must compete include:

   .  drugs,

   .  external electrical cardioversion and defibrillation,

   .  implantable defibrillators,

   .  purposeful destruction of the Atrio-Ventricular, or AV, node followed by
      implantation of a pacemaker, and

   .  open heart surgery and the "maze" procedure.


Physicians will not recommend the use of our microcatheter systems unless they
can conclude that our systems provide a safe, effective and cost-efficient
alternative to current technologies for the mapping and ablation of AF or VT. If
our clinical data and other studies do not show that our products are safe and
effective, our products will not effectively compete against establish
treatments and our revenues will decline.

None of our ablation products has received regulatory approval in the United
States. Our failure to receive these approvals will harm our business and cause
the value of your investment to decline.


None of our products currently being developed for the ablation of AF and VT has
received regulatory approval in the United States. If we cannot gain United
States regulatory approval, our business will be harmed. Even if our ablation
products are successfully developed and the required regulatory approvals are
obtained, we cannot be certain that our products and the associated procedures
will ultimately gain any significant degree of market acceptance. Since our sole
product focus is to design and market microcatheter systems to map and ablate AF
and VT, our failure to successfully commercialize these systems would harm our
business and cause the value of your investment to decline.

We plan to significantly increase our operating expenses to expand our clinical
trials to complete the necessary number of patients to submit data for a PMA for
our ablation products. Our Phase II AF ablation trial has been completed and we
have begun phase III. Our operating expenses, which include sales and marketing,
research and development and general and administrative expenses, are based on
our expectations of future revenues and are relatively fixed in the short

                                       15
<PAGE>

term. If revenues fall below our expectations, we will not be able to quickly
reduce our spending in response, which would materially affect our operating
results and financial condition.

Reuse of our single-use products could cause our revenues to decline


Although all of our microcatheter systems are labeled for single use only, we
are aware that some physicians are reusing these products. Reuse of our
microcatheter systems could reduce revenues from product sales and could cause
our revenues to decline.

We must obtain governmental approvals or clearances before we can sell our
products.


Our products are considered to be medical devices and will be subject to
extensive regulation in the United States and internationally. These regulations
are wide ranging and govern, among other things:

   .  product design and development,

   .  product testing,

   .  product labeling,

   .  product storage,

   .  premarket clearance and approval,

   .  advertising and promotion, and

   .  product sales and distribution.


Before we can market any of our products in the United States or Europe, we must
demonstrate that our products are safe and effective and obtain approval or
clearance from applicable governmental authorities, which cannot be guaranteed.
In the United States, we must obtain 510(k) premarket notification clearance or
premarket approval, or PMA, from the FDA in order to market a product. We have
received 510(k) premarket notification clearances for both the Cardima
Pathfinder, Pathfinder mini and Tracer microcatheter systems for mapping VT and
for the Revelation microcatheter system for mapping AF. Currently, the timing to
receive 510(k) clearance is approximately 120 days and PMA approval is at least
12 months, but timing can be uncertain and the process may be significantly
longer. We cannot guarantee either the timing or receipt of approval or
clearance. These products may require a PMA and extensive clinical data may be
requested to support either 510(k) clearance or PMA approval.

We will be required to seek PMA approval for our ablation products, including
the Revelation Tx and the Therastream microcatheters for ablation. The process
of obtaining PMA approval is much more expensive, lengthy and uncertain than the
510(k) premarket notification clearance process. In order to prepare a PMA
application, we will be required to complete clinical trials to demonstrate the
safety and effectiveness of these products. We submitted an IDE application for
the Revelation microcatheter system for mapping and ablation of AF in January
1997. We

                                       16
<PAGE>

completed a mapping study at Stanford University Hospital and Massachusetts
General Hospital in September 1997. In addition, we received conditional IDE
approval in January 1998 and full approval in March 1998 for a feasibility
clinical study for AF ablation using the Revelation Tx microcatheter system. We
completed the expanded AF feasibility study and received IDE approval to begin a
pivotal (final) AF clinical study in June 2000. We filed an additional
feasibility IDE application for the Therastream microcatheter system in December
1998 and completed a 10 patient feasability trial in April 2000. We received
approvals to expand this feasibility study both in November and in June 2000.
There can be no assurance that any clinical study that we propose will be
permitted by the FDA, will be completed or, if completed, will provide data and
information that supports PMA approval. We expect that a PMA application will
not be submitted for up to one year, if at all. No assurance can be given that
we will ever be able to obtain PMA approval for any of our ablation products.
Our failure to complete clinical testing or to obtain timely PMA approval would
have a material adverse effect on our business, financial condition and results
of operations.

Regulatory agencies may limit the indications for which any of our products are
approved or cleared. Further, the FDA may restrict or withdraw approval or
clearance of a product if additional information becomes available to support
such action. Delays in the approval or clearance process, limitation of our
labeling claims or denial of our applications or notifications would cause our
business to be materially and adversely affected.

Pre-clinical and clinical trials are inherently unpredictable. If we do not
successfully conduct these trials, we may be unable to market our products and
our revenues may decline.


Through pre-clinical studies and clinical trials, we must demonstrate that our
products are safe and effective for their indicated uses. Results from pre-
clinical studies and early clinical trials may not allow us to predict results
in later-stage testing. We cannot be certain that our future clinical trials
will demonstrate the safety and effectiveness of any of our products or will
result in approval to market our products. As a result, if we are unable to
commence clinical trials as planned, complete clinical trials or demonstrate the
safety and effectiveness of our products, our business will be harmed. We also
cannot be certain that we can begin any future clinical trials or successfully
complete these trials once started. In addition, we may never meet our
development schedule for any of our products in development. Even if a product
is successfully developed and clinically tested, we cannot be certain that it
will be approved by the FDA on a timely basis or at all.  If our products are
not approved for commercial sales by the FDA, our business will be harmed.
Delays in enrolling patients in our trials could increase our expenses and harm
our business.

The rate at which we may complete our pre-clinical and clinical trials is
dependent upon the rate of patient enrollment. Patient enrollment depends on
many factors, including the size of the patient population, the nature of the
procedure, how close patients reside to clinical sites and the eligibility
criteria for the study. Delays in planned patient enrollment may result in
increased costs and delays, which could cause our business results to suffer.
After obtaining approvals or

                                       17
<PAGE>

clearances, we must continue to comply with applicable laws and regulations. If
we do not comply, our business results may suffer.

After approval or clearance, we will continue to be subject to extensive
regulatory requirements. Our failure to comply with applicable regulatory
requirements can result in enforcement actions by the FDA, including, but not
limited to:

    .  fines,

    .  injunctions,

    .  recall or seizure of products,

    .  withdrawal of marketing approvals or clearances,

    .  refusal of the FDA to grant clearances or approvals, and

    .  civil and criminal penalties.


We are also required to demonstrate and maintain compliance with the Quality
System regulations, or QSR, for all of our products. The FDA enforces the QSR
through periodic inspections, including a preapproval inspection for PMA
products. The QSR relates to product testing and quality assurance, as well as
the maintenance of records and documentation. If we or any third-party
manufacturer of our products does not conform to the QSR and cannot be brought
up to such a standard, we will be required to find alternative manufacturers
that do conform. Identifying and qualifying alternative manufacturers may be a
long and difficult process. We are also required to provide information to the
FDA on deaths or serious injuries alleged to have been associated with the use
of our medical devices, as well as product malfunctions that could contribute to
death or serious injury. If we fail to comply with these applicable laws, our
business results may suffer.

If we do not comply with foreign regulatory requirements to market our products
outside the United States, our business will be harmed. Sales of medical devices
outside the United States are subject to international regulatory requirements
that vary from country to country. The time required for approval varies from
country to country and may be longer or shorter than the time required in the
United States. In order to market any of our devices in the member countries of
the European Union, or the EU, we are required to obtain CE mark certification.
CE mark certification is an international symbol of adherence to quality
assurance standards and compliance with the European Medical Device Directives.
We have received CE mark certification to sell the Cardima Pathfinder,
Pathfinder mini, Revelation, Revelation Tx and Tracer for mapping in the EU. We
have received CE mark certification to sell the Venaport, Vueport and Naviport
guiding catheters in the EU. We also received approval to sell the Cardima
Pathfinder, Pathfinder mini, Tracer, Revelation and Revelation Tx, in Japan and
Australia, and to sell the Cardima Pathfinder, Tracer, Vueport and Naviport in
Canada. The Company also received CE mark certification in August 1998, December
1998 and November 1999 to sell the Revelation, Revelation Tx and Revelation T-
Flex microcatheters, respectively, for ablation of AF in the EU. We intend to
submit data in support of additional CE mark applications. There can be no
assurance we will be successful in obtaining or maintaining the CE mark for
these products,
                                       18
<PAGE>

as the case may be. Failure to receive approval to affix the CE mark would
prohibit us from selling these products in member countries of the EU, and would
result in significant delays in obtaining individual country approvals. No
assurance can be given that such approvals will ever be obtained. If these
approvals are not obtained, our business could be harmed.

Difficulties presented by international factors could negatively affect our
business. A component of our strategy is to expand our international sales
revenues.


We believe that we will face risks in doing business abroad that we do not face
domestically. Among the international risks we believe are most likely to affect
us are:
     .  export license requirements for our products,

     .  exchange rate fluctuations or currency controls,

     .  changes in the regulation of medical products by the European Union or
        other international regulatory agencies,

     .  the difficulty in managing a direct sales force from abroad,

     .  the financial condition, expertise and performance of our international
        distributors and any future international distributors,

     .  domestic or international trade restrictions, or

     .  changes in tariffs.

Any of these factors here could damage our business results.

We derive a significant portion of our revenues from the sale of microcatheters
in the European Union. The adoption of the Euro presents uncertainties for our
international business.


In January 1999, the new "Euro" currency was introduced and adopted by some
European countries that are part of the European Monetary Union, or EMU.
Beginning in 2003, all EMU countries are expected to be operating with the Euro
as their single currency. A significant amount of uncertainty exists as to the
effect the Euro will have on the marketplace generally. In particular, as a
significant amount of our sales revenue is derived from sales to EMU countries,
these participating countries' adoption of a single currency may likely result
in greater price transparency, making the EMU a more competitive environment for
our microcatheter products. In addition, some of the rules and regulations
relating to the governance of the currency have not yet been defined and
finalized. As a result, companies operating in or conducting business in Europe
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling the Euro.

We are currently assessing the effect the introduction of the Euro will have on
our internal accounting systems and the potential sales of our products. We will
take appropriate corrective actions based on the results of such assessment. We
have not yet determined the costs related to

                                       19
<PAGE>

addressing this issue. This issue and its related costs could have a material
adverse effect on our business, financial condition and results of operations.
We may be unable to successfully commercialize our microcatheter products as the
industry for them is highly competitive.

The market for catheters to map and/or ablate AF and VT is highly competitive.
Several of our competitors are developing new approaches and products for these
procedures. These approaches include mapping systems using contact mapping,
single-point spatial mapping and non-contact, multi-site electrical mapping
technologies, and ablation systems using RF, ultrasound, microwave, laser and
cryoablation technologies. Other companies are also developing surgical
procedures that could potentially be used by physicians to perform the open-
heart surgical maze procedure for the treatment of AF in a minimally invasive
manner. If any of these new approaches or products prove to be safe, effective
and cost effective, our products could be rendered noncompetitive or obsolete,
which would cause our business results to suffer. Many of our competitors have
an established presence in the field of interventional cardiology and
electrophysiology. These competitors include Boston Scientific, C.R. Bard, Inc.,
Johnson & Johnson, through its Cordis division, St. Jude Medical, Inc., through
its Daig division, and Medtronic, Inc. These competitors have substantially
greater financial and other resources than we do, including larger research and
development staffs and greater experience and capabilities in conducting
research and development activities, testing products in clinical trials,
obtaining regulatory approvals, and manufacturing, marketing and distributing
products. In addition, other companies are developing proprietary systems for
the diagnosis and treatment of cardiac arrhythmias. These companies include
Biosense, Inc. a division of Johnson and Johnson, Cardiac Pathways, Inc. and
Endocardial Solutions, Inc.  Other companies develop, market and sell
alternative approaches to the treatment of AF and VT. These companies include
Guidant Corporation, Medtronic, Inc., and Ventritex, Inc., a subsidiary of St.
Jude, Inc., manufacturers of implantable defibrillators. We cannot be certain
that we will succeed in developing and marketing technologies and products that
are safer, more clinically effective and cost-effective than the more
established treatments or the new approaches and products being developed and
marketed by our competitors. Furthermore, there can be no assurance that we will
succeed in developing new technologies and products that are available prior to
our competitors' products. Our failure to demonstrate the competitive advantages
and achieve market acceptance of our products would harm our business.

We are dependent on St. Jude to commercialize our diagnostic products in the
United States

On January 26, 2000, we announced that we had signed an exclusive three-year
distribution agreement for our diagnostic products in the United States with St.
Jude, which included an investment by St. Jude.  If St. Jude fails to
successfully commercialize our diagnostic products, we may have to restructure
or significantly curtail our business.

We license portions of our product technology. In particular, our microcatheter
products rely on a license granted by Target Therapeutics. The termination of
any of these licenses would harm our business.

                                       20
<PAGE>

We rely on license agreements for some of our products technology. A license
from Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation,
as the technological basis for our microcatheter systems for mapping and
ablation. Under the Target license agreement, we have an exclusive license under
certain United States patents. The exclusive license from Target covers the
diagnosis and treatment of electrophysiological disorders in areas other than
the central nervous system. In addition, we have obtained a non-exclusive
license to use Target's technology, provided it has made a substantial
improvement of such technology, for the diagnosis or treatment of diseases of
the heart, other than by balloon angioplasty. The license will terminate upon
the expiration or invalidation of all claims under the underlying patents. In
addition, this license may terminate if we fail to comply with various
commercialization, sublicensing, insurance, royalty, product liability,
indemnification, non-competition and other obligations on us. The license can
also be terminated by either party upon a material breach that remains uncured
for thirty days or if either party ceases to be actively engaged in its present
business for a period of twelve months. The loss of our exclusive rights to the
Target-based microcatheter technology would harm our business.

We have also licensed a proprietary surface coating material used on certain of
our microcatheters. We cannot be certain that these licenses will continue to be
available to us or will be available to us on reasonable terms. The loss of or
inability to maintain any of these licenses could result in delays in commercial
shipments until equivalent technology could be developed internally or
identified, licensed and integrated. These delays would have a material adverse
effect on our business, financial condition and results of operations.

We may not be able to commercialize our products under development if they
infringe existing patents or patents that have not yet issued.


We have conducted searches to determine whether our patent applications
interfere with existing patents. Based upon these searches, we believe that our
patent applications and products do not interfere with existing patents.
However, we cannot be sure that relevant patents have not been issued that could
block our ability to obtain patents or commercialize our products.  Moreover,
since United States patent applications are not a matter of public record, a
patent application could currently be on file that would stand in our way of
obtaining an issued patent. In addition, the United States patent laws were
recently amended to exempt physicians, other health care professionals and
affiliated entities from infringement liability for medical and surgical
procedures performed on patients. The issuance of any potentially competing
patent could harm our business.

Although we have not received any letters from others threatening to enforce
intellectual property rights against us, we cannot be certain that we will not
become subject to patent infringement claims or litigation proceedings in the
USPTO to determine the priority of inventions, or oppositions to patent grants
in foreign countries. An adverse determination in litigation, interference or
opposition proceedings could subject us to significant liabilities to third
parties, require us to cease using such technology, or require us to license
disputed rights from

                                       21
<PAGE>

third parties. However, we are not certain that any licenses will be available
to us, or if available, on commercially reasonable terms. Our inability to
license any disputed technology could delay the commercialization of our
products and harm our business. Under our license with Target, we are not
indemnified against claims brought by third parties alleging infringement of
patent rights. Consequently, we could bear the liability resulting from such
claims. We cannot be certain that we will have the financial resources to
protect and defend our intellectual property, as such defense is often costly
and time-consuming. Our failure to protect our patent rights, trade secrets,
know-how or other intellectual property would harm our business.

If healthcare providers do not receive adequate reimbursement for procedures
using our products, the market may not accept our products and our revenues may
decline.


United States healthcare providers, including hospitals and physicians, that
purchase microcatheter products generally rely on third-party payors,
principally federal Medicare, state Medicaid and private health insurance plans,
to reimburse all or a part of the costs and fees associated with the procedures
performed using our products. The success of our products will depend upon the
ability of health care providers to obtain satisfactory reimbursement for
medical procedures in which our microcatheter systems and the novel procedures
in which they are used. If these health care providers are unable to obtain
reimbursement from third-party payors, the market may not accept our products
and our revenues may decline.

Third-party payors may deny reimbursement if they determine that (1) a
prescribed device has not received appropriate regulatory clearances or
approvals, (2) is not used in accordance with cost-effective treatment methods
as determined by the payor, or (3) is experimental, unnecessary or
inappropriate. If FDA clearance or approval is received, third-party
reimbursement would also depend upon decisions by the United States Health Care
Financing Administration for Medicare, as well as by individual health
maintenance organizations, private insurers and other payors. Reimbursement
systems in international markets vary significantly by country and by region
within some countries, and reimbursement approvals may be obtained on a country-
by-country basis. Many international markets have government managed health care
systems that control reimbursement for new devices and procedures.  In most
markets, there are private insurance systems as well as government-managed
systems. There can be no assurance that (1) reimbursement for our products will
be available domestically or internationally, (2) if available, that such
reimbursement will be available in sufficient amounts in the United States or in
international markets under either government or private reimbursement systems,
or (3) that physicians will support and advocate reimbursement for procedures
using our products. Failure by hospitals and other users of our products to
obtain reimbursement from third-party payors or changes in government and
private third-party payor policies toward reimbursement for procedures employing
our products would have a material adverse effect on our business, financial
condition and results of operations.  Moreover, we are unable to predict what
additional legislation or regulation, if any, relating to the heath care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on our business.

                                       22
<PAGE>

We cannot be certain that we will be able to manufacture our products in high
volumes at commercially reasonable costs.

We currently manufacture our microcatheter systems in limited quantities for
United States and international sales and for pre-clinical and clinical
trials. However, we have no experience manufacturing our products under
development in the amounts necessary to achieve significant commercial sales.
We currently believe that our manufacturing capacity will be sufficient
through 2001. We expect that if United States sales for the Pathfinder and
Revelation microcatheter systems increase, or if we receive FDA clearance or
approvals for other products, we may need to expend significant capital
resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. However, we could encounter problems related to:

     .  capacity constraints,
     .  production yields,
     .  quality control, and
     .  shortages of qualified personnel.

Such problems could affect our ability to adequately scale-up production of our
products and fulfill customer orders on a timely basis, which could harm our
business.

Our manufacturing facilities are subject to periodic inspection by regulatory
authorities. Our operations must undergo either QSR compliance inspections
conducted by the FDA or receive an FDA exemption from such compliance
inspections in order for us to be permitted to produce products for sale in the
United States. Our facilities and manufacturing processes are subject to
inspections from time to time by the FDA, State of California and European
Notified Bodies. We have demonstrated compliance with ISO 9001 (EN 46001)
quality standards, as well as compliance with 93/42/EEC, the Medical Device
Directive. We are in compliance with procedures to produce products for sale in
Europe. Any failure by Cardima to comply with QSR requirements or to maintain
our compliance with ISO 9001 (EN 46001) standards and 93/42/EEC will require us
to take corrective actions, such as modification of our policies and procedures.

In addition, we may be required to cease all or part of our operations for some
period of time until we can demonstrate that appropriate steps have been taken
to comply with QSR or ISO 9001 (EN 46001) standards. There can be no assurance
that we will be found in compliance with QSR by regulatory authorities, or that
we will maintain compliance with ISO 9001 (EN 46001) standards in future audits.
Our failure to comply with state or FDA QSR requirements, maintain compliance
with ISO 9001 (EN 46001) standards, or develop our manufacturing capability in
compliance with such standards would have a material adverse effect on our
business, financial condition and results of operations.

                                       23
<PAGE>

If our sole-source suppliers are unable to meet our demands, our business
results will suffer.

We purchase laminated tubing and hydrophilic coating, key components for some of
our products, from sole, single or limited source suppliers. For some of these
components, there are relatively few alternative sources of supply. Establishing
additional or replacement suppliers for any of the numerous components used in
our products, if required, may not be accomplished quickly and could involve
significant additional costs. Any supply interruption from vendors or failure to
obtain alternative vendors for any of the numerous components used to
manufacture our products would limit our ability to manufacture our products.
Any such limitation on our ability to manufacture our products would cause our
business results to suffer.

We have limited sales and limited experience in the sale, marketing and
distribution of our products. Our failure to establish an effective direct or
indirect sales and marketing force will cause our revenues to decline. We have
only limited experience marketing and selling our products in commercial
quantities. Expanding our marketing and sales capability to adequately support
sales in commercial quantities will require substantial effort and require
significant management and financial resources. Our failure to establish an
effective sales and marketing force will cause our revenues to decline. We have
terminated several distribution arrangements in Europe. Our ability to
effectively operate a remote sales force will require additional resources, time
and expense which could have a material adverse effect on our business,
financial condition and results of operations. We cannot be certain that we will
be able to build a European direct business, that it will be cost- effective or
that its efforts will be successful.  Failure to establish an adequate business
in Europe would harm our business.

Currently, sales and marketing of the Cardima Pathfinder, Pathfinder mini,
Revelation, Revelation Tx and Tracer microcatheter systems are primarily
conducted through a number of exclusive distributors in certain European
countries and Japan. We have sold only a limited number of Pathfinder,
Revelation, Revelation, Tx, and Tracer microcatheter systems through these
distributors. Because we do not have written agreements with certain of our
exclusive distributors, the terms of such arrangements, such as length of
arrangements and minimum purchase obligations, are uncertain. In addition, the
laws in certain international jurisdictions may make it difficult and costly for
us to terminate such distribution arrangements without specific written
termination terms. We cannot be certain that we will be able to enter into
written distribution agreements with these distributors or that these
distributors will be able to effectively market and sell our products in these
markets. In addition, we cannot assure you that we will be able to enter into
additional agreements with desired distributors on a timely basis or at all, or
that these distributors will devote adequate resources to selling our products.
Our failure to establish and maintain appropriate distribution relationships
would harm our business.

                                       24
<PAGE>

We are dependent upon our key personnel and will need to hire additional key
personnel in the future.

Our ability to operate successfully depends in significant part upon the
continued service of certain key scientific, technical, clinical, regulatory and
managerial personnel, and our continuing ability to attract and retain
additional highly qualified personnel in these areas. Competition for such
personnel is intense, especially in the San Francisco Bay Area. We cannot be
certain that we can retain such personnel or that we can attract or retain other
highly qualified scientific, technical, clinical, regulatory and managerial
personnel in the future, including key sales and marketing personnel.


We may face product liability claims related to the use or misuse of our
products.

We face an inherent business risk of product liability claims in the event that
the use or misuse of our products results in personal injury or death. We cannot
be certain, however, particularly after commercial introduction of our products,
that we will not experience losses due to product liability claims. We currently
have general liability insurance with coverage in the amount of $1.0 million per
occurrence, subject to a $2.0 million annual limitation. We have product
liability insurance with coverage in the amount of $5.0 million per occurrence,
subject to a $5.0 million annual limitation. We cannot be certain that coverage
will continue to be available to us on reasonable terms, if at all. In addition,
there can be no assurance that all of the activities encompassed within our
business are or will be covered under our policies. Although our microcatheter
products are labeled for single use only, we are aware that some physicians are
reusing such products. Moreover, despite labeling of our microcatheters for
diagnostic use only, we believe that physicians are using such mapping
microcatheters for ablation. Multiple use or "off-label" use of our
microcatheters could subject us to increased exposure to product liability
claims, which could have a material adverse effect on our business, financial
condition and results of operations. We may require additional product liability
coverage if we significantly expand commercialization of our products. Such
additional coverage is expensive, difficult to obtain and may not be available
in the future on acceptable terms, if at all. Any claims or series of claims
against us, regardless of their merit or eventual outcome, could have a material
adverse effect on our business, financial condition and results of operations.


Trading in our shares could be subject to extreme price fluctuations which could
adversely affect your investment.

Prior to June 1997, there was no public market for our common stock. The market
price of our common stock has fluctuated widely in the past and is likely to
fluctuate in the future. The stock prices of medical device companies over the
last few years have been volatile and difficult to predict.

                                       25
<PAGE>

We do not intend to pay cash dividends on our stock.

We have never paid cash dividends on our capital stock and do not anticipate
paying cash dividends in the foreseeable future. Instead, we intend to retain
future earnings for reinvestment in our business. Our credit agreement requires
the approval of our bank to declare or pay cash dividends.


Our stock may become subject to penny stock rules, which may make it more
difficult for you to sell your shares.

We are currently listed on the Nasdaq Smallcap Market. If we are delisted from
the Nasdaq Smallcap Market, our common stock will be considered a penny stock
under regulations of the Securities and Exchange Commission and would therefore
be subject to rules that impose additional sales practice requirements on
broker-dealers who sell our securities. The additional burdens imposed upon
broker-dealers by these requirements could discourage broker-dealers from
effecting transactions in our common stock, which could severely limit the
market liquidity of the common stock and your ability to sell our securities in
the secondary market. We cannot assure you that we will be able to maintain our
listing on the Nasdaq Smallcap Market.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since the Company did not have any short-term investments or a variable interest
rate line of credit obligation as of September 30, 2000, the Company does not
have any material quantitative or qualitative disclosures about market risk.

                                       26
<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings

          None.

ITEM 2.   Changes in Securities and Use of Proceeds

          None.

ITEM 3.   Defaults Upon Senior Securities

          None.

ITEM 4.   Submission of Matters to a Vote of Security Holders

          None.

ITEM 5.   Other Information

          None.

ITEM 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibits - See Index to Exhibits.
          (b)  No reports on Form 8-K were filed in the quarter ended September
               30, 2000.

                                       27
<PAGE>

                                 CARDIMA, INC.

                                  SIGNATURES

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


DATE:   November 14, 2000            CARDIMA, INC.

                                     /s/ GABRIEL B. VEGH
                                     -----------------------------------------
                                     GABRIEL B. VEGH
                                     President, Chief Executive Officer and
                                     Director


                                     /s/ RONALD E. BOURQUIN
                                     -----------------------------------------
                                     RONALD E. BOURQUIN
                                     Vice President, Chief Financial Officer
                                     and Secretary

                                       28
<PAGE>

                                 CARDIMA, INC.

                        INDEX TO EXHIBITS FOR FORM 10-Q

                     FOR QUARTER ENDED SEPTEMBER 30, 2000


EXHIBIT NO.    EXHIBIT DESCRIPTION
-----------    -------------------

               Executive Agreements:

10.30          Allan L. Abati, PhD

10.31          Victor J. Barajas

10.32          Sandra A. Berg

10.33          Ronald Bourquin

10.34          Eric K.Y. Chan, PhD

10.35          Phillip Radlick, PhD

10.36          Gabriel B. Vegh

10.37          William K. Wheeler

27.1           Financial Data Schedule

                                       29