<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 March 31, 1998

                                       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 April 30, 1998, there were 8,174,414 shares of Registrant's Common Stock
outstanding.

                                       1
<PAGE>
 
                                 CARDIMA, INC.

                                     INDEX
<TABLE>
<S>                                                                                           <C>
PART I.  FINANCIAL INFORMATION................................................................ 3

 Item 1.  Financial Statements................................................................ 3
  Balance Sheets as of March 31, 1998 and December 31, 1997................................... 3
  Statements of Operations for the three months ended March 31, 1998 and 1997................. 4
  Statements of Cash Flows for the three months ended March 31, 1998 and 1997................. 5
  Notes to financial statements............................................................... 6
 Item 2.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations............................................................... 9

PART II. OTHER INFORMATION....................................................................24

 Item 1. Legal Proceedings....................................................................24
 Item 2. Changes in Securities and Use of Proceeds............................................24
 Item 3. Defaults Upon Senior Securities......................................................24
 Item 4. Submission of Matters to a Vote of Security Holders..................................24
 Item 5. Other Information....................................................................24
 Item 6. Exhibits and Reports on Form 8-K.....................................................24

SIGNATURES....................................................................................25

INDEX TO EXHIBITS FOR FORM 10-Q...............................................................26

</TABLE>

                                       2
<PAGE>
 
PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

                                 CARDIMA, INC.

                                BALANCE SHEETS
                      (In thousands except share amounts)
<TABLE> 
<CAPTION> 
                                                                                                       (1)
                                                                                        March 31,  December 31,
                                                                                          1998        1997
                                                                                       ----------- -----------
                                                                                       (unaudited)
<S>                                                                                     <C>         <C>  
ASSETS
Current Assets:
   Cash and cash equivalents                                                            $  8,118    $  8,578
   Short-term investments                                                                  1,236       4,270
   Accounts receivable, net of allowances for doubtful accounts
       of $42 at March 31, 1998 and $40 at December 31, 1997                                 351         268
   Inventories                                                                               599         532
   Other current assets                                                                      222         261
                                                                                        --------    --------

       Total current assets                                                               10,526      13,909

Property and equipment, net                                                                2,530       2,488
Restricted cash                                                                              170         192
Other assets                                                                               1,117       1,085
                                                                                        --------    --------

Total assets                                                                            $ 14,343    $ 17,674
                                                                                        ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                     $    885    $    898
   Accrued compensation                                                                      944         753
   Other current liabilities                                                                  10          55
   Notes payable                                                                              -            7
   Capital lease obligation - current portion                                                609         587
                                                                                        --------    --------

       Total current liabilities                                                           2,448       2,300

Deferred rent                                                                                 78          90
Capital lease obligation - noncurrent portion                                              1,011         840
Commitments
Stockholders' equity
   Common stock, $.001 par value; 25,000,000 shares authorized, 8,170,729 shares issued
   and outstanding at March 31, 1998, 8,103,875 at December 31, 1997; at amount paid in   45,744      45,597
   Deferred compensation                                                                    (667)       (731)
   Accumulated deficit                                                                   (34,271)    (30,422)
                                                                                        --------    --------
       Total stockholders' equity                                                         10,806      14,444
                                                                                        --------    --------
Total liabilities and stockholders' equity                                              $ 14,343    $ 17,674
                                                                                        ========    ========

</TABLE> 

 (1) The information in this column was derived from the Company's audited
     financial statements as of December 31, 1997.

     See accompanying notes to financial statements.

                                       3

<PAGE>
 

                                 CARDIMA, INC.

                           STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                             Three months ended
                                                                   March 31,
                                                             --------- ---------
                                                               1998      1997
                                                             --------- ---------
<S>                                                          <C>       <C>
Net sales                                                     $    501    $  217
Cost of goods sold                                                 748       374
                                                              --------  --------
                                                                        
   Gross profit                                                   (247)     (157)
                                                                        
Operating expenses:                                                     
   Research and development                                      1,663       810
   Selling, general and administrative                           2,047     1,330
                                                              --------  --------
                                                                        
      Total operating expenses                                   3,710     2,140
                                                              --------  --------
                                                                        
Operating loss                                                  (3,957)   (2,297)
                                                                        
Interest and other income                                          144        25
Interest expense                                                   (36)      (53)
                                                              --------  --------

Net loss                                                      $ (3,849) $ (2,325)
                                                              ========  ========

Basic and diluted net loss per share                          $  (0.47)
                                                              ========

Shares used in computing basic and diluted net loss per share    8,137
                                                              ========

Pro forma net loss per share                                            $  (0.36)
                                                                        ========

Shares used in computing pro forma net loss per share                      6,433
                                                                        ========
</TABLE> 

                See accompanying notes to financial statements

                                       4

<PAGE>
 
                                 CARDIMA, INC.

                           STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                      Three Months ended
                                                                           March 31,
                                                                      --------------------
                                                                        1998        1997
                                                                      --------    --------
<S>                                                                   <C>         <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                            ($3,849)    ($2,325)

  Adjustments to reconcile net loss to net cash provided by operations:
    Depreciation and amortization                                         192         146
    Amortization of deferred compensation                                  64          38
    Loss on disposal of assets                                              5           2
  Changes in operating assets and liabilities:
    Accounts receivable                                                   (83)       (113)
    Inventories                                                           (67)       (136)
    Other current assets                                                   39        (136)
    Restricted cash                                                        22          20
    Notes receivable                                                       (5)         -
    Other assets                                                          (44)       (180)
    Accounts payable                                                      (13)       (735)
    Accrued compensation                                                  191          84
    Other current liabilities                                             (45)          8
    Deferred rent                                                         (12)        (12)
                                                                      -------     -------
      Net cash used in operating activities                            (3,605)     (3,339)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments                                    (507)         -
  Maturities and sales of short-term investments                        3,541          -
  Capital expenditures                                                   (192)       (243)
                                                                      -------     -------
    Net cash used in investing activities                               2,842        (243)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments under capital leases                                (160)        (83)
  Proceeds from issuance of bridge loans                                   -        1,610
  Net proceeds from issuance of preferred stock                            -       10,158
  Payments under notes payable                                             (7)         -
  Net proceeds from sale of common stock                                  147          -
  Proceeds from sale/leaseback of capital equipment                       323          -
                                                                      -------     -------
    Net cash provided by financing activities                             303      11,685
                                                                      -------     -------

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                     (460)      8,103

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          8,578       2,992
                                                                      -------     -------

CASH AND CASH EQUIVALENTS, END OF PERIOD                               $8,118     $11,095
                                                                      =======     =======

</TABLE> 
                                       5
<PAGE>
 
                                 CARDIMA, INC.

                         NOTES TO FINANCIAL STATEMENTS
                                 MARCH 31, 1998
                                  (Unaudited)

1.   BASIS OF PRESENTATION

The accompanying unaudited 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 of normal recurring
adjustments) considered necessary for a fair presentation have been included.

The operating results for the three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1998.  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, 1997.

2.   BALANCE SHEET COMPONENTS

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

 
<TABLE>
<CAPTION>
                                                        March 31,                     December 31,
                                                           1998                          1997/1/
                                                 --------------------           --------------------
<S>                                                 <C>                            <C>
Inventories:
       Raw materials                                     $   225                        $   209
       Work-in-process                                       128                            119
       Finished goods                                        246                            204
                                                 --------------------           -------------------- 
                                                         $   599                        $   532
                                                 ====================           ====================
 
Property and equipment:
       Equipment                                           3,929                          3,715
       Leasehold improvements                                 99                             99
                                                 --------------------           -------------------- 
                                                         $ 4,028                        $ 3,814
       Less accumulated depreciation                      (1,498)                        (1,326)
                                                 --------------------           --------------------
                                                         $ 2,530                        $ 2,488
                                                 ====================           ====================
</TABLE>
-----------------------
/1/ The information in this column was derived from the Company's audited
    financial statements as of December 31, 1997.

                                       6
<PAGE>
 
                   NOTES TO FINANCIAL STATEMENTS (continued)
                                  (Unaudited)

3.   INITIAL PUBLIC OFFERING

In June 1997, the Company completed an initial public offering of 2,275,000
shares of Common Stock at an initial price to the public of $7.00 per share,
resulting in net proceeds to the Company (after deducting underwriting discounts
and commissions and offering expenses) of approximately $13.6 million.

4.   NET LOSS PER SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," ("SFAS 128").  SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share.  Unlike primary earnings per share, basic earnings per share excludes any
dilutive effect of options, warrants and convertible securities.  Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.  All earnings per share amounts for all periods have been
restated to conform to the SFAS 128 requirements.  Effective February 3, 1998,
Staff Accounting Bulletin No. 98 ("SAB 98") was issued and amends the existing
SEC staff guidance primarily to give effect to SFAS 128.  Topic 4.D of SAB 98
essentially eliminates the cheap stock (convertible preferred stock, redeemable
convertible preferred stock, common stock and common equivalent shares issued by
the Company at prices below the initial public offering price during the twelve-
month period prior to the offering) calculation from an initial public offering.

The Company has excluded all convertible debt, convertible preferred stock,
warrants and employee stock options from the computation of basic and diluted
earnings per share because all such securities are anti-dilutive for all periods
presented.

The following table sets forth the computation of basic and diluted earnings per
share (in thousands except for per share data):

<TABLE>
<CAPTION>
                                                                        Three Months Ended March 31,
                                                                           1998                   1997
                                                                   -----------------      -----------------
<S>                                                                <C>                      <C>     
Net loss                                                                      $3,849                $ 2,325
                                                                   =================      =================
   Weighted average shares outstanding........................                 8,137                     75
                                                                   -----------------      -----------------
Shares used to compute basic and diluted net loss per share...                 8,137                     75
                                                                   -----------------      -----------------
Basic and diluted net loss per share..........................                $(0.47)               $(31.00)
                                                                   =================      =================
</TABLE>

Pro forma net loss per share for 1998 and 1997 has been computed as described
above and also gives effect, pursuant to SEC staff policy, to the conversion of
convertible preferred shares not included above that were converted upon
completion of the Company's initial public offering (using the "if converted"
method) from the original date of issuance.

                                       7
<PAGE>
 
Pro forma basic and diluted net loss per share information is as follows (in
thousands except for per share data):

<TABLE>
<CAPTION>
                                                                                    Three Months Ended
                                                                                      March 31, 1997
                                                                                    ------------------  
 <S>                                                                                <C>                     
Net loss.......................................................................           $2,325
                                                                                    ==================
Shares used in computing basic and diluted net loss per share..................               75
Adjusted to reflect assumed conversion of preferred stock at the date of       
 issuance......................................................................            3,370
                                                                                    ------------------
Shares used in computing pro forma basic and diluted loss per share............            3,445
                                                                                    ==================
Pro forma basic and diluted net loss per share.................................           $(0.67)
                                                                                    ==================
</TABLE>

                                       8
<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
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 "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

The Company

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 $2.8 million from 
inception to March 31, 1998, which until January 1997 were primarily in Europe
and Japan, from sales of the Cardima Pathfinder and Tracer microcatheter systems
for diagnosing Ventricular Tachycardia (VT) and the Revelation microcatheter
system for diagnosing Atrial Fibrillation (AF), as well as ancillary products
such as the Venaport guiding catheters. In January 1997, the Company received a
510(k) clearance in the United States and began to market and sell the Cardima
Pathfinder system for diagnosing VT. As a result, the Company has derived a
majority of its revenues in 1997 in the United States from sales of the Cardima
Pathfinder for diagnosis of tachycardias. To date, the Company's international
sales have been made primarily through distributors who sell the Company's
products to physicians and hospitals.

The Company has obtained the right to affix the CE mark to its Cardima
Pathfinder, Tracer and Cardima Pathfinder 3mm microcatheter systems, permitting
the Company to market these products in the member countries of the European 
Union ("EU"). The Company received 510(k) clearance for the Revelation
microcatheter for mapping of AF in November 1997 and intends to seek 510(k)
clearance for its other diagnostic products, including the Cardima Pathfinder
Mini and Tracer products. 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 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 Cardima Pathfinder AFTC (AF
Temperature Control) 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.  The Company expects that its operating losses
will continue for the foreseeable future as the

                                       9
<PAGE>
 
Company continues to invest substantial resources in product development,
preclinical and clinical trials, obtaining regulatory approval, sales and
marketing and manufacturing.

RESULTS OF OPERATIONS - THREE MONTHS ENDED 1998 AND 1997

Net Sales

Net sales for the quarter ended March 31, 1998 increased 131% to $501,000 from
$217,000 in the same period in 1997. The increase is primarily due to U.S. sales
of the Cardima Pathfinder line of microcatheters for diagnosis of VT and the
Revelation line of microcatheters for diagnosis of AF following FDA clearance in
January and November 1997, respectively.  U.S. sales for the quarter ended March
31, 1998 increased 220% to $378,000 from $118,000 in the same period in 1997.

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 March 31, 1998 increased 100% to $748,000 from
$374,000 in the same period in 1997. The increase is due primarily to the large
increase in sales volume and associated manufacturing staff additions to meet
the demands to support sales efforts and clinical trials.

Research and Development Expenses

Research and development expenses for the quarter ended March 31, 1998 increased
105% to $1,663,000 from $810,000 in the same period in 1997. The increase is due
primarily to staff additions and associated expenses in research and development
and clinical and regulatory areas incurred as the Company increased human
resources to meet development program goals and increased expenses for clinical
trials in both Europe and the U.S.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended March 31,
1998 increased 54% to $2,047,000 from $1,330,000 in the same period in 1997.
Selling expenses for the quarter ended March 31, 1998 increased 97% to $940,000
from $476,000 in the same period in 1997.  The increase is due primarily to
costs associated with the establishment and expansion of the Company's U.S.
sales force which occurred in fourth quarter 1996 and third quarter 1997,
respectively.  The Company has incurred expenses relating to the ongoing
establishment of a direct sales force in several major markets in Europe and the
commencement of clinical trials, which requires training of sales and clinical
specialists.  General and administrative expenses for the quarter ended March
31, 1998 increased 44% to $666,000 from $463,000 in the same period in 1997.
The increase is due primarily to additional staff and expenses related to the
requirements of a public company.  Marketing expenses for the quarter ended
March 31, 1998 increased 13% to $441,000 from $392,000 in the same period in
1997.  The increase is due primarily to development of additional marketing
materials and programs to meet new product introductions.


                                       10
<PAGE>
 
Interest and Other Income

Interest and other income for the quarter ended March 31, 1998 increased to
$144,000 from $25,000 in the same period in 1997. The increase is due primarily
to larger cash and cash equivalent balances as a result of the Company's initial
public offering.

Interest Expense

Interest expense for the quarter ended March 31, 1998 decreased to $36,000 from
$53,000 in the same period in 1997. The decrease is due primarily to lower
borrowing levels for purchases of capital equipment.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date principally through private
placements of equity securities, which have yielded net proceeds of $32.1
million as of March 31, 1998, together with interest income on such proceeds, an
initial public offering of Common Stock in June 1997, which yielded net proceeds
of approximately $13.6 million, and equipment leases, which have totaled $2.1
million for the acquisition of certain capital equipment.  As of March 31, 1998,
the Company had approximately $9.4 million in cash and cash equivalents.

Net cash used in operating activities was approximately $3.6 million and $3.3
million for the three months ended March 31, 1998 and 1997, respectively,
resulting primarily from operating losses incurred during such periods.  Net
cash provided by investing activities was approximately $2.8 million for the
three months ended March 31, 1998, which was attributable primarily to
maturities and sales of short-term investments.   Net cash used was
approximately $243,000 for the three months ended March 31, 1997, which was
attributable primarily to capital expenditures.  Net cash provided by financing
activities was approximately $303,000 and $11.7 million for the three months
ended March 31, 1998 and 1997, respectively, resulting primarily from the
Company's financing equipment through its established lease line and the
Company's sale of equity securities in private placement transactions.

In February 1998, the Company entered into an equipment lease that permits the
Company up to $1,500,000 of financing for the purchase of office and
manufacturing equipment, software and custom-built equipment.  In March 1998,
the Company secured a commitment for a $3,000,000 line of credit which may be
used for general working capital purposes.  The availability of this line of
credit is subject to the satisfaction of a number of conditions, including the
completion by the proposed lender of its legal due diligence and the negotiation
and execution of definitive agreements.  There can be no assurance that these
conditions will be satisfied on a timely basis, if at all.  The Company's future
liquidity and capital requirements will depend upon numerous factors, including
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, sales and marketing
activities, the extent to which the Company's products gain market acceptance,
and competitive developments.  The Company believes that available cash, a line
of credit and lease lines will be sufficient to meet the Company's operating
expenses and capital requirements  through early 1999.  There can be no
assurance, however, that the Company will not require additional financing
during that period, or that if required, 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

                                       11
<PAGE>
 
arrangements. There can be no assurance that such additional funding, if needed,
will be available on terms acceptable to the Company, if at all. Furthermore,
any additional equity financing may 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 would have
a material adverse effect on the Company's business, financial condition and
results of operations.

FACTORS AFFECTING FUTURE RESULTS

History of Losses and Expectation of Substantial Future Losses

Since inception, the Company has experienced losses and expects to experience
substantial net losses for the foreseeable future.  To date, sales of the
Company's microcatheter systems have been limited.  The Company had net losses
of approximately $12.3 million and $7.8 million for the Company's fiscal years
ended 1997 and 1996, respectively, and $3.9 million for the three months ended
March 31, 1998.  As of March 31, 1998, the Company had an accumulated deficit of
approximately $34.3 million.  The Company expects to incur substantial net
operating losses for the foreseeable future as a result of research and product
development, clinical trials, manufacturing, sales, marketing and other expenses
expected to be incurred as the Company further develops, seeks regulatory
approvals, tests and distributes its microcatheter systems.  The Company's
limited operating history makes accurate prediction of future operating results
difficult or impossible.  There can be no assurance that the Company will ever
generate substantial revenue or achieve profitability.  Failure by the Company
to generate substantial revenues would have a material adverse effect on the
Company's business, financial condition and results of operations.

Future Additional Capital Requirements;  No Assurance Future Capital Will be
Available

The Company's future liquidity and capital requirements will depend on numerous
factors, including the progress of the Company's clinical research and product
development programs; the receipt of, and the time required to obtain,
regulatory clearances and approvals; the costs and timing of expansion of
product development, manufacturing and sales and marketing activities; the
extent to which the Company's products gain market acceptance; competitive
developments; and other factors.  In February 1998, the Company entered into an
equipment lease agreement that permits the Company to finance up to $1,500,000
of office and manufacturing equipment, software and custom built equipment.  In
March 1998, the Company secured a commitment letter for a $3,000,000 line of
credit which may be used for general working capital purposes.  The availability
of this line of credit is subject to the satisfaction of a number of conditions,
including the completion by the proposed lender of its legal due diligence and
the negotiation and execution of definitive agreements.  There can be no
assurance that these conditions will be satisfied on a timely basis, if at all.
The Company currently expects that, without additional funding, the Company's
current cash reserves will be depleted in early 1999.  In addition, if
unforeseen difficulties arise in the course of developing its products,
performing clinical trials, obtaining necessary regulatory clearances and
approvals or other aspects of the Company's business, the Company may be
required to invest greater-than-anticipated funds.  As a consequence, the
Company will be required to raise additional funds through public or private
debt or equity financings, collaborative relationships, bank facilities or other
arrangements.  There can be no assurance that, if additional financing is
needed, it will be available

                                       12
<PAGE>
 
on terms acceptable to the Company, if at all. Any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants.

No Assurance of Safety and Effectiveness; Early Stage of Product Development

To date, the Company has completed two clinical trials and has received two
510(k) pre-market clearances from the FDA with respect to its Cardima Pathfinder
microcatheter system for venous mapping of VT and Revelation microcatheter
system for mapping and pacing of the atria. The Company is currently developing
additional versions of its microcatheter systems for mapping AF and VT. Failure
to obtain clearances for the Company's other diagnostic products under
development on a timely basis would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company is in the early stage of developing, testing and obtaining
regulatory approval for its microcatheter systems designed for ablation of AF
and VT.  The Company is currently developing the Cardima Pathfinder AFTC
microcatheter system for ablation of AF and the Therastream microcatheter system
for ablation of VT.  The Company is required to obtain an IDE from the FDA prior
to conducting human clinical trials of its microcatheter systems for ablation.
The Company filed an IDE for clinical testing of the Revelation microcatheter
system for the mapping and ablation of AF in January 1997.  The Company
completed the mapping phase of this feasibility study in August 1997 and began
treating the first patient in the ablation phase with the Cardima Pathfinder
AFTC microcatheter system in March 1998.  The Company currently expects to file
an IDE to begin clinical testing of its Therastream microcatheter system for VT
ablation in 1998.  The Company must complete these clinical trials and a pivotal
trial, if initiated, prior to the filing of a PMA, and must receive PMA approval
prior to marketing such products for ablation in the United States.  Clinical
trials of the Company's microcatheter systems will require substantial financial
and management resources of the Company and the completion of such trials will
take several years.  There can be no assurance that necessary IDEs will be
granted by the FDA, that human clinical trials, if initiated, will be completed
or that these clinical studies will validate the results of the Company's pre-
clinical studies or demonstrate that such 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.  The failure of the Company to initiate and complete clinical
trials, demonstrate product safety and clinical effectiveness, or obtain
regulatory approval for the use of the Company's microcatheter systems for the
ablation of AF or VT would have a material adverse effect on the Company's
business, financial condition and results of operations.

Uncertainty of Product and Procedure Acceptance

The Company's microcatheter systems represent a novel approach to the mapping
and ablation of AF and VT.  Acceptance of the Company's products and procedures
by physicians, patients and health care payors will be necessary in order for
the Company to be successful.  The Company's microcatheter systems for the
mapping and ablation of AF and VT are new technologies that must compete with
more established treatments such as drugs, external electrical cardioversion and
defibrillation, implantable defibrillators, purposeful destruction of the Atrio-
Ventricular ("AV") node followed by implantation of a pacemaker, and open heart
surgery.  It is likely that physicians will not recommend the use of the
Company's microcatheter systems unless they conclude, based on clinical data and
other factors, that these systems provide a safe, effective and cost-efficient
alternative to established or emerging approaches to the mapping and ablation of
AF and VT.  Except for the Cardima Pathfinder microcatheter system for

                                       13
<PAGE>
 
mapping VT and the Revelation microcatheter system for mapping AF, none of the
products currently being developed by Cardima for the mapping and ablation of AF
and VT has obtained regulatory clearance or approval in the United States. Even
if the Company's products are successfully developed and the required regulatory
clearance or approval is obtained, there can be no assurance that such products
and the associated procedures will ultimately gain any significant degree of
market acceptance. Since the Company's sole product focus is to design and
market microcatheter systems to map and ablate AF and VT, the failure to
successfully commercialize these systems would have a material and adverse
affect on the Company's business, financial condition and results of operations.

Risks Regarding Products and Procedures Designed for Mapping and Ablation of AF

Cardima is developing its Cardima Pathfinder AFTC microcatheter system for
mapping and ablation of AF.  Currently, there is considerable clinical debate
about the need for mapping AF prior to ablation, and no mapping is performed
during the open heart surgical maze procedure.  However, the Company believes
that mapping prior to ablation may be useful to identify different segments of
the AF population, each of which could require slightly different mapping and
ablation procedures.  For example, some electrophysiologists believe most AF
patients will need to be mapped and ablated in both the left and right atria,
while others believe only the right atrial intervention is warranted.  Market
acceptance of this product for mapping will depend largely on a determination
that there is a clinical need for diagnostic mapping prior to ablation of AF.
The Cardima Pathfinder AFTC ablation procedure requires the use of RF energy in
the right and left atria to produce lesions.  In general, the use of RF energy
in the left atrium has the potential to create blood clots, which could travel
through the vasculature to the brain and may cause a stroke.  Consequently,
physicians may not recommend this procedure, in which event the Cardima
Pathfinder AFTC would be unlikely to gain market acceptance.  The failure of the
Company to complete development of the Cardima Pathfinder AFTC or to gain
regulatory approval with respect to the Pathfinder AFTC for ablation of AF,
demonstrate safety, clinical effectiveness or cost effectiveness, gain wide
market acceptance or successfully commercialize the Cardima Pathfinder AF for
the mapping and ablation of AF would have a material adverse effect on the
Company's business, financial condition and results of operations.

Risks Regarding Products and Procedures Designed for Mapping and Ablation of VT

The Cardima Pathfinder and Tracer microcatheter systems for VT mapping are
designed for use inside the vasculature of the heart wall and to provide access
to the vasculature of the heart through the venous system.  To achieve market
acceptance, the Company will need to demonstrate the safety, clinical
effectiveness and cost effectiveness of the Cardima Pathfinder and Tracer
microcatheter systems for VT mapping, of which there can be no assurance.  In
addition, electrophysiologists will need to be specially trained to perform this
procedure, which may further impede market acceptance.  There can be no
assurance that the Cardima Pathfinder or Tracer microcatheter systems for VT
mapping will ever achieve market acceptance, or in the case of the Tracer
microcatheter system, be cleared for marketing by the FDA, or be successfully
commercialized in the United States or internationally.  The inability of the
Company to gain wide market acceptance or successfully commercialize the Cardima
Pathfinder and Tracer microcatheter systems for VT mapping would have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company's Therastream microcatheter system is being developed for ablation
of VT using RF energy, which could cause damage to the arteries and veins of the
heart, potentially leading to myocardial

                                       14
<PAGE>
 
infarction and even death. Consequently, physicians may not recommend this
procedure, in which event the Therastream would be unlikely to gain market
acceptance. Failure of the Company to gain market acceptance or successfully
commercialize the Therastream would have a material adverse effect on the
Company's business, financial condition and results of operations.

Fluctuations in Operating Results

The Company's results of operations may fluctuate significantly from quarter to
quarter or year to year depending upon a number of factors, including actions
relating to regulatory matters, progress of pre-clinical and clinical trials,
the extent to which the Company's products gain market acceptance, the scale-up
of manufacturing capabilities, the expansion of sales and marketing activities,
competition, the timing of new product introductions by the Company or its
competitors and the ability of the Company to market its products successfully
in the United States and internationally.  Although the Cardima Pathfinder and
Tracer microcatheter systems are labeled for single use only, the Company is
aware that some physicians in international markets are reusing these products.
Reuse of the Company's microcatheter systems would reduce revenues from product
sales and could have a material adverse effect on future performance and
periodic operating results.  Due to such fluctuations in operating results,
period to period comparisons of the Company's revenues and operating results are
not necessarily meaningful and should not be relied upon as indicators of likely
future performance or annual operating results.

No Assurance of Obtaining Required Regulatory Approvals; Government Regulation

The pre-clinical and clinical testing, manufacturing, labeling, distribution and
promotion of the Company's products are subject to extensive and rigorous
government regulation in the United States and other countries.  Noncompliance
with applicable requirements can result in enforcement actions by the FDA
including, among other things, fines, injunctions, civil penalties, recall or
seizure of products, refusal of the FDA to grant pre-market clearances or
approvals, withdrawal of marketing approvals and criminal prosecution.  Any such
action would have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company is prohibited from marketing its products in the United States
unless it obtains 510(k) clearance or PMA approval from the FDA.  The Company
believes that it usually takes up to 12 months from submission to obtain 510(k)
clearance, but that it can take longer.  The Cardima Pathfinder and Revelation
microcatheter systems for mapping VT and AF, respectively, have each received
510(k) clearance.  The Company believes that its other mapping products will
also be eligible for 510(k) clearance, and has submitted 510(k) pre-market
notifications for the Cardima Pathfinder Mini and Tracer products.  These
submissions may need to include clinical trial data.  There can be no assurance,
however, that any of these products will receive 510(k) clearance in a timely
fashion, if at all.  Delays in market introduction resulting from the 510(k)
clearance process could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company will be required to seek PMA approval for its ablation products,
including the Cardima Pathfinder AFTC and the Therastream microcatheters for
ablation.  The process of obtaining PMA approval is much more costly, lengthy
and uncertain than the 510(k) clearance process.  The Company believes that the
FDA's review of a PMA application after filing can last from one to three years,
or even longer.  In order to prepare a PMA application, the Company will be
required to complete clinical trials to demonstrate the safety and effectiveness
of these products.  To date, the Company has not conducted any

                                       15
<PAGE>
 
human clinical studies using its microcatheter systems for the ablation of AF or
VT. The Company submitted an IDE for the Revelation microcatheter system for
mapping and ablation of AF in January 1997, and completed a mapping study at
Stanford University Hospital and Massachusetts General Hospital in September
1997. In addition, the Company received conditional IDE approval in January 1998
and full approval in March 1998 for a feasibility clinical study for AF ablation
using the Cardima Pathfinder AFTC microcatheter system. The Company expects to
file an additional IDE and begin its clinical trials for the Therastream
microcatheter system in the second half of 1998. There can be no assurance that
any clinical study that the Company proposes will be permitted by the FDA, will
be completed or, if completed, will provide data and information that supports
additional clinical investigations of the type necessary to obtain PMA approval.
The Company expects that a PMA application will not be submitted for at least
one year, if at all. No assurance can be given that the Company will ever be
able to obtain PMA approval for any of its ablation products. Failure of the
Company to obtain timely PMA approval would have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company is subject to periodic inspection by the FDA and the California
Department of Health Services, and must comply with various other regulatory
requirements that apply to medical devices marketed in the United States,
including labeling regulations, the Quality System Regulation ("QSR") (which
includes elaborate testing, control, documentation and other quality assurance
procedures), the Medical Device Reporting regulation (which requires that a
manufacturer report to the FDA certain types of adverse events involving its
products), and the FDA's prohibitions against promoting approved products for
unapproved ("off-label") uses.  The Company's failure to comply with applicable
regulatory requirements could result in enforcement action by the FDA, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

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.  The Company has obtained the requisite
approvals by means of the CE mark and TGA approval to sell the Cardima
Pathfinder, Cardima Pathfinder Mini, Revelation and Tracer for mapping in the
European Union ("EU") and Australia, respectively, to sell the Cardima
Pathfinder, Cardima Pathfinder Mini , Cardima Pathfinder 3mm  and Tracer in
Japan and to sell the Cardima Pathfinder, Tracer and Venaport in Canada.  The
Company has initiated clinical trials in the EU for its AF ablation products,
and will use this data to support its application for CE mark.  There can be no
assurance the Company will be successful in obtaining such approvals.  Failure
to receive approval to affix the CE mark would prohibit the Company from selling
these products in member countries of the EU, and would require significant
delays in obtaining individual country approvals.  No assurance can be given
that such approvals will ever be obtained.  In such event, the Company's
business, financial condition and results of operations would be materially and
adversely affected.

Rapid Technological Change; Significant Competition

The medical device industry is characterized by rapid and significant
technological change.  Accordingly, the Company's success will depend in part on
its ability to respond quickly to medical discoveries and technological changes,
including changes in the capital equipment with which the Company's
microcatheter systems are designed to be compatible.  Product development
involves a high degree of risk, and there can be no assurance that the Company's
new product development efforts will result in any

                                       16
<PAGE>
 
commercially successful products. Failure by the Company to respond to and
develop new technologies could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's microcatheter systems for the mapping and ablation of AF and VT
are new technologies that must compete with more established treatments such as
drugs, external electrical cardioversion and defibrillation, implantable
defibrillators, purposeful destruction of the AV node followed by implantation
of a pacemaker, and open heart surgery.  In the market for cardiac mapping and
ablation devices, the Company believes that the primary competitive factors are
safety, effectiveness, ease of use and overall system cost.  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.
Several of the Company's competitors are currently marketing and selling
catheters in the United States and internationally that map and ablate a type of
arrhythmia known as supraventricular tachycardia ("SVT").  In addition, several
competitors are also developing new approaches and new products for the mapping
and ablation of AF and VT.  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.  In addition, companies are
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 new products prove
to be safe and effective, the Company's products could be rendered
noncompetitive or obsolete, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

Many of the Company's competitors have an established presence in the field of
interventional cardiology and electrophysiology, including 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 the Company,
including larger research and development staffs and more 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,
including 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, including Guidant
Corporation, Medtronic, Inc., and Ventritex, Inc., a subsidiary of St. Jude,
Inc., the leading manufacturers of implantable defibrillators.  There can be no
assurance that the Company will succeed in developing and marketing technologies
and products that are more clinically effective and cost-effective than the more
established treatments or the new approaches and products being developed and
marketed by its competitors.  Furthermore, there can be no assurance the Company
will succeed in developing new technologies and products that are available
prior to its competitors' products.  Failure of the Company to demonstrate the
competitive advantages of its products would have a material adverse effect on
the Company's business, financial condition and results of operations.

Dependence on Patents and Proprietary and Licensed Technology; Risk of Patent
Infringement

The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets,
trademarks, copyrights and to operate without infringing or violating the
proprietary rights of others.  The Company's strategy is to actively pursue
patent protection

                                       17
<PAGE>
 
in the United States and foreign jurisdictions for technology that it believes
to be proprietary and that offers a potential competitive advantage for its
products. The patent positions of medical device companies, including the
Company, are uncertain and involve complex and evolving legal and factual
questions. The coverage sought in a patent application either can be denied or
significantly reduced before or after the patent is issued. 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 Company cannot
predict whether this amendment might have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures.

The Company relies on certain license agreements through which it licenses
certain technology from others, including technology of Target Therapeutics,
Inc., a subsidiary of Boston Scientific Corporation, ("Target") that is
integrated into the Company's microcatheter systems for mapping and ablation.
Under a license agreement with Target (the "Target License Agreement"), the
Company has an exclusive license (the "Target License") under certain issued
United States patents.  The Target License covers the diagnosis and treatment of
electrophysiological disorders in areas other than the central nervous system.
The Target License will terminate upon the expiration or invalidation of all
claims under the underlying patents.  In addition, the Company has 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 using balloon angioplasty.  Under the Target
License Agreement, Cardima has granted Target an exclusive, royalty-free license
to use any technology developed by Cardima prior to May 1996 in the fields of
neurology, interventional neuroradiology, interventional radiology, diagnosis
and treatment of male and female reproductive disorders and vascular prostheses.
The Target License Agreement imposes various commercialization, sublicensing,
insurance, royalty, product liability, indemnification, non-competition and
other obligations on the Company.  Failure by the Company to comply with certain
of these requirements could result in a termination of the Target License.  The
loss of the Company's exclusive rights to the Target-based microcatheter
technology would have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company has also licensed a proprietary surface coating material used on
certain of its catheters.  There can be no assurance that these licenses will
continue to be available to the Company.  The loss of or inability to maintain
any of these licenses could result in delays in commercial shipments by the
Company until equivalent technology could be developed internally or identified,
licensed and integrated, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

Although the Company has not received any significant letters from others
threatening to enforce intellectual property rights against the Company, there
can be no assurance that the Company will not become subject to patent
infringement claims or litigation, to interference proceedings in the USPTO to
determine the priority of inventions or to oppositions to patent grants in
foreign jurisdictions.  An adverse determination in litigation, interference or
opposition proceedings to which the Company may become a party could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease using such
technology.  Under the Company's license agreement with Target, the Company is
not indemnified against claims brought by third parties alleging infringement of
patent rights.  Consequently, the Company could bear the liability resulting
from such claims.  There can be no assurance that the Company will have the
financial resources to protect and defend its intellectual property, as such
defense is often costly and time-consuming.  Failure of the

                                       18
<PAGE>
 
Company to protect its patent rights, trade secrets, know-how or other
intellectual property could have a material adverse effect on the Company's
business, financial condition and results of operations.

The validity and breadth of claims in medical technology patents involve complex
legal and factual questions and, therefore, may be highly uncertain.  There can
be no assurance that any issued patent or patents based on pending patent
applications or any future patent application will exclude competitors or
provide competitive advantages to the Company, that any of the Company's patents
or patents in which it has licensed rights will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by the Company.  There can be no
assurance that others have not developed or will not develop similar products,
duplicate any of the Company's products or design around any patents issued to
or licensed by the Company or that may be issued in the future to the Company.
Since patent applications in the United States are maintained in secrecy until
patents issue, the Company cannot be certain that others were not the first to
file applications for inventions covered by the Company's pending patent
applications, nor can the Company be certain that it will not infringe any
patents that may be issued to others on such applications.  The Company
periodically reviews the scope of patents of which it is aware.  Although
Cardima does not believe that it is infringing patents known to the Company, the
question of patent infringement involves complex legal and factual issues and
there can be no assurance that any conclusion reached by the Company regarding
infringement will be consistent with the resolution of any such issues by a
court.

Risks Associated with International Sales

International sales have accounted for a significant portion of the Company's
revenues to date and will continue to account for a significant portion of the
Company's revenues for the foreseeable future.  A number of risks are inherent
in international transactions.  International sales may be limited or disrupted
by the imposition of government controls, export license requirements, economic
or political instability, trade restrictions, changes in tariffs or difficulties
in staffing and management.  Additionally, although the Company's sales are
denominated in U.S. dollars, Cardima's business, financial condition and results
of operations may be adversely affected by fluctuations in currency exchange
rates as well as increases in duty rates and difficulties in obtaining export
licenses.  The financial condition, expertise and performance of the Company's
international distributors and any future international distributors could
affect sales of the Company's products internationally and could have a material
adverse effect on the Company's business, financial condition and results of
operations.  The Company is in the process of hiring, training and establishing
a direct sales force in certain major European markets.  The ability of the
Company to effectively operate a remote sales force will require additional
resources, time and expense and could have a material adverse effect on the
Company's business, financial condition and results of operations.  The
international nature of the Company's business also subjects it and its
employees, representatives, agents and distributors to laws and regulations of
the international jurisdictions in which they operate or in which the Company's
products may be sold.  The regulation of medical devices in a number of such
jurisdictions, particularly in the EU, continues to develop, and there can be no
assurance that new laws or regulations will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Foreign regulatory agencies often establish product standards different from
those in the United States and any inability to obtain foreign regulatory
approvals on a timely basis could have a material adverse effect on the
Company's international business and its financial condition and results of
operations.  In addition, the laws of certain foreign countries do not protect
the Company's intellectual property rights to the same extent as do the laws of
the United States.  There can be no assurance that the Company will be able to
successfully commercialize any of its current microcatheter products, including

                                       19
<PAGE>
 
the Cardima Pathfinder, Cardima Pathfinder Mini, Revelation and Tracer
microcatheter systems, or any future product in any foreign market.

Uncertainty Related to Third-Party Reimbursement

U. S. health care providers, including hospitals and physicians, that
purchase medical devices 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 these devices.  The Company's success will depend upon, among
other things, the ability of health care providers to obtain satisfactory
reimbursement from third-party payors for medical procedures in which the
Company's microcatheter systems are used.  Third-party payors may deny
reimbursement if they determine that a prescribed device has not received
appropriate regulatory clearances or approvals, is not used in accordance with
cost-effective treatment methods as determined by the payor, or 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 reimbursement for the Company's
products will be available or, 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 that physicians
will support and advocate reimbursement for procedures using the Company's
products.  Failure by hospitals and other users of the Company's products to
obtain reimbursement from third-party payors or changes in government and
private third-party payor policies toward reimbursement for procedures employing
the Company's products would have a material adverse effect on the Company's
business, financial condition and results of operations.  Moreover, the Company
is 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 the Company.

Limited Manufacturing Experience; Scale-Up Risk; Need to Comply with United
States Manufacturing Standards; Dependence on Key Suppliers

The Company has only limited experience in manufacturing its microcatheter
systems.  The Company currently manufactures its microcatheter systems in
limited quantities for U. S. and international sales and for pre-clinical and
clinical trials. The Company has no experience manufacturing its products in the
volumes that will be necessary for the Company to achieve significant commercial
sales, and there can be no assurance that reliable, high-volume manufacturing
capacity can be established or maintained at commercially reasonable costs. The
Company has recently increased the number of microcatheters manufactured and
expects that, if United States sales for the Cardima Pathfinder and Revelation
microcatheter systems increase, or if the Company receives FDA clearance or
approvals for other products, it will need to expend significant capital
resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA

                                       20
<PAGE>
 
regulations, and the need for further FDA approval of new manufacturing
processes. In addition, the Company believes that substantial cost reductions in
its manufacturing operations will be required for it to commercialize its
microcatheter systems on a profitable basis. Any inability of the Company to
establish and maintain large-scale manufacturing capabilities would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities, and its operations must either undergo QSR compliance
inspections conducted by the FDA or receive an FDA exemption from such
compliance inspections in order for the Company to be permitted to produce
products for sale in the United States.  The Company's facilities and
manufacturing processes have successfully undergone a combined inspection by the
FDA and by the State of California and an annual reinspection by TUV in February
1997.  The Company has demonstrated compliance with ISO 9001 (EN 46001) quality
standards, as well as compliance with 93/42/EEC, the Medical Device Directive
and is in compliance with procedures to produce products for sale in Europe.
Any failure by the Company to comply with QSR requirements or to maintain its
compliance with ISO 9001 (EN 46001) standards may result in the Company being
required to take corrective actions, such as modification of its policies and
procedures.  In addition, the Company may be required to cease all or part of
its operations for some period of time until it can demonstrate that appropriate
steps have been taken to comply with QSR or ISO 9001 (EN 46001) standards.
There can be no assurance that the Company will be found in compliance with QSR
by regulatory authorities, or that it will continue to comply with ISO 9001 (EN
46001) standards in future audits or that the Company will not experience
difficulties in the course of developing its manufacturing capability.  Any
failure of the Company to comply with state or FDA QSR requirements or to
maintain compliance with ISO 9001 (EN 46001) standards, or to develop its
manufacturing capability in compliance with such standards, would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company purchases certain key components of its products, including the
hydrophilic coating for certain of its microcatheters, from sole, single or
limited source suppliers.  For certain of these components there are relatively
few alternative sources of supply.  Establishing additional or replacement
suppliers for any of the numerous components used in the Company's products, if
required, may not be accomplished quickly and could involve significant
additional costs.  Any supply interruption from vendors or failure of the
Company to obtain alternative vendors for any of the numerous components used to
manufacture the Company's products would limit the Company's ability to
manufacture its products and would have a material adverse effect on the
Company's business, financial condition and results of operations.

Limited Sales, Marketing and Distribution Experience

The Company has only limited experience marketing and selling its products in
commercial quantities.  Expanding the Company's marketing and sales capability
to adequately support sales in commercial quantities will require substantial
effort and require significant management and financial resources.  The Company
has terminated several distribution arrangements in Europe and is in the process
of hiring a direct sales force in France and Germany.  The Company currently has
one salesman in Germany and there can be no assurance that the Company will be
able to build a European direct sales force, that establishing such a sales
force will be cost-effective or that the Company's European sales efforts will
be successful.  The Company's Cardima Pathfinder, Cardima Pathfinder Mini,
Revelation and Tracer microcatheter systems for mapping of AF and VT have
obtained regulatory approval in certain

                                       21
<PAGE>
 
international markets, and sales and marketing of these products is conducted
primarily through distributors. The Company currently has a number of exclusive
distributors that cover certain European countries and Japan and has sold only a
limited number of Cardima Pathfinder, Revelation and Tracer microcatheter
systems through these distributors. The Company does not have written agreements
with certain of its exclusive distributors. Consequently, 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 the Company to terminate such distribution
arrangements absent specific written termination terms. There can be no
assurance that these distributors will be able to market and sell the Company's
products in these markets. There can be no assurance that the Company will be
able to enter into additional agreements with desired distributors on a timely
basis or at all, or that such distributors will devote adequate resources to
selling the Company's products. Failure to establish an adequate sales force or
to establish and maintain appropriate distribution relationships would have a
material adverse effect upon the Company's business, financial condition and
results of operations.

Dependence Upon Key Personnel

The Company's ability to operate successfully depends in significant part upon
the continued service of certain key scientific, technical, clinical, regulatory
and managerial personnel, and its 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, and there can be
no assurance that the Company can retain such personnel or that it can attract
or retain other highly qualified scientific, technical, clinical, regulatory and
managerial personnel in the future, including key sales and marketing personnel.

Risk of Product Liability; Adequacy of Insurance Coverage

The development, manufacture and sale of the Company's microcatheter systems may
expose the Company to product liability claims.  Although the Company has not
experienced any claims to date, there can be no assurance that the Company will
not experience losses due to product liability claims in the future.  Although
the Company currently has general liability insurance with coverage in the
amount of $1.0 million per occurrence, subject to a $2.0 million annual
limitation, and product liability insurance with coverage in the amount of $5.0
million per occurrence, subject to a $5.0 million annual limitation, there can
be no assurance that such coverage will continue to be available to the Company
on reasonable terms, if at all.  In addition, there can be no assurance that all
of the activities encompassed within the Company's business are or will be
covered under the Company's policies.  Although the Cardima Pathfinder,
Revelation and Tracer products are labeled for single use only, the Company is
aware that some physicians are reusing such products.  Moreover, despite
labeling of the Company's microcatheters for diagnostic use only, the Company
believes that physicians are using such mapping microcatheters for ablation.
Multiple use or "off-label" use of the Company's microcatheters could subject
the Company to increased exposure to product liability claims, which could have
a material adverse effect on the Company's business, financial condition and
results of operations.  The Company may require additional product liability
coverage if the Company significantly expands commercialization of its 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 the Company, regardless of their merit or eventual outcome, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

                                       22
<PAGE>
 
Impact of the Year 2000 Issue on the Company's Operations

Many existing computer programs use only two digits to identify a year in the
date field.  These programs were designed and developed without considering the
impact of the up coming change in the century.  If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000 (the
"Year 2000 Issue").  The Company is in the process of performing an assessment
of the potential impact of the Year 2000 Issue on its operations.  Management is
in the process of formalizing its assessment procedures and developing a plan to
address identified issues.  The Company has evaluated its financial and
accounting and inventory tracking systems and concluded that they are not
materially affected by the Year 2000 Issue.  The extent, if any, of the impact
of the Year 2000 Issue on the other systems and equipment is unknown.  A
corporate-wide inventory of computer applications is being performed by the
Company and is expected to be completed by the end of fiscal year 1998, after
which time the Company will attempt to remedy any issues.  The Company has also
begun communications with its facilities managers to determine the impact on
building security and related equipment.  There can be no assurance that all
third parties will address the Year 2000 Issue in a timely fashion, if at all.
Any Year 2000 Issue compliance problems of either the Company, its business
partners or its customers could have a material adverse effect on the Company's
business, operating results and financial condition.

                                       23
<PAGE>
 
PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

          None.

Item 2.   Changes in Securities and Use of Proceeds

          Incorporated by reference to Registrant's Annual Report on Form 10-K
          for the fiscal year ended December 31, 1997.

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 by the Registrant during the
               quarter ended March 31, 1998.

                                       24
<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:   May 13, 1998                            CARDIMA, INC.



                                                /s/ Phillip C. Radlick, Ph.D.
                                                -------------------------------
                                                PHILLIP C. RADLICK, Ph.D.
                                                President, Chief Executive
                                                Officer and Director



                                                /s/   Ronald E. Bourquin
                                                -------------------------------
                                                RONALD E. BOURQUIN
                                                Vice President and Chief
                                                Financial Officer

                                       25
<PAGE>
 
                                 CARDIMA, INC.

                        INDEX TO EXHIBITS FOR FORM 10-Q

                        FOR QUARTER ENDED MARCH 31, 1998


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


   27.1    Financial Data Schedule

                                       26