<PAGE>


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

                                   FORM 10-Q/A

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934.
     For the quarterly period ended June 30, 2001

                                       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 August 13, 2001, there were 33,446,939 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 (In thousands, except share and per share amounts).............  3
  ---------------------------------------------------------------------------
  CONDENSED STATEMENTS OF OPERATIONS......................................................  4
  ----------------------------------
  CONDENSED STATEMENTS OF CASH FLOWS......................................................  5
  ----------------------------------
  NOTES TO CONDENSED FINANCIAL STATEMENTS.................................................  6
  ---------------------------------------
 ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
 -----------------------------------------------------------------------------------
OPERATIONS................................................................................  9
----------

RESULTS OF OPERATIONS - THREE AND SIX-MONTHS ENDED JUNE 30, 2001 AND 2000................. 10
-------------------------------------------------------------------------

LIQUIDITY AND CAPITAL RESOURCES........................................................... 13
-------------------------------

PART II.  OTHER INFORMATION............................................................... 30
--------  -----------------

 ITEM 2   Changes in Securities and Use of Proceeds....................................... 30
 ------   -----------------------------------------
 ITEM 4.  Submission of Matters to a Vote of Security Holders............................. 30
 ------   ---------------------------------------------------
 ITEM 6   Exhibits and Reports on Form 8-K................................................ 31
 ------   --------------------------------

SIGNATURES................................................................................ 32
----------
</TABLE>


                                        2

<PAGE>

PART I.

ITEM 1.  FINANCIAL STATEMENTS

                                  CARDIMA, INC.

                            CONDENSED BALANCE SHEETS

               (In thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                                                      June 30, 2001  December 31,
ASSETS                                                                                 (Unaudited)      2000
                                                                                                    (See Note 1)
                                                                                        ---------   ------------
<S>                                                                                   <C>           <C>
Current assets:
     Cash and cash equivalents .....................................................    $  5,403        $  1,324
     Accounts receivable, net of allowances for doubtful accounts
         of $134 at June 30, 2001 and $124 at December 31, 2000 ....................         167             221
     Inventories ...................................................................       1,199           1,663
     Other current assets ..........................................................         343             240
                                                                                        --------        --------
         Total current assets ......................................................       7,112           3,448
Property and equipment, net ........................................................       1,517           1,803
Notes receivable from officers .....................................................         550             514
Other assets .......................................................................         215             138
                                                                                        --------        --------
                                                                                        $  9,394        $  5,903
                                                                                        ========        ========
Liabilities and stockholders' equity
Current liabilities:
     Accounts payable ..............................................................    $  1,530        $  1,310
     Accrued compensation ..........................................................         677             981
     Other current liabilities .....................................................          64              31
     Capital lease obligation - current portion ....................................         422             474
                                                                                        --------        --------
             Total current liabilities .............................................       2,693           2,796

Deferred rent ......................................................................          21              21
Capital lease obligation - noncurrent portion ......................................          92             192
Commitments

Stockholders' equity:
     Common stock, $0.001 par value; 75,000,000 shares authorized, 33,446,939
     shares issued and outstanding at June 30, 2001; 21,579,093 as of December
     31, 2000; at amount paid in ...................................................      77,707          71,405
     Deferred compensation .........................................................          --             (26)
     Accumulated deficit ...........................................................     (71,119)        (68,485)
                                                                                        --------        --------
        Total stockholders' equity .................................................       6,588           2,894
                                                                                        --------        --------
                                                                                        $  9,394        $  5,903
                                                                                        ========        ========
</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                      Six months ended
                                                                       June 30,                               June 30,
                                                          -----------------------------------    ----------------------------------
                                                               2001               2000                2001               2000
                                                          ---------------    ----------------    ----------------    --------------
<S>                                                       <C>                <C>                 <C>                 <C>
Net sales                                                 $           473    $            745    $          1,012    $        1,414
Cost of goods sold                                                    945                 676               1,919             1,522
                                                          ---------------    ----------------    ----------------    --------------
         Gross profit (loss)                                         (472)                 69                (907)             (108)
Operating expenses:
         Research and development                                   1,290               1,108               2,647             2,274
         Selling, general and administrative                        1,592               1,722               3,101             3,291
                                                          ---------------    ----------------    ----------------    --------------

                  Total operating expenses                          2,882               2,830               5,748             5,565
                                                          ---------------    ----------------    ----------------    --------------
Operating loss                                                     (3,354)             (2,761)             (6,655)           (5,673)
Interest and other income                                              44                  90                  56               143
Interest expense                                                      (16)               (103)                (35)             (214)
Gain on sale of intellectual property                                  --                  --               4,000                --
                                                          ---------------    ----------------    ----------------    --------------

Net loss                                                  $        (3,326)   $         (2,774)   $         (2,634)   $       (5,744)
                                                          ===============    ================    ================    ==============

Basic and diluted loss per share                          $         (0.11)   $          (0.13)   $          (0.10)   $        (0.29)
                                                          ===============    ================    ================    ==============

Shares used in computing basic and diluted net loss per
share                                                              29,148              21,471              25,384            20,072
                                                          ===============    ================    ================    ==============
</TABLE>

                 See accompanying notes to financial statements

   (1)    In January 2001, we received $4,000,000 from Medtronic, Inc.,
          representing the final payment on the transaction initiated in
          December 2000, whereby we sold a portion of our patent portfolio and
          related intellectual property pertaining to intravascular sensing and
          signal detection and certain guiding catheters.

                                        4

<PAGE>

                                  CARDIMA, INC.

                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                      Six months ended June 30,
                                                                                             (Unaudited)
                                                                                 ---------------------------------
                                                                                     2001               2000
                                                                                 ---------------    --------------
<S>                                                                              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                         $        (2,634)   $      ( 5,744)
Adjustments to reconcile net loss to net cash provided by operations:
     Depreciation and amortization                                                           438               516
     Amortization of deferred compensation                                                    26               100
       Changes in operating assets and liabilities:
         Accounts receivable                                                                  54               344
         Inventories                                                                         464              (466)
         Other current assets                                                               (103)              (51)
         Notes receivable                                                                    (36)             (137)
         Other assets                                                                        (77)              (59)
         Accounts payable                                                                    220              (196)
         Accrued compensation                                                               (304)             (216)
         Other current liabilities                                                            33               (22)
         Deferred rent                                                                        --                12
                                                                                 ---------------    --------------
             Net cash used in operating activities                                        (1,919)           (5,919)

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales of short-term investments                                                --               497
Capital expenditures                                                                        (152)             (114)
                                                                                 ---------------    --------------
             Net cash used in investing activities                                          (152)              383

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases                                                     (152)             (419)
Principal payments under credit line                                                          --              (529)
Net proceeds from sale of common stock and warrant exercises                               6,302            10,896
Proceeds from sale/leaseback of capital equipment                                             --               147
                                                                                 ---------------    --------------
             Net cash provided by financing activities                                     6,150            10,095
                                                                                 ---------------    --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                  4,079             4,559
                                                                                 ===============    ==============
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             1,324               423
                                                                                 ===============    ==============
CASH AND CASH EQUIVALENTS, END OF PERIOD                                         $         5,403    $        4,982
                                                                                 ===============    ==============
</TABLE>

                                        5

<PAGE>

                                  CARDIMA, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                  June 30, 2001
                                   (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
accounting principles generally accepted in the United States 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 six-month period ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2001 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, 2000. The accompanying balance sheet
at December 31, 2000 has been derived from these audited financial statements.

2.   MANAGEMENT'S PLANS

As of June 30, 2001 the Company has approximately $5,403,000 in cash and cash
equivalents, working capital of $4,419,000 and an accumulated deficit of
$71,119,000. 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 funds from equity or debt offerings, revenue
from product sales, 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 at least July 2002.

On January 26, 2000, the Company signed an exclusive three-year distribution
agreement, "the agreement" with St. Jude Medical Corporation, or St. Jude,
whereby St. Jude's Daig Division was to distribute Cardima's diagnostic products
in the United States. The distribution agreement included an equity investment
by St. Jude. St. Jude did not meet its minimum annual purchase quota for the
first year under the distribution agreement. On June 1, 2001, the Company and
St. Jude, Daig Division mutually agreed to terminate, in its entirety, the
agreement, allowing for a transition period to transfer customer accounts back
to the Company, which expires September 1, 2001. As the result, the Company
plans to gear up its own small sales force in the United States.

                                        6

<PAGE>

In order to commercialize our products and continue operations, we will need to
raise additional capital by mid - 2002. 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

In May 2001, the Company sold a total of 11,746,916 shares of common stock at
$0.58 per share in a private placement transaction to accredited investors. The
transaction included warrants to investors exercisable for 5,873,465 shares of
common stock at an exercise price of $0.87 per share. These warrants are
redeemable by the Company if the Company's common stock closes at $1.16 or above
for fifteen consecutive trading days. As a commission for the transaction, the
Company paid approximately $510,988 in cash and issued warrants, exercisable for
1,174,691 shares of common stock at an exercise price of $0.64 per share. The
Company's net proceeds, after expenses of the placement, were approximately
$6,200,000. The Company is using these proceeds for development activities,
clinical trial expenses, commercialization of product offerings, operating
costs, and other general corporate purposes.

4.   INVENTORY

Inventory components are as follows (in thousands):



                                         June 30,           December 31,
                                           2001                2000
                                      ----------           ------------
Inventories:                          (Unaudited)           (See Note 1)
         Raw materials                $      606           $        751
         Work-in-process                     156                     95
         Finished goods                      437                    817
                                      ----------           ------------
                                      $    1,199           $      1,663
                                      ==========           ============

Inventory amounts shown above are net of reserves for excess and obsolete
inventory of $346,000 and $212,000 at June 30, 2001 and December 31, 2000,
respectively. The Company reserves for inventory amounts by considering the
potential excess inventory in relation to sales forecasts and the obsolescence
of inventory as a result of technological advancements.

5.   REVENUE RECOGNITION

The Company recognizes revenue from two types of customers, end users and
distributors. Revenue is recognized upon the shipment of product, provided the
title of products has been transferred at the point of shipment, there is
persuasive evidence of an agreement, the payment for the product is reasonably
assured, and no substantive obligations to the customer remain. Customers are
not entitled to rights of product return.

                                        7

<PAGE>

6.   RESTRUCTURING

In January 2001, the Company eliminated 12 full-time positions and 10 temporary
positions or about 28% of its workforce, with the objective of re-aligning
resources to focus on its Phase III clinical trial to treat atrial fibrillation
and reducing over all operating expenses. These actions resulted in a
restructuring charge in the first quarter of fiscal 2001 of approximately
$300,000. This charge is comprised of employee severance of $289,000 and related
benefits of $9,000, and as of June 30, 2001 only $37,000 remained as a liability
for severance payable to the affected employees. The remaining liability is
expected to be paid through August 31, 2001, and no additional expenses are
expected to be incurred related to this reduction in work force. The 22
positions were comprised of 4 individuals from research and development, 14
individuals from manufacturing and operations, and 4 administrative positions;
all of these positions were located at our corporate headquarters. The amounts
recorded for this termination were recorded as follows: $157,000 research and
development, $116,000 general and administration, and $25,000 for cost of goods
sold. The affected employees were not covered by employment contracts that
required severance payments.

7.   NET LOSS PER SHARE

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
warrants and stock options from the computation of basic and diluted earnings
per share because all such securities are anti-dilutive for all periods
presented.

8.   COMPREHENSIVE INCOME (LOSS)

Comprehensive loss equaled net loss for all periods presented.

9.   RECENT ACCOUNTING PRONOUNCEMENTS

On June 29, 2001, the Financial Accounting Standards Board, or FASB, approved
the final Standards resulting from its deliberations on the business
combinations project. The FASB is expected to issue two statements in late July
2001, Statement of Financial Accounting Standards No. 141, or FAS 141, on
Business Combinations and FAS 142 on Goodwill and Other Intangible Assets. FAS
141 will be effective for any business combinations initiated after June 30,
2001 and also includes the criteria for recognition of intangible assets
separately from goodwill. FAS 142 will be effective for fiscal years beginning
after December 15, 2001 and will require that goodwill not be amortized, but
rather be subject to an impairment test at least annually. Separately identified
and recognized intangible assets resulting from business combinations completed
before July 1, 2001 that do not meet the new criteria for separate recognition
of intangible assets will be subsumed into goodwill upon adoption. In addition,
the useful lives of recognized intangible assets acquired in transactions
completed before July 2001 will be reassessed and the remaining amortization
periods adjusted accordingly. The adoption of FAS 141 and 142 is not expected
have a significant impact on our financial position at transition.

                                        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
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 "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. This discussion and analysis should be read in conjunction
with the Financial Statements and related Notes thereto included elsewhere in
this Form 10-Q and in the Company's Annual Report on Form 10-K.

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, or diagnosis, and ablation, or treatment, of cardiac
arrhythmias. The Company has generated revenues of approximately $11.9 million
from inception to June 30, 2001. Until January 1997, these revenues were
primarily in Europe and Japan from sales of our Cardima Pathfinder and Tracer
microcatheter systems for diagnosing VT and our 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,
respectively, following FDA 510(k) clearance. In January 2000, the Company
signed an exclusive three-year distribution agreement with St. Jude Medical
Corporation, or St. Jude. As of February 1, 2001, the distribution agreement
reverted to a non-exclusive arrangement due to Daig's failure to meet the
contractual first-year minimum sales level and on June 1, 2001, the agreement
was terminated in its entirety, with a transition period until September 1,
2001. The Company is marketing and distributing its products in the United
States with a small direct sales force. To date, the Company's international
sales have been made through a small direct sales force and distributors in
selected countries who sell the Company's products to physicians and hospitals.
European sales consist primarily of the Pathfinder microcatheter lines for
diagnosis of VT and REVELATION lines of microcatheters for diagnosis and
treating of 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

                                        9

<PAGE>

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 tip 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 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 recently refocused its efforts to complete its phase III clinical
trials in the United States for the treatment of AF with the REVELATION Tx
microcatheter system. Since the refocus on the phase III clinical trial, the
Company has completed four of the five necessary modules required for completing
the Pre-market approval (PMA) process necessary to sell the REVELATION Tx in the
United States.

The Company has a limited history of operations and has experienced significant
operating losses since inception. We expect that our operating losses will
continue for the foreseeable future as we continue to invest substantial
resources in product development, preclinical trials, obtaining regulatory
approval, sales and marketing and manufacturing.

Revenues are recognized when products are shipped.

RESULTS OF OPERATIONS - THREE AND SIX-MONTHS ENDED JUNE 30, 2001 AND 2000

Net Sales

Net sales for the quarter ended June 30, 2001 decreased 37% to $473,000 from
$745,000 for the same period in 2000. Net sales for the six-month period ended
June 30, 2001 decreased 28% to $1,012,000 from $1,414,000 for the same period in
2000. Sales in the United States for the quarter ended June 30, 2001 decreased
53% to $199,000 from $424,000 in the same period in 2000. United States sales
for the six-month period ended June 30, 2001 decreased 36% to $449,000 from
$706,000 in the same period in 2000. The decrease was primarily the result of
converting the United States direct sales force to an exclusive distribution
agreement with Daig, which was subsequently terminated on June 1, 2001 and
restructuring within the sales and marketing departments. International sales
for the quarter ended June 30, 2001 decreased 15% to $274,000 from $321,000 in
the same period in 2000. International sales for the six-month period ended June
30, 2001 decreased 20% to $563,000 from $708,000 in the same period in 2000. The
decrease in international sales for the three and six-month period was primarily
attributable to reductions in the European direct sales force to reduce
expenses. Accounts receivable decreased 24% to $167,000 at June 30, 2001 from
$221,000 at December 31, 2000 while the related allowance for doubtful accounts
increased 8% or $10,000 over the same period, due to increases of specific past
due international accounts.

                                       10

<PAGE>

On June 1, 2001, the Company and St. Jude, Daig Division mutually agreed to
terminate, in its entirety, their distribution agreement, allowing for a
transition period to transfer customer accounts back to the Company, which
expires September 1, 2001. Therefore, we will be marketing and distributing our
products with our own direct sales force in the United States.

Management has made a conscious decision to focus its resources on the
completion of the Phase III clinical trials to treat atrial fibrillation with
the REVELATION Tx microcatheter system, while building a sales foundation on
which to grow future revenue opportunities.

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 June 30, 2001 increased 40% to $945,000 from $676,000
for the same period in 2000. Cost of goods sold for the six-month period ended
June 30, 2001 increased 26% to $1,919,000 from $1,522,000 in 2000. This increase
was primarily due to increased inventory reserves and fixed costs being
allocated over lower manufacturing volume and a one time charge of $25,000 that
was recognized during the three-month period ending March 31, 2001 due to the
elimination of 14 full-time and temporary manufacturing and operation positions.
The reduction in manufacturing volume was part of a targeted reduction in
finished goods inventory levels from the fourth quarter of 2000 to the end of
the second quarter of 2001. Inventory reserves for excess and obsolete inventory
increased $134,000 from December 31, 2000 to June 30, 2001. The Company reserves
for inventory amounts by considering the potential excess inventory in relation
to sales forecasts and the obsolescence of inventory as a result of
technological advancements. When the Company writes off specific inventory or
has determined that inventory is obsolete, the inventory is disposed of.

Research and Development Expenses

Research and development expenses include product development, clinical testing
and regulatory expenses. Research and development expenses, including regulatory
and clinical functions for the quarter ended June 30, 2001 increased 16% to
$1,290,000 from $1,108,000 for the same period in 2000. Research and development
expenses, including regulatory and clinical functions for the six-month period
ended June 30, 2001 increased 16% to $2,647,000 from $2,274,000 for the same
period in 2000. The Company's investment in research and development for the
quarter ended June 30, 2001 decreased 4% to $590,000 from $616,000 for the same
period in 2000, as programs not related to the AF clinical trial were postponed.
The Company's investment in research and development for the six-month period
ended June 30, 2001 decreased 9% to $1,218,000 from $1,334,000 for the same
period in 2000. Regulatory and clinical expenses for the quarter ended June 30,
2001 increased 42% to $700,000 from $492,000 for the same period in 2000,
reflecting the increased efforts to enroll patients in the Phase III clinical
trial. Regulatory and clinical expenses for the six-month period ended June 30,
2001 increased 52% to $1,429,000 from $940,000 for the same period in 2000. The
increase in total expenses for the six-month period ended June 30, 2001 are due
to the restructuring efforts to focus resources on the completion of development
of the REVELATION Tx microcatheter system for AF ablation,

                                       11

<PAGE>

the postponement of projects not related to atrial fibrillation and a one time
charge of $157,000 that was recognized during the three-month period ending
March 31, 2001 due to the elimination of 4 full-time and temporary research and
development positions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended June 30, 2001
decreased 8% to $1,592,000 from $1,722,000 for the same period in 2000. Selling,
general and administrative expenses for the six-month ended June 30, 2001
decreased 6% to $3,101,000 from $3,291,000 for the same period in 2000. General
and administrative expenses for the quarter ended June 30, 2001 increased 11% to
$894,000 from $805,000 for the same period in 2000. General and administrative
expenses for the six-month ended June 30, 2001 increased 23% to $1,783,000 from
$1,454,000 for the same period in 2000. The increase in general and
administrative expenses in both periods is due to increased expenses in the
public and investor relations categories and a one time charge of $116,000 that
was recognized during the three-month period ending March 31, 2001 due to the
elimination of 4 full-time and temporary general and administrative positions,
as well as shifting the allocation of certain functions into the general and
administrative category. Selling expenses for the quarter ended June 30, 2001
decreased 18% to $569,000 from $693,000 for the same period in 2000 primarily
due to a reduction in sales staffing. Selling expenses for the six-month period
ended June 30, 2001 decreased 24% to $1,052,000 from $1,390,000 for the same
period in 2000. Marketing expenses for the quarter ended June 30, 2001 decreased
42% to $129,000 from $224,000 for the same period in 2000. Marketing expenses
for the six-month ended June 30, 2001 decreased 40% to $266,000 from $447,000
for the same period in 2000. Sales and marketing expenses decreased in general
due to efforts to reduce expenses and focus on the Company's Phase III clinical
trial.

Interest and Other Income

Interest and other income for the quarter ended June 30, 2001 decreased to
$44,000 from $90,000 for the same period in 2000. Interest and other income for
the six-months ended June 30, 2001 decreased to $56,000 from $140,000 for the
same period in 2000. This decrease was due primarily to lower cash balances.

Interest Expense

Interest expense for the quarter ended June 30, 2001 decreased to $16,000 from
$103,000 for the same period in 2000. Interest expense for the six-months ended
June 30, 2001 decreased to $35,000 from $214,000 for the same period in 2000.
This decrease was primarily due to the payoff of debt of approximately
$2,000,000 and the expiration and payoff of certain capital equipment leases.

Gain on the Sale of Intellectual Property

The gain on the sale of certain intellectual property is due to the final
$4,000,000 payment received from Medtronic in January 2001. The total purchase
price of the intellectual property

                                       12

<PAGE>

was $8,000,000, $4,000,000 of which was recognized in December 2000. The
intellectual property was carried at virtually no value on our balance sheets.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date, principally through private placements
of equity securities, which have yielded net proceeds of $64,000,000 through
June 30, 2001, our initial public offering of Common Stock in June 1997, which
resulted in net proceeds of approximately $13,600,000, together with interest
income on such proceeds, borrowings under a $3,000,000 line of credit, sale of
certain of our non-core patents to Medtronic for $8,000,000 and equipment leases
to finance certain capital equipment which have provided proceeds in the amount
of $4,700,000. As of June 30, 2001, the Company had approximately $5,403,000 in
cash and cash equivalents.

Net cash used in operating activities was approximately $1,919,000 compared to
the net cash used of $5,919,000 for the three months ended June 30, 2001 and
2000, respectively. The change is related to restructuring efforts and the
$4,000,000 gain on the sale of certain intellectual property recognized in
January 2001. Net cash used in investing activities was $152,000 compared to
$383,000 provided by investing activities, for the three months ended June 30,
2001, and 2000, respectively. This change is primarily attributable to higher
capital equipment expenditures and short-term investments in 2000. Net cash
provided by financing activities was approximately $6,150,000 compared to
$10,595,000 provided by financing activities for the three months ended June 30,
2001 and 2000, respectively. This change is primarily due to the sale of equity
securities in private placement transactions.

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 December 31, 2000 the
Company had paid off both the line of credit and certain equipment leases in
full.

In January 2001, the Company eliminated 12 full-time positions and 10 temporary
positions or about 28% of its workforce, with the objective of re-aligning
remaining resources to focus on its Phase III clinical trial to treat atrial
fibrillation and reducing overall operating expenses. These actions resulted in
a restructuring charge in the first quarter of fiscal 2001 of approximately
$300,000. This charge is comprised of employee severance of $289,000 and related
benefits of $9,000, and as of June 30, 2001 only $37,000 remained as a liability
for severance payable to certain affected employees. The remaining liability is
expected to be paid through August 31, 2001, and no additional expenses are
expected to be incurred related to this reduction in force. The 22 positions
were comprised of 4 individuals from research and development, 14 individuals
from manufacturing and operations, and 4 administrative positions; all of these
positions were located at our corporate headquarters. The amounts recorded for
this termination were recorded as follows: $157,000 research and development,
$116,000 general and administration, and $25,000 for cost of goods sold. The
affected employees were not covered by employment contracts that required
severance payments.

                                       13

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In May 2001, the Company sold a total of 11,746,916 shares of common stock at
$0.58 per share in a private placement transaction to accredited investors. The
transaction included warrants to investors exercisable for 5,873,465 shares of
common stock at an exercise price of $0.87 per share. As a commission for the
transaction, the Company paid approximately $510,988 in cash and issued
warrants, exercisable for 1,174,691 shares of common stock at an exercise price
of $0.64 per share. The Company's net proceeds, after expenses of the placement,
were approximately $6,200,000. The Company intends to use these proceeds for
development activities, clinical trial expenses, commercialization of product
offerings, operating costs, and other general corporate purposes.

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. Since inception, the Company has an accumulated
deficit of approximately $71.0 million. Management expects to continue to incur
additional losses in the foreseeable future as it completes new product
development and product commercialization. The Company believes that available
cash will be sufficient to meet the Company's cash requirements through at least
July 2002. 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.

FACTORS AFFECTING FUTURE RESULTS

We have sold a limited number of our microcatheter products, and we will
continue to incur substantial costs in bringing our microcatheter products to
market.

     We have sold only a limited number of our microcatheter systems. In
addition, we will continue to incur substantial losses into the foreseeable
future because of research and product development, clinical trials,
manufacturing, sales, marketing and other expenses as we seek to bring our
microcatheters to market. Since our inception, we have experienced losses, and
we expect to experience substantial net losses into the foreseeable future.

     Our net losses were approximately $7.8 million, $14.0 million and $16.2
million for 2000, 1999 and 1998 respectively. Our net losses were approximately
$3.3 million for the quarter ended June 30, 2001, compared to $2.8 million for
the same period in 2000, respectively. As of June 30, 2001, our accumulated
deficit was approximately $71.0 million. Our limited sales history makes it
difficult to assess our future results. We cannot be certain that we will ever

                                       14

<PAGE>

generate substantial revenue or achieve profitability. Our failure to generate
substantial revenues would harm our business.

We will need to raise capital in the future that could have a dilutive effect on
your investment.

     In order to commercialize our products, we will need to raise additional
capital. One possibility for raising additional capital would be the public or
private sale of our shares of stock. On May 3, 2001, we received net proceeds of
approximately $6.2 million from certain investors in a private placement of
11,746,916 shares of our common stock. Additionally, we issued redeemable
warrants to purchase up to an aggregate of 5,873,465 shares of our common stock
at an exercise price per share of $0.87. Any sale by us of additional shares of
stock will further dilute your percentage ownership in us.

Our failure to raise additional capital to develop and market our microcatheter
systems will cause our business to fail.

     We will need to raise additional capital in order to complete the clinical
trials for, and 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 performing 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. Our failure to raise this additional capital when needed
could cause us to cease our operations. 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,
private placements of securities, loan facilities and the sale of certain of our
patents and other intellectual property. As of June 30, 2001, cash, cash
equivalents, short-term investments and long-term restricted cash totaled
approximately $5.4 million. On May 3, 2001, we received net proceeds of
approximately $6.2 million from a private placement. We believe that our
existing cash, cash equivalents and short-term investments, along with cash
generated from the sale of a portion of our intellectual property to Medtronic,
as well as sales of our products and from financings will be sufficient to fund
our operating expenses, debt obligations and capital requirements through July
2002. However, there can be no assurance that we can obtain additional funding
after such date.

Our independent auditors believe that there is substantial doubt as to our
ability to continue as a going concern.

     As a result of our losses to date, working capital deficiency and
accumulated deficit, our independent auditors have concluded that there is
substantial doubt as to our ability to continue as a going concern for a
reasonable period time, and have modified their report in the form of an
explanatory paragraph describing the events that have given rise to this
uncertainty. Our continuation is based on our ability to generate or obtain
sufficient cash to meet our obligations on a timely basis and ultimately to
attain profitable operations. Our independent auditors' going concern
qualification may make it more difficult for us to obtain additional funding to
meet our

                                       15

<PAGE>

obligations. We anticipate that we will continue to incur significant losses
until successful commercialization of one or more of our products. There can be
no assurance that we can be operated profitably in the future.

We rely on third-parties to conduct and collect data for the clinical trials of
our products. If we are unable to access this data or the FDA refuses to accept
the data in a filing, the commercialization of our products will be delayed and
our business will be harmed.

     We often rely on third-parties, such as hospital and universities, to
conduct and collect data for our clinical trials. We depend on these third
parties to provide access and cooperate with us in completing filings with the
FDA. In order for the FDA to accept and rely on the data of a filing, the data
collection, analysis and summarization must meet FDA standards. We cannot be
certain that the clinical data collected by the third-parties meet FDA
standards. If we are unable to rely the clinical data collected by
third-parties, or if these third-parties do not perform their contractual
obligations, the FDA may require us to repeat our clinical trials. This could
significantly delay commercialization of our products, require us to spend
additional money on our clinical trials and harm our business.

We cannot assure the safety or effectiveness of our products. We are in an early
stage of our product development.

     To date, we have received 510(k) pre-market clearances from the FDA with
respect to our Pathfinder and Pathfinder Mini microcatheter systems for venous
mapping of ventricular tachycardia, and our REVELATION microcatheter system for
mapping the atria of the heart. We also received FDA 510(k) clearance for our
Venaport, Vueport and Naviport guiding catheters and our Tracer microcatheter
for mapping ventricular tachycardia.

     We are in the final stages of developing, testing and obtaining regulatory
approval for our REVELATION Tx microcatheter systems designed for ablation of
atrial fibrillation. We completed the mapping phase of this feasibility study in
August 1997 and the atrial fibrillation ablation feasibility study in December
1998. We received approval of an IDE supplement in December 1998 allowing us to
expand the atrial fibrillation study. In October 2000, we received permission to
expand the clinical trial to Phase III. The Phase III trial requires 80 patients
to be treated in up to 20 centers. Additionally, we recently began a clinical
trial in Germany involving our REVELATION Helix microcatheter in the treatment
of atrial fibrillation originating from the pulmonary veins. We also received
approval for an IDE to begin clinical testing of our Therastream microcatheter
system for ablation of ventricular tachycardia in December 1999 and approval to
expand that trial in 2000. We have postponed the clinical feasibility trial for
the Therastream microcatheter system for ablation of ventricular tachycardia to
focus on completing our atrial fibrillation Phase III clinical trial.

     We must complete the atrial fibrillation Phase III clinical trial in order
to gather data for the completion of our pre-market approval, or PMA,
application to the FDA for our atrial fibrillation ablation product. Currently,
we anticipate approval for our REVELATION Tx before the end of 2002. We have no
estimate as to when, or if, we will resume the clinical trial for our
Therastream microcatheter system. We must receive PMA approval before marketing
our products for ablation in the United States. Clinical trials of our
microcatheter systems will require substantial financial and management
resources. In addition, if we resume the clinical

                                       16

<PAGE>

trial for our Therastream microcatheter system, the completion of this clinical
trial could take several years. For the Therastream clinical trial, there can be
no assurance that:

  .  necessary IDEs will be granted by the FDA,

  .  human clinical trials 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 that we will have to overcome before obtaining the necessary
regulatory approvals or market acceptance. Our failure to complete our clinical
trials, demonstrate product safety and clinical effectiveness, and obtain
regulatory approval for the use of our microcatheter system for the ablation of
atrial fibrillation 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 the market does not accept our
products and the procedures in which they are used, 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 atrial fibrillation and
ventricular tachycardia is highly competitive. Our microcatheter systems for the
mapping and ablation of atrial fibrillation and ventricular tachycardia 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 approval and, in some cases,
reimbursement approval are important competitive factors. Existing treatments
with which we must compete include:

  .  drugs,

  .  external electrical shock to restore normal heart rhythms and
     defibrillation,

  .  implantable defibrillators,

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

  .  open-heart surgery known as the "maze" procedure.

                                       17

<PAGE>

     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 atrial
fibrillation or ventricular tachycardia. If our clinical data and other studies
do not show that our products are safe and effective, the FDA will not approve
our products for sale. If our products are not approved, we will not be able to
enter the market 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 in development for the ablation of atrial
fibrillation or ventricular tachycardia, has received regulatory approval in the
United States. If we cannot gain U.S. regulatory approval, our business will be
harmed. Even if our ablation products are successfully developed and we obtain
the required regulatory approvals, we cannot be certain that our products and
their 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 atrial fibrillation and, at an
undetermined future date, ventricular tachycardia, our failure to successfully
commercialize these systems would harm our business and cause the value of your
investment to decline.

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

     Although we label all of our microcatheter systems for single-use only, we
are aware that some physicians potentially may reuse these products. Reuse of
our microcatheter systems could reduce revenues from product sales and could
cause our revenues to decline. In addition, such misuse of our products could
result in personal injury and death. See "Risk Factor - We may face product
liability claims related to the use or misuse of our products."

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

     Our products are considered to be medical devices and are 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 we cannot guarantee.
In the United States, we must

                                       18

<PAGE>

obtain 510(k) pre-market notification clearance or a PMA from the FDA in order
to market a product. We have received 510(k) pre-market notification clearances
for our Pathfinder, Pathfinder Mini and Tracer microcatheter systems for mapping
ventricular tachycardia and for the REVELATION microcatheter system for mapping
atrial fibrillation. Currently, the timing to receive 510(k) clearance is
approximately 120 days and PMA approval is six to 12 months, but timing can be
uncertain and the actual process may be significantly longer. We cannot
guarantee either the timing or receipt of approval or clearance for any of our
products in development. These products may require a PMA, and the FDA may
request extensive clinical data to support either 510(k) clearance or a PMA.

     We are required to seek a PMA for our ablation products, including the
REVELATION Tx microcatheter. The process of obtaining a PMA is much more
expensive, lengthy and uncertain than the 510(k) pre-market notification
clearance process. In order to complete our PMA application, we will be required
to complete clinical trials to demonstrate the safety and effectiveness of these
products. In December 1997, the FDA approved a 10-patient atrial fibrillation
feasibility study for mapping and ablation with the REVELATION Tx. In June 2000,
we received conditional approval from the FDA and full approval in August 2000
for our Phase III pivotal study. We filed an additional feasibility IDE
application for the Therastream microcatheter system in December 1998 and
received permission to expand that trial in July 2000. We have postponed the
Therastream clinical trial, while we focus on completing our atrial fibrillation
Phase III clinical trial. There can be no assurance that any additional clinical
studies that we may propose will be permitted by the FDA, will be completed or,
if completed, will provide data and information that supports a PMA.
Furthermore, we cannot assure you that our Phase III trial for ablation of
atrial fibrillation will provide us with data and information that supports a
PMA.

     In March 2001, the FDA allowed us to file a modular PMA for our REVELATION
Tx in Phase III trial. Under the modular PMA submission, we will file five
separate segments of the PMA with the FDA, all of which together will comprise
our PMA application. At this time, we have filed the first four modules. The
modular PMA submission process generally reduces the time for FDA approval by
allowing an applicant to submit data required for completion of the trial to the
FDA on an ongoing basis. Instead of waiting until the last patient is treated
and then submitting all the necessary modules in one complete submission, we can
submit sections or modules required for the PMA filing as we go. In addition,
dialogue with the FDA during the modular submission process allows us to fine
tune our submission. Closure and acceptance of any one module does not allow
marketing of any part of the product. We are restricted from selling the product
until the entire PMA process is complete and approved by the FDA. No assurance
can be given that we will ever be able to obtain a PMA for any of our ablation
products. Our failure to complete clinical testing or to obtain timely a PMA
would have a material adverse effect on our business, financial condition and
results of operations.

     Regulatory agencies may limit the indications for which they approve or
clear any of our products. 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.

                                       19

<PAGE>

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 the FDA does not
approve our products for commercial sales, 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.

If we do not comply with applicable domestic laws and regulations after
obtaining approvals or clearances, our business results may suffer.

     After approval or clearance, we will continue to be subject to extensive
domestic 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 also are 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 pre-approval 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 also are required to provide information to the
FDA on deaths or serious injuries alleged to have been

                                       20

<PAGE>

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, 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 our
Pathfinder, Pathfinder Mini, REVELATION, REVELATION Tx and Tracer for mapping in
the European Union. We have received CE mark certification to sell our Venaport,
Vueport and Naviport guiding catheters in the European Union. We also received
approval to sell our Pathfinder, Pathfinder Mini, REVELATION, and Tracer in
Japan and Australia, and to sell our Pathfinder, Tracer, Venaport, Vueport and
Naviport in Canada. We also received CE mark certification in August 1998,
December 1998, and November 1999, to sell our REVELATION, REVELATION Tx and
REVELATION T-Flex microcatheters, respectively, for ablation of atrial
fibrillation in the European Union. 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, as the case may be.
Failure to receive or maintain approval to affix the CE mark would prohibit us
from selling these products in member countries of the European Union, and would
require significant delays in obtaining individual country approvals. No
assurance can be given that we will ever obtain or maintain such approvals. If
we do not receive or maintain these approvals, 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.

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<PAGE>

Any of these factors here could damage our business results.

We derive a 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, some European countries that are part of the European
Monetary Union, or EMU, introduced and adopted the new "Euro" currency.
Beginning in 2002, 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 in general. In particular, as a
portion 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, the EMU has not yet defined and/or
finalized some of the rules and regulations relating to the governance of the
currency. 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 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 atrial fibrillation and
ventricular tachycardia is highly competitive. Several of our competitors are
developing different 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 radio frequency, ultrasound, microwave, laser and
freezing technologies. Other companies are also developing surgical procedures
that physicians could potentially use to perform the open-heart surgical maze
procedure for the treatment of atrial fibrillation in a minimally invasive
manner. If any of these new approaches or products proves 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, or the study of the electrical
system of the heart. These competitors include Boston Scientific, through its EP
Technologies and Cardiac Pathways divisions, C.R. Bard, Inc., Johnson & Johnson,
through its Biosense-Webster 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-Webster, a division of Johnson & Johnson, and Endocardial Solutions,
Inc.

                                       22

<PAGE>

Other companies develop, market and sell alternative approaches to the treatment
of atrial fibrillation and ventricular tachycardia. These companies include
Guidant Corporation, Medtronic, Inc., and St. Jude Medical, 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 before our competitors' products.
Our failure to demonstrate the competitive advantages and achieve market
acceptance of our products would harm our business.

We license portions of our product technology from potential competitors, and
the termination of any of these licenses would harm our business.

     We rely on license agreements for some of our product technology from a
potential competitor. A license from Target Therapeutics, Inc., a subsidiary of
Boston Scientific Corporation, is the technological basis for our microcatheter
systems for mapping and ablation. Boston Scientific currently has research
efforts in the field of electrophysiology that may compete with our products.
Under the Target license agreement, we have an exclusive license under specific
issued 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 we have 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, Target Therapeutics has the right to terminate the license earlier if
we fail to comply with various commercialization, sublicensing, insurance,
royalty, product liability, indemnification, non-competition and other
obligations. Furthermore, either party can terminate the license if a material
breach 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.

     In December 2000, we sold certain patents and related intellectual property
pertaining to intravascular sensing and signal detection to Medtronic, Inc.,
which currently has research efforts in the field of electrophysiology that may
compete with our products. We received a perpetual, worldwide license at no cost
from Medtronic to use these patents and related intellectual property in our
products for mapping and ablation of arrhythmia-causing tissue. In addition,
Medtronic agreed not to sublicense the patents within our field of use to any
non-affiliated party. We have also licensed a proprietary surface coating
material from another vendor 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 we could internally develop or identify, license and integrate equivalent
technology. These delays would have a material adverse effect on our business,
financial condition and results of operations.

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<PAGE>


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 U.S. 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
a patent issuance. In addition, U.S. Congress recently amended the United States
patent laws 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,
interference proceedings in the U.S. Patent and Trademark Office 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 third parties. However, we are not certain that any licenses will be
available to us at all, 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, Target
does not indemnify us 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.

     U. S. 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 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 a
prescribed device (1) 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 we receive FDA clearance or approval, third-party
reimbursement would also depend upon decisions by the United States Health Care
Financing

                                       24

<PAGE>

Administration for Medicare, as well as by individual health maintenance
organizations, private insurers and other payers. 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.

     In March 2001, the U. S. Congress enacted, retroactive to January 2001, and
we received, pass-through reimbursement allowance on all of our U.S. approved
diagnostic and guiding catheter products, including the Pathfinder, Pathfinder
Mini, REVELATION, Tracer, Naviport, Vueport and Venaport. Pass-through
reimbursement allows for the direct charging of a specific product for
reimbursement.

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 in the amounts
necessary to achieve significant commercial sales. We currently believe that our
manufacturing capacity will be sufficient through December 2002. We expect that,
if U.S. sales for the Pathfinder and REVELATION microcatheter systems increase
or if we receive FDA clearance or approvals for other products, we will need to
expend significant capital resources and develop additional 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.

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<PAGE>

     Our manufacturing facilities are subject to periodic inspection by
regulatory authorities. Our operations must either undergo QSR compliance
inspections conducted by the FDA or receive an FDA exemption from such
compliance inspections in order for the FDA to permit us 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 comply with procedures to produce products for sale in
Europe. Any failure by us to comply with QSR requirements or to maintain our
compliance with ISO 9001 (EN 46001) standards and 93/42/EEC, the Medical Device
Directive, 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.

     Our facilities and manufacturing processes have recently undergone a
successful annual recertification inspection by the European Notified Body in
November 2001. In November 2000, the FDA conducted a QSIT-Audit of our quality
system, which we successfully passed. There is no assurance that our
manufacturing facilities will continue to meet such compliance audits and will
maintain such compliance standards.

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

     We purchase certain 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. On January 26, 2000, we signed an exclusive three-year
distribution agreement with St. Jude Medical Corporation whereby St. Jude was to
distribute our diagnostic products in the United States. St. Jude did not meet
its minimum annual sales quota for the first year under the distribution
agreement. On June 1, 2001, we mutually agreed with St. Jude to terminate the
agreement and to allow for a transition period to transfer customer accounts on
or before September 1, 2001. As the result, we plan to gear up our own small
sales force in the United

                                       26

<PAGE>

States. Therefore, we will be solely responsible for marketing and distributing
our products in the United States. Expanding our marketing and sales capability
to support sales in commercial quantities adequately 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 also have terminated several distribution arrangements because of the
distributors' failure to meet minimum sales levels under those agreements. Our
ability to operate a remote sales force effectively 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 our Pathfinder, Pathfinder Mini,
REVELATION and Tracer microcatheter systems are conducted through a number of
exclusive distributors in certain European countries and Japan and a small
direct sales force in Europe. We have sold only a limited number of Pathfinder,
Pathfinder Mini, REVELATION, and Tracer microcatheter systems through these
distributors. We also have approval to sell the REVELATION, REVELATION Tx and
REVELATION T-Flex in the European Union. 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.

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. In
2000, we settled two claims, which were filed against us in 1999, for an
aggregate amount of $32,500. We cannot be certain, in particular after
commercial introduction of our products, that we will not experience losses due

                                       27

<PAGE>

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 we label our microcatheter products for single-use
only, we are aware that some physicians are reusing such products. Moreover,
despite labeling 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.

We may experience power blackouts and higher electricity prices because of
California's current energy crisis, which could disrupt our operations and
increase our expenses.

     California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. We rely on the major Northern California
public utility, Pacific Gas & Electric Company, or PG&E, to supply electric
power to our facilities. Due to problems associated with the de-regulation of
the power industry in California and shortages in wholesale electricity
supplies, customers of PG&E have been faced with increased electricity prices,
power shortages and, in some cases, rolling blackouts. If blackouts interrupt
our power supply, we may be temporarily unable to continue our operations at our
facilities. Any such interruption in our ability to continue operations at our
facilities could delay our ability to develop or provide our products, which
could damage our reputation and result in lost revenue, either of which could
substantially harm our business and results of operations.

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

     Currently, our common stock trades on the Nasdaq SmallCap Market. During
the past year, our stock, at times, traded below $1.00 per share and the NASD
advised us that beginning on April 9, 2001, our common stock would no longer be
listed on the Nasdaq SmallCap Market. We appealed the NASD's decision, met the
continued listing requirements and on June 7, 2001, the NASD notified us that
our common stock would continue to trade on the Nasdaq SmallCap Market.

     If we were to be delisted from the Nasdaq SmallCap Market, our common stock
would be considered a penny stock under regulations of the Securities and
Exchange Commission and

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<PAGE>

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.

                                       29

<PAGE>

PART II.  OTHER INFORMATION

ITEM 2    Changes in Securities and Use of Proceeds

          On May 3, 2001, we entered into agreements with 29 accredited
          investors to sell an aggregate of 11,746,916 shares of our common
          stock at a price of $0.58 per share in a private placement. In
          addition, we issued warrants to purchase an aggregate of 5,873,465
          shares of our common stock at an exercise price of $0.87 per share.
          The warrants are redeemable by us if our common stock closed at or
          above $1.16 for fifteen consecutive trading days. In connection with
          this transaction, we paid approximately $510,988 in cash and issued
          warrants, exercisable for an aggregate of 1,174,691 shares of our
          common stock at an exercise price of $0.64 per share. Our net
          proceeds, after expenses of the placement, were approximately $6.2
          million.

          We relied on the exemption provided by Rule 506 under Regulation D and
          Section 4(2) of the Securities Act of 1933, as amended. A registration
          statement on Form S-3 was filed with the SEC on July 3, 2001.

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

          (a)  On May 10, 2001, the Company held its Annual Meeting of
               Stockholders.

          (b)  As listed below, all of management's nominees for directors were
               elected at the meeting:

               Philip C. Radlick, Ph.D. -- 20,116,616 shares voted in favor,
               240,646 against.

               Gabriel B. Vegh -- 20,181,451 shares voted in favor, 175,811
               against.

               Neville J. Jeharajah -- 20,117,151 shares voted in favor, 240,111
               against.

               Rodolfo C. Quijano, Ph.D. -- 20,117,151 shares voted in favor,
               240,111 against.

          (c)  (1) The proposal to approve six separate amendments to the
               Amended and Restated Certificate of Incorporation authorizing the
               Board of Directors, in its discretion, to effect one reverse
               stock split, ranging from a one-for-five reverse split to a
               one-for-ten reverse split of all of the issued and outstanding
               shares of its common stock was approved with 19,010,255 shares
               voting in favor, 1,296,232 shares voting against and 50,775
               shares abstaining.

               (2) The proposal to increase the number of shares of authorized
               common stock from 50,000,000 to 75,000,000 was approved with
               19,332,040 shares voting in favor, 943,237 shares voting against
               and 81,985 shares abstaining.

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<PAGE>

               (3) The proposal to amend the Company's 1993 Stock Option Plan to
               increase the number of shares reserved for issuance thereunder by
               2,000,000 was approved with 8,718,903 shares voting in favor,
               1,197,069 shares voting against, 10,349,390 broker non votes and
               91,900 shares abstaining.

               (4) The proposal to amend the Company's 1997 Employee Stock
               Purchase Plan to increase the number of shares reserved for
               issuance thereunder by 1,500,000 was approved with 8,876,812
               shares voting in favor, 860,695 shares voting against and
               10,349,390 broker non votes and 270,365 shares abstaining.

               (5) The appointment of Ernst & Young LLP as independent auditors
               of the Company for the fiscal year ending December 31, 2001 was
               ratified with 20,253,742 shares voting in favor, 61,905 shares
               voting against and 41,615 shares abstaining.

ITEM 6    Exhibits and Reports on Form 8-K

          (a)  None.
          (b)  No reports on Form 8-K were filed in the quarter ended June 30,
               2001.

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<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:    January 9, 2002                 CARDIMA, INC.



                                         Gabriel B. Vegh
                                         ---------------------------------------
                                         GABRIEL B. VEGH
                                         Chairman, Chief Executive Officer and
                                         Director

                                         Ronald E. Bourquin
                                         ---------------------------------------
                                         RONALD E. BOURQUIN
                                         Senior Vice President, Chief Financial
                                         Officer and Secretary

                                       32