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

                                  FORM 10-Q
                                        
  [X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities
       Exchange Act of 1934.
       For the quarterly period ended September 30, 1998

                                     or

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

                       COMMISSION FILE NUMBER: 0-22419
                                               -------

                                CARDIMA, INC.

           (Exact name of registrant as specified in its charter)


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


47266 BENICIA STREET, FREMONT, CA                               94538-7330
(Address of  Principal Executive Offices)                       (Zip Code)

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

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

As of October 31, 1998, there were 8,350,322 shares of Registrant's Common Stock
outstanding.
<PAGE>
 
                                 CARDIMA, INC.

                                     INDEX
<TABLE> 
<CAPTION> 

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

 Item 1.  Financial Statements...................................................................... 3
   Balance Sheets as of September 30, 1998 and December 31, 1997.................................... 3
   Statements of Operations for the three and nine months ended September 30, 1998 and 1997......... 4
   Statements of Cash Flows for the nine months ended September 30, 1998 and 1997................... 5
   Notes to financial statements.................................................................... 6
 Item 2.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations.................................................................... 9

PART II. OTHER INFORMATION..........................................................................25

 Item 1.  Legal Proceedings.........................................................................25
 Item 2.  Changes in Securities and Use of Proceeds.................................................25
 Item 3.  Defaults Upon Senior Securities...........................................................25
 Item 4.  Submission of Matters to a Vote of Security Holders.......................................25
 Item 5.  Other Information.........................................................................25
 Item 6.  Exhibits and Reports on Form 8-K..........................................................25

SIGNATURES..........................................................................................26

INDEX TO EXHIBITS FOR FORM 10-Q.....................................................................27

 EXHIBIT 27.1.......................................................................................28
</TABLE> 

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

                                 CARDIMA, INC.

                                BALANCE SHEETS
                     (In thousands, except share amounts)

<TABLE> 
<CAPTION> 
                                                                                   September 30,          December 31,
                                                                                        1998                  1997
                                                                                  -------------------   -------------------
<S>                                                                                     <C>                     <C> 
ASSETS                                                                              (unaudited)               (1)
Current Assets:                                                             
       Cash and cash equivalents                                                    $        4,440        $        8,578
       Short-term investments                                                                    -                 4,270
       Accounts receivable, net of allowances for doubtful accounts         
             of $33 at September 30, 1998 and $40 at December 31, 1997                         394                   268
       Inventories                                                                           1,828                   532
       Other current assets                                                                    372                   261
                                                                                  -------------------   -------------------
             Total current assets                                                            7,034                13,909

Property and equipment, net                                                                  3,142                 2,488
Restricted cash                                                                                105                   192
Other assets                                                                                   535                 1,085
                                                                                  -------------------   -------------------
Total assets                                                                        $       10,816        $       17,674
                                                                                  ===================   ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Accounts payable                                                             $        1,540        $          898
       Accrued compensation                                                                  1,000                   753
       Other current liabilities                                                                13                    55
       Notes payable                                                                             -                     7
       Capital lease obligation - current portion                                              864                   587
       Line of credit obligation - current portion                                             563                     -
                                                                                  -------------------   -------------------
             Total current liabilities                                                       3,980                 2,300

Deferred rent                                                                                   54                    90
Capital lease obligation - noncurrent portion                                                1,106                   840
Line of credit obligation - noncurrent portion                                               2,437                     -
Stockholders' equity
   Common stock, $.001 par value; 25,000,000 shares authorized, 
       8,317,086 shares issued and outstanding at September 30, 
       1998, 8,103,875 at December 31, 1997; at amount paid in                              45,861                45,597
       Deferred compensation                                                                  (541)                 (731)
       Accumulated deficit                                                                 (42,081)              (30,422)
                                                                                  -------------------   -------------------
             Total stockholders' equity                                                      3,239                14,444           
                                                                                  -------------------   -------------------
Total liabilities and stockholders' equity                                          $       10,816        $       17,674           
                                                                                  ===================   ===================

</TABLE> 
(1)    The information in this column was derived from the Company's audited
       financial statements as of December 31, 1997. See accompanying notes to
       financial statements.

                                       3
<PAGE>
 
                                  CARDIMA, INC.

                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)
<TABLE> 
<CAPTION> 
                                                                     Three months ended                    Nine months ended
                                                                        September 30,                         September 30,
                                                             ---------------------------------     ---------------------------------

                                                                 1998               1997               1998               1997
                                                             --------------     --------------     --------------     --------------

<S>                                                             <C>                     <C>             <C>              <C> 
Net sales                                                     $       643        $       314        $     1,769        $       850
Cost of goods sold                                                    586                501              1,929              1,332
                                                             --------------     --------------     --------------     --------------


       Gross profit                                                    57               (187)              (160)              (482)

Operating expenses:
       Research and development                                     1,874              1,760              5,445              3,629
       Selling, general and administrative                          2,155              1,708              6,182              4,684
                                                             --------------     --------------     --------------     --------------


             Total operating expenses                               4,029              3,468             11,627              8,313
                                                             --------------     --------------     --------------     --------------


Operating loss                                                     (3,972)            (3,655)           (11,787)            (8,795)

Interest  and other income                                             30                265                284                400
Interest expense                                                      (80)               (33)              (156)              (114)
                                                             --------------     --------------     --------------     --------------


Net loss                                                      $    (4,022)       $    (3,423)       $   (11,659)       $    (8,509)
                                                             ==============     ==============     ==============     ==============


Basic and diluted net loss per share                          $     (0.49)       $     (0.42)       $     (1.42)       $     (2.44)
                                                             ==============     ==============     ==============     ==============


Shares used in computing basic and diluted net loss per 
 share                                                              8,286              8,099              8,204              3,485
                                                             ==============     ==============     ==============     ==============

</TABLE> 

                 See accompanying notes to financial statements

                                       4
<PAGE>
 
                                 CARDIMA, INC.

                           STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                                                                     Nine Months ended
                                                                                                        September 30,
                                                                                            --------------------------------- 
                                                                                                 1998                1997
                                                                                            -------------        ------------ 
<S>                                                                                             <C>                     <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                                  ($11,659)            ($8,509)

     Adjustments to reconcile net loss to net cash provided by operations:
          Depreciation and amortization                                                             647                 277
          Amortization of deferred compensation                                                     190                 101
          Loss on disposal of assets                                                                 12                   -
     Changes in operating assets and liabilities:
          Accounts receivable                                                                      (126)                (93)
          Inventories                                                                            (1,296)               (209)
          Other current assets                                                                     (111)                (70)
          Restricted cash                                                                            87                  20
          Notes receivable                                                                          (15)                  -
          Other assets                                                                              (91)                475
          Accounts payable                                                                          642                (525)
          Accrued compensation                                                                      247                  60
          Other current liabilities                                                                 (42)                 41
          Deferred rent                                                                             (36)                (25)
                                                                                            -------------        ------------ 
              Net cash used in operating activities                                             (11,551)             (8,457)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of short-term investments                                                           (517)                  -
     Maturities and sales of short-term investments                                               4,786                   -
     Capital expenditures                                                                          (192)               (717)
                                                                                            -------------        ------------ 
          Net cash used in investing activities                                                   4,077                (717)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Principal payments under capital leases                                                       (525)               (210)
     Net proceeds from issuance of preferred stock                                                    -              13,442
     Payments under notes payable                                                                    (7)             (1,674)
     Proceeds from borrowings under line of credit                                                3,000                   -
     Net proceeds from sale of common stock                                                         265              13,765
     Proceeds from sale/leaseback of capital equipment                                              603                   -
                                                                                            -------------        ------------  
          Net cash provided by financing activities                                               3,336              25,323
                                                                                            -------------        ------------ 

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                                             (4,138)             16,149

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                    8,578                 907
                                                                                            -------------        ------------ 

CASH AND CASH EQUIVALENTS, END OF PERIOD                                                         $4,440             $17,056
                                                                                            =============        ============

</TABLE> 

                                       5
<PAGE>
 
                                 CARDIMA, INC.

                         NOTES TO FINANCIAL STATEMENTS
                              SEPTEMBER 30, 1998
                                  (Unaudited)
        
1.   BASIS OF PRESENTATION

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

The operating results for the three-month and nine month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1998.  The accompanying financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.

The Company has sustained continuing operating losses and expects such losses to
continue over the next several years.  Management plans to continue to finance
the operations with a combination of equity investments, revenue and other
financing facilities.  Management believes that it will be able to obtain
additional funds through either public or private equity or debt financings,
collaborative and other arrangements with corporate partners or from other
sources.  If adequate funds are not available, the Company may be required to
reduce its level of spending, including eliminating one or more of its research
and development programs.

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

2.   BALANCE SHEET COMPONENTS

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

 
<TABLE>
<CAPTION>
                                                     September 30,                 December 31,
                                                          1998                        1997/1/
                                                 -------------------          -------------------
<S>                                                <C>                          <C>
Inventories:
       Raw materials                                   $   331                      $   209
       Work-in-process                                     287                          119
       Finished goods                                    1,210                          204
                                                 -------------------          -------------------
                                                       $ 1,828                      $   532
                                                 ===================          ===================
 
Property and equipment:
       Equipment                                         4,944                        3,715
       Leasehold improvements                               99                           99
                                                 -------------------          ------------------- 
                                                       $ 5,043                      $ 3,814
       Less accumulated depreciation                    (1,901)                      (1,326)
                                                 -------------------          -------------------
                                                       $ 3,142                      $ 2,488
                                                 ===================          ===================
</TABLE>
    

3.   NET LOSS PER SHARE

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

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



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

                                       7
<PAGE>
 
                   NOTES TO FINANCIAL STATEMENTS (continued)
                                  (Unaudited)

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

<TABLE>
<CAPTION>
                                                        Three Months Ended                        Nine Months Ended 
                                                           September 30,                             September 30,
                                                     1998                 1997                 1998                 1997
                                              ----------------     ----------------     ----------------     ----------------
 
<S>                                           <C>                  <C>                  <C>                  <C>
Net loss                                          $(4,022)             $(3,423)            $(11,659)             $(8,509)
                                              ================     ================     ================     ================ 
   Weighted average shares outstanding....          8,286                8,099                8,204                3,485
                                              ----------------     ----------------     ----------------     ----------------
 
Shares used to compute basic and diluted
 net loss per share.......................          8,286                8,099                8,204                3,485
                                              ================     ================     ================     ================ 
Basic and diluted net loss per share......        $ (0.49)             $ (0.42)            $  (1.42)             $ (2.44)
                                              ================     ================     ================     ================
</TABLE>

Pro forma net loss per share for the nine months ended September 30, 1997 has
been computed as described above and also gives effect, pursuant to SEC staff
policy, to the conversion of convertible preferred shares not included above
that were converted upon completion of the Company's initial public offering in
June 1997 (using the "if converted" method) from the original date of issuance.

Pro forma basic and diluted net loss per share information for the nine month
period ended September 30, 1997 is as follows (in thousands except for per share
data):

<TABLE>
<CAPTION>
                                                                 Nine Months Ended
                                                                September 30, 1997
                                                            ------------------------
<S>                                                           <C>
Net loss...................................................         $  (8,509)
                                                            ========================
Shares used in computing basic and diluted net loss per
    share..................................................             3,485
Adjusted to reflect assumed conversion of preferred
    stock from the date of issuance through June 1997......             2,508
                                                            ------------------------
Shares used in computing pro forma basic and diluted
    loss per share.........................................             5,993
                                                            ========================
Pro forma basic and diluted net loss per share.............         $   (1.42)
                                                            ========================
</TABLE>

4.   LINE OF CREDIT

In June 1998, the Company secured a $3.0 million line of credit which may be
used for general working capital purposes.  As of September 30, 1998, the
Company has drawn the entire $3.0 million of this line of credit.  The payment
of the line of credit is interest only for the first six months, interest and
principal for months seven through thirty-six and a balloon payment (remaining
principal balance) at the end of the term.

                                       8
<PAGE>
 
ITEM  2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

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


OVERVIEW

The Company

Since its incorporation in November 1992, Cardima has been engaged in the
design, research, development, manufacturing and testing of microcatheter
systems for the mapping (diagnosis) and ablation (treatment) of cardiac
arrhythmias.  Cardima has generated revenues of approximately $4.1 million from
inception to September 30, 1998.   Until January 1997, these revenues were
primarily in Europe and Japan from sales of the Cardima Pathfinder and Tracer
microcatheter systems for diagnosing Ventricular Tachycardia (VT) and the
Revelation(TM) microcatheter system for diagnosing Atrial Fibrillation (AF), as
well as ancillary products such as the Venaport guiding catheters.  In January
1997, the Company received a 510(k) clearance in the United States and began to
market and sell the Cardima Pathfinder system for diagnosing VT.  As a result,
the Company has derived a majority of its revenues in 1997 and 1998 in the
United States from sales of the Cardima Pathfinder for diagnosis of VT.  In
November 1997, the Company received a 510(k) clearance in the United States and
began to market and sell the Revelation microcatheter for diagnosing AF.  To
date, the Company's international sales have been made primarily through
distributors who sell the Company's products to physicians and hospitals.

The Company has obtained the right to affix the CE mark to its Cardima
Pathfinder and Tracer microcatheter systems for mapping and its Revelation
microcatheter system for both mapping and ablation of AF, permitting the Company
to market these products in the member countries of the European Union ("EU").
The Company received 510(k) clearances for the Revelation microcatheter for
mapping of AF in November 1997,  for the Vueport balloon guiding catheter in
July 1998, and the Cardima Pathfinder Mini microcatheter for mapping VT in July
1998.  The Company is seeking 510(k) clearance for its Tracer mapping catheter
and its Naviport deflectable tip guiding catheter.  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.

                                       9
<PAGE>
 
The Company has a limited history of operations and has experienced significant
operating losses since inception.  The Company expects that its operating losses
will continue for the foreseeable future as the Company continues to invest
substantial resources in product development, preclinical and clinical trials,
obtaining regulatory approval, sales and marketing and manufacturing.

RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED 1998 AND 1997

Net Sales

Net sales for the quarter ended September 30, 1998 increased 105% to $643,000
from $314,000 in the same period in 1997.  Net sales for the nine month period
ended September 30, 1998 increased 108% to $1,769,000 from $850,000 in the same
period in 1997.  Each of these increases is primarily due to U.S. sales of the
Cardima Pathfinder and Revelation lines of microcatheters for diagnosis of VT
and AF, respectively, following FDA clearance in January 1997 and November 1997,
respectively.  U.S. sales for the quarter ended September 30, 1998 increased 78%
to $449,000 from $252,000 in the same period in 1997.  U.S. sales for the nine
month period ended September 30, 1998 increased 130% to $1,279,000 from $557,000
in the same period in 1997.

Cost of Goods Sold

Cost of goods sold primarily includes raw materials costs, catheter fabrication
costs, system assembly, test costs and manufacturing overhead.  Cost of goods
sold for the quarter ended September 30, 1998 increased 17% to $586,000 from
$501,000 in the same period in 1997.  Cost of goods sold for the nine month
period ended September 30, 1998 increased 45% to $1,929,000 from $1,332,000 in
the same period in 1997.  The increase is due primarily to the increase in sales
volume and associated manufacturing staff additions.

Research and Development Expenses

Research and development expenses for the quarter ended September 30, 1998
increased 6% to $1,874,000 from $1,760,000 in the same period in 1997.  Research
and development expenses for the nine month period ended September 30, 1998
increased 50% to $5,445,000 from $3,629,000 in the same period in 1997.  The
increase is due primarily to staff additions and associated expenses in research
and development and clinical and regulatory areas incurred as the Company
increased human resources to meet development program goals and increased
expenses for clinical trials in both Europe and the U.S.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended September 30,
1998 increased 26% to $2,155,000 from $1,708,000 in the same period in 1997.
Selling, general and administrative expenses for the nine month period ended
September 30, 1998 increased 32% to $6,182,000 from $4,684,000 in the same
period in 1997.  Selling expenses for the quarter ended September 30, 1998
increased 41% to $910,000 from $647,000 in the same period in 1997.  Selling
expenses for the nine month period ended September 30, 1998 increased 59% to
$2,703,000 from $1,704,000 in the same period in 1997.  The increase is due
primarily to costs associated with the expansion of the Company's U.S. sales
force, the ongoing establishment of a direct sales force in several major
markets in Europe and the commencement of clinical trials, which requires
training of participating physicians by sales and clinical specialists.  

                                       10
<PAGE>
 
General and administrative expenses for the quarter ended September 30, 1998
increased one percent to $708,000 from $698,000 in the same period in 1997.
General and administrative expenses for the nine month period ended September
30, 1998 increased 11% to $1,995,000 from $1,792,000 in the same period in 1997.
The increase for the nine month period ended September 30, 1998 is due primarily
to expenses related to the requirements of a public company. Marketing expenses
for the quarter ended September 30, 1998 increased 48% to $537,000 from $363,000
in the same period in 1997. Marketing expenses for the nine month period ended
September 30, 1998 increased 25% to $1,484,000 from $1,188,000 in the same
period in 1997. The increase is due primarily to expenses related to the
development of marketing materials and programs to address new product
introductions.

Interest and Other Income

Interest and other income for the quarter ended September 30, 1998 decreased to
$30,000 from $265,000 as in the same period in 1997.  Interest and other income
for the nine month period ended September 30, 1998 decreased to $284,000 from
$400,000 in the same period in 1997.  The decrease for the nine month period
ended September 30, 1998 is due primarily to lower cash and cash equivalent
balances.

Interest Expense

Interest expense for the quarter ended September 30, 1998 increased to $80,000
from $33,000 in the same period in 1997.  Interest expense for the nine month
period ended September 30, 1998 increased to $156,000 from $114,000 in the same
period in 1997.  The increase is due primarily to higher borrowing levels for
purchases of capital equipment.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date principally through private
placements of equity securities, which have yielded net proceeds of $32.1
million as of September 30, 1998, together with interest income on such
proceeds, an initial public offering of Common Stock in June 1997, which yielded
net proceeds of approximately $13.6 million, equipment leases, which have
totaled $3.2 million for the acquisition of certain capital equipment and a line
of credit, which has provided $3.0 million for working capital.  As of September
30, 1998, the Company had approximately $4.4 million in cash and cash
equivalents.  The Company will require additional capital that may not be
available on terms acceptable to the Company, or at all.  Such additional
capital, if available, may be raised through public or private financings,
collaborative relationships or other arrangements.  The failure of the Company
to raise capital when needed will have a material adverse effect on the
Company's business, financial condition and results of operations.

Net cash used in operating activities was approximately $11.6 million and $8.5
million for the nine months ended September 30, 1998 and 1997, respectively,
resulting primarily from operating losses incurred during such periods.  Net
cash provided by investing activities was approximately $4.1 million for the
nine months ended September 30, 1998, which was attributable primarily to
maturities and sales of short-term investments.  Net cash used was approximately
$717,000 for the nine months ended September 30, 1997, which was attributable
primarily to capital expenditures.  Net cash provided by financing activities
was approximately $3.3 million and $25.3 million for the nine months ended
September 30, 1998 and 1997, respectively, resulting primarily from the
Company's financing equipment through its 

                                       11
<PAGE>
 
established lease line, borrowings under its line of credit, the Company's sale
of equity securities in private placement transactions and the Company's initial
public offering in June 1997.

In February 1998, the Company entered into an equipment lease that permits the
Company up to $1.5 million of financing for the purchase of office and
manufacturing equipment, software and custom-built equipment.  In June 1998, the
Company secured a $3.0 million line of credit which may be used for general
working capital purposes.  As of September 30, 1998, $0.5 million of borrowing
capacity remained available to the Company under the equipment lease line and
the Company has drawn the entire $3.0 million line of credit.  The Company's
future liquidity and capital requirements will depend upon numerous factors,
including the progress of the Company's product development efforts, the
progress of the Company's clinical trials, actions relating to regulatory
matters, the costs and timing of expansion of product development,
manufacturing, sales and marketing activities, the extent to which the Company's
products gain market acceptance, and competitive developments.  The Company
believes that available cashand lease lines will be sufficient to meet the
Company's operating expenses and capital requirements through the balance of
1998.  The Company will require additional capital that may not be available on
terms acceptable to the Company, or at all.  The Company is evaluating sources
of capital and has engaged an investment banking firm to assist it in these
efforts.  Such additional capital, if available, may be raised through public or
private financings, collaborative relationships or other arrangements.  There
can be no assurance that such additional capital will be available on terms
acceptable to the Company, or at all.  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 results of operations.

FACTORS AFFECTING FUTURE RESULTS

History of Losses and Expectation of Substantial Future Losses

Since inception, the Company has experienced losses and expects to experience
substantial net losses for the foreseeable future.  To date, sales of the
Company's microcatheter systems have been limited.  The Company had net losses
of approximately $12.3 million and $7.8 million for the Company's fiscal years
ended 1997 and 1996, respectively, and $11.7 million for the nine months ended
September 30, 1998.  As of September 30, 1998, the Company had an accumulated
deficit of approximately $42.1 million.  The Company expects to incur
substantial net operating losses for the foreseeable future as a result of
research and product development, clinical trials, manufacturing, sales,
marketing and other expenses expected to be incurred as the Company further
develops, seeks regulatory approvals, tests and distributes its microcatheter
systems.  The Company's limited operating history makes accurate prediction of
future operating results difficult or impossible.  There can be no assurance
that the Company will ever generate substantial revenue or achieve
profitability.  Failure by the Company to generate substantial revenues would
have a material adverse effect on the Company's business, financial condition
and results of operations.

                                       12
<PAGE>
 
Future Additional Capital Requirements;  No Assurance Future Capital Will be
Available

The Company's future liquidity and capital requirements will depend on numerous
factors, including: the progress of the Company's clinical research and product
development programs; the receipt of, and the time required to obtain,
regulatory clearances and approvals; the costs and timing of expansion of
product development, manufacturing and sales and marketing activities; the
extent to which the Company's products gain market acceptance; competitive
developments; and other factors.  In February 1998, the Company entered into an
equipment lease agreement that permits the Company to finance up to $1.5 million
of office and manufacturing equipment, software and custom built equipment.  In
June 1998, the Company secured a $3.0 million line of credit which may be used
for general working capital purposes.  As of September 30, 1998, $0.5 million of
borrowing capacity remained available under the equipment lease and the Company
has drawn the entire $3.0 million line of credit.  The Company believes that
available cash and lease lines will be sufficient to meet the Company's
operating expenses and capital requirements  through the balance of 1998.  The
Company will require additional capital that may not be available on terms
acceptable to the Company, or at all. The Company is evaluating sources of
capital and has engaged an investment banking firm to assist it in these
efforts. In addition, if unforeseen difficulties arise in the course of
developing its products, performing clinical trials, obtaining necessary
regulatory clearances and approvals or other aspects of the Company's business,
the Company may be required to invest greater-than-anticipated funds. As a
consequence, the Company will be required to raise additional capital through
public or private debt or equity financings, collaborative relationships, bank
facilities or other arrangements. There can be no assurance that such additional
capital will be available on terms acceptable to the Company, or at all. Any
additional equity financing is expected to be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants.

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

To date, the Company has completed two clinical trials and has received three
510(k) pre-market clearances from the FDA with respect to its Cardima Pathfinder
and Pathfinder Mini microcatheter systems for venous mapping of VT and
Revelation microcatheter system for mapping and pacing of the atria. The Company
also received 510(k) clearance for the Vueport guiding catheter in June 1998 and
is seeking 510(k) clearance for its Tracer mapping catheter and its Naviport
deflectable tip guiding catheter. Failure to obtain clearances for the Company's
other diagnostic products and guiding catheters under development on a timely
basis would have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company is in the early stage of developing, testing and obtaining
regulatory approval for its microcatheter systems designed for ablation of AF
and VT. The Company is currently developing the Revelation Tx microcatheter
system for ablation of AF and the Therastream microcatheter system for ablation
of VT. The Company is required to obtain an IDE from the FDA prior to conducting
human clinical trials of its microcatheter systems for ablation. The Company
filed an IDE for clinical testing of the Revelation microcatheter system for the
mapping and ablation of AF in January 1997. The Company completed the mapping
phase of this feasibility study in August 1997 and began treating the first
patient in the ablation phase with the Revelation Tx microcatheter system in
March 1998. The Company has completed a 10 patient AF ablation feasibility study
and is preparing to submit to the FDA a supplement to its IDE requesting
expansion of the study in October 1998. The Company currently expects to file an
IDE to begin clinical testing of its Therastream microcatheter system for VT
ablation in 1998. The Company must complete these clinical trials and a pivotal
trial, if initiated, prior to the filing of a PMA, 

                                       13
<PAGE>
 
and must receive PMA approval prior to marketing such products for ablation in
the United States. Clinical trials of the Company's microcatheter systems will
require substantial financial and management resources of the Company and the
completion of such trials will take several years. There can be no assurance
that necessary IDEs will be granted by the FDA, that human clinical trials, if
initiated, will be completed or that these clinical studies will validate the
results of the Company's pre-clinical studies or demonstrate that such products
are safe and effective. In addition, the clinical trials may identify
significant technical or other obstacles to be overcome prior to obtaining
necessary regulatory approvals or market acceptance. The failure of the Company
to initiate and complete clinical trials, demonstrate product safety and
clinical effectiveness, or obtain regulatory approval for the use of the
Company's microcatheter systems for the ablation of AF or VT would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Uncertainty of Product and Procedure Acceptance

The Company's microcatheter systems represent a novel approach to the mapping
and ablation of AF and VT.  Acceptance of the Company's products and procedures
by physicians, patients and health care payors will be necessary in order for
the Company to be successful.  The Company's microcatheter systems for the
mapping and ablation of AF and VT are new technologies that must compete with
more established treatments such as drugs, external electrical cardioversion and
defibrillation, implantable defibrillators, purposeful destruction of the Atrio-
Ventricular ("AV") node followed by implantation of a pacemaker, and open heart
surgery.  It is likely that physicians will not recommend the use of the
Company's microcatheter systems unless they conclude, based on clinical data and
other factors, that these systems provide a safe, effective and cost-efficient
alternative to established or emerging approaches to the mapping and ablation of
AF and VT.  Although the Company has received regulatory clearance to market the
Cardima Pathfinder and Pathfinder Mini microcatheter systems for mapping VT and
the Revelation microcatheter system for mapping AF, none of the products
currently being developed by Cardima for ablation of AF and VT has received
regulatory approval in the United States.  Even if the Company's ablation
products are successfully developed and the required regulatory approvals are
obtained, there can be no assurance that such products and the associated
procedures will ultimately gain any significant degree of market acceptance.
Since the Company's sole product focus is to design and market microcatheter
systems to map and ablate AF and VT, the failure to successfully commercialize
these systems would have a material and adverse affect on the Company's
business, financial condition and results of operations.

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

Cardima is developing its Revelation Tx microcatheter system for mapping and
ablation of AF. Currently, there is considerable clinical debate about the need
for mapping AF prior to ablation, and no mapping is performed during the open
heart surgical maze procedure. However, the Company believes that mapping prior
to ablation may be useful to identify different segments of the AF population,
each of which could require slightly different mapping and ablation procedures.
For example, some electrophysiologists believe most AF patients will need to be
mapped and ablated in both the left and right atria, while others believe only
the right atrial intervention is warranted. Market acceptance of this product
for mapping will depend largely on a determination that there is a clinical need
for diagnostic mapping prior to ablation of AF. The Revelation Tx ablation
procedure may require the use of RF energy in both the right and left atria to
produce lesions. In general, the use of RF energy in the left atrium has the
potential to create blood clots, which could travel through the vasculature to
the brain and may cause a 

                                       14
<PAGE>
 
stroke. Consequently, physicians may not recommend this procedure, in which
event the Revelation Tx would be unlikely to gain market acceptance. The failure
of the Company to complete development of the Revelation Tx or to gain
regulatory approval with respect to the Revelation Tx for ablation of AF,
demonstrate safety, clinical effectiveness or cost effectiveness, gain wide
market acceptance or successfully commercialize the Revelation Tx for the
mapping and ablation of AF would have a material adverse effect on the Company's
business, financial condition and results of operations.

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

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

The Company's Therastream microcatheter system is being developed for ablation
of VT using RF energy, which could cause damage to the arteries and veins of the
heart, potentially leading to myocardial infarction and even death.
Consequently, physicians may not recommend this procedure, in which event the
Therastream would be unlikely to gain market acceptance.  Failure of the Company
to gain market acceptance or successfully commercialize the Therastream would
have a material adverse effect on the Company's business, financial condition
and results of operations.

Fluctuations in Operating Results

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

No Assurance of Obtaining Required Regulatory Approvals; Government Regulation

The pre-clinical and clinical testing, manufacturing, labeling, distribution and
promotion of the Company's products are subject to extensive and rigorous
government regulation in the United States and 

                                       15
<PAGE>
 
other countries. Noncompliance with applicable requirements can result in
enforcement actions by the FDA including, among other things, fines,
injunctions, civil penalties, recall or seizure of products, refusal of the FDA
to grant pre-market clearances or approvals, withdrawal of marketing approvals
and criminal prosecution. Any such action would have a material adverse effect
on the Company's business, financial condition and results of operations.

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

The Company will be required to seek PMA approval for its ablation products,
including the Revelation Tx  and the Therastream microcatheters for ablation.
The process of obtaining PMA approval is much more costly, lengthy and uncertain
than the 510(k) clearance process.  The Company believes that the FDA's review
of a PMA application after filing can last from one to three years, or even
longer.  In order to prepare a PMA application, the Company will be required to
complete clinical trials to demonstrate the safety and effectiveness of these
products. The Company submitted an IDE for the Revelation microcatheter system
for mapping and ablation of AF in January 1997, and completed a mapping study at
Stanford University Hospital and Massachusetts General Hospital in September
1997.  In addition, the Company received conditional IDE approval in January
1998 and full approval in March 1998 for a feasibility clinical study for AF
ablation using the Revelation Tx microcatheter system.  The Company has
completed a 10 patient AF ablation feasibility study and is preparing to submit
to the FDA a supplement to its IDE requesting expansion of the study in November
1998.  The Company expects to file an additional IDE and begin its clinical
trials for the Therastream microcatheter system in the fourth quarter of 1998.
There can be no assurance that any clinical study that the Company proposes will
be permitted by the FDA, will be completed or, if completed, will provide data
and information that supports additional clinical investigations of the type
necessary to obtain PMA approval.  The Company expects that a PMA application
will not be submitted for at least one year, if at all.  No assurance can be
given that the Company will ever be able to obtain PMA approval for any of its
ablation products.  Failure of the Company to obtain timely PMA approval would
have a material adverse effect on the Company's business, financial condition
and results of operations.

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

                                       16
<PAGE>
 
requirements could result in enforcement action by the FDA, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Sales of medical devices outside the United States are subject to international
regulatory requirements that vary from country to country.  The time required
for approval varies from country to country and may be longer or shorter than
the time required in the United States.  The Company has obtained the requisite
approvals by means of the CE mark and TGA approval to sell the Cardima
Pathfinder, Cardima Pathfinder Mini, Revelation and Tracer for mapping in the
European Union ("EU") and Australia, respectively, to sell the Cardima
Pathfinder, Cardima Pathfinder Mini, Revelation and Tracer in Japan and to sell
the Cardima Pathfinder, Tracer, Vueport and Naviport in Canada.  The Company
also received CE mark approval on August 4, 1998 to sell the Revelation
microcatheter for treatment of AF in the EU.  The Company intends to submit data
in support of additional CE mark applications.  There can be no assurance the
Company will be successful in obtaining the CE mark for these products.  Failure
to receive approval to affix the CE mark would prohibit the Company from selling
these products in member countries of the EU, and would require significant
delays in obtaining individual country approvals.  No assurance can be given
that such approvals will ever be obtained.  In such event, the Company's
business, financial condition and results of operations would be materially and
adversely affected.

Rapid Technological Change; Significant Competition

The medical device industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend in part on
its ability to respond quickly to medical discoveries and technological changes,
including changes in the capital equipment with which the Company's
microcatheter systems are designed to be compatible. Product development
involves a high degree of risk, and there can be no assurance that the Company's
new product development efforts will result in any commercially successful
products. Failure by the Company to respond to and develop new technologies
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's microcatheter systems for the mapping and ablation of AF and VT
are new technologies that must compete with more established treatments such as
drugs, external electrical cardioversion and defibrillation, implantable
defibrillators, purposeful destruction of the AV node followed by implantation
of a pacemaker, and open heart surgery. In the market for cardiac mapping and
ablation devices, the Company believes that the primary competitive factors are
safety, effectiveness, ease of use and overall system cost. In addition, the
length of time required for products to be developed and to receive regulatory
and, in some cases, reimbursement approval are important competitive factors.
Several of the Company's competitors are currently marketing and selling
catheters in the United States and internationally that map and ablate a type of
arrhythmia known as supraventricular tachycardia ("SVT"). In addition, several
competitors are also developing new approaches and new products for the mapping
and ablation of AF and VT. These approaches include mapping systems using
contact mapping, single-point spatial mapping and non-contact, multi-site
electrical mapping technologies, and ablation systems using RF, ultrasound,
microwave, laser and cryoablation technologies. In addition, companies are
developing surgical procedures that could potentially be used by physicians to
perform the open heart surgical maze procedure for the treatment of AF in a
minimally invasive manner. If any of these new approaches or new products prove
to be safe and effective, the Company's products could be rendered
noncompetitive or obsolete, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

                                       17
<PAGE>
 
Many of the Company's competitors have an established presence in the field of
interventional cardiology and electrophysiology, including Boston Scientific,
C.R. Bard, Inc., Johnson & Johnson, through its Cordis division, St. Jude
Medical, Inc., through its Daig division, and Medtronic, Inc.  These competitors
have substantially greater financial and other resources than the Company,
including larger research and development staffs and more experience and
capabilities in conducting research and development activities, testing products
in clinical trials, obtaining regulatory approvals, and manufacturing, marketing
and distributing products.  In addition, other companies are developing
proprietary systems for the diagnosis and treatment of cardiac arrhythmias,
including Biosense, Inc. a division of Johnson and Johnson, Cardiac Pathways,
Inc. and Endocardial Solutions, Inc.  Other companies develop, market and sell
alternative approaches to the treatment of AF and VT, including Guidant
Corporation, Medtronic, Inc., and Ventritex, Inc., a subsidiary of St. Jude,
Inc., the leading manufacturers of implantable defibrillators.  There can be no
assurance that the Company will succeed in developing and marketing technologies
and products that are more clinically effective and cost-effective than the more
established treatments or the new approaches and products being developed and
marketed by its competitors.  Furthermore, there can be no assurance the Company
will succeed in developing new technologies and products that are available
prior to its competitors' products.  Failure of the Company to demonstrate the
competitive advantages of its products would have a material adverse effect on
the Company's business, financial condition and results of operations.

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

The Company's success will depend in part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets,
trademarks, copyrights and to operate without infringing or violating the
proprietary rights of others. The Company's strategy is to actively pursue
patent protection in the United States and foreign jurisdictions for technology
that it believes to be proprietary and that offers a potential competitive
advantage for its products. The patent positions of medical device companies,
including the Company, are uncertain and involve complex and evolving legal and
factual questions. The coverage sought in a patent application either can be
denied or significantly reduced before or after the patent is issued. In
addition, the United States patent laws were recently amended to exempt
physicians, other health care professionals and affiliated entities from
infringement liability for medical and surgical procedures performed on
patients. The Company cannot predict whether this amendment might have a
material adverse effect on the Company's ability to protect its proprietary
methods and procedures.

The Company relies on certain license agreements through which it licenses
certain technology from others, including technology of Target Therapeutics,
Inc., a subsidiary of Boston Scientific Corporation, ("Target") that is
integrated into the Company's microcatheter systems for mapping and ablation.
Under a license agreement with Target (the "Target License Agreement"), the
Company has an exclusive license (the "Target License") under certain issued
United States patents. The Target License covers the diagnosis and treatment of
electrophysiological disorders in areas other than the central nervous system.
The Target License will terminate upon the expiration or invalidation of all
claims under the underlying patents. In addition, the Company has obtained a 
non-exclusive license to use Target's technology, provided it has made a
substantial improvement of such technology, for the diagnosis or treatment of
diseases of the heart, other than using balloon angioplasty. Under the Target
License Agreement, Cardima has granted Target an exclusive, royalty-free license
to use any technology developed by Cardima prior to May 1996 in the fields of
neurology, interventional neuroradiology, interventional radiology, diagnosis
and treatment of male and female reproductive disorders and vascular prostheses.
The Target License

                                       18
<PAGE>
 
Agreement imposes various commercialization, sublicensing, insurance, royalty,
product liability, indemnification, non-competition and other obligations on the
Company. Failure by the Company to comply with certain of these requirements
could result in a termination of the Target License. The loss of the Company's
exclusive rights to the Target-based microcatheter technology would have a
material adverse effect on the Company's business, financial condition and
results of operations.

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

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

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

Risks Associated with International Sales

A number of risks are inherent in international transactions.  International
sales may be limited or disrupted by the imposition of government controls,
export license requirements, economic or political 

                                       19
<PAGE>
 
instability, trade restrictions, changes in tariffs or difficulties in staffing
and management. Additionally, although the Company's sales are denominated in
U.S. dollars, Cardima's business, financial condition and results of operations
may be adversely affected by fluctuations in currency exchange rates as well as
increases in duty rates and difficulties in obtaining export licenses. The
financial condition, expertise and performance of the Company's international
distributors and any future international distributors could affect sales of the
Company's products internationally and could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company is in the process of hiring, training and establishing a direct sales
force in certain major European markets. The ability of the Company to
effectively operate a remote sales force will require additional resources, time
and expense and could have a material adverse effect on the Company's business,
financial condition and results of operations. The international nature of the
Company's business also subjects it and its employees, representatives, agents
and distributors to laws and regulations of the international jurisdictions in
which they operate or in which the Company's products may be sold. The
regulation of medical devices in a number of such jurisdictions, particularly in
the EU, continues to develop, and there can be no assurance that new laws or
regulations will not have a material adverse effect on the Company's business,
financial condition and results of operations. Foreign regulatory agencies often
establish product standards different from those in the United States and any
inability to obtain foreign regulatory approvals on a timely basis could have a
material adverse effect on the Company's international business and its
financial condition and results of operations. In addition, the laws of certain
foreign countries do not protect the Company's intellectual property rights to
the same extent as do the laws of the United States. There can be no assurance
that the Company will be able to successfully commercialize any of its current
microcatheter products, including the Cardima Pathfinder, Cardima Pathfinder
Mini, Revelation and Tracer microcatheter systems, or any future product in any
foreign market.

Uncertainty Related to Third-Party Reimbursement

U. S. health care providers, including hospitals and physicians, that purchase
medical devices generally rely on third-party payors, principally federal
Medicare, state Medicaid and private health insurance plans, to reimburse all or
a part of the costs and fees associated with the procedures performed using
these devices. The Company's success will depend upon, among other things, the
ability of health care providers to obtain satisfactory reimbursement from 
third-party payors for medical procedures in which the Company's microcatheter 
systems are used. Third-party payors may deny reimbursement if they determine 
that a prescribed device has not received appropriate regulatory clearances or
approvals, is not used in accordance with cost-effective treatment methods as
determined by the payor, or is experimental, unnecessary or inappropriate. If
FDA clearance or approval is received, third-party reimbursement would also
depend upon decisions by the United States Health Care Financing Administration
for Medicare, as well as by individual health maintenance organizations, private
insurers and other payors. Reimbursement systems in international markets vary
significantly by country and by region within some countries, and reimbursement
approvals may be obtained on a country-by-country basis. Many international
markets have government managed health care systems that control reimbursement
for new devices and procedures. In most markets, there are private insurance
systems as well as government managed systems. There can be no assurance that
reimbursement for the Company's products will be available or, if available,
that such reimbursement will be available in sufficient amounts in the United
States or in international markets under either government or private
reimbursement systems, or that physicians will support and advocate
reimbursement for procedures using the Company's products. Failure by hospitals
and other users of the Company's products to obtain reimbursement from third-
party payors or changes in government and private third-party payor policies
toward reimbursement for procedures employing the

                                       20
<PAGE>
 
Company's products would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, the Company
is unable to predict what additional legislation or regulation, if any, relating
to the heath care industry or third-party coverage and reimbursement may be
enacted in the future, or what effect such legislation or regulation would have
on the Company.

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

The Company has only limited experience in manufacturing its microcatheter
systems. The Company currently manufactures its microcatheter systems in limited
quantities for U. S. and international sales and for pre-clinical and clinical
trials. The Company has no experience manufacturing its products in the volumes
that will be necessary for the Company to achieve significant commercial sales,
and there can be no assurance that reliable, high-volume manufacturing capacity
can be established or maintained at commercially reasonable costs. The Company
has recently increased the number of microcatheters manufactured and expects
that, if United States sales for the Cardima Pathfinder and Revelation
microcatheter systems increase, or if the Company receives FDA clearance or
approvals for other products, it will need to expend significant capital
resources and develop manufacturing expertise to establish large-scale
manufacturing capabilities. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving production
yields, quality control and assurance, component supply shortages, shortages of
qualified personnel, compliance with FDA regulations, and the need for further
FDA approval of new manufacturing processes. In addition, the Company believes
that substantial cost reductions in its manufacturing operations will be
required for it to commercialize its microcatheter systems on a profitable
basis. Any inability of the Company to establish and maintain large-scale
manufacturing capabilities would have a material adverse effect on the Company's
business, financial condition and results of operations.

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

The Company purchases certain key components of its products, including the
hydrophilic coating for certain of its microcatheters, from sole, single or
limited source suppliers.  For certain of these 

                                       21
<PAGE>
 
components, there are relatively few alternative sources of supply. Establishing
additional or replacement suppliers for any of the numerous components used in
the Company's products, if required, may not be accomplished quickly and could
involve significant additional costs. Any supply interruption from vendors or
failure of the Company to obtain alternative vendors for any of the numerous
components used to manufacture the Company's products would limit the Company's
ability to manufacture its products and would have a material adverse effect on
the Company's business, financial condition and results of operations.

Limited Sales, Marketing and Distribution Experience

The Company has only limited experience marketing and selling its products in
commercial quantities. Expanding the Company's marketing and sales capability to
adequately support sales in commercial quantities will require substantial
effort and require significant management and financial resources. The Company
has terminated several distribution arrangements in Europe and is in the process
of hiring a direct sales force in France and Germany. The Company currently has
one salesman in Germany and there can be no assurance that the Company will be
able to build a European direct sales force, that establishing such a sales
force will be cost-effective or that the Company's European sales efforts will
be successful. The Cardima Pathfinder, Pathfinder Mini, Revelation and Tracer
microcatheter systems for mapping of AF and VT have obtained regulatory approval
in certain international markets, and sales and marketing of these products is
often conducted through distributors. The Company received CE mark approval on
August 4, 1998 to sell the Revelation microcatheter for treatment of AF in the
EU. The Company currently has a number of exclusive distributors that cover
certain European countries and Japan and has sold only a limited number of
Cardima Pathfinder, Revelation and Tracer microcatheter systems through these
distributors. The Company does not have written agreements with certain of its
exclusive distributors. Consequently, the terms of such arrangements, such as
length of arrangements and minimum purchase obligations, are uncertain. In
addition, the laws in certain international jurisdictions may make it difficult
and costly for the Company to terminate such distribution arrangements absent
specific written termination terms. There can be no assurance that these
distributors will be able to market and sell the Company's products in these
markets. There can be no assurance that the Company will be able to enter into
additional agreements with desired distributors on a timely basis or at all, or
that such distributors will devote adequate resources to selling the Company's
products. Failure to establish an adequate sales force or to establish and
maintain appropriate distribution relationships would have a material adverse
effect upon the Company's business, financial condition and results of
operations.

Dependence Upon Key Personnel

The Company's ability to operate successfully depends in significant part upon
the continued service of certain key scientific, technical, clinical, regulatory
and managerial personnel, and its continuing ability to attract and retain
additional highly qualified personnel in these areas. Competition for such
personnel is intense, especially in the San Francisco Bay Area, and there can be
no assurance that the Company can retain such personnel or that it can attract
or retain other highly qualified scientific, technical, clinical, regulatory and
managerial personnel in the future, including key sales and marketing personnel.

Risk of Product Liability; Adequacy of Insurance Coverage

The development, manufacture and sale of the Company's microcatheter systems may
expose the Company to product liability claims.  Although the Company has not
experienced any claims to date, there can be no assurance that the Company will
not experience losses due to product liability claims in

                                       22
<PAGE>
 
the future. Although the Company currently has general liability insurance with
coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million
annual limitation, and product liability insurance with coverage in the amount
of $5.0 million per occurrence, subject to a $5.0 million annual limitation,
there can be no assurance that such coverage will continue to be available to
the Company on reasonable terms, if at all. In addition, there can be no
assurance that all of the activities encompassed within the Company's business
are or will be covered under the Company's policies. Although the Cardima
Pathfinder, Pathfinder Mini, Revelation and Tracer products are labeled for
single use only, the Company is aware that some physicians are reusing such
products. Moreover, despite labeling of the Company's microcatheters for
diagnostic use only, the Company believes that physicians are using such mapping
microcatheters for ablation. Multiple use or "off-label" use of the Company's
microcatheters could subject the Company to increased exposure to product
liability claims, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company may require
additional product liability coverage if the Company significantly expands
commercialization of its products. Such additional coverage is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
if at all. Any claims or series of claims against the Company, regardless of
their merit or eventual outcome, could have a material adverse effect on the
Company's business, financial condition and results of operations.

Impact of the Year 2000 Issue on the Company's Operations

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

The Company has utilized only internal resources to test and replace software
for Year 2000 modifications. All of the replacement software were upgrades being
purchased for other reasons. Therefore the Company has not incurred any
additional costs in researching and resolving any Year 2000 issues.

The Company currently has no contingency plans in place in the event it does not
complete all phases of the Year 2000 program. The Company plans to evaluate the
status of completion in March 1999 and determine whether such a plan is
necessary.

                                       23
<PAGE>
 
Year 2000 Disclosure Chart
                               RESOLUTION PHASES

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

                                ASSESSMENT                 REMEDIATION               TESTING                IMPLEMENTATION
------------------------------------------------------------------------------------------------------------------------------------

<S>                             <C>                        <C>                       <C>                     <C> 
Information Technology          100 % Complete             100% Complete             100% Complete          100% Complete

------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------

 
Operating Equipment with
 Embedded Chips or Software     100% Complete              100% Complete             100% Complete          100% Complete
 
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------


Products                        Not Applicable             Not Applicable            Not Applicable         Not Applicable

------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------

3rd Party
                                100% Complete for          100% Complete for         100% Complete for      100% Complete for 
                                system interface; 40%      system interface          system interface       system interface
                                Complete for all other 
                                material exposures. 

                                Expected completion date 
                                for surveying all third 
                                parties, March 1999
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                       24
<PAGE>
 
PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

          None.

Item 2.   Changes in Securities and Use of Proceeds

          Changes in Securities is incorporated by reference to Registrant's
          Annual Report on Form 10-K for the fiscal year ended December 31,
          1997.

          Use of proceeds from registered securities

          On June 6, 1997, a Registration Statement on Form S-1 (No. 333-23209)
          was declared effective by the SEC pursuant to which the Company issued
          2,275,000 shares of common stock.  The shares were sold for the
          account of the Company at a price of $7.00 per share, generating
          $15,925,000 in gross proceeds to the Company.  The initial public
          offering was managed by Bear Stearns & Company.

          From the effective date of the Registration Statement to September 30,
          1998, the Company incurred approximately $1,114,750 in underwriting
          discounts and commissions and approximately $2,285,609 of expenses
          paid to or for the underwriters and other related expenses.  The net
          proceeds of the offering, after deducting the foregoing expenses, were
          approximately $13,639,391.

          From the effective date of the Registration Statement to September 30,
          1998, the Company has used $12,117,702 to fund ongoing operations.

Item 3.   Defaults Upon Senior Securities

          None.

Item 4.   Submission of Matters to a Vote of Security Holders
 
          None.

Item 5.   Other Information

          None.

Item 6.   Exhibits and Reports on Form 8-K

          (a)  Exhibits - See Index to Exhibits.
          (b)  No reports on Form 8-K were filed by the Registrant during the
               quarter ended September 30, 1998.

                                       25
<PAGE>
 
                                 CARDIMA, INC.

                                  SIGNATURES

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


DATE:   November 12, 1998               CARDIMA, INC.


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


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

                                       26
<PAGE>
 
                                 CARDIMA, INC.

                        INDEX TO EXHIBITS FOR FORM 10-Q

                      FOR QUARTER ENDED SEPTEMBER 30, 1998


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


   27.1         Financial Data Schedule