<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 June 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 July 31, 1998, there were 8,282,996 shares of Registrant's Common Stock
outstanding.
<PAGE>
 
                                 CARDIMA, INC.

                                     INDEX

PART I.  FINANCIAL INFORMATION.................................................3

 ITEM 1.  FINANCIAL STATEMENTS.................................................3
  Balance Sheets as of June 30, 1998 and December 31, 1997.....................3
  Statements of Operations for the three and nine months ended 
    June 30, 1998 and 1997.....................................................4
  Statements of Cash Flows for the three and nine months ended 
    June 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

 ITEM 1. LEGAL PROCEEDINGS....................................................24
 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................24
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................24
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................24
 ITEM 5. OTHER INFORMATION....................................................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

                                       2
<PAGE>
 
PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

                                 CARDIMA, INC.

                                BALANCE SHEETS
                      (In thousands except share amounts)
<TABLE>
<CAPTION>
                                                                                                       (1)
                                                                                        June 30,   December 31,
                                                                                          1998        1997
                                                                                       ----------- ----------- 
ASSETS                                                                                 (unaudited)
<S>                                                                                    <C>         <C>         
Current Assets:
   Cash and cash equivalents                                                            $  5,012    $  8,578
   Short-term investments                                                                     -        4,270
   Accounts receivable, net of allowances for doubtful accounts
    of $26 at June 30, 1998 and $40 at December 31, 1997                                     455         268
   Inventories                                                                             1,075         532
   Other current assets                                                                      233         261
                                                                                        --------    --------  
       Total current assets                                                                6,775      13,909

Property and equipment, net                                                                2,917       2,488
Restricted cash                                                                              170         192
Other assets                                                                                 724       1,085
                                                                                        --------    --------  
Total assets                                                                            $ 10,586    $ 17,674
                                                                                        ========    ======== 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                     $  1,040    $    898
   Accrued compensation                                                                      768         753
   Other current liabilities                                                                  12          55
   Notes payable                                                                              -            7
   Capital lease obligation - current portion                                                717         587
                                                                                        --------    --------  
       Total current liabilities                                                           2,537       2,300

Deferred rent                                                                                 66          90
Capital lease obligation - noncurrent portion                                                856         840
Commitments
Stockholders' equity
   Common stock, $.001 par value; 25,000,000 shares authorized, 8,212,248 shares
    issued and outstanding at June 30, 1998, 8,103,875 at December 31, 1997; at       
    amount paid in                                                                        45,790      45,597
   Deferred compensation                                                                    (604)       (731)
   Accumulated deficit                                                                   (38,059)    (30,422)
                                                                                        --------    --------  
       Total stockholders' equity                                                          7,127      14,444
                                                                                        --------    --------  
Total liabilities and stockholders' equity                                              $ 10,586    $ 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  Six months ended
                                                                   June 30,           June 30,
                                                             -------------------  -----------------
                                                               1998      1997      1998       1997
                                                             -------    -------   -------   -------
<S>                                                          <C>        <C>       <C>       <C>

Net sales                                                    $   625    $   319   $ 1,126   $   536
Cost of goods sold                                               595        457     1,343       831
                                                             -------    -------   -------   -------  
   Gross profit                                                   30       (138)     (217)     (295)

Operating expenses:
   Research and development                                    1,908      1,059     3,571     1,869
   Selling, general and administrative                         1,980      1,646     4,027     2,976
                                                             -------    -------   -------   -------  
      Total operating expenses                                 3,888      2,705     7,598     4,845
                                                             -------    -------   -------   -------  
Operating loss                                                (3,858)    (2,843)   (7,815)   (5,140)

Interest  and other income                                       110        110       254       135
Interest expense                                                 (40)       (28)      (76)      (81)
                                                             -------    -------   -------   -------  

Net loss                                                     $(3,788)   $(2,761)  $(7,637)  $(5,086)
                                                             =======    =======   =======   =======  

Basic and diluted net loss per share                         $ (0.46)             $ (0.94)
                                                             =======              =======            
Shares used in computing basic and diluted net loss per
 share                                                         8,186                8,160
                                                             =======              =======

Pro forma net loss per share                                            $ (0.43)            $ (1.03)
                                                                        =======             =======  

Shares used in computing pro forma net loss per share                     6,433               4,939
                                                                        =======             =======
</TABLE> 
                See accompanying notes to financial statements

                                       4
<PAGE>
 
                                 CARDIMA, INC.

                           STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                        Six Months ended
                                                                           June 30,
                                                                      --------------------
                                                                        1998       1997
                                                                      --------    --------
<S>                                                                   <C>         <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                            $(7,637)    $(5,086)

  Adjustments to reconcile net loss to net cash provided by 
   operations:
    Depreciation and amortization                                         415         277
    Amortization of deferred compensation                                 127         101
    Loss on disposal of assets                                             12          -
  Changes in operating assets and liabilities:
    Accounts receivable                                                  (187)        (93)
    Inventories                                                          (543)       (209)
    Other current assets                                                   28         (70)
    Restricted cash                                                        22          20
    Other assets                                                          (17)        475
    Accounts payable                                                      142        (525)
    Accrued compensation                                                   15          60
    Other current liabilities                                             (43)         41
    Deferred rent                                                         (24)        (25)
                                                                      -------     ------- 
      Net cash used in operating activities                            (7,690)     (5,034)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments                                    (517)          -
  Maturities and sales of short-term investments                        4,787           -
  Capital expenditures                                                   (342)       (717)
                                                                      -------     ------- 
    Net cash used in investing activities                               3,928        (717)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments under capital leases                                (332)       (210)
  Net proceeds from issuance of preferred stock                             -      13,442
  Payments under notes payable                                             (7)     (1,674)
  Net proceeds from sale of common stock                                  194      13,765
  Proceeds from sale/leaseback of capital equipment                       341           -
                                                                      -------     ------- 
    Net cash provided by financing activities                             196      25,323
                                                                      -------     ------- 

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                   (3,566)     19,572

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

CASH AND CASH EQUIVALENTS, END OF PERIOD                              $ 5,012     $20,479
                                                                      =======     =======
</TABLE> 

                                       5
<PAGE>
 
                                 CARDIMA, INC.

                         NOTES TO FINANCIAL STATEMENTS
                                 JUNE 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 six month periods ended June 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.

2.   BALANCE SHEET COMPONENTS

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

 
<TABLE>
<CAPTION>
                                                June 30,                   December 31,
                                                  1998                        1997/1/
                                           -----------------            -----------------
<S>                                           <C>                          <C>
Inventories:
      Raw materials                             $   218                      $   209
       Work-in-process                              403                          119
       Finished goods                               454                          204
                                                -------                      -------
                                                $ 1,075                      $   532
                                                =======                      =======
Property and equipment:              
       Equipment                                  4,512                        3,715
       Leasehold improvements                        99                           99
                                                -------                      -------
                                                $ 4,611                      $ 3,814
       Less accumulated depreciation             (1,694)                      (1,326)
                                                -------                      -------
                                                $ 2,917                      $ 2,488
                                                =======                      =======
</TABLE>
----------
/1/   The information in this column was derived from the Company's audited
      financial statements as of December 31, 1997.

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

3.   NET LOSS PER SHARE

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

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

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

<TABLE>
<CAPTION>
                                                    Three Months Ended June 30,                Six Months Ended June 30,
                                                     1998                 1997                 1998                 1997
                                                --------------       --------------       --------------       --------------
<S>                                             <C>                  <C>                  <C>                  <C>
Net loss                                               $(3,788)             $(2,761)             $(7,637)             $(5,086)
                                                       =======              =======              =======              =======
   Weighted average shares outstanding....               8,186                2,280                8,160                1,178
                                                       -------              -------              -------              -------
Shares used to compute basic and diluted
 net loss per share.......................               8,186                2,280                8,160                1,178
                                                       =======              =======              =======              =======
Basic and diluted net loss per share......             $ (0.46)             $ (1.21)             $ (0.94)             $ (4.32)
                                                       =======              =======              =======              =======
</TABLE>

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

Pro forma basic and diluted net loss per share information for the three and six
month periods ended June 30, 1997 is as follows (in thousands except for per
share data):

                                       7
<PAGE>
 
<TABLE>
<CAPTION>
                                                            Three Months Ended            Six Months Ended
                                                               June 30, 1997                June 30, 1997
                                                          ----------------------       ----------------------
<S>                                                       <C>                          <C>
Net loss................................................         $(2,761)                     $(5,086)
                                                                 =======                      =======
Shares used in computing basic and diluted net loss per          
 share..................................................           2,280                        1,178
Adjusted to reflect assumed conversion of preferred              
 stock at the date of issuance..........................           4,153                        3,761
                                                                 -------
Shares used in computing pro forma basic and diluted             
 loss per share.........................................           6,433                        4,939
                                                                 =======                      =======
Pro forma basic and diluted net loss per share..........         $ (0.43)                     $ (1.03)
                                                                 =======                      =======
</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.  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 at the end of the term, if fully
utilized.  As of June 30, 1998, $3.0 million of borrowing capacity remained
available to the Company under this line of credit.

                                       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 $3.4 million from
inception to June 30, 1998, which until January 1997 were primarily in Europe
and Japan, from sales of the Cardima Pathfinder and Tracer microcatheter systems
for diagnosing Ventricular Tachycardia (VT) and the Revelation microcatheter
system for diagnosing Atrial Fibrillation (AF), as well as ancillary products
such as the Venaport guiding catheters.  In January 1997, the Company received a
510(k) clearance in the United States and began to market and sell the Cardima
Pathfinder system for diagnosing VT.  As a result, the Company has derived a
majority of its revenues in 1997 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, Tracer and Cardima Revelation microcatheter systems, 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.

The Company has a limited history of operations and has experienced significant
operating losses since inception.  The Company expects that its operating losses
will continue for the foreseeable future as the 

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

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

Net Sales

Net sales for the quarter ended June 30, 1998 increased 96% to $625,000 from
$319,000 in the same period in 1997.  Net sales for the six month period ended
June 30, 1998 increased 110% to $1,126,000 from $536,000 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 June 30, 1998 increased 119% to
$451,000 from $206,000 in the same period in 1997.  U.S. sales for the six month
period ended June 30, 1998 increased 155% to $829,000 from $325,000 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 June 30, 1998 increased 30% to $595,000 from $457,000
in the same period in 1997.  Cost of goods sold for the six month period ended
June 30, 1998 increased 62% to $1,343,000 from $831,000 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 June 30, 1998 increased
80% to $1,908,000 from $1,059,000 in the same period in 1997.  Research and
development expenses for the six month period ended June 30, 1998 increased 91%
to $3,571,000 from $1,869,000 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 June 30, 1998
increased 20% to $1,980,000 from $1,646,000 in the same period in 1997.
Selling, general and administrative expenses for the six month period ended June
30, 1998 increased 35% to $4,027,000 from $2,976,000 in the same period in 1997.
Selling expenses for the quarter ended June 30, 1998 increased 47% to $853,000
from $582,000 in the same period in 1997.  Selling expenses for the six month
period ended June 30, 1998 increased 70% to $1,793,000 from $1,057,000 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.  General and administrative expenses for the quarter
ended June 30, 1998 decreased two percent to $620,000 from $631,000 in the same
period in 1997.  General and administrative expenses for the six month period
ended June 30, 1998 increased 18% to $1,286,000 from $1,094,000 in the same
period in 1997.  The decrease for the quarter ended June 30, 1998 is due
primarily to lower recruiting expenses in 1998 compared to expenses incurred 

                                       10
<PAGE>
 
in the same period in 1997. The increase for the six month period ended June 30,
1998 is due primarily to additional staff and expenses related to the
requirements of a public company. Marketing expenses for the quarter ended June
30, 1998 increased 17% to $507,000 from $433,000 in the same period in 1997.
Marketing expenses for the six month period ended June 30, 1998 increased 15% to
$948,000 from $825,000 in the same period in 1997. The increase is due primarily
to additional staff and 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 June 30, 1998 remained at the
same level of  $110,000 as in the same period in 1997.  Interest and other
income for the six month period ended June 30, 1998 increased to $254,000 from
$135,000 in the same period in 1997.  The increase for the six month period
ended June 30, 1998 is due primarily to larger cash and cash equivalent balances
as a result of the Company's initial public offering in June 1997.

Interest Expense

Interest expense for the quarter ended June 30, 1998 increased to $40,000 from
$28,000 in the same period in 1997.  Interest expense for the six month period
ended June 30, 1998 decreased to $76,000 from $81,000 in the same period in
1997.  The increase for the quarter ended June 30, 1998 is due primarily to
higher borrowing levels for purchases of capital equipment.  The decrease for
the six month period ended June 30, 1998, compared to the same period in 1997 is
due primarily to the conversion of all Notes Payable into shares of series E
preferred stock in March 1997.

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 June 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, and equipment leases, which have totaled $2.6
million for the acquisition of certain capital equipment.  As of June 30, 1998,
the Company had approximately $5.0 million in cash and cash equivalents.

Net cash used in operating activities was approximately $7.7 million and $5.0
million for the six months ended June 30, 1998 and 1997, respectively, resulting
primarily from operating losses incurred during such periods.  Net cash provided
by investing activities was approximately $3.9 million for the six months ended
June 30, 1998, which was attributable primarily to maturities and sales of
short-term investments.   Net cash used was approximately $717,000 for the six
months ended June 30, 1997, which was attributable primarily to capital
expenditures.  Net cash provided by financing activities was approximately
$196,000 and $25.3 million for the six months ended June 30, 1998 and 1997,
respectively, resulting primarily from the Company's financing equipment through
its established lease line, 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

                                       11
<PAGE>
 
working capital purposes.  As of June 30, 1998, $1.0 million and $3.0 million of
borrowing capacity remained available to the Company under these lines.  The
Company's future liquidity and capital requirements will depend upon numerous
factors, including the progress of the Company's product development efforts,
the progress of the Company's clinical trials, actions relating to regulatory
matters, the costs and timing of expansion of product development,
manufacturing, sales and marketing activities, the extent to which the Company's
products gain market acceptance, and competitive developments.  The Company
believes that available cash, a line of credit and lease lines will be
sufficient to meet the Company's operating expenses and capital requirements
through the balance of 1998.  There can be no assurance, however, that the
Company will not require additional financing during that period, or that if
required, such additional financing will be available on terms acceptable to the
Company, if at all.  The Company may seek to raise additional funds through
public or private financing, collaborative relationships or other arrangements.
There can be no assurance that such additional funding, if needed, will be
available on terms acceptable to the Company, if at all.  Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants.  Collaborative arrangements, if
necessary to raise additional funds, may require the Company to relinquish its
rights to certain of its technologies, products or marketing territories.  The
failure of the Company to raise capital when needed would have a material
adverse effect on the Company's business, financial condition and results of
operations.

FACTORS AFFECTING FUTURE RESULTS

History of Losses and Expectation of Substantial Future Losses

Since inception, the Company has experienced losses and expects to experience
substantial net losses for the foreseeable future.  To date, sales of the
Company's microcatheter systems have been limited.  The Company had net losses
of approximately $12.3 million and $7.8 million for the Company's fiscal years
ended 1997 and 1996, respectively, and $7.6 million for the six months ended
June 30, 1998.  As of June 30, 1998, the Company had an accumulated deficit of
approximately $38.1 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.



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 

                                       12
<PAGE>
 
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 June 30,
1998, $1.0 million and $3.0 million of borrowing capacity remained available to
the Company under these lines. The Company believes that available cash, a line
of credit and lease lines will be sufficient to meet the Company's operating
expenses and capital requirements through the balance of 1998. In addition, if
unforeseen difficulties arise in the course of developing its products,
performing clinical trials, obtaining necessary regulatory clearances and
approvals or other aspects of the Company's business, the Company may be
required to invest greater-than-anticipated funds. As a consequence, the Company
will be required to raise additional funds through public or private debt or
equity financings, collaborative relationships, bank facilities or other
arrangements. There can be no assurance that, if additional financing is needed,
it will be available on terms acceptable to the Company, if at all. Any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants.

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

To date, the Company has completed two clinical trials and has received 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 currently expects to file an IDE to begin clinical
testing of its Therastream microcatheter system for VT ablation in 1998.  The
Company must complete these clinical trials and a pivotal trial, if initiated,
prior to the filing of a PMA, and must receive PMA approval prior to marketing
such products for ablation in the United States.  Clinical trials of the
Company's microcatheter systems will require substantial financial and
management resources of the Company and the completion of such trials will take
several years.  There can be no assurance that necessary IDEs will be granted by
the FDA, that human clinical trials, if initiated, will be completed or that
these clinical studies will validate the results of the Company's pre-clinical
studies or demonstrate that such products are safe and effective.  In addition,
the clinical trials may identify significant technical or other obstacles to be
overcome prior to obtaining necessary regulatory approvals or market acceptance.
The failure of the Company to initiate and complete clinical trials, demonstrate
product safety and clinical effectiveness, or obtain regulatory approval for the
use of the Company's microcatheter systems for the ablation of AF or VT would
have a material adverse effect on the Company's business, financial condition
and results of operations.

Uncertainty of Product and Procedure Acceptance

                                       13
<PAGE>
 
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 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.

                                       14
<PAGE>
 
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 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 

                                       15
<PAGE>
 
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 expects to
file an additional IDE and begin its clinical trials for the Therastream
microcatheter system in the second half of 1998.  There can be no assurance that
any clinical study that the Company proposes will be permitted by the FDA, will
be completed or, if completed, will provide data and information that supports
additional clinical investigations of the type necessary to obtain PMA approval.
The Company expects that a PMA application will not be submitted for at least
one year, if at all.  No assurance can be given that the Company will ever be
able to obtain PMA approval for any of its ablation products.  Failure of the
Company to obtain timely PMA approval would have a material adverse effect on
the Company's business, financial condition and results of operations.

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

Sales of medical devices outside the United States are subject to international
regulatory requirements that vary from country to country.  The time required
for approval varies from country to country and may be longer or shorter than
the time required in the United States.  The Company has obtained the requisite
approvals by means of the CE mark and TGA approval to sell the Cardima
Pathfinder, Cardima Pathfinder Mini, Revelation and Tracer for mapping in the
European Union ("EU") and Australia, respectively, to sell the Cardima
Pathfinder, Cardima Pathfinder Mini, 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 has ongoing clinical
trials in the EU for its AF ablation products, and has submitted this data to
support its application for CE mark. There can be no assurance the Company will
be successful in obtaining such approvals.
                                       16
<PAGE>
 
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.

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 

                                       17
<PAGE>
 
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 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 

                                       18
<PAGE>
 
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 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 

                                       19
<PAGE>
 
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 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 

                                       20
<PAGE>
 
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 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 

                                       21
<PAGE>
 
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 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

                                       22
<PAGE>
 
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.

                                       23
<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 June 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 June 30,
          1998, the Company has used approximately $8,545,693 to fund ongoing
          operations.

Item 3.   Defaults Upon Senior Securities

          None.

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

          (a) On May 19, 1998, the Registrant held its Annual Meeting of
          Stockholders.

          (b) As listed below, all of management's nominees for directors were
          elected at the meeting pursuant to proxies solicited pursuant to
          Regulation 14 under the Securities and Exchange Act of 1934

<TABLE>
<CAPTION>
              Name of Nominee                     No. of Votes For         No. of Votes Withheld        No. of Votes Abstain
<S>                                          <C>                         <C>                         <C>
Phillip Radlick, Ph.D.                              7,173,661                           0                       1,235
Gabriel Vegh                                        7,173,661                           0                       1,235
Michael J.F. Du Cros                                7,173,661                           0                       1,235
Neal Moszkowski                                     7,173,661                           0                       1,235
Charles P. Waite, Jr.                               7,173,661                           0                       1,235
</TABLE>

          c)  The appointment of Ernst & Young LLP as independent auditors of
          the Company for the fiscal year ending December 31, 1998 was ratified
          with 7,174,896 shares voting in favor, 0 voting against, 0 shares
          abstaining.

                                       24
<PAGE>
 
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 June 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:    August 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 JUNE 30, 1998


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


   10.25       Master Loan and Security Agreement Dated June 19, 1998, between
               Registrant and Transamerica Business Credit Corp.

   27.1        Financial Data Schedule



                                       27