<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, 2001
                                       or

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

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

                                  CARDIMA, INC.

             (Exact name of registrant as specified in its charter)


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


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

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

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

As of November 12, 2001 there were 37,548,210 shares of Registrant's Common
Stock outstanding.

                                        1

<PAGE>

                                  CARDIMA, INC.

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

ITEM 1.  FINANCIAL STATEMENTS ...................................................................        3
  CONDENSED BALANCE SHEETS ......................................................................        3
  CONDENSED STATEMENTS OF OPERATIONS ............................................................        4
  CONDENSED STATEMENTS OF CASH FLOWS ............................................................        5
  NOTES TO CONDENSED FINANCIAL STATEMENTS .......................................................        6
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..       10

RESULTS OF OPERATIONS - THREE AND NINE-MONTH ENDED SEPTEMBER 30, 2001 AND 2000 ..................       11

LIQUIDITY AND CAPITAL RESOURCES .................................................................       14

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

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

SIGNATURES ......................................................................................       31
</TABLE>

                                        2

<PAGE>

PART I.

ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                   September 30,  December 31,
ASSETS                                                                                 2001           2000
                                                                                   (Unaudited)    (See Note 1)
                                                                                    -----------   ------------
<S>                                                                                <C>            <C>
Current assets:
     Cash and cash equivalents .................................................   $    6,026     $      1,324
     Accounts receivable, net of allowances for doubtful accounts
         of $89 at September 30, 2001 and $124 at December 31, 2000 ............          276              221
     Inventories ...............................................................        1,358            1,663
     Other current assets ......................................................          391              240
                                                                                   ----------     ------------
         Total current assets ..................................................        8,051            3,448
Property and equipment, net ....................................................        1,452            1,803
Notes receivable from officers .................................................          558              514
Other assets ...................................................................          220              138
                                                                                   ----------     ------------
                                                                                   $   10,281     $      5,903
                                                                                   ==========     ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable ..........................................................   $    1,570     $      1,310
     Accrued compensation ......................................................          729              981
     Other current liabilities .................................................           60               31
     Capital lease obligation - current portion ................................          366              474
                                                                                   ----------     ------------
             Total current liabilities .........................................        2,725            2,796

Deferred rent ..................................................................           21               21
Capital lease obligation - noncurrent portion ..................................           89              192
Commitments

Stockholders' equity:
     Common stock, $0.001 par value; 75,000,000 shares authorized,
     36,555,178 shares issued and outstanding at September 30, 2001;
     21,579,093 as of December 31, 2000; at amount paid in .....................       81,655           71,405
     Deferred compensation .....................................................           --              (26)
     Accumulated deficit .......................................................      (74,209)         (68,485)
                                                                                   ----------     ------------
        Total stockholders' equity .............................................        7,446            2,894
                                                                                   ----------     ------------
                                                                                   $   10,281     $      5,903
                                                                                   ==========     ============
</TABLE>

            See accompanying notes to condensed financial statements

                                       3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Three-month ended                      Nine-month ended
                                                                    September 30,                          September 30,
                                                          -----------------------------------    -------------------------------
                                                               2001               2000                2001               2000
                                                          ---------------    ----------------    ---------------     -----------
<S>                                                       <C>                <C>                 <C>                 <C>
Net sales                                                 $           465    $           425     $         1,477     $      1,839
Cost of goods sold                                                    949                889               2,868            2,411
                                                          ---------------    ---------------     ---------------     ------------
         Gross profit (loss)                                         (484)              (464)             (1,391)            (572)
Operating expenses:
         Research and development                                   1,091              1,373               3,738            3,647
         Selling, general and administrative                        1,538              1,498               4,639            4,789
                                                          ---------------    ---------------     ---------------     ------------

                  Total operating expenses                          2,629              2,871               8,377            8,436
                                                          ---------------    ---------------     ---------------     ------------

Operating loss                                                     (3,113)            (3,335)             (9,768)          (9,008)
Interest and other income                                              37                 38                  93              182
Interest expense                                                      (14)               (91)                (49)            (305)
Gain on sale of intellectual property                                  --                 --               4,000               --
                                                          ---------------    ---------------     ---------------     ------------

Net loss                                                  $        (3,090)   $        (3,388)    $        (5,724)    $     (9,131)
                                                          ===============    ===============     ===============     ============

Basic and diluted loss per share                          $         (0.09)   $         (0.16)    $         (0.20)    $      (0.44)
                                                          ===============    ===============     ===============     ============

Shares used in computing basic and diluted
net loss per share                                                 34,641             21,547              28,469           20,564
                                                          ===============    ===============     ===============     ============
</TABLE>

                 See accompanying notes to financial statements

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

                                        4

<PAGE>

                                  CARDIMA, INC.

                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                Nine months ended September 30,
                                                                                          (Unaudited)
                                                                                -------------------------------
                                                                                    2001              2000
                                                                                 -----------       -----------
<S>                                                                             <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                         $    (5,724)         ($9,131)
Adjustments to reconcile net loss to net cash provided by operations:
     Depreciation and amortization                                                       655              769
     Amortization of deferred compensation                                                26              150
     Loss on disposal of assets                                                           30                2
       Changes in operating assets and liabilities:
         Accounts receivable                                                             (55)             362
         Inventories                                                                     305             (587)
         Other current assets                                                           (151)             (41)
         Notes receivable                                                                (44)            (129)
         Other assets                                                                    (82)            (118)
         Accounts payable                                                                260             (203)
         Accrued compensation                                                           (252)            (247)
         Other current liabilities                                                        29              (13)
         Deferred rent                                                                    --               17
                                                                                 -----------      -----------
             Net cash used in operating activities                                    (5,003)          (9,169)

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales of short-term investments                                            --              497
Capital expenditures                                                                    (252)            (250)
                                                                                 -----------      -----------
             Net cash used in investing activities                                      (252)             247

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases                                                 (293)            (615)
Principal payments under credit line                                                      --             (804)
Net proceeds from sale of common stock and warrant exercises                          10,250           10,989
Proceeds from sale/leaseback of capital equipment                                         --              146
                                                                                 -----------      -----------
             Net cash provided by financing activities                                 9,957            9,716
                                                                                 -----------      -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                              4,702              794
                                                                                 ===========      ===========
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                         1,324              423
                                                                                 ===========      ===========
CASH AND CASH EQUIVALENTS, END OF PERIOD                                         $     6,026      $     1,217
                                                                                 ===========      ===========
</TABLE>

                                        5

<PAGE>

                                  CARDIMA, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               September 30, 2001
                                   (Unaudited)

1.  BASIS OF PRESENTATION

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

The operating results for the three and nine-month period ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2001 or for future operating results. The
accompanying financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000. The accompanying
balance sheet at December 31, 2000 has been derived from these audited financial
statements.

2.  MANAGEMENT'S PLANS

As of September 30, 2001 the Company has approximately $6,026,000 in cash and
cash equivalents, working capital of $5,326,000 and an accumulated deficit of
$74,209,000. Assuming the Company has adequate funding to continue the course of
its development activities, the Company expects such losses to continue for at
least the next two years. Management is seeking to continue to finance
operations with a combination of funds from equity or debt offerings, revenue
from product sales, funds from potential corporate alliances and technology
licenses. The Company expects its existing capital resources will permit it to
meet its capital and operational requirements through at least March 2002.

On January 26, 2000, the Company signed an exclusive three-year distribution
agreement, "the agreement" with St. Jude Medical Corporation, or St. Jude,
whereby St. Jude's Daig Division was to distribute Cardima's diagnostic products
in the United States. The distribution agreement included an equity investment
by St. Jude. St. Jude did not meet its minimum annual purchase quota for the
first year under the distribution agreement. On June 1, 2001, the Company and
St. Jude, Daig Division mutually agreed to terminate, in its entirety, the
agreement, allowing for a transition period to transfer customer accounts back
to the Company, which expired September 1, 2001. The transfer of these accounts
required the Company to hire one additional sales representative in addition to
two sales representatives the Company employed. The incremental expense for the
increase in the sales force is expected to cost the Company approximately
$250,000 a year.

The Company plans to market and distribute its products in the United States
with a small direct sales force and plans to market and distribute its prodcuts
internationally through distributors in selected countries who will sell the
Company's products to physicians and hospitals.

                                        6

<PAGE>

In order to commercialize our products and continue operations, we will need to
raise additional capital by March 2002. Our failure to raise additional capital
to develop and market our products will cause our business to suffer and would
cause the Company to cease operations.

3.   PRIVATE PLACEMENT

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

In August 2001, the Company sold a total of 2,822,472 shares of common stock at
prices between $1.27 and $1.38 per share in a private placement transaction to
accredited investors. The transaction included warrants to investors exercisable
for 1,411,234 shares of common stock at exercise prices between $1.91 and $2.07
per share. These warrants are redeemable by the Company if the Company's common
stock closes at least 200% of the applicable warrant exercise price for
fifteen consecutive trading days. As a commission for the transaction, the
Company paid approximately $283,275 in cash and issued warrants, exercisable for
282,247 shares of common stock at exercise prices between $1.40 and $1.52 per
share. The Company's net proceeds, after expenses of the placement, were
approximately $3,400,000. The Company intends to use these proceeds for
development activities, clinical trial expenses, commercialization of product
offerings, operating costs, and other general corporate purposes.

On September 25, 2001, the Company announced that it intended to call for
redemption, subject to certain criteria, its warrants to purchase an aggregate
of up to 5,873,465 shares of common stock issued on May 3, 2001 in connection
with this private placement. The Company has set November 22, 2001 as the date
of redemption for all unexercised warrants.

                                       7

<PAGE>

4.   INVENTORY

Inventory components are as follows (in thousands):

                                   September 30,        December 31,
                                       2001                 2000
                                   -------------        -------------
Inventories:                        (Unaudited)          (See Note 1)
         Raw materials             $       664          $        751
         Work-in-process                   159                    95
         Finished goods                    535          $        817
                                   -------------        -------------
                                   $     1,358          $      1,663

                                   =============        =============

Inventory amounts shown above are net of reserves for excess and obsolete
inventory of $323,000 and $212,000 at September 30, 2001 and December 31, 2000,
respectively. The Company reserves for inventory amounts by considering the
potential excess inventory in relation to sales forecasts and the obsolescence
of inventory as a result of technological advancements.

5.   NET LOSS PER SHARE

Net loss per share has been computed using the weighted average number of shares
of common stock outstanding during the period. The Company has excluded all
warrants and stock options from the computation of basic and diluted earnings
per share because all such securities are anti-dilutive for all periods
presented.

6.   COMPREHENSIVE INCOME (LOSS)

Comprehensive loss equaled net loss for all periods presented.

7.   REVENUE RECOGNITION

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

8.   RECENT ACCOUNTING PRONONCEMENTS

                                        8

<PAGE>

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

                                        9

<PAGE>

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

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

OVERVIEW

Since its incorporation in November 1992, Cardima has been engaged in the
design, research, development, manufacturing and testing of microcatheter
systems for the mapping, or diagnosis, and ablation, or treatment, of cardiac
arrhythmias. The Company has generated revenues of approximately $12.4 million
from inception to September 30, 2001. Until January 1997, these revenues were
primarily in Europe and Japan from sales of our Cardima Pathfinder and Tracer
microcatheter systems for diagnosing VT and our Revelation microcatheter system
for diagnosing AF, as well as ancillary products such as the Venaport guiding
catheters. Subsequent to 1997, United States sales consist primarily of
Pathfinder and Revelation lines of microcatheters for diagnosis of VT and AF,
respectively, following FDA 510(k) clearance. In January 2000, the Company
signed an exclusive three-year distribution agreement with St. Jude Medical
Corporation, or St. Jude. As of February 1, 2001, the distribution agreement
reverted to a non-exclusive arrangement due to Daig's failure to meet the
contractual first-year minimum sales level and on June 1, 2001, the agreement
was terminated in its entirety, with a transition period until September 1,
2001. The Company plans to market and distribute its products in the United
States with a small direct sales force and distributors in selected countries
who will sell the Company's products to physicians and hospitals. To date, the
Company's international sales have been made through a small direct sales force
and plans to market and distribute its products internationally through
distributors in selected countries who sell the Company's products to physicians
and hospitals. European sales consist primarily of the Pathfinder microcatheter
lines for diagnosis of VT and Revelation lines of microcatheters for diagnosis
and treating of AF.

The Company has obtained the right to affix the CE Mark to its Cardima
Pathfinder, Pathfinder mini and Tracer microcatheter systems for mapping VT and
its Revelation, Revelation Tx and

                                       10

<PAGE>

Revelation T-Flex microcatheter systems for both mapping and ablation of AF,
permitting the Company to market these products in the member countries of the
EU. The Company received 510(k) clearances for the Revelation microcatheter for
mapping of AF, the Pathfinder mini microcatheter and the Tracer microcatheter
for mapping VT, for the Vueport balloon guiding catheter in July 1998 and for
the Naviport deflectable tip guiding catheter in August 1999. The Company will
be required to conduct clinical trials, demonstrate safety and effectiveness and
obtain PMA approval from the FDA in order to sell any of the Company's products
designed for treatment of AF or VT in the United States. Specifically, PMA
approval will be required prior to the introduction in the United States of the
Revelation Tx microcatheter system for treatment of AF or Therastream
microcatheter system for treatment of VT.

The Company recently refocused its efforts to complete its phase III clinical
trials in the United States for the treatment of AF with the Revelation Tx
microcatheter system. Since the refocus on the phase III clinical trial, the
Company has completed four of the five necessary modules required for completing
the Pre-market approval (PMA) process necessary to sell the Revelation Tx in the
United States. In October 2001, two of the completed modules were accepted and
closed by the FDA.

The Company began a left-sided atrial clinical trial in Germany with the
REVELATION Helix microcatheter system for the treatment of AF originating in the
pulmonary veins. To date, 16 patients have been treated at three sites. The
Company expects to expand this trial to a total of five sites in Germany. The
Company plans to seek CE mark approval for the REVELATION Helix before the end
of 2001.

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

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

RESULTS OF OPERATIONS - THREE AND NINE-MONTH ENDED SEPTEMBER 30, 2001 AND 2000

Net Sales

Net sales for the quarter ended September 30, 2001 increased 9% to $465,000 from
$425,000 for the same period in 2000. This 9% increase was primarily a result of
increased sales of therapeutic products in Europe. Net sales for the nine-month
period ended September 30, 2001 decreased 20% to $1,477,000 from $1,839,000 for
the same period in 2000. Sales in the United States for the quarter ended
September 30, 2001 decreased 37% to $139,000 from $220,000 in the same period in
2000. United States sales for the nine-month period ended September 30, 2001
decreased 37% to $588,000 from $925,000 in the same period in 2000. The
decreases were primarily the result of the termination of the exclusive
distribution agreement with Daig, which expired on June 1, 2001. The Agreement
allowed for a transition period to transfer

                                       11

<PAGE>

customer accounts back to the Company by September 1, 2001. The transfer of
these accounts required the Company to hire one additional sales representative
in addition to two sales representatives the Company employed. The incremental
expense for the increase in the sales force is expected to cost the Company
approximately $250,000 a year.

The Company plans to market and distribute its products in the United States
with its small direct sales force and plans to market and distribute its
products internationally through distributors in selected countries who sell the
companies products to physicians and hospitals. International sales for the
quarter ended September 30, 2001 increased 59% to $326,000 from $205,000 in the
same period in 2000. The increase was primarily the result of expanding our
diagnostic product line in Japan as a result of higher reimbursements within
their healthcare system for certain products and incorporating additional
distribution channels in Europe. International sales for the nine-month period
ended September 30, 2001 decreased 3% to $889,000 from $914,000 in the same
period in 2000. The decrease in international sales for the nine-month period
was primarily attributable to reductions in the European direct sales force in
the first quarter of 2001 to reduce expenses.

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

Cost of Goods Sold

Cost of goods sold primarily includes raw materials costs, catheter fabrication
costs, system assembly, test costs and manufacturing overhead. Cost of goods
sold for the quarter ended September 30, 2001 increased 7% to $949,000 from
$889,000 for the same period in 2000. Cost of goods sold for the nine-month
period ended September 30, 2001 increased 19% to $2,868,000 from $2,411,000 in
2000. This increase in both periods was primarily due to increased inventory
reserves and fixed costs being allocated over lower manufacturing volume. The
reduction in manufacturing volume was part of a targeted reduction in finished
goods inventory levels from the fourth quarter of 2000 to the end of the third
quarter of 2001.

Research and Development Expenses

Research and development expenses include product development, clinical testing
and regulatory expenses. Research and development expenses, including regulatory
and clinical functions for the quarter ended September 30, 2001 decreased 21% to
$1,091,000 from $1,373,000 for the same period in 2000. Research and development
expenses, including regulatory and clinical functions for the nine-month period
ended September 30, 2001 increased 3% to $3,738,000 from $3,647,000 for the same
period in 2000. Research and development expense for the quarter ended September
30, 2001 decreased 44% to $434,000 from $779,000 for the same period in 2000, as
programs not related to the AF clinical trial were postponed and the research
and development group transferred costs for REVELATION Helix microcatheter
systems to clinical trial expense. Research and development expense for the
nine-month period ended September 30, 2001 decreased 22% to $1,652,000 from
$2,114,000 for the same period in 2000. Regulatory and clinical expenses for the
quarter ended September

                                       12

<PAGE>

30, 2001 increased 11% to $657,000 from $594,000 for the same period in 2000.
Regulatory and clinical expenses for the nine-month period ended September 30,
2001 increased 36% to $2,086,000 from $1,533,000 for the same period in 2000.
The increase in both periods is primarily due to patient enrollment costs
associated with the Phase III clinical trial.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended September 30,
2001 increased 3% to $1,538,000 from $1,498,000 for the same period in 2000.
Selling, general and administrative expenses for the nine-month ended September
30, 2001 decreased 3% to $4,639,000 from $4,789,000 for the same period in 2000.
General and administrative expenses for the quarter ended September 30, 2001
increased 30% to $1,032,000 from $796,000 for the same period in 2000. General
and administrative expenses for the nine-month ended September 30, 2001
increased 25% to $2,816,000 from $2,250,000 for the same period in 2000. The
increase in general and administrative expenses in both periods is due to
increased spending for public and investor relations activities. Selling
expenses for the quarter ended September 30, 2001 decreased 24% to $422,000 from
$552,000 for the same period in 2000. Selling expenses for the nine-month period
ended September 30, 2001 decreased 24% to $1,473,000 from $1,942,000 for the
same period in 2000. Selling expenses decreased in both periods due staffing
reductions as the Company entered into an exclusive distribution agreement with
Diag, which was mutually terminated in its entirety on September 1, 2001. The
Company plans to sell its products with a small direct sales force and plans to
hire one additional sales representative with an expected incremental expense of
approximately $250,000 a year. Marketing expenses for the quarter ended
September 30, 2001 decreased 44% to $84,000 from $150,000 for the same period in
2000. Marketing expenses for the nine-month ended September 30, 2001 decreased
41% to $350,000 from $597,000 for the same period in 2000. Sales and marketing
expenses decreased in general due to efforts to reduce expenses and focus on the
Company's Phase III clinical trial.

Interest and Other Income

Interest and other income for the quarter ended September 30, 2001 decreased to
$37,000 from $38,000 for the same period in 2000. Interest and other income for
the nine-months ended September 30, 2001 decreased to $93,000 from $182,000 for
the same period in 2000. The decrease in both periods was primarily due to lower
interest rates, and lower average cash balances.

Interest Expense

Interest expense for the quarter ended September 30, 2001 decreased to $14,000
from $91,000 for the same period in 2000. Interest expense for the nine-months
ended September 30, 2001 decreased to $49,000 from $305,000 for the same period
in 2000. This decrease was primarily due to the payoff of debt of approximately
$2,000,000 and the expiration and payoff of certain capital equipment leases.

Gain on the Sale of Intellectual Property

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

                                       13

<PAGE>

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

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date, principally through private placements
of equity securities, which have yielded net proceeds of $68,000,000 through
September 30, 2001, our initial public offering of Common Stock in June 1997,
which resulted in net proceeds of approximately $13,600,000, together with
interest income on such proceeds, borrowings under a $3,000,000 line of credit,
sale of certain of our non-core patents to Medtronic for $8,000,000 and
equipment leases to finance certain capital equipment, which have provided
proceeds in the amount of $4,700,000. As of September 30, 2001, the Company had
approximately $6,026,000 in cash and cash equivalents.

Net cash used in operating activities was approximately 5,003,000 compared to
the net cash used of $9,169,000 for the three months ended September 30, 2001
and 2000, respectively. The change is related to restructuring efforts and the
$4,000,000 gain on the sale of certain intellectual property recognized in
January 2001. Net cash provided by financing activities was approximately
9,957,000 compared to $9,716,000 provided by financing activities for the three
months ended September 30, 2001 and 2000, respectively. This change was
primarily due to the sale of equity securities in private placement
transactions.

In May 1999, the Company entered into an equipment lease that permits the
Company to borrow up to $1,000,000 for the purchase of office and manufacturing
equipment, software and custom-built equipment. As of December 31, 2000 the
Company had paid off both the line of credit and certain equipment leases in
full.

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

In August 2001, the Company sold a total of 2,822,472 shares of common stock at
prices between $1.27 and $1.38 per share in a private placement transaction to
accredited investors. The transaction included warrants to investors exercisable
for 1,411,234 shares of common stock at exercise prices between $1.91 and $2.07
per share. These warrants are redeemable by the Company if the Company's common
stock closes at at least 200% of the applicable warrant

                                       14

<PAGE>

exercise price for fifteen consecutive trading days. As a commission for the
transaction, the Company paid approximately $283,275 in cash and issued
warrants, exercisable for 282,247 shares of common stock at an exercise price of
between $1.40 and $1.52 per share. The Company's net proceeds, after expenses of
the placement, were approximately $3,400,000. The Company intends to use these
proceeds for development activities, clinical trial expenses, commercialization
of product offerings, operating costs, and other general corporate purposes.

On September 25, 2001, the Company announced that it intended to call for
redemption, subject to certain criteria, its warrants to purchase an aggregate
of up to 5,873,465 shares of common stock issued on May 3, 2001 in connection
with this private placement. The Company has set November 22, 2001 as the date
of redemption for all unexercised warrants.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including receipt of adequate funding, sales and marketing
activities, the progress of the Company's product development efforts, the
progress of the Company's clinical trials, actions relating to regulatory
matters, the costs and timing of expansion of product development,
manufacturing, the extent to which the Company's products gain market acceptance
and competitive developments. Since inception, the Company has an accumulated
deficit of approximately $74.0 million. Management expects to continue to incur
additional losses in the foreseeable future as it completes new product
development and product commercialization. The Company believes that available
cash will be sufficient to meet the Company's cash requirements through at least
March 2002. The Company will require additional financing. There can be no
assurance however, that such additional financing will be available on terms
acceptable to the Company, if at all. The Company may seek to raise additional
funds through public or private financing, collaborative relationships or other
arrangements. Furthermore, any additional equity financing is expected to be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital when needed will have a material adverse effect on the
Company's business, financial condition and would cause the Company to cease
operations.

FACTORS AFFECTING FUTURE RESULTS

                                       15

<PAGE>

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

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

         Our net losses were approximately $3.0 million for the quarter ended
September 30, 2001, compared to $3.4 million for the same period in 2000,
respectively. As of September 30, 2001, our accumulated deficit was
approximately $74.0 million. Our limited sales history makes it difficult to
assess our future results. We cannot be certain that we will ever generate
substantial revenue or achieve profitability. Our failure to generate
substantial revenues would harm our business.

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

         In order to commercialize our products, we will need to raise
additional capital. One possibility for raising additional capital would be the
public or private sale of our shares of stock. On May 3, 2001, we received net
proceeds of approximately $6.2 million from certain investors in a private
placement of 11,746,916 shares of our common stock. Additionally, we issued
redeemble warrants to purchase up to an aggregate of 5,813,465 shares of our
common stock at an exercise price per share of $0.87. On August 9, 10 and 13,
2001, we received approximately $3.4 million from certain investors in a private
placement of 2,822,472 shares of common stock. In addition, we issued redeemable
warrants to purchase up to an aggregate of 1,441,234 shares of common stock at
exercise prices of between $1.91 and $2.07. Any sale by us of additional shares
of stock will further dilute your percentage ownership in us.

         On September 24, 2001, we elected to redeem the warrants issued on May
2001 for $.001 per warrant share. We expect that if all of the May 2001
warrants are exercised prior to the redemption date of November 22, 2001, we
will receive aggregate proceeds of approximately $5,109,907, before expenses.

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

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

                                       16

<PAGE>

our operations. Debt financing, if available, may involve restrictive covenants.
We have financed our operations to date primarily through private sales of
equity securities, proceeds from our initial public offering in June 1997,
private placement of securities, loan-facilities and the sale of certain of our
patents and other intellectual property. As of September 30, 2001, cash, cash
equivalents, short-term investments and long-term restricted cash totaled
approximately $6.0 million. On May 3, 2001 and on August 9, 10 and 13, 2001 we
received net proceeds of approximately $6.2 million and $3.4 million from
private placements. We believe that our existing cash, cash equivalents and
short-term investments, along with cash generated from the sale of a portion of
our intellectual property to Medtronic, as well as sales of our products and
from financing, will be sufficient to fund our operating expenses, debt
obligations and capital requirements through March 2002.

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

         We often rely on our contractual rights in our agreements with clinical
investigators, or clinical research organizations to access data collected by
others in phases of our clinical trials. We depend on the continued performance
by these third parties of their contractual obligations to provide access and
cooperate with us in completing filings with the FDA. We cannot be certain that
the FDA will permit our reliance on these third parties because if we are unable
to rely on clinical data collected by others, or if these third parties do not
perform their contractual duties, the FDA may require us to repeat clinical
trials. Either of these scenarios could significantly delay commercialization of
our products, require us to spend more money on our clinical trials and cause
our business results to suffer.

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

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

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

                                       17

<PAGE>

          We must complete the AF Phase III clinical trial in order to gather
data for the completion of our pre-market approval, or PMA, application to the
FDA for our AF ablation product. Currently, we anticipate completing enrollment
in our Phase III trial at the end of the calendar year. Further, we anticipate
filing our completed PMA application in mid 2002. We have no estimate as to
when, or if, we will resume the clinical trial for our Therastream microcatheter
system. We must receive PMA approval before marketing our products for ablation
in the United States. Clinical trials of our microcatheter systems will require
substantial financial and management resources. In addition, if we resume the
clinical trial for our Therastream microcatheter system, the completion of this
clinical trial could take several years. For the Therastream clinical trial,
there can be no assurance that:

     .    necessary IDEs will be granted by the FDA,

     .    human clinical trials will be completed,

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

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

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

          The Company began a left-sided atrial clinical trial in Germany with
the REVELATION Helix microcatheter system for the treatment of AF originating in
the pulmonary veins. To date, 16 patients have been treated at three sites. The
Company expects to expand this trial to a total of five sites in Germany. The
Company plans to seek CE mark approval for the REVELATION Helix before the end
of 2001.

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

          Our microcatheter systems represent a novel approach to diagnosing and
treating AF and VT. Acceptance of our products and procedures by physicians,
patients and health care payors will be necessary in order for us to be
successful. If the market does not accept our products and the procedures in
which they are used, our business could be harmed and our revenues would
decline.

Our microcatheter products must be safe, effective and cost efficient in order
for them to effectively compete against more established treatments. If we
cannot compete with these treatments, our revenues will decline

          The market for catheters to diagnose or treat AF and VT is highly
competitive. Our microcatheter systems for the mapping and ablation of AF and VT
are new technologies. Safety, cost efficiency and effectiveness are the primary
competitive elements in our market. In addition, the length of time required for
products to be developed and to receive regulatory approval and,

                                       18

<PAGE>

in some cases, reimbursement approval are important competitive factors.
Existing treatments with which we must compete include:

          .    drugs,

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

          .    implantable defibrillators,

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

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

       Physicians will not recommend the use of our microcatheter systems unless
they can conclude that our systems provide a safe, effective and cost-efficient
alternative to current technologies for the mapping and ablation of AF or VT. If
our clinical data and other studies do not show that our products are safe and
effective, the FDA will not approve our products for sale. If our products are
not approved, we will not be able to enter the market and our revenues will
decline.

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

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

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

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

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

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

          .    product design and development,

          .    product testing,

          .    product labeling,

          .    product storage,

                                       19

<PAGE>

          .    premarket clearance and approval,

          .    advertising and promotion, and

          .    product sales and distribution.

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

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

       In March 2001, the FDA allowed us to file a modular PMA for our
Revelation Tx in Phase III trial. Under the modular PMA submission, we will file
five separate segments of the PMA with the FDA, all of which together will
comprise our PMA application. At this time, we have filed the first four
modules, two of which have been accepted and closed by the FDA. No assurance can
be given that we will ever be able to obtain a PMA for any of our ablation
products. The acceptance and closure of any module does not permit us to market
our product. All five modules must be completed and accepted. Our failure to
complete clinical testing or to obtain timely a PMA would have a material
adverse effect on our business, financial condition and results of operations.

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

                                       20

<PAGE>

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

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

Delays in enrolling patients in our trials could increase our expenses and harm
our business

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

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

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

   .   fines,

   .   injunctions,

   .   recall or seizure of products,

   .   withdrawal of marketing approvals or clearances,

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

   .   civil and criminal penalties.

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

                                       21

<PAGE>

contribute to death or serious injury. If we fail to comply with these
applicable laws, our business results may suffer.

     If we do not comply with foreign regulatory requirements to market our
products outside the United States, our business will be harmed. Sales of
medical devices outside the United States are subject to international
regulatory requirements that vary from country to country. The time required for
approval varies from country to country and may be longer or shorter than the
time required in the United States. In order to market any of our devices in the
member countries of the European Union, we are required to obtain CE mark
certification. CE mark certification is an international symbol of adherence to
quality assurance standards and compliance with the European Medical Device
Directives. We have received CE mark certification to sell our Pathfinder,
Pathfinder Mini, Revelation, Revelation Tx and Tracer for mapping in the
European Union. We have received CE mark certification to sell our Venaport,
Vueport and Naviport guiding catheters in the European Union. We also received
approval to sell our Pathfinder, Pathfinder Mini, Revelation, and Tracer in
Japan and Australia, and to sell our Pathfinder, Tracer, Venaport, Vueport and
Naviport in Canada. We also received CE mark certification in August 1998,
December 1998, and November 1999, to sell our Revelation, Revelation Tx and
Revelation T-Flex microcatheters, respectively, for ablation of AF in the
European Union. We intend to submit data in support of additional CE mark
applications. There can be no assurance we will be successful in obtaining or
maintaining the CE mark for these products, as the case may be. Failure to
receive or maintain approval to affix the CE mark would prohibit us from selling
these products in member countries of the European Union, and would require
significant delays in obtaining individual country approvals. No assurance can
be given that we will ever obtain or maintain such approvals. If we do not
receive or maintain these approvals, our business could be harmed.

Difficulties presented by international factors could negatively affect our
business

     A component of our strategy is to expand our international sales revenues.
We believe that we will face risks in doing business abroad that we do not face
domestically. Among the international risks we believe are most likely to affect
us are:

     .    export license requirements for our products,

     .    exchange rate fluctuations or currency controls,

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

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

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

     .    domestic or international trade restrictions, or

     .    changes in tariffs.

          Any of these factors here could damage our business results.

                                       22

<PAGE>

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

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

     We are currently assessing the effect the introduction of the Euro will
have on our internal accounting systems and the potential sales of our products.
We will take appropriate corrective actions based on the results of such
assessment. We have not yet determined the costs related to addressing this
issue. This issue and its related costs could have a material adverse effect on
our business, financial condition and results of operations.

We may be unable to successfully commercialize our microcatheter products, as
the electrophysiology industry is highly competitive

     The market for catheters to map and/or ablate AF and VT is highly
competitive. Several of our competitors are developing different approaches and
products for these procedures. These approaches include mapping systems using
contact mapping, single-point spatial mapping and non-contact, multi-site
electrical mapping technologies, and ablation systems using radio frequency,
ultrasound, microwave, laser and freezing technologies. Other companies are also
developing surgical procedures that physicians could potentially use to perform
the open-heart surgical maze procedure for the treatment of AF in a minimally
invasive manner. If any of these new approaches or products proves to be safe,
effective and cost effective, our products could be rendered noncompetitive or
obsolete, which would cause our business results to suffer.

     Many of our competitors have an established presence in the field of
interventional cardiology and electrophysiology, or the study of the electrical
system of the heart. These competitors include Boston Scientific, through its EP
Technologies and Cardiac Pathways divisions, C.R. Bard, Inc., Johnson & Johnson,
through its Biosense-Webster division, St. Jude Medical, Inc., through its Daig
division, and Medtronic, Inc. These competitors have substantially greater
financial and other resources than we do, including larger research and
development staffs and greater experience and capabilities in conducting
research and development activities, testing products in clinical trials,
obtaining regulatory approvals, and manufacturing, marketing and distributing
products. In addition, other companies are developing proprietary systems for
the diagnosis and treatment of cardiac arrhythmias. These companies include
Biosense-Webster, a division of Johnson & Johnson, and Endocardial Solutions,
Inc. Other companies develop, market and sell alternative approaches to the
treatment of AF and VT. These companies include Guidant Corporation, Medtronic,
Inc., and St. Jude Medical, Inc., manufacturers of implantable defibrillators.
We cannot be certain that we will succeed in

                                       23

<PAGE>

developing and marketing technologies and products that are safer, more
clinically effective and cost-effective than the more established treatments or
the new approaches and products being developed and marketed by our competitors.
Furthermore, there can be no assurance that we will succeed in developing new
technologies and products that are available before our competitors' products.
Our failure to demonstrate the competitive advantages and achieve market
acceptance of our products would harm our business.

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

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

     In December 2000, we sold certain patents and related intellectual property
pertaining to intravascular sensing and signal detection to Medtronic, Inc. We
received a perpetual, worldwide license at no cost from Medtronic, Inc. to use
these patents and related intellectual property in our products for mapping and
ablation of arrhythmia-causing tissue. We have also licensed a proprietary
surface coating material used on certain of our microcatheters from another
vendor.

     We cannot be certain that these licenses will continue to be available to
us or will be available to us on reasonable terms. The loss of or inability to
maintain any of these licenses could result in delays in commercial shipments
until we could internally develop or identify, license and integrate equivalent
technology. These delays would have a material adverse effect on our business,
financial condition and results of operations.


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

     We have conducted searches to determine whether our patent applications
interfere with existing patents. Based upon these searches, we believe that our
patent applications and products do not interfere with existing patents.
However, we cannot be sure that relevant patents have not been issued that could
block our ability to obtain patents or commercialize our products. Moreover,
since U.S. patent applications are not a matter of public record, a patent
application could currently be on file that would stand in our way of obtaining
a patent issuance. In addition,

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<PAGE>

U.S. Congress recently amended the United States patent laws to exempt
physicians, other health care professionals and affiliated entities from
infringement liability for medical and surgical procedures performed on
patients. The issuance of any potentially competing patent could harm our
business.

     Although we have not received any letters from others threatening to
enforce intellectual property rights against us, we cannot be certain that we
will not become subject to patent infringement claims or litigation,
interference proceedings in the U.S. Patent and Trademark Office to determine
the priority of inventions, or oppositions to patent grants in foreign
countries. An adverse determination in litigation, interference or opposition
proceedings could subject us to significant liabilities to third parties,
require us to cease using such technology, or require us to license disputed
rights from third parties. However, we are not certain that any licenses will be
available to us at all, or if available, on commercially reasonable terms. Our
inability to license any disputed technology could delay the commercialization
of our products and harm our business. Under our license with Target, Target
does not indemnify us against claims brought by third parties alleging
infringement of patent rights. Consequently, we could bear the liability
resulting from such claims. We cannot be certain that we will have the financial
resources to protect and defend our intellectual property, as such defense is
often costly and time-consuming. Our failure to protect our patent rights, trade
secrets, know-how or other intellectual property would harm our business.

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

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

     Third-party payors may deny reimbursement if they determine that a
prescribed device (1) has not received appropriate regulatory clearances or
approvals, (2) is not used in accordance with cost-effective treatment methods
as determined by the payor, or (3) is experimental, unnecessary or
inappropriate. If we receive FDA clearance or approval, third-party
reimbursement would also depend upon decisions by the United States Health Care
Financing Administration for Medicare, as well as by individual health
maintenance organizations, private insurers and other payers. Reimbursement
systems in international markets vary significantly by country and by region
within some countries, and reimbursement approvals may be obtained on a
country-by-country basis. Many international markets have government-managed
health care systems that control reimbursement for new devices and procedures.
In most markets, there are private insurance systems as well as
government-managed systems. There can be no assurance that (1) reimbursement for
our products will be available domestically or internationally, (2) if
available, that such reimbursement will be available in sufficient amounts in
the United States or in international markets under either government or private
reimbursement systems, or (3) that physicians will support and advocate
reimbursement for procedures using our products. Failure

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<PAGE>

by hospitals and other users of our products to obtain reimbursement from
third-party payors or changes in government and private third-party payor
policies toward reimbursement for procedures employing our products would have a
material adverse effect on our business, financial condition and results of
operations. Moreover, we are unable to predict what additional legislation or
regulation, if any, relating to the heath care industry or third-party coverage
and reimbursement may be enacted in the future, or what effect such legislation
or regulation would have on our business.

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

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

     We currently manufacture our microcatheter systems in limited quantities
for United States and international sales and for pre-clinical and clinical
trials. However, we have no experience manufacturing our products in the amounts
necessary to achieve significant commercial sales. We currently believe that our
manufacturing capacity will be sufficient through December 2002. We expect that,
if U.S. sales for the Pathfinder and Revelation microcatheter systems increase
or if we receive FDA clearance or approvals for other products, we will need to
expend significant capital resources and develop additional manufacturing
expertise to establish large-scale manufacturing capabilities. However, we could
encounter problems related to:

         .  capacity constraints,

         .  production yields,

         .  quality control, and

         .  shortages of qualified personnel.

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

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

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<PAGE>

QSR or ISO 9001 (EN 46001) standards. There can be no assurance that we will be
found in compliance with QSR by regulatory authorities, or that we will maintain
compliance with ISO 9001 (EN 46001) standards in future audits. Our failure to
comply with state or FDA QSR requirements, maintain compliance with ISO 9001 (EN
46001) standards, or develop our manufacturing capability in compliance with
such standards, would have a material adverse effect on our business, financial
condition and results of operations.

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

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

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

We have limited sales and limited experience in the sale, marketing and
distribution of our products. Our failure to establish an effective direct or
indirect sales and marketing force will cause our revenues to decline

We have only limited experience marketing and selling our products in commercial
quantities. On January 26, 2000, the Company signed an exclusive three-year
distribution agreement, "the agreement" with St. Jude Medical Corporation, or
St. Jude, whereby St. Jude's Daig Division was to distribute Cardima's
diagnostic products in the United States. The distribution agreement included an
equity investment by St. Jude. St. Jude did not meet its minimum annual purchase
quota for the first year under the distribution agreement. On June 1, 2001, the
Company and St. Jude, Daig Division mutually agreed to terminate, in its
entirety, the agreement, allowing for a transition period to transfer customer
accounts back to the Company, which expired September 1, 2001. As a result,
the Company is marketing and distributing its products in the United States with
a small direct sales force and distributors in selected countries who will sell
the Company's products to physicians and hospitals.

     Therefore, we will be solely responsible for marketing and distributing our
products in the United States. Expanding our marketing and sales capability to
support sales in commercial quantities adequately will require substantial
effort and require significant management and financial resources. Our failure
to establish an effective sales and marketing force will cause our revenues to
decline.

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<PAGE>

     We also have terminated several distribution arrangements in Europe. Our
ability to operate a remote sales force effectively will require additional
resources, time and expense, which could have a material adverse effect on our
business, financial condition and results of operations. We cannot be certain
that we will be able to build a European direct business, that it will be
cost-effective or that its efforts will be successful. Failure to establish an
adequate business in Europe would harm our business.

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

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

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

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

     We face an inherent business risk of product liability claims in the event
that the use or misuse of our products results in personal injury or death. In
2000, we settled two claims, which were filed against us in 1999, for an
aggregate amount of $32,500. We cannot be certain, in particular after
commercial introduction of our products, that we will not experience losses due
to product liability claims. We currently have general liability insurance with
coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million
annual limitation. We have product liability insurance with coverage in the
amount of $5.0 million per occurrence, subject to a $5.0 million annual
limitation. We cannot be certain that coverage will continue to be available to
us on reasonable terms, if at all. In addition, there can be no assurance that
all of the activities encompassed within our business are or will be covered
under our policies. Although we label our microcatheter products for single-use
only, we are aware that some physicians are reusing

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<PAGE>

such products. Moreover, despite labeling our microcatheters for diagnostic use
only, we believe that physicians are using such mapping microcatheters for
ablation. Multiple use or "off-label" use of our microcatheters could subject us
to increased exposure to product liability claims, which could have a material
adverse effect on our business, financial condition and results of operations.
We may require additional product liability coverage if we significantly expand
commercialization of our products. Such additional coverage is expensive,
difficult to obtain and may not be available in the future on acceptable terms,
if at all. Any claims or series of claims against us, regardless of their merit
or eventual outcome, could have a material adverse effect on our business,
financial condition and results of operations.

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

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

We do not intend to pay cash dividends on our stock

     We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. Instead, we intend
to retain future earnings for reinvestment in our business.

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

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

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

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PART II. OTHER INFORMATION

ITEM 2   Changes in Securities and Use of Proceeds

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

         We relied on the exemption provided by Rule 506 under Regulation D and
         Section 4(2) of the Securities Act of 1933, as amended. A registration
         statement on Form S-3 was filed with the SEC on July 3, 2001 and was
         declared effective on August 22, 2001.

         On August 9, 10 and 13, 2001, we entered into agreements with eleven
         accredited investors to sell an aggregate of 2,822,472 shares of
         common stock at prices between $1.27 and $1.38. In addition, we issued
         warrants to purchase an aggregate of 1,411,234 shares of our common
         stock at an exercise price of between $1.91 and $2.07 per share. These
         warrants are redeemable by us if our common stock closes at least 200%
         of the applicable warrant exercise price for fifteen consecutive
         trading days. In connection with this transaction, we paid
         approximately $283,275 in cash and issued warrants exercisable for
         282,247 shares of common stock at an exercise price of between $1.40
         and $1.52 per share. Our net proceeds, after expenses of the placement
         were approximately $3,400,000.

         We relied on the exemption provided by Rule 506 under Regulation D and
         Section 4(2) of the Securities Act of 1933, as amended. A registration
         statement on Form S-3 was filed with the SEC on October 12, 2001.

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

         None.

ITEM 6   Exhibits and Reports on Form 8-K

         (a)    None.

         (b)    A report on Form 8-K, was filed August 23, 2001.

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<PAGE>

                                  CARDIMA, INC.

                                   SIGNATURES

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

DATE:   November 14, 2001               CARDIMA, INC.


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


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

                                       31