<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, 1997

                                       or

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

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

                                 CARDIMA, INC.

            (Exact name of registrant as specified in its charter)


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


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

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

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

As of October 31, 1997, there were 8,099,176 shares of Registrant's Common Stock
outstanding.

                                       1
<PAGE>
 
                                 CARDIMA, INC.

                                     INDEX

<TABLE>
<CAPTION>
                                                                                               Page #
                                                                                             ----------
<S>            <C>                                                                           <C>
PART  I.        FINANCIAL INFORMATION

     Item 1.    Financial Statements

                Balance Sheets as of September 30, 1997 and December 31, 1996                      3
                Statements of Operations for the three and nine months ended September 30,         
                1997 and 1996                                                                      4

                Statements of Cash Flows for the nine months ended                                 
                September 30, 1997 and 1996                                                        5

                Notes to Financial Statements                                                      6

     Item 2.    Management's Discussion and Analysis of Financial Condition and                    
                Results of Operations                                                              8

PART II.        OTHER INFORMATION

     Item 1.    Legal Proceedings                                                                 22

     Item 2.    Changes in Securities and Use of Proceeds                                         22

     Item 3.    Defaults Upon Senior Securities                                                   23

     Item 4.    Submission of  Matters to a Vote of Security Holders                              23

     Item 5.    Other Information                                                                 23

     Item 6.    Exhibits and Reports on Form 8-K                                                  23

SIGNATURES                                                                                        24

INDEX TO EXHIBITS                                                                                 25

   Exhibit 11.1                                                                                   26

   Exhibit 27.1                                                                                   27

</TABLE>

                                       2
<PAGE>
PART I.FINANCIAL INFORMATION

Item 1.FINANCIAL STATEMENTS

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

<TABLE> 
<CAPTION> 
                                                                                                        (1)
                                                                                         Sept. 30,   Dec. 31,
ASSETS                                                                                     1997        1996
                                                                                         ----------  ---------
                                                                                         (unaudited)
<S>                                                                                      <C>         <C>
Current Assets:                                                                          
   Cash and cash equivalents                                                              $17,246     $  907
   Accounts receivable, net of allowances for doubtful accounts
       of $77 at Sept. 30, 1997 and $30 at Dec. 31, 1996                                      197         68
   Inventories                                                                                559        377
   Other current assets                                                                       655        229
                                                                                          -------     ------
       Total current assets                                                                18,657      1,581

Property and equipment, net                                                                 2,138      1,400
Restricted cash                                                                               192        275
Other assets                                                                                  206        708
                                                                                          -------     ------
Total assets                                                                              $21,193     $3,964
                                                                                          =======     ======

Liabilities and stockholders' equity (net capital deficiency)
Current liabilities:
   Accounts payable                                                                       $   648     $1,155
   Accrued compensation                                                                       826        513
   Other current liabilities                                                                  168         52
   Notes payable                                                                                8      1,682
   Capital lease obligation - current portion                                                 509        329
                                                                                          -------     ------
       Total current liabilities                                                            2,159      3,731

Deferred rent                                                                                 102        139
Capital lease obligation - noncurrent portion                                                 793        722
COMMITMENTS
Redeemable  convertible preferred stock at amount paid in:
   Series D redeemable convertible, 1,919,052 at December 31, 1996; none
     at September 30, 1997                                                                     -       9,740
Stockholders' equity (net capital deficiency):
   Preferred stock, $.001 par value; 5,000,000 shares authorized
     Series A convertible, 428,567 shares issued and outstanding as of December 31, 1996;
     none at September 30, 1997 at amount paid in                                              -       2,949
     Series B convertible, 333,333 shares issued and outstanding as of December 31, 1996;
     none at September 30, 1997 at amount paid in                                              -          -
     Series C convertible, 458,245 shares issued and outstanding as of December 31, 1996;
     none at September 30, 1997 at amount paid in                                              -       4,764
Common stock, $.001 par value; 25,000,000 shares authorized, 8,099,176 shares
   issued and outstanding at Sept. 30, 1997, 74,999 at December 31, 1996; at amount paid   45,592        595
   Deferred compensation                                                                     (794)      (526)
   Deficit accumulated during the development stage                                       (26,659)   (18,150)  
                                                                                         --------   --------
       Total stockholders' equity (net capital deficiency)                                 18,139    (10,368)  
                                                                                          -------   --------
Total liabilities and stockholders' equity                                                $21,193   $  3,964       
                                                                                          =======   ========

</TABLE> 
(1)     The information in this column was derived from the Company's audited
        financial statements as of December 31, 1996.

                See accompanying notes to financial statements.

                                       3

<PAGE>
                                 CARDIMA, INC.

                           STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)
                                  (Unaudited)
<TABLE> 
<CAPTION> 


                                           Three months ended     Nine months ended
                                              September 30,          September 30,
                                           --------- ---------   ---------- ---------
                                             1997      1996         1997      1996
                                           --------- ---------   ---------- ---------
<S>                                         <C>       <C>          <C>       <C>
Net sales                                   $   314    $   114     $   850   $    526
Cost of goods sold                              501        569       1,332      1,346
                                            -------    -------     -------   --------
                                                               
   Gross profit                                (187)      (455)       (482)      (820)
                                                               
Operating expenses:                                            
   Research and development                   1,760        771       3,629      1,999
   Selling, general and administrative        1,708        946       4,684      2,605
                                            -------    -------     -------   --------
      Total operating expenses                3,468      1,717       8,313      4,604
                                            -------    -------     -------   --------
Operating loss                               (3,655)    (2,172)     (8,795)    (5,424)
Interest  and other income                      265         20         400        131
Interest expense                                (33)       (19)       (114)       (25)
                                            -------    -------     -------   --------
Net loss                                    $(3,423)   $(2,171)    $(8,509)  $ (5,318)
                                            =======    =======     =======   ========
Net loss per share                          $ (0.42)               $ (1.90)
                                            =======                =======
Shares used in computing net 
        loss per share                        8,093                  4,478
                                            =======                =======
Pro forma net loss per share                           $ (0.34)              $  (0.84)
                                                       =======               ========
Shares used in computing pro forma net 
        loss per share                                   6,431                  6,347
                                                       =======               ========
</TABLE> 
                See accompanying notes to financial statements

                                       4


<PAGE>
                                 CARDIMA, INC.
                           STATEMENTS OF CASH FLOWS
                                (In thousands)
                                  (Unaudited)
<TABLE> 
<CAPTION> 
                                                                         NINE MONTHS
                                                                      ENDED SEPTEMBER 30,
                                                                      --------------------
                                                                        1997       1996
                                                                      --------    --------
<S>                                                                   <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                            ($8,509)    ($5,318)
  Adjustments to reconcile net loss to net cash provided by operations:
    Depreciation and amortization                                         506         234
    Amortization of deferred compensation                                 164          22
  Changes in operating assets and liabilities:
    Accounts receivable                                                  (129)        (18)
    Inventories                                                          (182)         (8)
    Other current assets                                                 (426)       (141)
    Restricted cash                                                        83          42
    Other assets                                                          455        (106)
    Accounts payable                                                     (507)        135
    Accrued compensation                                                  313         227
    Other current liabilities                                             116           2
    Deferred rent                                                         (37)         21
                                                                      -------     -------
      Net cash used in operating activities                            (8,153)     (4,908)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                   (609)       (181)
                                                                      -------     -------
    Net cash used in investing activities                                (609)       (181)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments under capital leases                                (337)       (200)
  Conversion of notes payable                                          (1,674)          -
  Net proceeds from issuance of preferred stock                        13,442       3,559
  Net proceeds from sale of common stock                               13,670           7
                                                                      -------     -------
    Net cash provided by financing activities                          25,101       3,366
                                                                      -------     -------

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS                   16,339      (1,723)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                            907       2,992
                                                                      -------     -------

CASH AND CASH EQUIVALENTS, END OF PERIOD                              $17,246      $1,269
                                                                      =======     =======
</TABLE> 
                                       5
<PAGE>
 
                                 CARDIMA, INC.

                         NOTES TO FINANCIAL STATEMENTS
                              SEPTEMBER 30, 1997
                                  (Unaudited)


1.      BASIS OF PRESENTATION

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

          The operating results for the three- and nine-month periods ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1997.  The accompanying
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Form S-1 (No. 333-23209)
dated March 13, 1997.

2.      BALANCE SHEET COMPONENTS

          Certain balance sheet components are as follows:  


<TABLE>
<CAPTION>
                                                                 (In thousands)
                                                     (Unaudited)                (Audited)
                                                      Sept. 30,                 Dec. 31,
                                                        1997                      1996
                                                 ----------------          ----------------
<S>                                                <C>                       <C>
Inventories:
      Raw materials                                   $   179                   $  145
      Work-in-process                                     157                      131
      Finished goods                                      223                      101
                                                      -------                   ------
                                                      $   559                   $  377
                                                      =======                   ======
Property and equipment:                                                         
      Equipment                                         3,186                    2,008
      Leasehold improvements                               99                       93
                                                      -------                   ------
                                                      $ 3,285                   $2,101
      Less accumulated depreciation                    (1,147)                    (701)
                                                      -------                   ------
                                                      $ 2,138                   $1,400
                                                      =======                   ======
</TABLE>

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

3.      INITIAL PUBLIC OFFERING

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

4.      NET LOSS PER SHARE

          Net loss per share is computed using the weighted average number of
common shares outstanding. Common equivalent shares are excluded from the
computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common
and common equivalent shares issued during the 12-month period prior to the
filing of a registration statement in connection with the Company's initial
public offering at prices below the public offering price of $7.00 have been
included in the calculation as if they were outstanding for all periods
presented through March 31, 1997 (using the treasury stock method for stock
options at the estimated public offering price).

          Pro forma net loss per share for the three and nine months ended
September 30, 1997 and 1996 has been computed as described above and also gives
effect to the conversion of convertible preferred shares not included above that
automatically converted upon completion of the Company's initial public offering
(using the "if converted" method) from original date of issuance. For the three
and nine months ended September 30, 1997, pro forma net loss per share was
($0.42) and ($1.33) per share, respectively.

          In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The impact on earnings per share for the three and nine months ended
September 30, 1997 and 1996 is not expected to be material.

                                       7
<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 and
Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements regarding regulatory approvals, operating results and
capital requirements. Except for historical information, the matters discussed
in this Form 10-Q, are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. Such factors include the Company's ability to conduct
successful clinical trials, obtain timely regulatory approvals and gain
acceptance from the marketplace for its products, as well as the risk factors
discussed below in "Factors Affecting Future Results" and those listed from time
to time in the Company's SEC reports. The Company assumes no obligation to
update the forward-looking statements included in this Form 10-Q.


OVERVIEW

          Since its incorporation in November 1992, Cardima has been engaged in
the design, research and development, manufacturing and testing of microcatheter
systems for the mapping (diagnosis) and ablation (treatment) of cardiac
arrhythmias. The Company has a limited history of operations and has experienced
significant operating losses since inception. The Company expects that its
operating losses will continue for the foreseeable future as the Company
continues to invest substantial resources in product development, preclinical
and clinical trials, obtaining regulatory approval, sales and marketing and
manufacturing.

          Cardima has generated limited revenues, which until January 1997 have
primarily been in Europe and Japan, from sales of the Cardima Pathfinder and
Tracer microcatheter systems for diagnosing Ventricular Tachycardia (VT) and the
Cardima Pathfinder AF microcatheter system for diagnosing Atrial Fibrillation
(AF). The Cardima Pathfinder 3 Fr. will be marketed in the United States (U.S.)
as the Revelation Microcatheter. In January 1997, the Company received a 510(k)
clearance in the United States and began to market and sell the Cardima
Pathfinder system for diagnosing VT. As a result, the Company has derived a
majority of its revenues in the nine-month period ended September 30, 1997
through sales of the Cardima Pathfinder for diagnosis of VT in the United
States. To date, the Company's international sales have been made primarily
through distributors who sell the Company's products to physicians and
hospitals. The Company is currently establishing a direct sales force in certain
key European markets. The Company has obtained the right to affix the CE mark to
its Cardima Pathfinder, Tracer and Cardima Pathfinder AF microcatheter systems,
permitting the Company to market these products in the member countries of the
EU. In order to begin shipping the Tracer microcatheter systems for diagnosing
VT in the United States, the Company will need to receive 510(k) clearance for
this product from the U.S. Food and Drug Administration (the "FDA"). The Company
received 510(k) pre-market notification for the Cardima Pathfinder AF for
mapping and pacing of the atria on November 11, 1997 and intends to seek 510(k)
clearance for its other diagnostic products, including the Cardima Pathfinder
1.5 Fr. and Tracer products. The Company will be required to conduct clinical
trials, demonstrate safety and effectiveness, and obtain PMA approval from the
FDA in order to sell any of the Company's products designed for treatment of AF
or VT in the United States. Specifically, PMA approval will be required prior to
the introduction in the United States of the Cardima Pathfinder AF microcatheter
system for treatment of AF or Tracer VT microcatheter system for treatment of
VT. In
                                       8
<PAGE>
 
January 1997, the Company submitted an Investigational Device Exemption (IDE)
for the Cardima Pathfinder AF microcatheter system for diagnosing and treatment
of AF and in January 1997 received conditional approval from the FDA to begin a
Phase I feasibility study for diagnosing AF. The Company has recently completed
Phase I clinical trials for its Cardima Pathfinder AF microcatheter system and
expects to file an additional IDE in November 1997 and, upon approval, begin
Phase II clinical trials for treatment of AF with the Cardima Pathfinder AFTC
(AF Temperature Control) microcatheter.

RESULTS OF OPERATIONS (THREE AND NINE MONTHS ENDED 1997 AND 1996)

Net Sales

          Net sales for the quarter ended September 30, 1997 increased 175% to
$314,000 from $114,000 in the same period in 1996.  Net sales for the nine-month
period ended September 30, 1997 increased 62% to $850,000 from $526,000 in the
same period in 1996.  Each of these increases is due to U.S. sales of the
Cardima Pathfinder line of microcatheters for diagnosis of VT following FDA
clearance in January 1997.  Net sales in these periods were negatively impacted
by lower sales in Europe due to the termination of distribution arrangements in
major European markets.

Cost of Good 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, 1997 decreased 12% to $501,000
from $569,000 in the same period in 1996.  Cost of goods sold for the nine-month
period ended September 30, 1997 remained relatively flat compared to the same
period in 1996.  The decrease for the quarter ended September 30, 1997 is due
primarily to the allocation of overall fixed costs over a greater number of
units including units to support research and development, clinical and sales
efforts.

Research and Development Expenses

          Research and development expenses for the quarter ended September 30,
1997 increased 128% to $1,760,000 from $771,000 in the same period in 1996.
Research and development expenses for the nine-month period ended September 30,
1997 increased 82% to $3,629,000 from $1,999,000 in the same period in 1996.
Each of these increases is due primarily to staff additions and associated
expenses in research and development and clinical and regulatory areas incurred
as the Company increased human resources to meet program goals and clinical
objectives.

Selling, General and Administrative Expenses

          Selling, general and administrative expenses for the quarter ended
September 30, 1997 increased 81% to $1,708,000 from $946,000 in the same period
in 1996.  Selling, general and administrative expenses for the nine-month period
ended September 30, 1997 increased 80% to $4,684,000 from $2,605,000 in the same
period in 1996.  The increase in selling expenses is due primarily to costs
associated with the establishment and expansion of the Company's U.S. sales
force, which occurred in fourth quarter 1996 and third quarter 1997,
respectively, and the commitment of additional resources to support the
Company's European sales efforts.  The Company has incurred expenses relating to
the 

                                       9
<PAGE>
 
termination of several distribution arrangements, the establishment of a direct
sales force in several major markets in Europe and the commencement of clinical
trials, which require some training from sales and clinical specialists. The
increase in general and administrative expenses is due primarily to additional
staffing and expenses to meet the growth of the Company and expenses related to
the requirements of a public company. The increase in marketing expenses is due
primarily to additional staffing, marketing materials and programs to meet new
product introductions.

Interest and Other Income

          Interest and other income for the quarter ended September 30, 1997
increased to $265,000 from $20,000 in the same period in 1996.  Interest and
other income for the nine-month period ended September 30, 1997 increased to
$400,000 from $131,000 in the same period in 1996.  Each of these increases is
due primarily to larger cash and cash equivalent balances as a result of the
Company's initial public offering.

Interest Expense

          Interest expense for the quarter ended September 30, 1997 increased to
$33,000 from $19,000 in the same period in 1996.  Interest expense for the nine-
month period ended September 30, 1997 increased to $114,000 from $25,000 in the
same period in 1996.  Each of these increases is due primarily to higher
borrowing levels for purchases of capital equipment.

LIQUIDITY AND CAPITAL RESOURCES

          The Company has financed its operations to date principally through
private placements of equity securities, which had yielded net proceeds of $30.9
million as of September 30, 1997, together with interest income on such
proceeds, an initial public offering of Common Stock in June 1997, which yielded
net proceeds of approximately $13.6 million, and equipment leases, which have
totaled $1.8 million to acquire certain capital equipment.  As of September 30,
1997, the Company had approximately $17.2 million in cash and cash equivalents.

          Net cash used in operating activities was approximately $8.2 million
and $4.9 million for the nine months ended September 30, 1997 and 1996,
respectively, resulting primarily from operating losses incurred during such
periods. Net cash used in investing activities was approximately $584,000 and
$181,000 for the nine months ended September 30, 1997 and 1996, respectively,
attributable primarily to capital expenditures during such periods. Net cash
provided by financing activities was approximately $25.1 million and $3.4
million for the nine months ended September 30, 1997 and 1996, respectively,
resulting primarily from the Company's initial public offering and the sale of
equity securities in private placement transactions.

          The Company's future liquidity and capital requirements will depend
upon numerous factors, including the progress of the Company's product
development efforts, the progress of the Company's clinical trials, actions
relating to regulatory matters, the costs and timing of expansion of product
development, manufacturing, sales and marketing activities, the extent to which
the Company's products gain market acceptance, and competitive developments. The
Company believes that available cash and cash generated from operations will be
sufficient to meet the Company's operating expenses and capital 

                                       10
<PAGE>
 
requirements through the end of 1998. There can be no assurance, however, that
the Company will not require additional financing during that period, or that if
required, such additional financing will be available on terms acceptable to the
Company, if at all. The Company may seek to raise additional funds through
public or private financing, collaborative relationships or other arrangements.
There can be no assurance that such additional funding, if needed, will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Collaborative arrangements, if
necessary to raise additional funds, may require the Company to relinquish its
rights to certain of its technologies, products or marketing territories. The
failure of the Company to raise capital when needed would have a material
adverse effect on the Company's business, financial condition and results of
operations.

FACTORS AFFECTING FUTURE RESULTS

History of Losses and Expectation of Substantial Future Losses

          Since inception, the Company has experienced losses and expects to
experience substantial net losses for the foreseeable future.  To date, sales of
its Cardima Pathfinder, Cardima Pathfinder AF and Tracer microcatheter systems
have been limited.  The Company had net losses of approximately $5.2 million and
$7.8 million for years ended 1995 and 1996, respectively, and $3.4 million and
$8.5 million for the three and nine months ended September 30, 1997,
respectively.  As of September 30, 1997, the Company had an accumulated deficit
of approximately $26.7 million.  The Company expects to incur substantial net
losses for the foreseeable future as a result of research and product
development, clinical trials, manufacturing, sales, marketing and other expenses
expected to be incurred as the Company further develops, tests and distributes
its microcatheter systems.  The Company's limited operating history makes
accurate prediction of future operating results difficult or impossible.  There
can be no assurance that the Company will ever generate substantial net sales or
achieve profitability.  Failure by the Company to generate substantial revenues
or to reduce the research and development, marketing, and manufacturing expenses
below net sales would have a material adverse effect on the Company's business,
financial condition and results of operations.

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

          The Company is currently developing versions of its Cardima Pathfinder
and Tracer microcatheter systems for mapping AF and VT. To date, the Company has
completed two clinical trials and has received two 510(k) pre-market clearances
from the FDA with respect to its Cardima Pathfinder microcatheter system for
venous mapping of VT and Cardima Pathfinder AF microcatheter system for mapping
and pacing of the atria. Failure to obtain clearances for the Company's other
diagnostic products under development, including the Pathfinder 1.5 Fr., on a
timely basis would have a material adverse effect on the Company's business,
financial condition and results of operations.

          The Company is in the early stage of developing, testing and obtaining
regulatory approval for its microcatheter systems designed for ablation of AF
and VT.  The Company is currently developing the Cardima Pathfinder AF
microcatheter system for ablation of AF and the Tracer VT microcatheter system
for ablation of VT.  The Company has not conducted any human clinical studies
using its microcatheter systems for the ablation of AF or VT.  The Company is
required to obtain an IDE from the FDA prior to conducting human clinical trials
of its microcatheter systems for ablation.  The Company filed an IDE for 

                                       11
<PAGE>
 
the Cardima Pathfinder AF microcatheter system for mapping and ablation in
January 1997, and completed a feasibility study for AF mapping at Stanford
University Hospital and Massachusetts General Hospital. The Company has
submitted the results of the Phase I mapping study to the FDA. The FDA has not
approved any studies for ablation and there can be no assurance that the FDA
will approve any filed IDE for the ablation of AF. The Company must complete
these clinical trials, if initiated, prior to the filing of a PMA, and must
receive PMA approval prior to marketing such products for ablation in the United
States. Clinical trials of the Company's microcatheter systems will require
substantial financial and management resources of the Company and the completion
of such trials will take several years. There can be no assurance that necessary
IDEs will be granted by the FDA, that human clinical trials, if initiated, will
be completed or that these clinical studies will validate the results of the
Company's pre-clinical studies or demonstrate that such products are safe and
effective. In addition, the clinical trials may identify significant technical
or other obstacles to be overcome prior to obtaining necessary regulatory
approvals or market acceptance. The failure of the Company to initiate and
complete clinical trials, demonstrate product safety and clinical effectiveness,
or obtain regulatory approval for the Cardima Pathfinder AF for AF ablation or
the Tracer VT for VT ablation would have a material adverse effect on the
Company's business, financial condition and results of operations.

Uncertainty of Product and Procedure Acceptance

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

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

        Cardima is developing its Cardima Pathfinder AF microcatheter
system for mapping and ablation of AF. Currently, there is considerable clinical
debate about the need for mapping AF prior to ablation, and no mapping is
performed during the open heart surgical maze procedure. However, the Company
believes that mapping prior to ablation may be useful to identify different
segments of the AF population, each of which could require slightly different
mapping and ablation procedures. For example, some electrophysiologists believe
most AF patients will need to be mapped and ablated in both the left and right
atria, while others believe only the right atrial intervention is warranted.
Market acceptance of this product for mapping will 

                                       12
<PAGE>
 
depend largely on a determination that there is a clinical need for diagnostic
mapping prior to ablation of AF. The Cardima Pathfinder AF ablation procedure
requires the use of RF energy in the right and left atria to produce lesions. In
general, the use of RF energy in the left atrium has the potential to create
blood clots, which could travel through the vasculature to the brain and cause a
stroke. Consequently, physicians may not recommend this procedure, in which
event the Cardima Pathfinder AF would be unlikely to gain market acceptance. The
failure of the Company to complete development of the Cardima Pathfinder AF or
to gain regulatory approval with respect to the Pathfinder AF for ablation of
AF, demonstrate safety, clinical effectiveness or cost effectiveness, gain wide
market acceptance or successfully commercialize the Cardima Pathfinder AF for
the mapping and ablation of AF would have a material adverse effect on the
Company's business, financial condition and results of operations.

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

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

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

Fluctuations in Operating Results

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

                                       13
<PAGE>
 
No Assurance of Obtaining Required Regulatory Approvals; Government Regulation

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

          The Company is prohibited from marketing its products in the United
States unless it obtains 510(k) clearance or PMA approval from the FDA. The
Company believes that it usually takes up to 12 months from submission to obtain
510(k) clearance, but that it can take longer. The Cardima Pathfinder
microcatheter systems for mapping VT and AF have each received 510(k) clearance.
The Company believes that its other mapping products will also be eligible for
510(k) clearance, and has submitted 510(k) pre-market notification for the
Cardima Pathfinder 1.5 Fr. and intends to seek 510(k) clearance for the Tracer
products. These submissions may need to include clinical trial data. There can
be no assurance, however, that any of these products will receive 510(k)
clearance in a timely fashion, if at all. Delays in market introduction
resulting from the 510(k) clearance process could have a material adverse effect
on the Company's business, financial condition and results of operations.

          The Company will be required to seek PMA approval for its ablation
products, including the Cardima Pathfinder AF and the Tracer VT microcatheters
for ablation. The process of obtaining PMA approval is much more costly, lengthy
and uncertain than the 510(k) clearance process. The Company believes that the
FDA's review of a PMA application after filing can last from one to three years,
or even longer. In order to prepare a PMA application, the Company will be
required to complete clinical trials to demonstrate the safety and effectiveness
of these products. To date, the Company has not conducted any human clinical
studies using its microcatheter systems for the ablation of AF or VT. The
Company submitted an IDE for the Cardima Pathfinder AF microcatheter system for
mapping and ablation of AF in January 1997, and completed a Phase I feasibility
study for mapping AF at Stanford University Hospital and Massachusetts General
Hospital in September 1997. The FDA has not approved any clinical studies for
ablation, and the Company will be required to submit the results of the Phase I
mapping study prior to conducting clinical studies for ablation. The Company
expects to file an additional IDE and begin its clinical trials for the Tracer
VT microcatheter system in the second half of 1997. There can be no assurance
that any clinical study that the Company proposes will be permitted by the FDA,
will be completed or, if completed, will provide data and information that
supports additional clinical investigations of the type necessary to obtain PMA
approval. The Company expects that a PMA application will not be submitted for
at least two years, if at all. No assurance can be given that the Company will
ever be able to obtain PMA approval for any of its ablation products. Failure of
the Company to obtain timely PMA approval would have a material adverse effect
on the Company's business, financial condition and results of operations.

          The Company is subject to periodic inspection by the FDA and the
California Department of Health Services, and must comply with various other
regulatory requirements that apply to medical devices marketed in the United
States, including labeling regulations, the Quality System Regulation 

                                       14
<PAGE>
 
("QSR")(which includes elaborate testing, control, documentation and other
quality assurance procedures), the Medical Device Reporting regulation (which
requires that a manufacturer report to the FDA certain types of adverse events
involving its products), and the FDA's prohibitions against promoting approved
products for unapproved ("off-label") uses. The Company's failure to comply with
applicable regulatory requirements could result in enforcement action by the
FDA, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

          Sales of medical devices outside the United States are subject to
international regulatory requirements that vary from country to country.  The
time required for approval varies from country to country and may be longer or
shorter than the time required in the United States.  The Company has obtained
the requisite approvals by means of the CE mark to sell the Cardima Pathfinder,
Cardima Pathfinder 1.5 Fr., Cardima Pathfinder AF, Tracer and Venaport for
mapping in the European Union ("EU") and Australia, to sell the Cardima
Pathfinder, Cardima Pathfinder 1.5 Fr., Cardima Pathfinder AF and Tracer in
Japan and to sell the Cardima Pathfinder, Tracer and Venaport in Canada.  The
Company plans to commence clinical trials in the EU, Canada and Japan for its
ablation products, including certification to enable CE marking.  There can be
no assurance the Company will be successful in obtaining such approvals.
Failure to receive approval to affix the CE mark would prohibit the Company from
selling these products in member countries of the EU, and would require
significant delays in obtaining individual country approvals.  No assurance can
be given that such approvals will ever be obtained.  In such event, the
Company's business, financial condition and results of operations would be
materially and adversely affected.

Rapid Technological Change; Significant Competition

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

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

                                       15
<PAGE>
 
these new approaches or new products prove to be safe and effective, the
Company's products could be rendered noncompetitive or obsolete, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

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

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

          The Company's future liquidity and capital requirements will depend on
numerous factors, including the progress of the Company's clinical research and
product development programs:  the receipt of, and the time required to obtain,
regulatory clearances and approvals; the costs and timing of expansion of
product development, manufacturing and sales and marketing activities; the
extent to which the Company's products gain market acceptance; competitive
developments; and other factors.  The timing and amount of such capital
requirements cannot be accurately predicted.  In addition, if unforeseen
difficulties arise in the course of developing its products, performing clinical
trials, obtaining necessary regulatory clearances and approvals or other aspects
of the Company's business, the Company may be required to invest greater-than-
anticipated funds.  As a consequence, the Company may be required to raise
additional funds through public or private debt or equity financings,
collaborative relationships, bank facilities or other arrangements.  If
additional financing is needed, there can be no assurance that it will be
available on terms acceptable to the Company, if at all.  Any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants.

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

          The Company's success will depend in part on its ability to obtain
patent protection for its products and processes, to preserve its trade secrets,
trademarks, copyrights and to operate without infringing or violating the
proprietary rights of others. The Company's strategy is to actively pursue
patent protection in the United States and foreign jurisdictions for technology
that it believes to be proprietary and that offers a potential competitive
advantage for its products. The patent positions of medical device companies,
including the Company, are uncertain and involve complex and evolving legal

                                       16
<PAGE>
 
and factual questions. The coverage sought in a patent application either can be
denied or significantly reduced before or after the patent is issued. In
addition, the U.S. patent laws were recently amended to exempt physicians, other
health care professionals and affiliated entities from infringement liability
for medical and surgical procedures performed on patients. The Company cannot
predict whether this amendment might have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures.

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

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

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

                                       17
<PAGE>
 
          The validity and breadth of claims in medical technology patents
involve complex legal and factual questions and, therefore, may be highly
uncertain. There can be no assurance that any issued patent or patents based on
pending patent applications or any future patent application will exclude
competitors or provide competitive advantages to the Company, that any of the
Company's patents or patents in which it has licensed rights will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held or licensed by the Company.
There can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around any
patents issued to or licensed by the Company or that may be issued in the future
to the Company. Since patent applications in the United States are maintained in
secrecy until patents issue, the Company cannot be certain that others were not
the first to file applications for inventions covered by the Company's pending
patent applications, nor can the Company be certain that it will not infringe
any patents that may be issued to others on such applications. The Company
periodically reviews the scope of patents of which it is aware. Although Cardima
does not believe that it infringes patents known to the Company, the question of
patent infringement involves complex legal and factual issues and there can be
no assurance that any conclusion reached by the Company regarding infringement
will be consistent with the resolution of any such issues by a court.

Risks Associated with International Sales

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

                                       18
<PAGE>
 
Uncertainty Related to Third-Party Reimbursement

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

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

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

                                       19
<PAGE>
 
would have a material adverse effect on the Company's business, financial
condition and results of operations.

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

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

Limited Sales, Marketing and Distribution Experience

          The Company has only limited experience marketing and selling its
products in commercial quantities. Expanding the Company's marketing and sales
capability to adequately support sales in commercial quantities will require
substantial effort and require significant management and financial resources.
The Company is in the process of terminating several distribution arrangements
in Europe and hiring a direct sales force in major European markets. There can
be no assurance that the Company will be able to continue to build a marketing
staff or sales force, that expanding such a marketing staff or sales force will
be cost-effective or that the Company's sales and marketing efforts will be
successful. The Company's Cardima Pathfinder, Cardima Pathfinder AF and Tracer
microcatheter systems for mapping of AF and VT have obtained regulatory approval
in certain international markets, and sales and marketing of these products is
conducted primarily through distributors. The Company currently has a number of
exclusive distributors that cover certain European countries and Japan and has
sold only a limited number of Cardima Pathfinder, Cardima Pathfinder AF and
Tracer microcatheter systems through these 

                                       20
<PAGE>
 
distributors. The Company does not have written agreements with certain of its
exclusive distributors. Consequently, the terms of such arrangements, such as
length of arrangements and minimum purchase obligations are uncertain. In
addition, the laws in certain international jurisdictions may make it difficult
and costly for the Company to terminate such distribution arrangements absent
specific written termination terms. There can be no assurance that these
distributors will be able to market and sell the Company's products in these
markets. There can be no assurance that the Company will be able to enter into
additional agreements with desired distributors on a timely basis or at all, or
that such distributors will devote adequate resources to selling the Company's
products. Failure to establish an adequate sales force or to establish and
maintain appropriate distribution relationships would have a material adverse
effect upon the Company's business, financial condition and results of
operations.

Dependence Upon Key Personnel

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

Risk of Product Liability; Adequacy of Insurance Coverage

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

                                       21
<PAGE>
 
PART II.  OTHER INFORMATION

Item 1.    Legal Proceedings

           Not applicable.

Item 2.    Changes in Securities and Use of Proceeds

           In connection with its initial public offering in 1997, the Company
           filed a Registration Statement on Form S-1, SEC file No. 333-23209
           (the "Registration Statement"), which was declared effective by the
           Commission on June 5, 1997. Pursuant to the Registration Statement,
           the Company registered 2,616,250 shares of its Common Stock, $0.001
           par value per share, for its own account, including 341,250 shares to
           be sold upon exercise of an option granted to underwriters to cover
           overallotments. The offering commenced on June 6, 1997. The aggregate
           offering price of the registered shares sold was $15,925,000, the
           underwriter's option was not exercised and 341,250 shares were
           subsequently deregistered. The managing underwriters of the offering
           were Bear Stearns & Co. Inc. and Dain Bosworth Incorporated.

           From June 6, 1997 to September 30, 1997, the company incurred the
           following expenses in connection with the offering:

                <TABLE>
                <CAPTION> 
                <S>                                     <C>
                Underwriting discounts and commissions   $1,114,750
                Other expenses                            1,167,517
                                                         ----------
                         Total Expenses                  $2,282,267
                </TABLE>

           All of such expenses were direct or indirect payments to others.

           The net offering proceeds to the Company after deducting the total
           expenses above were $13,642,733. From June 6, 1997 to September 30,
           1997, the Company used such net offering proceeds, in direct or
           indirect payments to others, as follows:

                <TABLE>
                <CAPTION> 
                <S>                               <C>
                Purchase and installment of 
                  machinery and equipment          $    64,331
                Repayment of indebtedness              148,122
                Working capital                     13,430,280
                                                   -----------
                          Total                    $13,642,733
                </TABLE>

           Each of such amounts is a reasonable estimate of the application of
           the net offering proceeds. This use of proceeds does not represent a
           material change in the use of proceeds described in the prospectus of
           the Registration Statement.

                                       22
<PAGE>
 
Item 3.    Defaults Upon Senior Securities

           Not applicable

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

Item 5.    Other Information

           See Notes to Financial Statements.

Item 6.    Exhibits and Reports on Form 8-K

          (a)   Exhibits - See Index to Exhibits.
          (b)   No reports on Form 8-K were filed by the Registrant during the
                quarter ended September 30, 1997.

                                       23
<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 13, 1997       CARDIMA, INC.
                              
                              
                              /s/   Phillip C. Radlick, Ph.D.
                              -------------------------------
                              PHILLIP C. RADLICK, Ph.D.
                              President, Chief Executive Officer and Director
                              
                              
                              /s/   Ronald E. Bourquin
                              -------------------------------
                              RONALD E. BOURQUIN
                              Vice President and Chief Financial Officer

                                       24
<PAGE>
 
                                 CARDIMA, INC.

     INDEX TO EXHIBITS FOR FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997


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

   11.1        Statement Regarding Computation of Net Loss Per Share

   27.1        Financial Data Schedule

                                       25