<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-K

[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934. For the fiscal year ended December 31, 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)

<TABLE>
<CAPTION>
<S>                                                               <C>
                    Delaware                                      94-3177883
(State or Other Jurisdiction of Incorporation or     (I.R.S. Employer Identification No.)
                  Organization)
</TABLE>

                              47266 Benicia Street
                         Fremont, California 94538-7330
                                 (510) 354-0300
   (Address, including zip code, and telephone number, including area code,
                  of registrant's principal executive offices)

        Securities Registered Pursuant to Section 12 (b) of The Act: None

          Securities Registered Pursuant To Section 12 (g) of The Act:
                    Common Stock, $0.001 par value per share

         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. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant was $ 66,185,000 based on the last reported sales price of the
Registrant's common stock on the Nasdaq National Market on March 15, 2002.

         As of March 15, 2002, there were 42,699,875 shares of Registrant's
common stock outstanding.

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

<PAGE>

                                 CARDIMA, INC.

                                   FORM 10-K

                  For the Fiscal Year Ended December 31, 2001

                                TABLE OF CONTENT

                                                                        Page No.
                                                                        --------

PART I..................................................................    4

 ITEM 1.  BUSINESS......................................................    4
 ITEM 2.  PROPERTIES....................................................   26
 ITEM 3.  LEGAL PROCEEDINGS.............................................   26
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........   26

PART II.................................................................   27

 ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS...........................................   27
 ITEM 6.  SELECTED FINANCIAL DATA.......................................   28
 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS.....................................   30
 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....   49
 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................   49
 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE......................................   49

PART III................................................................   50

 ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........   50
 ITEM 11.  EXECUTIVE COMPENSATION.......................................   51
 ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT...................................................   51
 ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............   51

PART IV.................................................................   52

 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
          FORM 8-K......................................................   52

SIGNATURES..............................................................   54


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of our Definitive Proxy Statement filed with the Securities
and Exchange Commission pursuant to Regulation 14A in connection with our 2002
Annual Meeting of Stockholders are incorporated herein by reference into Part
III of this report.

                           FORWARD-LOOKING STATEMENTS

         The statements incorporated by reference or contained in this report
discuss our future expectations, contain projections of our results of
operations or financial condition, and include other "forward-looking"
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.
Our actual results may differ materially from those expressed in forward-looking
statements made or incorporated by reference in this report. Forward-looking
statements that express or imply our beliefs, plans, objectives, assumptions or
future events or performance may involve estimates, assumptions, risks and
uncertainties. Therefore, our actual results and performance may differ
materially from those expressed in the forward-looking statements.
Forward-looking statements often, although not always, include words or phrases
such as the following, or the negative of such words or other comparable
terminology:

         .     "will likely result,"
         .     "are expected to,"
         .     "will continue,"
         .     "is anticipated,"
         .     "estimate,"
         .     "believe,"
         .     "predict,"
         .     "potential,"
         .     "intends,"
         .     "plans,"
         .     "projection," and
         .     "outlook."

         You should not unduly rely on forward-looking statements contained or
incorporated by reference in this report. Actual results or outcomes may differ
significantly and materially from those predicted in our forward-looking
statements due to the risks and uncertainties inherent in our business,
including risks and uncertainties in:

         .     clinical trial results,
         .     obtaining and maintaining regulatory approval,
         .     market acceptance of and continuing demand for our products,
         .     the attainment of patent protection for any of these products,
         .     the impact of competitive products, pricing and reimbursement
               policies,
         .     our ability to obtain additional financing to support our
               operations, and
         .     changing market conditions and other risks detailed below.

         You should read and interpret any forward-looking statements together
with the following documents:

         .     our Quarterly Reports on Form 10-Q,
         .     the risk factors contained in this report under the caption
               "Factors Affecting Future Results," and
         .     our other filings with the SEC.

         Any forward-looking statement speaks only as of the date on which that
statement is made. We will not update any forward-looking statement to reflect
events or circumstances that occur after the date on which such statement is
made, unless required by law.

                                        3

<PAGE>

                                     PART I

Item 1.  Business

Overview

         We design, develop, manufacture and market minimally invasive,
single-use, microcatheter systems for the mapping (diagnosis) and ablation
(treatment) of the two most common forms of cardiac arrhythmias: atrial
fibrillation and ventricular tachycardia. Arrhythmias are abnormal electrical
heart rhythms that adversely affect the mechanical activities of the heart and
can significantly affect a person's quality of life and be potentially fatal. We
develop microcatheter systems designed (1) to locate and provide more extensive
and less traumatic access to arrhythmia-causing tissue for diagnosing the
arrhythmia, referred to as mapping, and (2) to restore normal heart rhythms by
isolating and destroying the arrhythmia-causing tissue using radiofrequency
energy, referred to as ablation. Our microcatheters incorporate multiple
electrodes at the distal end to record electrical signals for mapping and, with
certain microcatheters, to emit radiofrequency energy for ablation, allowing
physicians to both map and ablate arrhythmias using the same microcatheter. Our
microcatheters are also designed with variable stiffness guidewire technology
and a highly flexible distal tip to allow more extensive and less traumatic
access to the chambers and vasculature of the heart. In addition, all of our
microcatheters are disposable, single-use products that can be adapted to and
used with all existing signal display systems and radiofrequency generators,
eliminating the need for significant new investment in capital equipment by
hospitals.


         During 2001, we made significant progress in our plans to seek and
receive approval for the first product to be approved for atrial fibrillation
treatment in the United States. After completion of our Phase II clinical trial
to treat atrial fibrillation with the REVELATION Tx microcatheter system in
2000, we began our Phase III pivotal clinical trial. In 2001, we submitted to
the U.S. Food and Drug Administration a modular Pre-Market Approval (PMA)
application for our Phase III clinical trial. The FDA approved this application
in March 2001 and we submitted the first of five agreed upon modules. In April,
May and June 2001, we submitted three additional modules, two of which were
subsequently accepted and closed by the FDA. We are continuing our dialogue with
the FDA regarding the two other modules, which we expect to be accepted and
closed by the FDA prior to the submission of the fifth and final module which
pertains to the six-month follow-up data of the patients involved in the trial.
After reviewing our clinical progress to date (in early 2002), the FDA agreed
that we have met the necessary patient enrollment in our Phase III clinical
trial as of December 2001. In order to submit the fifth and final module to our
PMA application, we must follow these patients for six months, prepare the
results of the study and then submit the data to the FDA. We expect to submit
this data in August 2002 to the FDA and seek an expedited review at that time.

         In Europe, we began a 40 patient clinical trial with the REVELATION
Helix microcatheter system to treat atrial fibrillation originating in the
pulmonary veins of the heart. This trial, which began in August 2001 in Germany,
was designed to potentially expedite feasibility studies in the United States
and accelerate market acceptance of the REVELATION Helix throughout the European
Union. In December 2001, independent of this study, we applied for and received,
CE Mark approval to market the REVELATION Helix.

         While we produce and sell microcatheters for the diagnosis of
ventricular tachycardia, our current efforts focus on the development of
microcatheters to diagnose and treat atrial fibrillation. In January 2001, we
restructured the Company to conserve and concentrate our resources on the
clinical trials for our atrial fibrillation products with the objective of
completing the regulatory approval process in both the United States and Europe.
As part of the restructuring, we deemphasized our ventricular tachycardia
program and suspended the clinical study of the TheraStream microcatheter
system. We have not established a time frame for resuming the TheraStream
clinical study.

                                        4

<PAGE>

Heart and Arrhythmic Disorders

         The heart is an electromechanical pump that relies on self-generated
electrical signals to contract its muscle fibers and pump blood throughout the
body. It is divided into four chambers: the two upper chambers, or atria, and
the two lower chambers, or ventricles. The heart consists of two pumps working
side by side, each with its own atrium and ventricle. The pump on the right side
collects venous blood from the body and sends it to the lungs for oxygenation.
The pump on the left side receives the oxygenated blood from the lungs and pumps
it thoughout the body. The process is repeated on average, 72 times per minute.

         The heart, as with any other organ, requires oxygen and nutrients to
function efficiently. Because the heart has large oxygen and nutrient demands of
its own, it requires an extensive, well developed vascular network to bring
blood to and carry blood away from its muscle tissue. This vascular network is
located throughout the majority of the heart's walls to nourish the heart tissue
directly. This network is comprised of an arterial system and a venous system,
both of which originate on the epicardium, or outer surface, of both the atria
and the ventricles, and penetrates into the tissues of the walls of the heart.
Thus, the anatomy of the heart walls consists of a thick mass of muscle cells
supported by a framework of blood vessels.

         The heart's pumping action is controlled by its electrical conduction
system comprised of specialized cells within the heart muscle tissue. This
conduction system allows electrical signals to propagate through the heart in a
systematic and very organized way. In a systematically timed sequence, this
conduction system carries electrical signals to the muscle cells throughout the
heart. This electrical conduction cycle results in a normal heartbeat that
originates in the right atrium, commencing in a specialized group of cells
called the Sino-Atrial node.

         The Sino-Atrial node is the heart's natural pacemaker, regularly
discharging an electrical signal that is responsible for setting the heart rate,
usually at a rate of 60 to 100 beats per minute. The signal generated in the
Sino Atrial node is propagated through the atrial tissue until it reaches the
Atrio-Ventricular node, located just above the ventricles, and is delayed
momentarily. This momentary delay provides enough time for the atria to fill the
ventricles with blood before the ventricles are signaled to contract.

         Once the electrical signal exits the Atrio-Ventricular node, it is
rapidly conducted down the His Bundle, and is distributed widely throughout both
ventricles via the Purkinje Fibers, delivering the electrical signal to both
ventricles at the same time, causing them to contract in unison. Since the
ventricles pump blood to the lungs and the rest of the body the ventricles are
surrounded by a larger amount of muscle tissue than the atria. The left
ventricle, in particular, is the stronger of the two ventricles, generating
higher pressure and working harder in order to pump oxygenated blood through the
entire body. In the normal heart, the four chambers work rhythmically with each
other to ensure that properly oxygenated blood is constantly delivered
throughout the body. This "normal" heart rate is called "normal sinus rhythum"
(NSR).

     Arrhythmias

         Arrhythmias are abnormal electrical heart rhythms that adversely affect
the mechanical activities of the heart, have detrimental physical effects and
impair a person's quality of life. Arrhythmias result in insufficient blood
flow, which may cause dizziness, inadequate function of important organs in the
body, stroke and/or even death. Arrhythmias have numerous causes, including
congenital defects, tissue damage from heart attacks or arteriosclerosis. There
are two general types of arrhythmias: tachycardia, a fast resting heart rate,
typically more than 100 beats per minute; and bradycardia, a slow resting heart
rate, typically less than 60 beats per minute. Tachycardias fall into one of two
major categories: (1) atrial tachycardia, which has its origin in the atria and
(2) ventricular tachycardia, which has its origin in the wall of the ventricles.
Generally, arrhythmias are degenerative and worsen over time.

                                        5

<PAGE>

Atrial Fibrillation

         Atrial fibrillation, the most common form of atrial tachycardias, is
characterized by the irregular fluttering and/or very rapid beating of the atria
that results from malfunctioning of the electrical conduction system in the
walls of the atria leading to irregular and chaotic atrial beating. During
atrial fibrillation, the regular pumping action of the atria is replaced by
irregular, disorganized and quivering spasms of atrial muscle tissue. Symptoms
of atrial fibrillation typically include a rapid and irregular heartbeat,
palpitations, discomfort and dizziness. This malfunction results in the failure
of the atria to fill the ventricles completely and, consequently, the failure of
the heart to pump adequate amounts of blood to the body. Once atrial
fibrillation becomes symptomatic, it is typically associated with significant
morbidity related to reduced blood flow. Often, the greatest concern is that the
reduced cardiac output can lead to blood pooling in the atria causing the
formation of blood clots. Over time, blood clots in the left atrium can dislodge
and travel through the bloodstream to the brain, resulting in stroke and/or even
death.

         According to the North American Society of Pacing and
Electrophysiology, atrial fibrillation affects more than 2 million people in the
United States, with approximately 160,000 new cases being diagnosed each year.
The American Heart Association estimates that atrial fibrillation is responsible
for over 70,000 strokes each year in the United States. The American Heart
Association estimates that the cost of treating these patients is more than $3.6
billion annually. The cost of drug treatment for atrial fibrillation alone is
estimated to be in excess of $400 million worldwide each year.

         Standard electrocardiograms may be unable to locate the origin, or
focus, of the atrial fibrillation. The preferred diagnostic method, called
mapping, involves placing catheters with electrodes inside the chambers of the
heart to record the electrical signals generated by the heart in order to locate
the focus or origin of the arrhythmia.

         Current atrial fibrillation treatments are primarily supportive and
palliative and do not cure atrial fibrillation. The most common therapies used
in treating atrial fibrillation are anti-arrhythmic and anti-coagulant drugs.
Anti-arrhythmic drugs are typically used to try to reduce the number of episodes
of atrial fibrillation and/or to reduce the duration of each individual episode.
Anti-coagulants are used to reduce the normal clotting mechanism of the blood,
therefore reducing the potential of creating blood clots. However,
anti-arrhythmic drug therapy often becomes less effective over time, with
approximately half of the patients developing resistance to the drugs. In
addition, anti-arrhythmic drugs have potentially severe side effects, including
pulmonary fibrosis and impaired liver function, and significantly affect the
patient's quality of life. Another palliative procedure for atrial fibrillation
is external cardioversion, or the application of a strong electrical current
using an external defibrillator to attempt to shock the heart back into normal
sinus rhythum. This treatment only effects a single episode of atrial
fibrillation and therefore has no effect on the basic cause of atrial
fibrillation Another alternative treatment is the purposeful destruction of the
atrio-ventricular node followed by implantation of a pacemaker. This is
typically considered a treatment of last resort for atrial fibrillation patients
and does not cure or treat the atrial fibrillation itself. The patient also is
dependent on the pacemaker for life. Pacemakers are a device implanted into the
chest, are battery-powered and typically require replacement approximately every
seven to ten years, depending on manufacturer, type of device and amount of
electrical energy delivered. Patients with pacemakers are usually required to
continue with anti-coagulant drug therapy, which increases risk of hemorraghic
stroke.

         The only curative therapy for atrial fibrillation used today is an open
heart operation commonly known as the surgical "maze" procedure whereby
comcomitant to another heart procedure, such as valve replacement, a surgeon
makes several cuts through in the wall of the atrium with a scalpel and then
sutures these cuts back together. When healed, these cuts leave a pattern of
scars that resemble a maze. These scars isolate and contain the chaotic
electrical impulses and channel the electrical signal emanating from the
Sino-Atrial node thereby returning the heart to normal sinus rhythm. This open
heart operation is very expensive and is associated with long hospital stays and
a three to six month recovery time. Although this approach is not commonly used
because it is limited to atrial fibrillation patients who also have some other
surgical need, it is generally considered very effective in controlling atrial
fibrillation.

                                        6

<PAGE>

         Today's leaders in electrophysiology are experimenting with minimally
invasive, catheter-based ablation procedures that replicate the surgical maze
procedure from inside the heart, thereby reducing the procedure time, patient
recovery time and overall procedural costs.

Ventricular Tachycardia

         Ventricular tachycardia is a life-threatening condition in which
heartbeats are improperly initiated from within the ventricular wall, in
addition to the Sino-Atrial node, bypassing the heart's normal conduction
system. A typical ventricular tachycardia patient has experienced a myocardial
infarction, or heart attack, which can result in the formation of a scar or
electrical barrier inside the tissue of the ventricular wall, leading to
improper electrical conduction in the cells immediately surrounding the scar.
During episodes of ventricular tachycardia, the ventricles beat at such an
abnormally rapid rate that they are unable to fill completely with blood, thus
reducing the amount of oxygenated blood being pumped throughout the body. The
resulting reduction in the amount of oxygen transported to the tissue and
organs of the body can cause dizziness and loss of consciousness. Ventricular
tachycardia can often progress into ventricular fibrillation, which is an
extremely irregular, chaotic and ineffective spasming of the ventricles.
Ventricular fibrillation is fatal within a few minutes of its occurrence, unless
orderly contractions of the ventricles are restored through immediate external
electrical cardioversion or defibrillation.

         The American Heart Association estimates that more than 220,000 people
in the United States die from sudden cardiac death each year. Of these,
approximately 50,000 people survive, primarily through emergency defibrillation.
We estimate that each year over 100,000 people in the United States are
diagnosed with symptomatic ventricular tachycardia. The American Heart
Association also estimates that approximately 1.5 million people in the United
States suffer myocardial infarctions each year, of which approximately one
million survive. Approximately 30% of the survivors of a myocardial infarction
suffer an episode of ventricular tachycardia within the following year.

Limitations of Current Catheter-Based Diagnosis and Therapy

         The demonstrated medical benefits and cost efficiency of minimally
invasive procedures have encouraged electrophysiologists to seek new, minimally
invasive techniques for the diagnosis and treatment of arrhythmias. In the case
of atrial fibrillation, electrophysiologists have experimented with a treatment
technique, often referred to as the "drag and burn procedure," in which
conventional radiofrequency tip ablation catheters are dragged across the inside
surface of the atrium to attempt to create a linear lesion. However, creating
continuous, linear, transmural lesions to isolate portions of the atria using
this method with standard tip catheters has proven time consuming, difficult and
ineffective.

         We believe that the disadvantages of existing catheter-based approaches
for atrial fibrillation are attributable not to the minimally invasive approach
of the procedure, but rather to the existing catheter technology. The catheters
currently used are large and stiffer than our products and have a single
electrode at the end of the catheter designed to create an ablation at the tip
only. This makes creating a line of lesion or burn very difficult.

         Based on experience with standard endocardial catheters,
electrophysiologists recognize the need to record and evaluate a greater amount
of electrical information from various areas in the heart simultaneously during
atrial fibrillation or ventricular tachycardia procedures. In the case of atrial
fibrillation, we believe there is a need for catheters that are able to access
both right and left atria to create linear lesions, replicating less invasively,
the surgical maze procedure.

Our Microcatheter System Solution

         The principal clinical goal in the diagnosis and treatment of atrial
fibrillation and ventricular tachycardia is effective mapping and the ability to
safely create appropriate lesions. To achieve this, the electrophysiologist must
be able to access areas of the heart that are currently inaccessible, using easy
to perform techniques. We are

                                        7

<PAGE>

working to achieve this goal by designing microcatheter systems which provide
more extensive and safe access to the arrhythmia-causing tissue. We believe
it is important to be able to both map (diagnose) and ablate (treat) with a
single catheter. Our current Phase III clinical trial to treat atrial
fibrillation with the REVELATION Tx involves three anatomical ablation lines
placed in pre-determined areas of the atria, mimicking the surgically performed
maze procedure. Our microcatheter systems are designed to offer the
following perceived advantages over existing, competitive catheters:

         .     Minimally-invasive approach. Our microcatheter systems are
               designed to provide greater access to the vasculature of the
               heart simply because they are smaller and more flexible than
               competitive technologies. Our microcatheters can reach small
               vessels where other systems simply cannot go because of size
               constraints. We believe that this increased access results in
               decreased procedure time, shorter hospital stays, lower procedure
               costs and fewer complications than the surgical procedures
               currently in use.

         .     Single microcatheter that can both map and ablate. We initially
               developed microcatheters for diagnosing arrhythmias. Our primary
               focus today is the development of our REVELATION family of
               therapeutic microcatheters, which are capable of both mapping and
               ablating. We believe this dual functionality of our microcatheter
               systems will decrease procedure times, improve treatment outcomes
               and enhance the overall safety of the procedure.

         .     Enhanced access to the vasculature of the heart. Our
               microcatheters are approximately one-third to one-fourth the size
               of standard electrophysiology catheters, and incorporate variable
               stiffness technology. Variable stiffness technology means we use
               a tapered core guidewire as the basic building block of each
               catheter and attach a highly flexible, atraumatic tip to the
               leading end of each catheter. As a result, our microcatheters are
               more torqueable and flexible than standard electrophysiology
               catheters to allow more extensive and less traumatic access to
               the vasculature of the heart. This technology also allows for our
               REVELATION series of mapping and ablation catheters to easily
               conform to the contours of the heart wall, thereby maintaining
               controlled, regular contact even in a fast-beating heart.

         .     Less tissue damage at safer power setting. Because our ablation
               microcatheters are smaller, they can create thinner lesion lines
               while maintaining the same depth of tissue penetration. This
               significantly reduced surface tissue damage may be important in
               lesion formation in the pulmonary veins where pulmonary vein
               stenosis after conventional ablation therapy is an issue. The
               REVELATION series of ablation catheters creates thinner lines. We
               also can create these lesions at lower power settings because of
               the effect of current density. We can ablate at power settings as
               low as 5 watts while conventional catheters need at least 30
               watts. Power relates to potential clot formation. This reduced
               operating power by the REVELATION series directly effects the
               safety of the procedure.

         .     Compatible with existing capital equipment. Our microcatheter
               systems are designed to be compatible with all leading
               electrophysiology signal display systems and radiofrequency
               generators currently in use by all electrophysiology departments.
               This eliminates the need for new investment in additional capital
               equipment. This equipment compatibility makes our catheters very
               cost effective for an electrophysiology lab to incorporate into
               their arrhythmia treatment capability.

         .     Reduced procedure and radiation exposure times. We believe that
               the dual functionality, the ability to both map and ablate, of
               our microcatheter systems will reduce procedure times and enhance
               safety. Since the electrophysiologists must use x-rays to place
               and determine location of all catheters, faster procedures equate
               to decreased cumulative x-ray exposure to patients, physicians
               and lab personnel.

                                        8

<PAGE>

     Curative Treatment for Atrial Fibrillation

         Our REVELATION, REVELATION Tx and REVELATION T-Flex microcatheter
systems are designed to diagnose and treat atrial fibrillation in the right
atria by creating long, thin, continuous, linear, transmural lesions. Our
REVELATION Helix microcatheter system is designed to diagnose and treat atrial
fibrillation that originates from the pulmonary veins, located in the left
atria. The REVELATION Tx, which has received CE Mark approved in the European
Union, is in a Phase III clinical trial in the United States to treat atrial
fibrillation. The REVELATION Helix can both diagnose and treat focal, or
localized atrial fibrillation and make circumferential or partially
circumferential scar patterns within the pulmonary veins or on the ostia, or
outer base of the pulmonary veins, to contain atrial fibrillation. The
REVELATION Helix received CE Mark approval in December 2001 to treat atrial
fibrillation originating in the pulmonary veins.

         Our microcatheter systems typically deliver less radiofrequency energy
and create thinner lesions than standard electrophysiology catheters, preserving
a greater amount of atrial tissue following the procedure. We believe these
thinner lesions will result in an improvement in atrial function and a reduction
in the risk of blood clotting, reducing or possibly eliminating the need for
chronic anticoagulant therapy. We also designed the REVELATION Tx, REVELATION
T-Flex and REVELATION Helix microcatheters with temperature-sensing bands
between each electrode that are designed to be in direct contact with the atrial
tissue thereby giving a more accurate temperature reading during ablation.
Temperature sensing is extremely important when treating tissue in the left
atria. The delivery of radiofrequency energy creates scar tissue and has the
potential to coagulate blood. Blood clots are extremely dangerous on the left
side of the heart because these clots can flow through the arterial system to
the brain causing a stroke. Competitive systems utilize temperature sensors
positioned under their electrodes that are not in direct contact with the
tissue. We believe the direct contact design and more accurate temperature
monitoring during an ablation is a competitive advantage due to the concern of
creating clots or coagulum during an ablation procedure. We believe this
approach has the potential to offer the effectiveness of the open-heart surgical
cure for atrial fibrillation, but with less trauma, fewer complications, reduced
pain, shorter hospital stays and lower procedure costs.

     Curative Approach for Ventricular Tachycardia

         Our PATHFINDER, PATHFINDER mini and TRACER microcatheter systems for
mapping ventricular tachycardia and the TheraStream microcatheter system for
both mapping and ablation of ventricular tachycardia are designed for use inside
the vasculature of the heart wall, facilitating access to arrhythmia-causing
tissue through the venous system. We believe that at least half of the
ventricular tachycardia foci are located in the intramyocardium and the
epicardium, areas that are ineffectively accessed using standard endocardial
catheters or basket type catheters in development. The intravascular approach to
ventricular tachycardia ablation should permit our microcatheters to be
positioned in close proximity to the arrhythmia-causing tissue, facilitating the
creation of smaller, more focused lesions. We believe that this approach has the
potential to be more effective than standard endocardial ablation procedures,
with reduced destruction of surrounding healthy tissue, thus optimizing the
normal function of the heart after the procedure. We are aware of at least one
other epicardial mapping catheter in addition to the PATHFINDER, PATHFINDER
mini, TRACER and TheraStream under development.

         In January 2001, we decided to focus our efforts on our atrial
fibrillation program and postpone our work on the therapeutic ventricular
tachycardia program until such time that we have the appropriate.

Our Business Strategy

         Our objective is to be a leading developer of innovative products that
provide safer and more effective diagnosis and treatment of atrial fibrillation
and ventricular tachycardia. We are currently focusing our development efforts
on getting regulatory approval in the United States for our REVELATION family of
microcatheters to treat atrial fibrillation. Once our REVELATION Tx is approved
in the United States, we intend

                                        9

<PAGE>

to focus our efforts on commencement of a clinical trial in the United States
for the REVELATION Helix for mapping and treating atrial fibrillation
originating in the pulmonary veins of the heart. Our strategy incorporates the
following key elements:

         .     Develop microcatheter technology to address unmet clinical needs
               for both mapping and ablation. We are developing microcatheter
               systems to address clinical needs that are not adequately
               addressed by current technology. We are focusing on endocardial
               access for atrial fibrillation. We are designing systems, which
               incorporate variable stiffness guidewire technology originally
               developed at Target Therapeutics, Inc., a subsidiary of Boston
               Scientific Corporation, including guiding catheters in order to
               optimize the physician's ability to access the areas of interest
               in the heart easily and safely. Additionally, for treating atrial
               fibrillation, we believe our REVELATION family of microcatheters
               will be used to create long, thin linear lesions which are
               designed to replicate the "maze" surgical procedure, which is an
               expensive, highly invasive procedure, but has a high rate of
               success. By using microcatheters that can map as well as ablate,
               we believe the electrophysiologist need access the
               arrhythmia-causing tissue only once in order to map it, verify
               that it is causing the arrhythmia and then ablate the tissue
               using the same catheter.

         .     Provide microcatheter systems that lower the cost of treating
               electrophysiological disorders. Our microcatheter systems are
               designed to reduce the average time required for atrial
               fibrillation and ventricular tachycardia diagnostic and
               therapeutic procedures significantly. As a result, time spent in
               high cost electrophysiology laboratories should be reduced,
               lowering the overall cost of atrial fibrillation or ventricular
               tachycardia treatments. The shorter procedure time that we
               believe will result from the use of our microcatheter systems
               should enable physicians to perform a greater number of atrial
               fibrillation or ventricular tachycardia procedures and reduce the
               overall cost per procedure. In addition, we intend to use data
               derived from our clinical studies to establish enhanced
               reimbursement rates for atrial fibrillation and ventricular
               tachycardia procedures using our microcatheter systems. We
               believe that our microcatheter systems will appeal to patients
               and third-party payors seeking a cost-effective solution to the
               diagnosis and treatment of atrial fibrillation and ventricular
               tachycardia.

         .     Accelerate acceptance and adoption of our microcatheter systems
               by leading electrophysiologists. We have formed relationships
               with leading medical centers in the United States, Europe and
               Japan to perform clinical trials of our microcatheter systems for
               the diagnosis and treatment of atrial fibrillation. Based on data
               submitted upon completion of our Phase II clinical trial, we
               obtained approval from the US Food and Drug Administration to
               expand to a Phase III pivotal trial. We believe that successful
               acceptance and adoption of these systems by widely recognized
               experts in the field of electrophysiology is an important step in
               the overall market acceptance of our microcatheter systems. We
               intend to continue to work with leading physicians and medical
               centers, to complete the Phase III clinical trial demonstrating
               the safety and effectiveness of our microcatheter systems and,
               ultimately, to establish broad market acceptance of our products.
               In addition, we intend to accelerate physician education through
               additional training with our clinical investigators and adoption
               through peer-reviewed publications concerning the clinical trials
               of our microcatheter systems.

         .     Increase sales by further penetrating international markets. We
               intend to increase international sales, especially in Europe,
               through expansion of our network of international distributors to
               further penetrate international markets, given their substantial
               size and the relatively lower regulatory barriers. We received
               ISO 9001 (EN 46001) Quality Systems certification for our
               manufacturing facilities from the European Union regulators, as
               well as European approval to market a number of our products with
               the right to affix the CE Mark. We received regulatory approval
               in the United States, Europe, Japan, Australia and Canada for our
               PATHFINDER microcatheter system for mapping ventricular
               tachycardia and have received regulatory approval in the United
               States, Europe, Japan and Australia

                                       10

<PAGE>

               for our REVELATION microcatheter system for mapping atrial
               fibrillation. We received CE Mark approval to market the
               REVELATION, REVELATION Tx, REVELATION T-Flex and REVELATION Helix
               ablation microcatheter systems to treat atrial fibrillation which
               were approved in the European Union in August 1998, December
               1998, June 2000 and December 2001, respectively.

Products

         We are currently focused on developing microcatheter systems for the
diagnosis and treatment of atrial fibrillation. These systems are designed to
access both the right and left atria. Our microcatheter systems are designed to
be used endocardially in the atria, to map and then ablate atrial fibrillation
causing tissues through the creation of long, thin, continuous, linear,
transmural lesions. The series of electrodes at the distal ends, depending on
the particular product, may both receive electrical signals for mapping and
emitting radiofrequency energy for ablation. In addition, these microcatheter
systems are smaller in diameter and are designed to be more flexible and
torqueable than other existing electrophysiology catheters, providing thinner
linear lesions and less destruction of tissue. Our microcatheters are designed
as single use, disposable products. We are designing our products to be used
with all existing electrophysiology recording systems and radiofrequency
ablation generators. Our ancillary products, including guiding catheters,
electrical switch boxes and connecting cables, support these microcatheter
systems.

         The following table describes our products and their intended
indications and regulatory status:

<TABLE>
<CAPTION>
                                                                                                               International
                                 Description               Indication       U.S. Regulatory Status(1)       Regulatory Status(1)
                       ------------------------------   ----------------   ---------------------------   --------------------------
<S>                    <C>                              <C>                <C>                           <C>
Therapeutic Products
--------------------

REVELATION             Eight-electrode microcatheter    Mapping            510(k) (2) clearance          Approved in European
                       system designed to map in both                      obtained.                     Union (CE Mark) (3),
                       right and left atria.                                                             Japan and Canada.

                       Can also be used for linear      Ablation                                         Approved in the European
                       ablation in approved markets.                                                     Union (CE Mark) for
                                                                                                         ablation.

REVELATION Tx          Eight-electrode microcathere     Mapping and        Phase III IDE(4) approved;    Approved in European
                       system with tissue temperature   Ablation           clinical trial in progress.   Union (CE Mark).
                       sensors designed to map and
                       create long, thin, continuous,
                       linear, transmural lesions in
                       the atrium.

REVELATION T-Flex      Deflectable and steerable        Mapping and        Supplemental submission       Approved in European
                       eight-electrode microcatheter    Ablation           to FDA planned after          Union (CE Mark).
                       system with tissue temperature                      REVELATION Tx
                       sensors designed to map and                         approval.
                       create long, thin, continuous,
                       linear, transmural lesions in
                       the right atrium.

REVELATION Helix       Helical shaped eight-electrode   Mapping and        Clinical trial planned to     Approved in European
                       microcatheter system with        Ablation           begin in second half of       Union (CE Mark).
                       tissue temperature sensors                          2002.
                       designed to map and create
                       circumferential or focal
                       lesions in the pulmonary
                       vein ostia of the left atrium.

Diagnostic Products
--------------------

PATHFINDER             Multi-                           Mapping            510(k) clearance obtained.    Approved in European
</TABLE>

                                       11

<PAGE>

<TABLE>
<CAPTION>
                                                                                                               International
                                 Description               Indication       U.S. Regulatory Status(1)       Regulatory Status(1)
                       ------------------------------   ----------------   ---------------------------   --------------------------
<S>                    <C>                              <C>                <C>                           <C>
                       electrode microcatheter                                                           Union (CE Mark) and
                       system designed for accessing                                                     Japan
                       coronary sinus vasculature to
                       locate arrhythmia-causing
                       tissue.

PATHFINDER mini        Smallest PATHFINDER              Mapping            510(k) clearance obtained.    Approved in European
                       microcatheter (1.5 French)                                                        Union (CE Mark), Japan
                       designed to provide access to                                                     and Canada.
                       more distal and smaller
                       coronary veins

TRACER                 Over-the-wire multi-electrode    Mapping            510(k) clearance obtained.    Approved in European
                       microcatheter system designed                                                     Union (CE Mark) and
                       to be used in the veins of the                                                    Japan.
                       heart wall over a guidewire.

TheraStream            Over-the-wire multi-electrode    Ablation           US IDE approved for           No trial currently planned
                       microcatheter system designed                       feasibility trial. Clinical   in European Union.
                       for mapping and ablation from                       trial on hold.
                       within the veins of the heart
                       wall.

Support Products
--------------------

VENAPORT               Guiding catheters to access      Venous access      510(k) clearance obtained.    Approved in European
                       coronary sinus with a family                                                      Union (CE Mark), Japan
                       of curve shapes and lengths.                                                      and Switzerland.
                       Designed to deliver our
                       microcatheters.

VUEPORT                Balloon-tipped coronary sinus    Venous access,     510(k) clearance obtained.    Approved in European
                       guiding catheter designed to     delivery of EP                                   Union (CE Mark), Japan,
                       facilitate delivery of           catheters,                                       Canada and Australia.
                       electrophysiology (EP)           venography
                       catheters and for injection
                       of contrast material to
                       facilitate and provide
                       occlusive venography.

NAVIPORT               Deflectable guiding catheter     EP catheter        510(k) clearance obtained.    Approved in European
                       designed to facilitate           delivery and                                     Union (CE Mark),
                       delivery of EP catheters.        support                                          Japan, Canada and
                                                                                                         Australia.

Accessories
--------------------

EP SELECT              Switch box designed to           Connectivity for   510(k) clearance obtained.    Approved in European
                       interface with existing          pacing and                                       Union (CE Mark).
                       electrophysiology lab            electrophysiol-
                       equipment and multi-electrode    ogy recording.
                       catheters.

TX SELECT              Switch box designed to           Connectivity for   Incorporated into US IDE      Approved in European
                       interface with existing          pacing,            for REVELATION Tx as          Union (CE Mark).
                       electrophysiology lab            electrophysiol-    part of the mapping and
                       equipment and multi-electrode    ogy recording      ablation system. Currently
                       catheters.                       and radio          in Phase III pivotal
                                                        frequency          clinical study.
                                                        ablation.
</TABLE>
---------------
(1)  The regulatory status of our microcatheter systems reflects our current
     status of regulatory submission or approvals in the United States, Europe
     and Japan. See "--Government Regulation." The actual submission times could
     differ materially

                                       12

<PAGE>

     from those anticipated in these estimates as a result of certain factors,
     including failure to complete development of microcatheter systems or to
     demonstrate safety or effectiveness in clinical studies, as well as the
     other factors set forth under our "Management's Discussion and Analysis of
     Financial Condition and Results of Operations - Factors Affecting Future
     Results" and elsewhere in this Annual Report on Form 10-K.

(2)  510(K) clearance is when a product has been found by the Food and Drug
     Administration to be substantially equivalent to other similar and legally
     marketed devices and receives clearance for commercial distribution. A
     510(K) product usually requires less time to receive FDA approval to
     market.

(3)  Receipt of the CE Mark means approval to market a specific product in any
     country that is a member of the European Common Market

(4)  IDE is an Investigational Device Exemption issued by the FDA to study
     the safety and effectiveness of an unapproved investigational device in
     humans. Approval to begin an IDE study is issued if the FDA believes the
     device potentially offers benefits for public health that outweigh the
     identified risk(s).

     Products Designed for Mapping and Ablating Atrial Fibrillation

         Our REVELATION family of microcatheters can access both the right and
left atria in a minimally invasive procedure. They are designed to effectively
map and ablate atrial fibrillation-causing tissue by creating (1) long, thin,
continuous, linear, transmural lesions in the right or left atria and (2) focal,
circumferential or linear lesions in and around the pulmonary veins located in
the left atria.

         REVELATION for Atrial Fibrillation Mapping. The REVELATION
microcatheter system is designed to facilitate mapping of the atria. The
REVELATION is a thin, flexible, eight-electrode microcatheter. The REVELATION
microcatheter system is a 3.3 French diameter microcatheter that incorporates
variable stiffness technology that permits access to any area of the atria and
has eight coiled electrodes for added flexibility to enhance contact and
conformity with atrial tissue. This microcatheter system is being marketed for
mapping atrial fibrillation in the United States, Europe and Japan. The
REVELATION is also approved for treating atrial fibrillation in the European
Union.

         Mapping prior to ablation may be useful to identify different segments
of the atrial fibrillation population, each of which could require slightly
different ablation procedures. For example, some electrophysiologists believe
most atrial fibrillation patients will need to be mapped and ablated in both the
left and right atria, while others believe only right atrial intervention is
warranted. During the maze procedure, the surgeon does not map the atria, rather
a set of predetermined cuts are made in anatomical areas of the atria. We
believe that our products will have clinical utility in either of these
situations.

         REVELATION Tx for Atrial Fibrillation Ablation. The REVELATION Tx is a
thin, flexible, eight-electrode microcatheter. The REVELATION Tx microcatheter
system is a 3.7 French diameter microcatheter that incorporates variable
stiffness technology that permits access to any area of the atria and has coiled
electrodes for added flexibility to enhance contact and conformity with atrial
tissue. The REVELATION Tx also has temperature-sensing thermocouples placed
between each coiled electrode to monitor tissue temperature during ablation. The
eight electrodes are closely grouped and can be used to create a long,
continuous lesion that extends through the thickness of the atrial wall. We
believe that the electrophysiologist will be able to use the REVELATION Tx
microcatheter system to create long, thin, continuous, linear, transmural
lesions in both the right and left atria, thereby restoring normal electrical
function in the atria by isolating the arrhythmia-causing tissue in a manner
similar to the open heart surgical maze procedure, without the associated risk
and at a reduced expense. Unlike other catheter-based ablation techniques, such
as the "drag and burn" approach, our approach does not require resetting the
catheter position during the linear ablation procedure. As a result, the
REVELATION Tx may have the ability to more effectively and rapidly isolate the
arrhythmia-causing tissue.

                                       13

<PAGE>

         The REVELATION Tx microcatheter is designed with narrow, coiled
electrodes that are able to deliver radiofrequency energy to ablate the atrial
fibrillation-causing tissue at much lower power settings than documented with
current electrophysiology catheters. These lower power settings reduce the
damage to atrial tissue. We have designed our REVELATION Tx microcatheter system
to be used with virtually all cardiac electrophysiology radiofrequency
generators and electrophysiology mapping systems.

         We submitted data to the FDA from our Phase II clinical study to treat
atrial fibrillation in the United States and received permission to expand to
the Phase III clinical trial in June 2000. By December 31, 2001, a sufficient
number of patients had been treated in this clinical trial to provide the
necessary volume of safety and effectiveness data required for acceptance by the
FDA of our Pre-Market Approval (PMA) application. approval of a PMA application
from the FDA will be required before the REVELATION Tx can be marketed in the
United States to treat atrial fibrillation. See "--Government Regulation."

         REVELATION T-Flex for Diagnosing and Treating Atrial Fibrillation. The
REVELATION T-Flex microcatheter system has the same operational characteristics
as the REVELATION Tx, is a 5.0 French diameter microcatheter with a that is
deflectable, or steerable. The addition of the ability to deflect makes the
REVELATION T-Flex more maneuverable and potentially easier to position in the
atrial anatomy.

         REVELATION Helix for Atrial Fibrillation Ablation. The REVELATION Helix
is a thin, flexible, eight-electrode microcatheter with a helical-shaped distal
tip. The REVELATION Helix microcatheter system is a 4.0 French diameter
microcatheter that incorporates variable stiffness guidewire technology and
permits access to areas of the pulmonary vein area of the atria where the
anatomy requires circumferential contact with the endocardium. The REVELATION
Helix also has temperature-sensing thermocouples placed between each coiled
electrode to monitor tissue temperature during ablation. The eight electrodes
are closely grouped and can be used to create a continuous lesion that extends
through the thickness of the atrial wall, or for mapping and ablating a focal
site in the pulmonary veins.

         Like the REVELATION Tx, the REVELATION Helix microcatheter is designed
with narrow coiled electrodes that are able to deliver radiofrequency energy to
ablate atrial fibrillation-causing tissue at much lower power settings than
documented with standard electrophysiology catheters. These lower power settings
are crucial in left atrial therapy due to potential for creation of coagulum. We
have designed our REVELATION Helix microcatheter system to be used with all
cardiac electrophysiology radiofrequency generators and electrophysiology
mapping computer systems.

         We believe that electrophysiologists will be able to use the REVELATION
Helix microcatheter system to create thin, linear or curvilinear, transmural
lesions in the atria both continuous and focally, thereby restoring normal
electrical function in the atria by isolating the arrhythmia-causing tissue in a
manner similar to the open heart surgical maze procedure, without the associated
risk and at a reduced expense. Unlike other catheter-based ablation techniques,
such as the "drag and burn" approach, our approach does not require resetting
the catheter position during the linear ablation procedure. As a result, the
REVELATION Helix has the ability to more effectively and rapidly isolate the
arrhythmia-causing tissue.

         A multi-center, 40-patient clinical investigation of the REVELATION
Helix began in Germany with the first patient treated in August, 2001. As of
December 31, 2001, twenty-three patients have been treated. On December 10,
2001, we received approval to market the REVELATION Helix in Europe under the CE
Mark. The clinical investigation will be continued until the 40 patients have
been treated to collect clinical data to support a U.S. application for an
Investigational Device Exemption (IDE) and to provide clinical data to support
sales and marketing of the device in Europe. As of December 31, 2001, no
complications associated with the REVELATION Helix had been reported.

     Products Designed for Mapping and Ablating Ventricular Tachycardia

                                       14

<PAGE>

         Our intravascular approach allows our microcatheters to be positioned
in the veins on the outer surface of the heart (epicardially) in close proximity
to the ventricular tachycardia causing tissue and provides stable positioning
within the coronary vascular system. We believe this approach will result in
greater accuracy of diagnosis and more effective treatment.

         Our intravascular electrophysiology microcatheters, exclusive of the
guiding catheters, are coated with a hydrophilic coating. This coating has been
used on Target Therapeutic's products designed to access the vessels of the
brain. We believe the coating significantly improves product functionality. We
have an exclusive license to use the hydrophilic coating technology in products
designed to map and ablate cardiac arrhythmias while positioned within coronary
vasculature.

         PATHFINDER, PATHFINDER mini and TRACER for Ventricular Tachycardia
Mapping. This microcatheter systems used for diagnosing ventricular tachycardia
are designed to be positioned within the coronary vasculature using a guiding
catheter or guidewire, similar to those used in angioplasty procedures, and
which have a series of electrodes at their distal ends in order to perform as
electrophysiology catheters. Our PATHFINDER, PATHFINDER mini and TRACER
microcatheter systems can be used to sub-select vessels and even access the
small veins located at the apex, or lower tip of the heart. Our PATHFINDER and
TRACER microcatheter systems are configured with four, eight, sixteen or twenty
electrodes, which enable the physician to map, over a larger area than most
current mapping catheter. The PATHFINDER mini, our smallest microcatheter
system is 1.5 French in diameter (the typical catheter is approximately one
fifth the size) and provides more distal access to smaller vasculature of the
heart.

         We received 510(k) clearance in the United States and CE Mark approval
in the European Union for our PATHFINDER microcatheter system for mapping
ventricular tachycardia. We sell our PATHFINDER for ventricular tachycardia
mapping in the United States and in Europe through a small direct sales force
and an expanding network of distributors. Our products are sold in Japan,
Australia and Canada through our distributors in each country. The PATHFINDER
can safely map ventricular tachycardia via the coronary veins and up to four
PATHFINDERs have been placed in various vessels of the coronary system
simultaneously, thereby aiding in the diagnosis of ventricular tachycardia.

         We have decided to focus our efforts on our atrial fibrillation program
and postpone work on the TheraStream ventricular tachycardia program until such
time that we deem appropriate.

         The Cardima PATHFINDER and PATHFINDER mini microcatheter systems for
venous mapping of ventricular tachycardia have received 510(k) clearances from
the U.S. Food and Drug Administration, as well as the VENAPORT, VUEPORT and
NAVIPORT families of guiding catheters.

Research and New Product Development

         We believe our future success will depend in large part on our ability
to develop and introduce clinically advanced diagnostic and therapeutic systems
that are effective, easy to use, safe and reliable. Our research and new product
development department focuses on the continued development and refinement of
our existing diagnostic devices, systems and procedures, as well as on the
development of new devices, systems and procedures for treating cardiac
arrhythmias. Currently, our primary research and development program involves
completing the Phase III clinical trial with the REVELATION Tx microcatheter
system for atrial fibrillation ablation. Our secondary research and development
program involves commencing the US clinical trial with our REVELATION Helix
microcatheter system for pulmonary vein ablation as part of our overall
therapeutic atrial fibrillation program.

                                       15

<PAGE>

          Research and development expenses for the years ended December 31,
2001, 2000 and 1999, were $4.9 million, $4.4 million and $5.7 million,
respectively. We announced restructurings and workforce reductions in January
2001, January 2000 and in January 1999, which affected all functional areas,
including research and development. We continue to focus our efforts on certain
specific projects.

Marketing and Distribution

          We marketed and sold our microcatheter systems through a direct sales
force in the United States, France and Germany, and to our distributors in other
countries throughout 1999. In January 2000, we signed an exclusive three-year
distribution agreement with St. Jude Medical Corporation's Daig Division to
distribute our diagnostic products in the United States. As of September 1,
2001, the agreement was terminated due to Daig's failure to meet the contractual
first-year minimum sales level.

          We have three direct sales representatives responsible for sales of
our 510(k) cleared products in the United States and we are focusing our efforts
on expanding our domestic customer base. We believe that there are between 500
and 600 hospitals in the United States that perform electrophysiology procedures
on a routine basis. Further, we believe there are over 1,000 board certified
electrophysiologists practicing domestically.

         In the fourth quarter of 2001, we expanded our European sales force to
four sales representatives and one clinical specialist, specifically to cover
Germany, France, the Mediterranean area, the United Kingdom, the Nordic area,
and central and eastern Europe in order to support the REVELATION Helix launch
throughout Europe. We are in the process of selecting a distributor in
France. We believe there are about approximately 1,000 hospitals that perform
electrophysiology procedures and approximately 1,000 board certified
electrophysiologists located internationally.

         We have increased our sales channels in Asia by adding a new
distributor in Hong Kong and are in the process of adding a distributor in
China. We continue to selectively expand our international distribution in order
to ensure that our sales effort remains in line with our revenue objectives.

Manufacturing

         We fabricate certain proprietary components of our products and
assemble, inspect, test and package most components into finished products.
Designing and manufacturing our products from raw materials allows us to
maintain greater control of quality and manufacturing process changes and the
ability to limit outside access to our proprietary technology.

         We believe that our custom-designed, proprietary processing equipment
is an important component of our manufacturing strategy. In some cases, we
developed proprietary enhancements for existing production machinery to
facilitate the manufacture of our products to exacting standards. We also
developed core manufacturing technologies and processes, including proprietary
extrusion techniques and equipment, polymer-processing capabilities, including
composite lamination, welding of dissimilar materials, balloon forming and
proprietary, precision guidewire-grinding techniques enabling fabrication of a
large variety of guidewire core profiles. Furthermore, our technological
expertise includes wire-braiding, precision coil winding, application of
hydrophilic coating, material cleaning and surface preparation.

         Catheter manufacturing involves complex operations with a number of
separate processes and similar components. Catheters are assembled and tested by
us prior to sterilization. If we receive PMA approval from the FDA for our
atrial fibrillation products, we may need to expend significant capital
resources and develop additional manufacturing capacity to establish large-scale
manufacturing capabilities. We have limited experience manufacturing our
products in the volumes that will be necessary for us to achieve significant
commercial sales,

                                       16

<PAGE>

and there can be no assurance that reliable, high-volume manufacturing capacity
can be established or maintained at commercially reasonable costs.

Components and raw materials are purchased from various qualified suppliers and
subjected to stringent quality specifications. We conduct supplier quality
audits and have established a supplier qualification program. Several of the
components and equipment, such as laminate tubing, core wire mandrels, connector
components and hydrophilic coating, are provided by sole source suppliers. Our
intravascular electrophysiology microcatheters, exclusive of the guiding
catheters, are coated with a hydrophilic coating. This coating has been used on
Target Therapeutics products designed to access the vessels of the brain. Target
Therapeutics is a company that develops, markets and sells cardiac
electrophysiology products that compete directly with the microcatheter products
being developed by us. We believe the coating significantly improves product
functionality. We have an exclusive license to use the hydrophilic coating
technology in products designed to map and ablate cardiac arrhythmias while
positioned within coronary vasculature. Because of the long lead time for some
components, which are currently available from a single source, a supplier's
inability to supply such components in a timely manner could have a material
adverse effect on our ability to manufacture products and therefore on our
business, financial condition and ability to test or market our products on a
timely basis.

         Our manufacturing facilities are subject to periodic inspection from
regulatory authorities, and its operations must undergo FDA Quality System
Regulations and ISO 9001 (EN 46001) compliance inspections conducted by the FDA
and TUV, a regulatory agency of the European Union, to market our products. We
have obtained ISO 9001 (EN 46001) Quality Systems certification from TUV and
have obtained the right to affix the CE Mark to certain of our electrophysiology
mapping and ablation catheters and accessories. We are subject to periodic
inspections by the FDA and California Department of Heath Services. Our
facilities and manufacturing processes have undergone successful annual
re-certification inspections by TUV in August 2000 and in November 2001. In
November 2000, the FDA conducted a Quality System Inspection Technique Audit of
our manufacturing facilities, which we successfully passed. However, there can
be no assurance that our manufacturing facilities will continue to meet such
compliance audits and will maintain such compliance standards. See "Government
Regulation."

Patents and Proprietary Rights

         Our success will depend in part on our ability to obtain patent and
copyright protection for our products and processes, to preserve our trade
secrets and to operate without infringing or violating the proprietary rights of
third parties. Our strategy is to actively pursue patent protection in the
United States and foreign jurisdictions for technology we believe to be
proprietary and which offers a potential competitive advantage for our products.
We have filed and intend to continue to file patent applications, both in the
United States and selected international markets, to seek protection for
proprietary aspects of our technology. We own 18 issued United States patents
and 6 pending United States patent applications. In December 2000, we sold four
non-therapeutic patents and seven issued follow-on patents, as well as one
pending and one provisional patent, to Medtronic, Inc. for $8,000,000 in cash.
We received back a perpetual, worldwide co-license at no cost from Medtronic to
use those patents and related intellectual property in our products for mapping
and ablation of arrhythmia-causing tissue. In addition, Medtronic agreed not to
sublicense the patents within our field of use to any non-affiliated party. We
have also licensed a proprietary surface-coating material from another vendor
used on certain of our microcatheters. We have also filed 51 patent applications
in major international markets, of which two have been granted. No assurance can
be given that these patent applications will provide competitive advantages for
our products or that any patent application filed by us will issue as a patent.
In addition, there can be no assurance that any of our

                                       17

<PAGE>

patents or patent applications will not be challenged, invalidated, or
circumvented in the future. There can also be no assurance that competitors,
many of whom have greater resources than us and have substantial investments in
competing technologies, will not apply for and obtain patents which will
prevent, limit or interfere with our ability to make, use, or sell our products
either in the United States or internationally.

         We also obtained rights to certain technology by entering into license
arrangements. Pursuant to a license agreement with Target Therapeutics, Inc., we
obtained an exclusive, royalty-free, worldwide license under certain patents
issued in the United States and corresponding international patents to use
Target Therapeutics, Inc. technology and to make, use and sell or otherwise
distribute products for the diagnosis and treatment of electrophysiological
diseases in the body, other than in the central nervous system, including the
brain. The exclusive license applies to any Target Therapeutics, Inc. technology
developed through May 1996 and will terminate on April 23, 2013, the expiration
date of the last-to-issue of the licensed patents covering Target Therapeutics,
Inc. technology developed prior to May 31, 1996. In addition to this exclusive
license to use Target Therapeutics, Inc. technology to develop products for
electrophysiological diseases, we obtained a non-exclusive license to use Target
Therapeutics, Inc. technology, provided we make a substantial improvement on
such technology, for the diagnosis or treatment of diseases of the heart other
than by balloon angioplasty. As defined in the agreement, a substantial
improvement is any modification, improvement or enhancement of Target
Therapeutics, Inc. technology that results in a material change in the function,
purpose or application of a particular product incorporating Target
Therapeutics, Inc. technology. We believe that the incorporation of electrodes
in our microcatheter systems, together with other modifications, satisfies the
substantial improvement requirement, although we have not confirmed this belief
in writing with Target Therapeutics, Inc.

         Under the Target Therapeutics, Inc. agreement, we granted back to
Target Therapeutic, Inc. an exclusive, royalty-free, worldwide license to use
technology developed by us through May 1996 in the fields of neurology,
interventional neuroradiology, interventional radiology, reproductive disorders
and vascular prostheses. In addition, we agreed not to conduct material research
and development, acquire corporate entities or make or sell products in these
areas or to sell products, other than products utilizing Target Therapeutic's
technology, for use in diagnosis or treatment of diseases related to the
production of electrical current in tissue located in areas of the body other
than the heart, without first notifying Target Therapeutic and negotiating a
distribution agreement. We also agreed that we would not sell products utilizing
Target Therapeutic's technology for use in diagnosis or treatment of diseases
related to the production of electrical current in tissue located in areas of
the body other than the heart without, if we intend to sell to a distributor,
first notifying Target Therapeutic and offering it the right of first refusal
with respect to the terms of the distribution, or if selling directly to the
consumer, paying Target Therapeutics, Inc. an amount equal to 40% of the gross
profit for such product.

         We obtained rights to a biocompatible hydrophilic-coating material and
process through an exclusive royalty-bearing license to use the hydrophilic
coating technology in products designed to map and ablate cardiac arrhythmias
while positioned within the coronary arteries and coronary veins. The license
will terminate upon the later of 15 years from first commercial sale of
catheters treated with the coating material or the expiration of the
last-to-issue licensed patent, unless terminated earlier for material breach.

         In addition to patents and licenses, we also rely upon trade secrets,
technical know-how and continuing technical innovation to develop and maintain
our competitive position. We typically require our employees, consultants, and
advisors to execute confidentiality and assignment of invention agreements in
connection with their employment, consulting or advisory relationships with us.
There can be no assurance, however, that the agreements will not be breached or
that we will have adequate remedies for any breach. Furthermore, no assurance
can be given that competitors will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our proprietary knowledge, or that we can meaningfully protect our rights in
unpatented proprietary technology.

                                       18

<PAGE>

         U.S. patent applications filed prior to November 29, 2000 are
maintained in secrecy until patents are issued, however, in the case of U.S.
patent applications filed after this date or filed in foreign countries, the
applications are published 18 months from filing or from the priority date.
Publication of discoveries in the scientific or patent literature tend to lag
behind actual discoveries and related patent applications, and the large number
of patents and applications and the fluid state of our development activities
make comprehensive patent searches and analysis impractical or not
cost-effective. Although we have made patent and publication searches in the
United States and in foreign countries to determine whether materials, processes
or designs used by our potential products or us infringe or will infringe
third-party patents, such searches can not be comprehensive due to the nature of
patents. Patents issued and patent applications filed relating to medical
devices are voluminous and there can be no assurance that current and potential
competitors and other third parties have not filed or will not file applications
for, or have not received or will not receive, patents and will not obtain
additional proprietary rights relating to products, materials or processes used
or proposed to be used by us.

         The medical device industry has experienced extensive litigation
regarding patents and other intellectual property rights, and companies in the
medical device industry have employed intellectual property litigation to gain a
competitive advantage. Although there are no claims against us, any such claims,
with or without merit, could be time-consuming and expensive to respond to and
could divert our technical and management personnel. If any third party patent
claims are upheld as valid and enforceable in any litigation or administrative
proceeding, we could be prevented from practicing the subject matter claimed in
such patents, or could be required to obtain licenses from the patent owners of
each patent, or redesign our products or processes to avoid infringement. There
can be no assurance such licenses will be available or, if available, will be
available on terms acceptable to us or that we will be successful in any attempt
to redesign our products or processes to avoid infringement. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent us from manufacturing and selling our
products, which would have a material adverse effect on our business, financial
condition, and results of operations. We intend to vigorously protect and defend
our intellectual property. Costly and time-consuming litigation brought by us
may be necessary to enforce patents issued to us to protect trade secrets or
know-how or to determine the enforceability, scope and validity of the
proprietary rights of others.

         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 us that any of our patent or
patents in which we have licensed rights will be held valid if subsequently
challenged or that others will not claim rights in or ownership of our patents
and other proprietary rights held or licensed by us. There can be no assurance
that others have not developed or will not develop similar products, duplicate
any of our products or design around any patents issued to or licensed by us or
that may be issued in the future to us. Since patent applications in the United
States are maintained in secrecy for a period of time as stated above, we also
cannot be certain that others did not first file applications for inventions
covered by our pending patent applications, nor can we be certain that we will
not infringe any patents that may issue to others on such applications. We
periodically review the scope of patents of which we are aware. Although we do
not believe that we are infringing on patents known to us, the question of
patent infringement involves complex legal and factual issues and there can be
no assurance that any conclusion reached by us regarding infringement will be
consistent with the resolution of any such issues by a court.

         In addition, the United States patent laws exempt medical practitioners
and related health care entities from infringement liability for medical and
surgical procedures in certain circumstances. We cannot predict whether this
exception might have a material adverse effect on our ability to protect our
proprietary methods and procedures.

                                       19

<PAGE>

Competition

         We believe our primary competitors to be large companies who are
engaged in the development and marketing of existing catheter technology, which
we believe to be less effective therapies for the treatment of atrial
fibrillation and ventricular tachycardia. Additional treatments include drugs,
external electrical cardioversion and defibrillation, implantable
defibrillators, open heart surgery and purposeful destruction of the
atrio-ventricular node, followed by implantation of a pacemaker. Several
competitors are also developing new approaches and new products for the mapping
and ablation of atrial fibrillation and ventricular tachycardia. These
approaches include mapping systems using contact mapping, single-point spatial
mapping and non-contact, multi-site electrical mapping technologies and ablation
systems using ultrasound, microwave, laser and cryoablation technologies. In
addition, companies are developing surgical procedures that could potentially be
used by physicians to perform the surgical maze procedure in a minimally
invasive manner. If any of these approaches or products are approved and prove
to be safe and effective, our products could be rendered non-competitive or
obsolete, which could have a material adverse effect on our business, financial
condition and results of operations.

         Many of our competitors have an established presence in the field of
interventional cardiology and electrophysiology, including Boston Scientific,
C.R. Bard, Inc., Guidant, Inc., Johnson & Johnson, through its Cordis division,
St. Jude, 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 more experience and capabilities in
conducting research and development activities, testing products in clinical
trials, obtaining regulatory approvals, and manufacturing, marketing and
distributing products.

         Other companies are developing proprietary systems for the diagnosis of
cardiac arrhythmias including Biosense Webster, Inc., a division of Johnson &
Johnson; Cardiac Pathways, Inc. and EP Technologies, divisions of Boston
Scientific; and Endocardial Solutions, Inc. Other companies develop, market and
sell alternative approaches to the treatment of atrial fibrillation and
ventricular tachycardia, including Guidant, Inc., Medtronic, Inc., and St. Jude
Medical Inc., which manufacture implantable defibrillators. There can be no
assurance that we will succeed in developing and marketing technologies and
products that are more clinically effective and cost-effective than the current
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 prior to our
competitors' products. Our failure to demonstrate the competitive advantages of
our products would have a material adverse effect on our business, financial
condition and results of operations.

         In the market for cardiac mapping and ablation devices, we believe that
the primary competitive factors are safety, clinical effectiveness, ease of use
and overall cost to the health care system. In addition, the length of time
required for products to be developed and to receive regulatory and, in some
cases, reimbursement approval is an important competitive factor. The medical
device industry is characterized by rapid and significant technological change.
Accordingly, our success will depend in part on our ability to respond quickly
to medical and technological changes through the development and introduction of
new products. Product development involves a high degree of risk and there can
be no assurance that our new product development efforts will result in any
commercially successful products. We believe our products compete very favorably
with respect to these factors, although there is no assurance that we will be
able to continue to do so.

Government Regulation

         The pre-clinical and clinical testing, manufacturing, labeling,
marketing and distribution of our products are subject to extensive and rigorous
government regulation in the United States and other countries. Non-compliance
with applicable regulatory requirements can result in enforcement action by the
Food and Drug Administration or comparable foreign regulatory bodies including,
among other things, fines, injunctions, civil

                                       20

<PAGE>

penalties, recall or seizure of products, refusal to grant marketing clearances
or approvals, withdrawal of marketing approvals and criminal prosecution.

     U.S. Regulation

         A medical device may be marketed in the United States only with prior
authorization from the FDA. Devices classified by the FDA as posing less risk
are placed either in Class I or II. All Class II and some Class I devices
require 510(k) clearance from the FDA prior to marketing. Such clearance
generally is granted when submitted information establishes that a proposed
device is "substantially equivalent" in intended use and safety and
effectiveness to a Class I or II device already legally on the market or to a
"pre-amendment" Class III device (i.e., one that has been in commercial
distribution since before May 28, 1976) which the FDA has not required a PMA
application. The FDA recently has been requiring a more rigorous demonstration
of substantial equivalence than in the past, including in some cases requiring
clinical trial data. During this process, the FDA may determine that it needs
additional information or that a proposed device is precluded from receiving
clearance because it is not "substantially equivalent" to a legally marketed
Class I or II device. After a device receives 510(k) clearance, any modification
that could significantly affect its safety or effectiveness, or constitute a
major change in its intended use, will require a supplemental 510(k) clearance.
We believe that, generally, it takes about 4 to 12 months from the date of
submission to obtain 510(k) clearance. However, the process may take
substantially longer, depending on the circumstances, and there can be no
assurance that 510(k) clearance will ever be obtained.

         To date, we have received 510(k) clearances from the FDA for our
PATHFINDER, PATHFINDER mini and TRACER over-the-wire microcatheter systems for
mapping ventricular tachycardia and REVELATION microcatheter system for mapping
atrial fibrillation. In addition, we have received 510(k) clearance for our line
of VENAPORT, VUEPORT and NAVIPORT guiding catheters used to introduce
electrophysiology catheters into the heart.

         A device that does not qualify for 510(k) clearance is placed in Class
III, which is reserved for devices classified by the FDA as posing greater risk
(e.g., life-sustaining, life-supporting or implantable devices, or devices that
are not substantially equivalent to a legally marketed Class I or Class II
device) or when there is no similar device already approved. A Class III device
generally must go through the PMA application process to receive FDA approval.
This process which requires the manufacturer to establish the safety and
effectiveness of the device to the FDA's satisfaction with extensive
pre-clinical and clinical data as well as information about the manufacture of
the device and its components and about the labeling and promotional material.
As part of the PMA application process, the FDA may inspect the manufacturer's
facilities for compliance with the Quality System Regulation, which includes an
extensive review of design, manufacturing, and process controls, documentation
and other quality assurance procedures.

         Upon submission of the PMA application, the FDA determines if the
application is sufficiently complete to permit a substantive review, and, if so,
the application is accepted for filing. The FDA then commences an in-depth
review of the PMA application, which typically takes six months to two years,
but may take longer. The review time is often significantly extended as a result
of the FDA asking for more information or clarification of information already
provided. The FDA also may respond with a "not approvable" determination based
on deficiencies in the application and require additional clinical trials that
are often expensive and time consuming and can delay approval for months or even
years. Recently, the FDA has heightened its scrutiny of clinical trial data
submitted in support of PMA applications. In addition, the FDA may visit an
applicant's facilities and/or its investigator's sites to audit the clinical
data. Near the completion of the PMA application process, an FDA advisory
committee, typically a panel of clinicians, will generally be convened to review
the application and recommend to the FDA whether, or upon what conditions, the
device should be approved. Although the FDA is not bound by the advisory panel
decision, the panel's recommendation is important to the FDA's overall
decision-making process and the panel's recommendation is generally accepted.

                                       21

<PAGE>

         If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approvable letter conditions are satisfied, the FDA will
issue an Approval Order for the approved indications, which can be more limited
than those originally sought by the manufacturer. The Approval Order can include
post approval conditions that the FDA believes necessary to ensure the safety
and effectiveness of the device including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in enforcement action, including withdrawal of
the approval. The PMA process can be expensive and lengthy, and no assurance can
be given that any of our PMA applications will ever be approved. Even after
obtaining approval, a new PMA application or PMA supplement is generally
required for any modification to the device, its labeling or its manufacturing
process.

         We have confirmed that our ablation products, including the REVELATION
Tx, REVELATION T-Flex and REVELATION Helix will be designated as Class III
devices requiring PMA approval. There can be no assurance that a PMA application
will be submitted for any such products or that, once submitted, the PMA
application will be accepted for filing, found approvable, or, if found
approvable, will not take longer than expected to obtain, or will not include
unfavorable restrictions.

         A clinical trial in support of a 510(k) submission or a PMA application
generally requires an Investigational Device Exemption (IDE) application
approved in advance by the FDA for a specific number of patients. The IDE
application must be supported by appropriate data, such as animal and laboratory
testing results. Clinical trials may begin if the IDE application is approved by
the FDA and by the appropriate institutional review boards at the clinical trial
sites. During a clinical trial, we would be permitted to sell products used in
the study for an amount that does not exceed recovery of the costs of
manufacture, research, development and handling. Our failure to adhere to
regulatory requirements generally applicable to clinical trials and to the
conditions of an IDE could result in a material adverse effect on us, including
termination of the IDE and an inability to obtain marketing clearance or
approval for our products.

         We received FDA approval to conduct a pivotal Phase III clinical trial
of our REVELATION Tx microcatheter system for atrial fibrillation in August
2000. By December 31, 2001, a sufficient number of patients had been treated in
this clinical study to provide the necessary volume of safety and effectiveness
data required for acceptance of the PMA application. The integrity of the data
and the eligibility of all datapoints for inclusion in the data analysis must be
confirmed by the FDA. An IDE for our TheraStream ventricular tachycardia
ablation microcatheter system was approved by the FDA in November 1999 and
approval to expand the study was received in 2000. We have decided to focus our
efforts on our atrial fibrillation program and to postpone work on our
ventricular tachycardia program.

         Any devices manufactured or distributed by us pursuant to FDA
clearances or approvals will be subject to pervasive and continuing regulation
by the FDA and certain state agencies. We are subject to inspection by the FDA
and the California Department of Health Services and have to comply with various
other regulatory requirements that usually apply to medical devices marketed in
the United States, including general labeling regulations, the Quality System
Regulations, 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. In addition, Class II devices, such as our
mapping products, can be subject to additional special controls (e.g.,
performance standards, post-market surveillance, patient registries, and FDA
guidelines) that do not apply to Class I devices. Our failure to comply with
applicable regulatory requirements could result in enforcement action by the
FDA, which could have a material adverse effect on us.

                                       22

<PAGE>

         Unanticipated changes in existing regulatory requirements, failure to
comply with such requirements or adoption of new requirements could have a
material adverse effect on us. We also are subject to numerous federal, state
and local laws relating to such matters as safe working conditions, good
manufacturing practices, environmental protection, fire hazard control and
hazardous material disposal. There can be no assurance we will not incur
significant costs to comply with such laws and regulations in the future or that
such laws or regulations will not have a material adverse effect upon our
business, financial condition and results of operations.

     Foreign Regulation

         In order for us to market our products in Europe and certain other
foreign jurisdictions, we must obtain regulatory approvals and clearances and
otherwise comply with extensive regulations in those jurisdictions regarding
safety, quality and manufacturing processes. These regulations, including the
requirements for regulatory approval or clearance and the time period required
for regulatory review, vary from country to country. In addition, there may be
foreign regulatory barriers other than pre-market approval. There can be no
assurance we will obtain regulatory approvals or clearances in such countries or
that we will not be required to incur significant costs in obtaining or
maintaining our foreign regulatory approvals or clearances. Under certain
circumstances, FDA approval is required for us to export our products. Delays in
receipt of approvals to market our products, failure to receive these approvals
or loss of previously received approvals could have a material adverse effect on
our business, financial condition and results of operations.

         The European Union has promulgated rules that require commercial
medical products to bear the CE Mark. The CE Mark is recognized by the European
Union as a symbol of adherence to strict quality systems requirements set forth
in the ISO 9001 (EN 46001) quality standards, as well as compliance with
93/42/EEC, the Medical Device Directive. A CE Mark allows us to market our
products in the European Union and avoid the costly and cumbersome
requirements to obtain approvals in each European Union country separately. We
received ISO 9001 (EN 46001) Quality Systems certification for our manufacturing
facilities in Fremont, California, which were re-certified in December 1998 and
in November 2001. This certification is required in order to affix the CE Mark
to our approved products marketed in Europe.

         We have received regulatory approval to affix the CE Mark to our
REVELATION, REVELATION Tx, REVELATION T-Flex and REVELATION Helix microcatheters
for treatment of atrial fibrillation as well as our PATHFINDER diagnostic family
of microcatheters. Failure to receive regulatory approval to affix the CE Mark
would prohibit us from selling these products in member countries of the
European Union.

Third-Party Reimbursement

         In the United States, health care providers, including hospitals and
physicians, that purchase medical products for treatment of their patients
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 products.
Our success will be dependent upon, among other things, the ability of health
care providers to obtain satisfactory reimbursement from third-party payors for
medical procedures in which our products 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, inappropriate or used for a non-approved indication. If FDA
clearance or approval were received, third-party reimbursement would also depend
upon decisions by the United States Health Care Financing Administration (HCFA)
for Medicare, as well as by individual health maintenance organizations, private
insurers and other payors. Government agencies, private insurers and other
payors determine whether to provide coverage for a particular procedure based on
its medical necessity for the patient in question. The federal Medicare program,
many state Medicaid programs and other payors reimburse health care providers
for medical treatment at a fixed rate based on, or adapted from the
diagnosis-related group established by the HCFA. The fixed rate of reimbursement
is typically based on the

                                       23

<PAGE>

patient's diagnosis and the procedure performed, but may be related to the
specific type or number of devices used in a procedure. There can be no
assurance that reimbursement for our products will be available in sufficient
amounts if at all, or that future reimbursement policies of payors will not
adversely affect our ability to sell products on a profitable basis.

         In addition, Medicare traditionally has considered items or services
involving devices that have not been approved or cleared for marketing by FDA to
be precluded from Medicare coverage. However, under a policy which has been in
effect since November 1, 1995, Medicare coverage will not be precluded for items
and related services involving devices that have been classified by FDA as
"non-experimental / investigational" (Category B) devices and that are furnished
in accordance with the FDA-approved IDE governing clinical trials. Even with
items or services involving Category B devices, however, Medicare coverage may
be denied if any other coverage requirements are not met, such as if the
treatment is not medically needed for the specific patient. There can be no
assurance that our products will be covered when they are used in clinical
trials and, if covered, whether the payment amounts for their use will be
considered to be adequate by hospitals and physicians. If the devices are not
covered or the payments are considered to be inadequate, we may need to bear
additional costs to sponsor such trials, and such costs could have a material
adverse effect on our business, financial condition and results of operations.

         There is also proposed federal legislation that would change the
traditional Medicare payment system by creating a new visit-based payment system
called ambulatory patient groups, that establishes fixed payments for specific
medical procedures that are performed on an outpatient basis. If our products
increase the cost per procedure above the fixed rate under the ambulatory
patient groups system, market acceptance of such products could be impaired,
which would have a material adverse effect on our business, financial condition
and results of operations.

         The U. S. Congress has recently enacted and we have recently received
pass-through reimbursement allowance in March 2001 on all U.S. approved
diagnostic and guiding catheter products including the PATHFINDER, REVELATION,
TRACER, NAVIPORT, VUEPORT and VENAPORT. Pass-through reimbursement allows for
the direct charging of a specific product for reimbursement.

         Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Many international markets have
government managed health care systems that control reimbursement for new
products and procedures. In most markets, there are private insurance systems as
well as government-managed systems. Market acceptance of our products will
depend on the availability and level of reimbursement in international markets
targeted by us. There can be no assurance that we will obtain reimbursement in
any country within a particular time, for a particular time, for a particular
amount, or at all.

         Regardless of the type of reimbursement system, we believe that
physician advocacy of our products will be required to obtain reimbursement. We
believe that less invasive procedures generally provide less costly overall
therapies as compared to conventional drug, surgery and other treatments. In
addition, we believe that a patient's underlying arrhythmia should typically not
recur after treatment with procedures using our products. We anticipate that
hospital administrators and physicians would justify the use of our products by
the attendant cost savings and clinical benefits derived from the use of our
products. However, there can be no assurance this will be the case. There can be
no assurance reimbursement for our products will be available 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 our products. Failure by hospitals and other
users of our products to obtain reimbursement from third-party payors, or
changes in government and private third-party payors' policies toward
reimbursement for procedures using our products, would have a material adverse
effect on our business, financial condition and results of operations.

                                       24

<PAGE>

Product Liability and Insurance

         The development, manufacture and sale of our microcatheter systems may
expose us to product liability claims. Although 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, 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 be
available to us in the future 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 all our guiding, diagnostic
and therapeutic products are labeled for single use only, we are aware that some
physicians are resterilizing and reusing such products. Moreover, despite
labeling our microcatheters for diagnostic use only, we believe 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.

Facilities

         We lease approximately a 44,000 square feet facility in Fremont,
California. Our facility includes a 4,000 square feet cleanroom, a machine shop
for prototyping and tooling, extrusion and braiding capability, wire grinding
operations, general assembly/test/inspection areas, and a materials area. Our
facility master lease was amended to allow for an additional three-year
extension to our facility lease, which expires in November 2002. In May 2001, we
entered into a sublease agreement with Bay Packets, Inc. to sublease
approximately 16,674 square feet of the second floor of the facility. This
sublease expires October 14, 2002. We are currently reviewing our facility plans
for the next three years. Although we believe this facility will be adequate to
meet our requirements for the current period of time, we may need additional
space to commercialize our products.

Employees

         At December 31, 2001, we had 67 employees, 7 of whom were engaged
directly in research and new product development, 8 in regulatory affairs,
quality assurance and clinical activities, 27 in manufacturing, 11 in sales and
marketing and 14 in finance and administration.

         In January 2001, we eliminated 12 full-time positions and 10 temporary
positions or about 28% of its workforce, with the objective of re-aligning
resources to focus on our Phase III clinical trial to treat atrial fibrillation
and reducing overall operating expenses. These actions resulted in a
restructuring charge in the first quarter of fiscal 2001 of approximately
$300,000. This charge is comprised of employee severance of $289,000 and related
benefits of $9,000, and as of September 30, 2001 all severance and benefits
related to the restructuring were paid. The 22 positions were comprised of 4
individuals from research and development, 14 individuals from manufacturing and
operations, and 4 administrative positions; all of these positions were located
at our corporate headquarters. The amounts recorded for this termination were as
follows: $157,000 research and development, $116,000 general and administration,
and $25,000 for manufacturing/cost of goods sold. The majority of affected
employees were not covered by employment contracts that required severance
payments.

         We maintain compensation, benefits, equity participation, and work
environment policies intended to assist in attracting and retaining qualified
personnel. We believe the success of our business will depend, in significant
part, on our ability to attract and retain such personnel. None of our employees
are represented by a collective bargaining agreement, nor have we experienced
any work stoppage. We consider our relations with our employees to be good. See
"Management's Discussion and Analysis of Financial Condition and Results of

                                       25

<PAGE>

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

Item 2.  Properties

Facilities

         We lease approximately a 44,000 square feet facility in Fremont,
California. Our facility includes a 4,000 square feet cleanroom, a machine shop
for prototyping and tooling, extrusion and braiding capability, wire grinding
operations, general assembly/test/inspection areas, and a materials area. Our
facility master lease was amended to allow for an additional three-year facility
lease, expiring in November 2002. In May 2001, we entered into a sublease
agreement with Bay Packets, Inc. to sublease approximately 16,674 square feet of
the second floor of the facility. This sublease expires October 14, 2002. We are
currently reviewing our facilities plan going forward. We believe this facility
will be adequate to meet our requirements for the current period of time.

Item 3.  Legal Proceedings

         We are not a party to any material legal proceedings.

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

         Not applicable.

                                       26

<PAGE>

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

         Our common stock trades on the Nasdaq SmallCap Market under the symbol
CRDM since June 2001. Prior to that, our common stock traded on the Nasdaq
National Market since our initial public offering in June 1997. Prior to that
time, there was no public market for our common stock. The following table sets
forth for the periods indicated the high and low sale prices of our common
stock.

                                                          HIGH           LOW
                                                       ---------      ---------
              YEAR ENDED DECEMBER 31, 2001
                  First Quarter ...................      $0.66          $0.28
                  Second Quarter ..................       1.50           0.22
                  Third Quarter....................       2.60           1.04
                  Fourth Quarter...................       2.67           1.39


                                                          HIGH           LOW
                                                       ---------      ---------
              YEAR ENDED DECEMBER 31, 2000
                  First Quarter ...................      $4.06          $1.66
                  Second Quarter...................       2.53           1.00
                  Third Quarter....................       1.50           1.00
                  Fourth Quarter...................       1.27           0.19


         As of March 15, 2002, there were approximately 268 holders of record of
our common stock.

         We have never declared or paid cash dividends on our capital stock. We
currently expect to retain our future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our credit agreement requires the approval of our bank to
declare or pay cash dividends.

                                       27

<PAGE>

Item 6.  Selected Financial Data

         The following selected financial information has been derived from the
audited financial statements. The information below is not necessarily
indicative of results of future operations, and should be read in conjunction
with Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and related notes thereto
included in Item 8 of this Form 10-K in order to fully understand factors that
may affect the comparability of the information presented below.

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                          --------------------------------------------------------
                                                            2001        2000        1999        1998        1997
                                                          --------    --------    --------    --------    --------
<S>                                                       <C>         <C>         <C>         <C>         <C>
Statements of Operations Data:
Net sales                                                 $  1,861    $  2,570    $  3,495    $  2,499    $  1,261
Cost of goods sold                                           3,717       3,667       3,384       2,962       2,011
                                                          --------    --------    --------    --------    --------
     Gross profit (loss)                                    (1,856)     (1,097)        111        (463)       (750)
Operating expenses:
     Research and development                                4,873       4,432       5,694       7,230       5,320
     Selling, general and administrative                     6,675       6,185       8,173       8,556       6,656
                                                          --------    --------    --------    --------    --------
          Total operating expenses                          11,548      10,617      13,867      15,786      11,976
                                                          --------    --------    --------    --------    --------
Operting loss                                              (13,404)    (11,714)    (13,756)    (16,249)    (12,726)
Interest and other income                                      123         230         250         359         602
Interest expense                                               (60)       (365)       (522)       (296)       (148)
Gain on sale of intellectual property                        4,000       4,000          --          --          --
                                                          --------    --------    --------    --------    --------
Net loss                                                  $ (9,341)   $ (7,849)   $(14,028)   $(16,186)   $(12,272)
                                                          ========    ========    ========    ========    ========
Basic and diluted net loss per share                      $  (0.30)   $  (0.38)   $  (0.89)   $  (1.96)   $  (2.64)
                                                          ========    ========    ========    ========    ========
Shares used in computing basic and diluted net loss per
share                                                       31,114      20,818      15,746       8,239       4,642
                                                          ========    ========    ========    ========    ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                          --------------------------------------------------------
                                                            2001        2000        1999        1998        1997
                                                          --------    --------    --------    --------    --------
<S>                                                       <C>         <C>         <C>         <C>         <C>
Balance Sheets Data:
Cash, cash equivalents and short-term
   Investments                                            $  7,542    $  1,324    $    920    $    645    $ 12,848
Working capital (deficit)                                    6,756         652      (1,293)     (1,614)     11,609
Total assets                                                11,818       5,903       6,089       7,283      17,674
Capital lease obligation, noncurrent portion                    64         192       1,012       1,120         840
Line of credit obligation, noncurrent portion                   --          --       1,095       2,183          --
Accumulated deficit                                        (77,826)    (68,485)    (60,636)    (46,608)    (30,422)
Total stockholders' equity (deficit)                         8,757       2,894        (420)     (1,176)    (14,444)
</TABLE>

                                       28

<PAGE>
<TABLE>
<CAPTION>

                                  CARDIMA, INC.
                         Quarterly Results of Operations
                    (In thousands, except per share amounts)
                                   (Unaudited)

                                                                 For the Quarter Ended
                                                      --------------------   ---------------------
                                                      Mar. 31,    Jun. 30,   Sept. 30,    Dec. 31,
                                                        2001        2001        2001        2001
                                                      --------    --------   ---------    --------
<S>                                                   <C>         <C>         <C>         <C>
Net sales                                             $    539    $    473    $    465    $    384
Cost of goods sold                                         974         945         949         849
                                                      --------    --------    --------    --------
         Gross margin                                     (435)       (472)       (484)       (465)

Operating expenses:
         Research and development                        1,357       1,290       1,091       1,135
         Selling, general and administrative             1,509       1,592       1,538       2,036
                                                      --------    --------    --------    --------
                  Total operating expenses               2,866       2,882       2,629       3,171
                                                      --------    --------    --------    --------
Operating loss                                          (3,301)     (3,354)     (3,113)     (3,636)

Interest and other income                                   12          44          37          30
Interest expense                                           (19)        (16)        (14)        (11)
Gain on sale of intellectual property                    4,000        --          --          --
                                                      --------    --------    --------    --------
Net income (loss)                                     $    692    $ (3,326)   $ (3,090)   $ (3,617)
                                                      ========    ========    ========    ========

Basic net income/(loss) loss per share                $   0.03    $  (0.11)   $  (0.09)   $  (0.09)
                                                      ========    ========    ========    ========

Shares used net income (loss) basic and diluted         21,620      29,148      34,641      39,045
                                                      ========    ========    ========    ========

</TABLE>
<TABLE>
<CAPTION>

                                                                 For the Quarter Ended
                                                      --------------------   ---------------------
                                                      Mar. 31,    Jun. 30,   Sept. 30,    Dec. 31,
                                                        2000        2000        2000        2000
                                                      --------    --------   ---------    --------
<S>                                                   <C>         <C>         <C>         <C>
Net sales                                             $    669    $    745    $    425    $    731
Cost of goods sold                                         846         676         889       1,256
                                                      --------    --------    --------    --------
         Gross margin                                     (177)         69        (464)       (525)

Operating expenses:
         Research and development                        1,166       1,108       1,373         785
         Selling, general and administrative             1,569       1,722       1,498       1,396
                                                      --------    --------    --------    --------
                  Total operating expenses               2,735       2,830       2,871       2,181
                                                      --------    --------    --------    --------
Operating loss                                          (2,912)     (2,761)     (3,335)     (2,706)

Interest and other income                                   53          90          38          49
Interest expense                                          (111)       (103)        (91)        (60)
Gain on sale of intellectual property                       --          --          --       4,000
                                                      --------    --------    --------    --------
Net income (loss)                                     $ (2,970)   $ (2,774)   $ (3,388)   $  1,283
                                                      ========    ========    ========    ========

Basic net income/(loss) loss per share                $  (0.16)   $  (0.13)   $  (0.16)   $   0.06
                                                      ========    ========    ========    ========

Shares used net income (loss) basic and diluted         18,674      21,471      21,547      21,579
                                                      ========    ========    ========    ========
</TABLE>

                                       29

<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         This discussion and analysis contains statements of a forward-looking
nature relating to future events or our future financial performance. Such
statements are only predictions and the actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in "--Factors Affecting Future Results" as well as those
discussed elsewhere in this Annual Report on Form 10-K. The historical results
set forth in this discussion and analysis are not necessarily indicative of
trends with respect to any actual or projected future financial performance.
This discussion and analysis should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this Annual
Report on Form 10-K.

Overview

         Since our incorporation in 1992, we have been engaged in the design,
research, development, manufacturing, testing and marketing of microcatheter
systems for the mapping and ablation of cardiac arrhythmias. We have generated
revenues of approximately $12.8 million from inception to December 31, 2001.
Prior to 1997, these revenues were generated primarily in Europe and Japan from
sales of our PATHFINDER and TRACER microcatheter systems for diagnosing
ventricular tachycardia and our REVELATION microcatheter system for diagnosing
atrial fibrillation, as well as ancillary products such as the VENAPORT guiding
catheters. Since 1997 and the regulatory clearance by the FDA of certain of our
products, sales in the United States consist primarily of our PATHFINDER and
REVELATION lines of microcatheters for diagnosing ventricular tachycardia and
atrial fibrillation. To date, our international sales have been made through our
small direct sales force and distributors who sell our products to physicians
and hospitals. European sales consist primarily of the REVELATION and REVELATION
Tx microcatheter systems for treating atrial fibrillation following receipt of
CE Mark for those products in August 1998 and December 2001, respectively.

         We obtained the right to affix the CE Mark to our PATHFINDER,
PATHFINDER mini and TRACER microcatheter systems for mapping ventricular
tachycardia and our REVELATION and REVELATION Tx microcatheter systems for both
mapping and ablation of atrial fibrillation, permitting us to market those
products in the member countries of the European Union. We received 510(k)
clearances for the REVELATION microcatheter for mapping atrial fibrillation
and the PATHFINDER mini microcatheter for mapping ventricular tachycardia and
the VUEPORT balloon guiding catheter in July 1998. In addition, we received
510(k) clearance for our TRACER catheter for mapping ventricular tachycardia
and our NAVIPORT deflectable tip guiding catheter.

         We will be required to conduct clinical trials, demonstrate safety and
effectiveness and obtain PMA approval from the FDA in order to sell any of our
products for treating atrial fibrillation or ventricular tachycardia in the
United States. Specifically, PMA approval will be required prior to the
introduction in the United States of the REVELATION Tx, REVELATION T-Flex and
REVELATION Helix microcatheter systems for treating atrial fibrillation. We
are currently in Phase III in the United States to treat atrial fibrillation
with the REVELATION Tx microcatheter system.

         We have a limited history of operations and have 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, pre-clinical and clinical trials,
obtaining regulatory approval, sales and marketing and manufacturing.

Critical Accounting Policies

                                       30

<PAGE>

     Use of Estimates

         We have prepared our financial statements in conformity with generally
accepted accounting principles in the United States, which requires management
to make estimates and assumptions that effect the amounts reported in financial
statements and accompanying notes. Actual results could differ from these
estimates.

     Revenue Recognition

         We recognize revenue when products are shipped. We recognize revenue
from two types of customers, end-users and distributors. Revenue is recognized
upon the shipment of product, provided that 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.

     Inventories

         Our inventories are stated at the lower of cost or market. Cost is
based on actual costs computed on a first-in, first-out basis. Inventory amounts
are shown net of reserves for excess and obsolete inventory at the lower of cost
or market. We reserve 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.

Results of Operations - Years Ended December 31, 2001 and 2000

     Net Sales

         For the year ended December 31, 2001, revenues decreased 28% to
$1,861,000 from $2,570,000 for 2000. U.S. sales decreased 44% to $743,000 from
$1,334,000 primarily due to the termination of the distribution agreement with
Daig in September 2001. Historically, revenue from Daig represented
approximately 36% of our domestic sales in 2000

         European sales decreased 9% to $613,000 from $674,000, primarily
due to our distributors' reduction of employees. Sales in Japan decreased 9% to
$501,000 from $548,000 due to changes in product reimbursement laws in Japan in
the first quarter of 2001. Sales in the rest of the world decreased 71% to
$4,000 from $14,000 in 2000. Due to redirecting our resources to clinical trials
in progress. In 2002, we expect net sales to be generated from the following
geographies: 17% from sales in the United States, 22 % from Asia and 61% from
Europe. We expect overall net sales to increase in 2002 as compared to 2001.

         We have decided to focus our resources and efforts on the completion of
our 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.

         Because the electrophysiology market is a focused, specialized group of
physicians, we market and distribute our products in the United States with a
small direct sales force and market and distribute our products
internationally through a small direct sales force and distributors in selected
countries who sell our products to physicians and hospitals.

     Cost of Goods Sold

         Cost of goods sold primarily includes raw material costs, catheter
fabrication costs, system assembly and testing costs and manufacturing overhead.
Cost of goods sold for 2001 increased 1% to $3,717,000 from $3,667,000 for 2000.
The increase of cost of goods sold as a percent of net sales was primarily due
to a decrease

                                       31

<PAGE>

in U.S. sales volume to $743,000 for 2001 from $1,334,000 for 2000, which was
due to the refocused of our efforts on our clinical trials and the termination
of the distributor agreement with Daig. The reduction in manufacturing volume
was part of a targeted reduction in finished goods inventory levels, lower
demand and introduction of new products into manufacturing to be used for
clinical trials. Production operated at approximately 60% of capacity. We expect
costs per unit to begin to decrease as we plan to increase sales and related
production volume, which will allocate fixed costs over an increased number of
units produced. We expect total cost of goods sold to decrease slightly as
revenue increases in 2002. We will continue to work on process improvements to
provide greater manufacturing flexibility and cost savings in the production of
our microcatheter systems.

     Research and Development Expenses

         Research and development expenses for 2001 increased 10% to $4,873,000
from $4,432,000 for 2000. The increase was primarily due to increased patient
enrollments and necessary clinical trial expense from the United States Phase
III clinical trial with the REVELATION Tx and cost associated with the European
approval of the REVELATION Helix. We continue to experience cost savings
associated with our efforts to focus on key research and development projects,
and maintaining our focus on our atrial fibrillation products and clinical
trials. We expect total research and  development expenses in 2002 to
increase as compared to 2001. The costs associated with research and preclinical
programs and clinical development programs were approximately (in thousands):

                                                     December 31,
                                                 ------------------
                                                   2001       2000
                                                 -------    -------
         Research and development programs       $ 2,060    $ 2,503
         Clinical development programs           $ 2,813    $ 1,929
                                                 -------    -------
           Total research and development        $ 4,873    $ 4,432
                                                 =======    =======

         We are currently engaged in the clinical development of the products
listed below. We must complete Phase III clinical trial for our atrial
fibrillation ablation products in order to gather data for the completion of our
PMA application to the FDA. Currently, we are targeting approval for our
REVELATION Tx before the end of 2002. We must receive PMA approval before
marketing our products for ablation in the United States. Clinical trials of our
products will require substantial financial and management resources. 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 systems for treating atrial
fibrillation would have a material adverse effect on our business, financial
condition and results of operations. The above uncertainties make it difficult
for us to accurately predict the time or cost until completion of the current
projects listed as follows:
<TABLE>
<CAPTION>
<S>                      <C>                             <C>               <C>                          <C>

                                                                                                         International Regulatory
                               Description                 Indication       U.S. Regulatory Status                Status
Therapeutic Products     ---------------------------     ---------------   ------------------------     --------------------------
--------------------

REVELATION Tx            Guidewire based                 Mapping and       Phase III IDE approved;      Approved in European
                         eight-electrode                 Ablation          clinical trial in            Union (CE Mark).
                         microcatheter system with                         progress.
                         tissue temperature sensors
                         designed to map and create
                         long, thin, continuous,
                         linear, transmural lesions
                         in the atrium.

REVELATION T-Flex        Deflectable and steerable       Mapping and       Supplemental submission      Approved in European
                         eight-electrode                 Ablation          to FDA planned after         Union (CE Mark).
                         microcatheter system with                         REVELATION TX approval
                         temperature sensors designed
                         to map and create long,
                         thin, continuous, linear,
                         transmural lesions in the
                         right atrium.

REVELATION Helix         Helical shaped guide-wire       Mapping and       Clinical trial planned       Approved in European
                         eight-electrode                 Ablation          to begin in second half      Union (CE Mark).
                         microcatheter system with                         of 2002.
                         temperature sensors
                         designed to map and create
                         circumferential, focal
                         linear lesions in the
                         pulmonary vein ostia of the
                         left atrium.


</TABLE>

                                       32

<PAGE>

     Selling, General and Administrative Expenses

         Selling, general and administrative expenses for 2001 increased 8% to
$6,675,000 from $6,185,000 for 2000. Selling expenses for 2001 decreased 10% to
$2,160,000 from $2,393,000 for 2000 due to staffing reductions as we entered
into a distribution agreement with Daig in January 2000, which was subsequently
terminated on September 1, 2001. We plan to sell our products with a small
direct sales force and hired one additional sales representative with an
expected incremental expense of approximately $250,000 a year. General and
administrative expenses for 2001 increased 31% to $4,161,000 from $3,172,000 for
2000. The increase was primarily due to recognizing compensation expense for
stock options and costs related to increased investor relations expenses.
Marketing expenses for 2000 decreased 43% to $354,000 from $620,000 for 2000.
The decrease was due primarily to the reduction of employees, decreased expenses
for trade shows and the reduction in our direct marketing expenses as we
continue to focus on the Phase III clinical trial. We expect to increase sales
in 2002 due to the the approval of the REVELATION Helix microcatheter system in
Europe. In general, expenses will be flat, except for sales and marketing, which
are expected to increase in support of selling of the REVELATION Helix.

     Interest and Other Income, and Interest Expense

         Interest and other income for 2001 decreased 47% to $123,000 from
$230,000 for 2000. The decrease was due primarily to average yields declining
from 6.19% in 2000 to 4.04% in 2001, lower average cash and investment balances
in 2001. Interest expense for 2001 decreased 84% to $60,000 from $365,000 in
2000. The decrease was due primarily to the payoff of a line of credit and the
payoff of capital lease obligations. We expect interest expense to decrease in
2002 as compared to 2001.

                                       33

<PAGE>

     Gain on Sale of Intellectual Property

         The gain on Sale of Intellectual Property was due to the sale of a
portion of our patent portfolio and related intellectual property pertaining to
intravascular sensing and signal detection and certain guiding catheter patents
to Medtronic for an aggregate purchase price of $8,000,000. In December 2000 we
received $4,000,000 of the purchase price. The remaining $4,000,000 was received
in January 2001, upon completion of the remaining transfer obligations under the
agreement. We are not currently planning to sell any additional portions of our
extensive patent portfolio and related intellectual property.

Results of Operations - Years Ended December 31, 2000 and 1999

     Net Sales

         For the year ended December 31, 2000, revenues decreased 26% to
$2,570,000 from $3,495,000 for 1999. U.S. sales decreased 30% to $1,334,000 from
$1,915,000 due to converting from a direct sales force to an exclusive
distributor arrangement. European sales decreased 40% to $674,000 from
$1,127,000, primarily due to a restructuring and reduction in staff in Europe.
Sales in Japan increased 61% to $548,000 from $341,000 due to strong sales of
diagnostic products; and sales in the rest of the world decreased 88% to $14,000
from $112,000, due to 1999 sales including sales of products used in a clinical
trial in 1999.

     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 2000 increased 8% to $3,667,000 from $3,384,000 for 1999. The
increase of cost of goods sold as a percent of net sales was due primarily to
increased costs associated with the growth anticipated from the distribution
agreement with Daig.

     Research and Development Expenses

         Research and development expenses for 2000 decreased 22% to $4,432,000
from $5,694,000 for 1999. The decrease is primarily due to the substantial
completion of the Revelation Tx and the Revelation T-Flex research and
development projects, and our efforts to focus on key research projects and to
de-emphasize certain other projects.

     Selling, General and Administrative Expenses

         Selling, general and administrative expenses for 2000 decreased 24% to
$6,185,000 from $8,173,000 for 1999. Selling expenses for 2000 decreased 45% to
$2,393,000 from $4,376,000 for 1999. This decrease is a result of converting
from a direct sales force to an exclusive distributor arrangement with Daig.
General and administrative expenses for 2000 increased 10% to $3,172,000 from
$2,878,000 for 1999 due to additional accrued compensation expense related to
termination expenses and bonuses accrued over the past twelve months. Marketing
expenses for 2000 decreased 32% to $620,000 from $919,000 for 1999 due to the
reduction in employees, decreased expenses for trade shows and the reduction in
our direct marketing expenses due to our distribution agreement with Daig.

                                       34

<PAGE>

     Interest and Other Income, Interest Expense

         Interest income for 2000 decreased to $230,000 from $250,000 for 1999
due to lower balances of cash and investments in 2000. Interest expense for 2000
decreased to $365,000 from $522,000 for 1999 due to the payoff of a line of
credit.

     Gain on Sale of Intellectual Property

         We sold a portion of our patent portfolio and related intellectual
property pertaining to intravascular sensing and signal detection and certain
guiding catheter to Medtronic for an aggregate price of $8,000,000, of which
$4,000,000 was recognized as of December 31, 2000.

Liquidity and Capital Resources

         We have financed our operations to date, principally through (1)
private placements of equity securities, which have resulted in net proceeds of
approximately $86,600,000 through December 31, 2001, (2) the initial public
offering of our common stock in June 1997, which resulted in net proceeds of
approximately $13,600,000, together with interest income on such proceeds, (3)
borrowings under a $3,000,000 line of credit, (4) sale of certain of our
non-core patents to Medtronic for $8,000,000, and (5) equipment leases to
finance certain capital equipment which have provided proceeds in the amount of
$4,700,000. As of December 31, 2001, we had approximately $7,542,000 in cash and
cash equivalents.

         Net cash used in operating activities was approximately $7,600,000,
$7,000,000 and $12,900,000 for the years ended December 31, 2001, 2000 and 1999,
respectively, resulting primarily from operating losses incurred. Net cash of
$350,000 used in investing activities in 2001 attributable primarily to the
capital expenditures of property and equipment. Net cash provided by operations
in 2000 related primarily to the maturities of certain short-term investments of
$497,000 offset by capital expenditures of property and equipment of $122,000.
Net cash of $731,000 used in investing activities in 1999 is attributable
primarily to the purchases of short-term investments. Net cash provided by
financing activities was approximately $14,200,000, $7,500,000 and $13,400,000
for the years ended December 31, 2001, 2000 and 1999, respectively, resulting
primarily from the sale of equity securities in private placement transactions.

         In January and February 1999, we sold a total of 7,500,000 shares of
our common stock at $2.00 per share, in a private placement transaction to
accredited investors. As commission, we issued 354,806 shares of our common
stock to the placement agent in addition to a payment in cash of $490,388. We
also issued warrants to purchase 750,000 shares of our common stock at an
exercise price of $2.20, as commission. Our net proceeds, after deducting
placement expenses, were approximately $14,300,000. We used the proceeds for
development activities, clinical trial expenses, commercialization of product
offerings, operating costs and other general corporate purposes.

         In February 2000, we sold a total of 4,666,611 shares of our common
stock, at $2.25 per share, in a private placement transaction to accredited
investors. The transaction included the issuance of warrants to investors for
the purchase of 933,322 shares of our common stock, at an exercise price of
$2.48 per share. As commission, we paid $524,891 in cash to the placement agent.
We also issued a warrant to purchase 233,329 shares of common stock, at an
exercise price of $2.48 per share, as commission. Our net proceeds, after
deducting placement expenses, were approximately $9,900,000. We used the
proceeds for development activities, clinical trial expenses, commercialization
of product offerings, operating costs and other general corporate purposes.

         In December 2000, we sold a portion of our patent portfolio and related
intellectual property pertaining to intravascular sensing and signal detection
and certain guiding catheters to Medtronic, Inc. for $8,000,000 in cash,

                                       35

<PAGE>

$4,000,000 of which was paid upon execution of the agreement, and the balance
was paid in January 2001 at the completion of the transfer of the property.

         In May 2001, we sold 11,746,916 shares of our common stock at $0.58 per
share in private placement transactions to accredited investors. The transaction
included the issuance of warrants to investors for the purchase of 5,873,465
shares of our common stock at an exercise price of $0.87 per share. These
warrants were callable by us if our common stock closed at $1.16 or above for
fifteen consecutive trading days. As commission, we paid approximately $510,988
in cash and issued warrants to purchase 1,174,691 shares of our common stock at
an exercise price of $0.638 per share. Our net proceeds, after deducting
placement expenses, were approximately $6,200,000. We used these proceeds for
development activities, clinical trial expenses, commercialization of product
offerings, operating costs and other general corporate purposes.

         In August 2001, we sold a total of 2,822,471 shares of our common stock
at prices between $1.27 and $1.38 per share in a private placement transaction
to accredited investors. The transaction included the issuance of warrants to
investors for the purchase of 1,411,234 shares of our common stock at exercise
prices between $1.91 and $2.07 per share. These warrants are callable by us if
our common stock closes at least 200% of the applicable warrant exercise price
for fifteen consecutive trading days. As commission, we paid approximately
$283,275 in cash and issued warrants to purchase 282,247 shares of our common
stock at exercise prices between $1.40 and $1.52 per share. Our net proceeds,
after deducting placement expenses, were approximately $3,400,000. We are using
these proceeds for development activities, clinical trial expenses,
commercialization of product offerings, operating costs and other general
corporate purposes.

         In September 2001, we announced that we intended to call for
redemption, subject to certain criteria, our warrants to purchase an aggregate
of up to 5,873,465 shares of common stock issued in the May 2001 private
placement. In November 2001, all the warrants were exercised, resulting in net
proceeds of approximately $4,600,000. We are using these proceeds for
development activities, clinical trial expenses, commercialization of product
offerings, operating costs and other general corporate purposes.

         The following is a schedule of future obligations at December 31, 2001
(in thousands):


                                      Operating  Operating   Capital
                                        Lease    Sub-Lease   Leases
                                       -------   ---------   -------
  Year ending December 31,
           2002 .................      $   727    ($  379)   $   300
           2003 .................           --         --         42
           2004 .................           --         --         25
           2005 .................           --         --          2
           2006 .................           --         --         --
                                       -------    -------    -------
  Total minimum payments required      $   727    ($  379)   $   369
                                       =======    =======    =======

         Our future liquidity and capital requirements will depend upon numerous
factors, including sales and marketing activities, the progress of our product
development efforts, the progress of our clinical trials, actions relating to
regulatory matters, the costs and timing of expansion of product development,
manufacturing, the extent to which our products gain market acceptance and other
competitive developments.

         As of December 31, 2001, we have generated an accumulated deficit of
approximately $77.8 million. Management expects to continue to incur additional
losses in the foreseeable future as it progresses in clinical trials, completes
new product development and commercialization. Management recognizes the need to
raise additional funds from outside sources and currently evaluating financing
options. In addition to the sale of patents in December 2000, we implemented
several cost containment measures, including a reduction of 22 employees, a
reduction in specific research and development programs and the postponement of
our ventricular tachycardia clinical trial. Management believes that our cash
balances as of December 31, 2001, will be sufficient to fund planned
expenditures through at least July 2002. Management believes that it will be
able to obtain additional funds through public or private equity financings, or
arrangements with corporate partners or from other sources. But such sources may
not be available on acceptable terms, if available at all. If additional
financial resources are not available, we may need to significantly curtail
operations or even cease operations. Our independent auditors have concluded
that there is substantial doubt as to our ability to continue as a going concern
for a reasonable period of time, and have, therefore, modified their report in
the form of an explanatory paragraph describing the events that have given rise
to this uncertainty.

                                       36

<PAGE>

FACTORS AFFECTING FUTURE RESULTS

         You should carefully consider the following risks factors and all other
information in this report before purchasing our common stock. Investing in our
common stock has a high degree of risk. The risks and uncertainties described
below are not the only ones facing our company. Additional risks and
uncertainties that are not yet identified or that we currently think are
immaterial may also have a materially adverse affect on our business. If any of
the following risks actually occur, out business, financial condition or results
of operations would likely suffer and the trading price of our common stock
could decline. In addition to historical information, this prospectus contains
forward-looking statements. These forward-looking statements involve certain
risks and uncertainties that could cause actual results to differ materially
from those in such forward-looking statements.

         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 $9.3 million, $7.8 million and $14.0
million for 2001, 2000 and 1999, respectively. As of December 31, 2001, our
accumulated deficit was approximately $77.8 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.

Our needs to raise additional capital in the future 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 common stock. In May 2001, we received net
proceeds of approximately $6.2 million from a private placement of 11,746,916
shares of our common stock. As part of this private placement, we also issued
redeemble warrants to purchase up to an aggregate of 5,873,465 shares of our
common stock at an exercise price per share of $0.87. In addition, in August
2001, we received net proceeds of approximately $3.5 million from a private
placement of 2,822,471 shares of our common stock, along with the issuance of
redeemable warrants to purchase up to an aggregate of 1,411,234 shares of our
common stock at exercise prices between $1.91 and $2.07. In September 2001, we
announced that we had elected to redeem the warrants issued in the May 2001
private placement for $0.001 per warrant share; all of the May 2001 warrants
were exercised by the redemption date, and we received net proceeds of
approximately $4.6 million. Any sale by us of additional shares of our common
stock will further dilute your ownership percentage in Cardima.

If we fail to raise additional capital to develop and market our microcatheter
systems, our business will fail.

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<PAGE>

         We will need to raise additional capital through public or private
financings or other arrangements in order to complete our clinical trials and
market our microcatheter systems. In addition, we may be required to expend
greater than anticipated funds if unforeseen difficulties arise in the course of
completing the development and marketing of our products or in other aspects of
our business. We cannot assure you that additional capital will be available to
us when needed, if at all, or, if available, on terms attractive to us. If we
cannot obtain sufficient capital, we may be forced to delay, scale back or
eliminate some or all of our product research and development programs, to limit
the marketing of our products, or to license to third parties the rights to
commercialize our products or technologies that we would otherwise develop and
market ourselves. Furthermore, debt financing, if available, may involve
restrictive covenants that could affect our ability to raise additional capital.
Our failure to raise capital when needed could cause us to cease our operations.

         We have financed our operations since inception primarily through the
private placement of equity securities, proceeds from our initial public
offering in June 1997, loan facilities and the sale of certain of our patents
and other intellectual property. As of December 31, 2001, our cash and cash
equivalents totaled approximately $7.5 million. We believe that our existing
cash and cash equivalents and short-term investments, as well as sales of our
products, will be sufficient to fund our operations through July 2002. However,
there can be no assurance that we can obtain additional funding after such date.

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

         As a result of our losses to date, working capital deficiency and
accumulated deficit, our independent auditors have concluded that there is
substantial doubt as to our ability to continue as a going concern for a
reasonable period of time, and have modified their report in the form of an
explanatory paragraph describing the events that have given rise to this
uncertainty. Our continuation is based on our ability to generate or obtain
sufficient cash to meet our obligations on a timely basis and ultimately to
attain profitable operations. Our independent auditors' going concern
qualification may make it more difficult for us to obtain additional funding to
meet our obligations. We anticipate that we will continue to incur significant
losses until successful commercialization of one or more of our products. There
can be no assurance that we can be operated profitably in the future.

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

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

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

         To date, we have received 510(k) pre-market clearances from the FDA
with respect to our PATHFINDER and PATHFINDER mini microcatheter systems for
venous mapping of ventricular tachycardia and our REVELATION microcatheter
system for mapping the atria of the heart. We also received FDA 510(k) clearance

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<PAGE>

for our VENAPORT, VUEPORT and NAVIPORT guiding catheters and our TRACER
microcatheter for mapping ventricular tachycardia.

         We are in the final stages of developing, testing and obtaining
regulatory approval for our REVELATION Tx microcatheter systems designed for
ablation of atrial fibrillation. We completed the mapping phase of this
feasibility study in August 1997 and the atrial fibrillation ablation
feasibility study in December 1998. We received approval of an IDE supplement in
December 1998 allowing us to expand the atrial fibrillation study. In October
2000, we received permission to expand the clinical trial to Phase III. The
Phase III clinical trial requires 80 patients to be treated in up to 20 centers.
Additionally, in August 2001, we began a clinical trial in Germany involving our
REVELATION Helix microcatheter in the treatment of atrial fibrillation
originating from the pulmonary veins.

         We also received approval for an IDE to begin clinical testing of our
TheraStream microcatheter system for ablation of ventricular tachycardia in
December 1999 and approval to expand that trial in 2000, however, we have
postponed the clinical feasibility trial for the TheraStream microcatheter
system for ablation of ventricular tachycardia to focus on completing our atrial
fibrillation Phase III clinical trial. We have no estimate as to when, or if, we
will resume the clinical trial for our TheraStream microcatheter system.

         We must complete the atrial fibrillation Phase III clinical trial in
order to gather data for the completion of our pre-market approval, or PMA,
application to the FDA for our atrial fibrillation ablation product. Currently,
we are targeting approval for our REVELATION Tx before the end of 2002. 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.

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

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

         Our microcatheter systems represent a novel approach to diagnosing and
treating atrial fibrillation and ventricular tachycardia. Acceptance of our
products and procedures by physicians, patients and health care payors will be
necessary in order for us to be successful. If the market does not accept our
products and the procedures involved in their use, 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.

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<PAGE>

         The market for catheters to diagnose or treat atrial fibrillation and
ventricular tachycardia is highly competitive. Our microcatheter systems for the
mapping and ablation of atrial fibrillation and ventricular tachycardia are new
technologies. Safety, cost efficiency and effectiveness are the primary
competitive factors in our market. Other competitive factors include the length
of time required for products to be developed and receive regulatory approval
and, in some cases, reimbursement approval. Existing treatments with which we
must compete include:

         .     conventional catheters using the "drag and burn" technique,

         .     drugs,

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

         .     implantable defibrillators,

         .     purposeful destruction of the atrio-ventricular 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 atrial fibrillation or ventricular tachycardia. If our clinical data and
other studies do not show that our products are safe and effective, the FDA will
not approve our products for sale. If our products are not approved, we will not
be able to enter the market and our revenues will decline.

None of our ablation products have received regulatory approval in the United
States. Our failure to receive these approvals will harm our business.

         None of our products in development for the ablation of atrial
fibrillation or ventricular tachycardia has received regulatory approval in the
United States. If we cannot gain U.S. regulatory approval, our business will be
harmed. Even if our ablation products are successfully developed and we obtain
the required regulatory approvals, we cannot be certain that our ablation
products and their associated procedures will ultimately gain market acceptance.
Since our sole product focus is to design and market microcatheter systems to
map and ablate atrial fibrillation and ventricular tachycardia, our failure to
successfully commercialize these systems would harm our business.

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

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

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

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

         .     product design and development,

         .     product testing,

         .     product labeling,

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<PAGE>

         .     product storage,

         .     premarket clearance and approval,

         .     advertising and promotion, and

         .     product sales and distribution.

         Before we can market any of our products in the United States or
Europe, we must demonstrate that our products are safe and effective and obtain
approval or clearance from the applicable governmental authorities. 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 ventricular tachycardia and for the REVELATION
microcatheter system for mapping atrial fibrillation. Currently, the process for
510(k) clearance is approximately 120 days and PMA approval is six to 12 months.
However, the timing of such process can be uncertain and may be significantly
longer. We cannot guarantee either the timing or receipt of approval or
clearance for any of our products in development. These products may require a
PMA, and the FDA may request extensive clinical data to support either 510(k)
clearance or a PMA.

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

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

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

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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. No assurance can be given that our future
clinical trials will demonstrate the safety and effectiveness of any of our
products or will result in regulatory approval to market our products. As a
result, if we are unable to commence and complete our clinical trials as
planned, or demonstrate the safety and effectiveness of our products, our
business will be harmed. In addition, no assurance can be given that we can
begin any future clinical trials or successfully complete these trials once
started. 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 clinical 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, the proximity of patients' residences to clinical sites and the
eligibility criteria for the study and impact of other clinical studies
competing for the same patient population and/or the same physicians' time and
research efforts. Delays in planned patient enrollment may result in increased
costs and delays, which could cause our business results to suffer.

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

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

         .     fines,

         .     injunctions,

         .     recall or seizure of products,

         .     withdrawal of marketing approvals or clearances,

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

         .     civil and criminal penalties.

         We also are required to demonstrate and maintain compliance with the
Quality System Regulations for all of our products. The FDA enforces the Quality
System Regulations through periodic inspections, including a pre-approval
inspection for PMA products. The Quality System Regulations 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
comply with the Quality System Regulations and cannot be brought into
compliance, we will be required to find alternative manufacturers. 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 contribute to death or serious injury.
If we fail to comply with these applicable regulations, our business results may
suffer.

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<PAGE>

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 products 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 to sell our
REVELATION, REVELATION Tx, REVELATION T-Flex and REVELATION Helix microcatheters
for ablation of atrial fibrillation in the European Union. We intend to submit
data in support of additional CE Mark applications. However, 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 could damage our business results.

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

         All European countries that are part of the European Monetary Union, or
EMU, began operating with the new "Euro" currency in 2002. 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,

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<PAGE>

these participating countries' adoption of a single currency may likely result
in greater price transparency, making the EMU a more competitive environment for
our products. In addition, the EMU has not yet defined and/or finalized some of
the rules and regulations relating to the governance of the currency. As a
result, companies operating in or conducting business in Europe will need to
ensure that their financial and other software systems are capable of processing
transactions and properly handling the Euro.

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

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

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

         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
clinical trials, obtaining regulatory approvals, and manufacturing, marketing
and distributing products. In addition, other companies are developing
proprietary systems for the diagnosis and treatment of cardiac arrhythmias,
including Biosense-Webster, a division of Johnson & Johnson, and Endocardial
Solutions, Inc. Other companies are also developing, marketing and selling
alternative approaches for the treatment of atrial fibrillation and ventricular
tachycardia, including manufacturers of implantable defibrillators such as
Guidant Corporation, Medtronic, Inc. and St. Jude Medical, Inc. We cannot be
certain that we will succeed in developing and marketing technologies and
products that are safer, more clinically effective and cost-effective than the
more established treatments or the new approaches and products being developed
and marketed by our competitors. Furthermore, there can be no assurance that we
will succeed in developing new technologies and products that will be available
before those of our competitors. Our failure to demonstrate the competitive
advantages and achieve market acceptance of our products would harm our
business.

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

         We rely on license agreements for some of our product technology from
potential competitors. A license from Target Therapeutics, Inc., a subsidiary of
Boston Scientific Corporation, is the technological basis for our microcatheter
systems for mapping and ablation. Boston Scientific currently has research
efforts in the field of electrophysiology that may compete with our products.
Under the Target Therapeutics, Inc. license agreement, we have an exclusive
license under specific issued U.S. patents. The exclusive license from Target
Therapeutics, Inc. 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 Therapeutics, Inc. technology,
provided we have made

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<PAGE>

a substantial improvement of such technology, for the diagnosis or treatment of
diseases of the heart, other than by balloon angioplasty. The license will
terminate upon the expiration or invalidation of all claims under the underlying
patents. In addition, Target Therapeutic has the right to terminate the license
earlier if we fail to comply with various commercialization, sublicensing,
insurance, royalty, product liability, indemnification, non-competition and
other obligations. Furthermore, either party can terminate the license if a
material breach remains uncured for thirty days or if either party ceases to be
actively engaged in its present business for a period of twelve months. The loss
of our exclusive rights to the Target Therapeutic-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., for $8,000,000 in cash, which currently has research efforts in the field
of electrophysiology that may compete with our products. We received a
perpetual, worldwide license at no cost from Medtronic to use these patents and
related intellectual property in our products for mapping and ablation of
arrhythmia-causing tissue. In addition, Medtronic agreed not to sublicense the
patents within our field of use to any non-affiliated party. We have also
licensed a proprietary surface-coating material from another vendor used on
certain of our microcatheters.

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

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 prevent us from obtaining a
patent issuance. In addition, Congress recently amended the U.S. 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 cannot be certain that at such time any
licenses will be available to us, 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 Therapeutic, Target Therapeutic 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.

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         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 healthcare providers to obtain satisfactory reimbursement for medical
procedures in which our microcatheter systems are used. If these healthcare
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 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 (1) reimbursement for
our products will be available domestically or internationally, (2) if
available, that such reimbursement will be available in sufficient amounts in
the United States or in international markets under either government or private
reimbursement systems, or (3) that physicians will support and advocate
reimbursement for procedures using our products. Failure by hospitals and other
users of our products to obtain reimbursement from third-party payors or changes
in government and private third-party payor policies toward reimbursement for
procedures employing our products would harm our business. 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.

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 U.S. and international sales and for pre-clinical and clinical
trials. However, we have limited 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

                                       46

<PAGE>

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, the 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 the Quality System Regulations
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
the Quality System Regulations or ISO 9001 (EN 46001) standards. There can be no
assurance that we will be found in compliance with the Quality System
Regulations 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 Quality System Regulation requirement, maintain compliance with ISO 9001
(EN 46001) standards, or develop our manufacturing capability in compliance with
such standards, would have a material adverse effect on our business, financial
condition and results of operations.

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

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

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

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

         We have only limited experience marketing and selling our products in
commercial quantities. In January 2000, we signed an exclusive three-year
distribution agreement with St. Jude Medical Corporation whereby St. Jude was to
distribute our diagnostic products in the United States. St. Jude did not meet
its minimum annual sales quota for the first year under the distribution
agreement. In June 2001, we mutually agreed with St. Jude to terminate the
agreement and to allow for a transition period to transfer customer accounts by
the termination date of September 1, 2001. As a result, we plan to expand our
own small sales force in the United States. Therefore, we will be solely
responsible for marketing and distributing our products in the United States.
Expanding our marketing and sales capability to support sales in commercial
quantities adequately will require substantial effort and require significant
management and financial resources. Our failure to establish an effective sales
and marketing force will cause our revenues to decline.

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

         Currently, sales and marketing of our PATHFINDER, PATHFINDER Mini,
REVELATION and TRACER microcatheter systems are conducted through a number of
exclusive distributors in certain European countries and

                                       47

<PAGE>

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, REVELATION T-Flex and REVELATION Helix in the
European Union. Because we do not have written agreements with certain of our
exclusive distributors, the terms of such arrangements, such as length of
arrangements and minimum purchase obligations, are uncertain. In addition, the
laws in certain international jurisdictions may make it difficult and costly for
us to terminate such distribution arrangements without specific written
termination terms. We cannot be certain that we will be able to enter into
written distribution agreements with these distributors or that these
distributors will be able to effectively market and sell our products in these
markets. In addition, we cannot assure you that we will be able to enter into
additional agreements with desired distributors on a timely basis or at all, or
that these distributors will devote adequate resources to selling our products.
Our failure to establish and maintain appropriate distribution relationships
would harm our business

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

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

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

         We face an inherent business risk of product liability claims in the
event that the use or misuse of our products results in personal injury or
death. 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 such coverage will be adequate or continue to be available to us on
reasonable terms, if at all. In addition, there can be no assurance that all of
the activities encompassed within our business are or will be covered under our
policies. Although we label our microcatheter products for single-use only, we
are aware that some physicians are reusing such products. Moreover, despite
labeling our microcatheters for diagnostic use only, we believe that physicians
are using such mapping microcatheters for ablation. Multiple use or "off-label"
use of our microcatheters could subject us to increased exposure to product
liability claims, which could have a material adverse effect on our business,
financial condition and results of operations. We may require additional product
liability coverage if we significantly expand commercialization of our products.
Such additional coverage is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. Any claims or series of
claims against us, regardless of their merit or eventual outcome, could have a
material adverse effect on our business, financial condition and results of
operations.

We do not intend to pay cash dividends on our stock.

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

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

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

                                       48

<PAGE>

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 SEC and would
therefore be subject to rules that impose additional sales practice requirements
on broker-dealers who sell our common stock. 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 our common stock and your ability to sell our common stock
in the secondary market. We cannot assure you that we will be able to maintain
our listing on the Nasdaq SmallCap Market.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

         Since we did not have short-term investments or a line of credit
obligation as of December 31, 2001, we do not have any material quantitative or
qualitative disclosures about market risk.

Item 8.  Financial Statements and Supplementary Data

         Our financial statements and the report of independent auditors appear
on pages F-1 through F-18 of this report.

Item 9.  Changes In and Disagreements with Accountants on Accounting and
         Financial Disclosure

         Not applicable.




                                       49

<PAGE>

                                    PART III

Item 10. Directors and Executive Officers Of The Registrant

         The response to this item is contained in part below and the remainder
is contained in our Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 20, 2002 (the "2002 Proxy Statement") under the
caption "Election of Directors" and is incorporated herein by reference.

         Our executive officers are appointed annually by our Board of Directors
and serve at the discretion of the Board.

         Mr. Gabriel Vegh (age 62), the founder of the Company was nominated as
our Chairman of the Board in May 2001 to serve along with his continued position
as Chief Executive Officer. Mr. Vegh has been a Director of Cardima since
November 1992, serving as President and Chief Executive Officer from June 2000
to May 2001. Mr. Vegh was the President and CFO in May 1993, Chief Operating
Officer in November 1994, and Executive Vice President from January 1995 until
June 2000. Prior to joining Cardima, from August 1985 until May 1993, Mr. Vegh
was the Vice President, Operations of Target Therapeutics, Inc., which is now a
division of Boston Scientific Corporation. From February 1983 until August 1985,
Mr. Vegh was General Manager, Pilot Operations of Advanced Cardiovascular
Systems, Inc, which is now a division of Guidant Corporation. Mr. Vegh received
a B.S. in Mechanical Engineering from the New Jersey Institute of Technology.

         Mr. William Wheeler (age 55) was appointed as our President and Chief
Operating Officer in May 2001. Prior to serving in this capacity, Mr. Wheeler
was our Senior Vice President, Worldwide Sales and Marketing since May 2000.
Prior to joining us, from August 1998 to October 1999, Mr. Wheeler was the
President, Chief Executive Officer, as well as a member of the Board of
Directors, of Vascular Architects, Inc., a privately-held start-up company
focused on vascular occlusive disease. From October 1996 to August 1998, Mr.
Wheeler was the Vice President of Sulzer Vascutek, a worldwide leader of large
diameter, synthetic vascular grafts. From May 1987 to October 1996, Mr. Wheeler
was Director of Sales and Marketing, in both international and domestic
operations for IMPRA, Inc., a vascular graft manufacturer. Mr. Wheeler attended
Lebanon Valley College in Pennsylvania and has completed individual courses at
the UCLA John B. Anderson Graduate School of Business Administration.

         Ms. Marianne Baldwin (age 55) was appointed as our Vice President,
Worldwide Regulatory and Quality since October 2001 after serving as our
Director of Regulatory and Clinical and Quality. Prior to joining us, Ms.
Baldwin held various positions over more than 10 years of increasing
responsibility in regulatory and clinical affairs for companies that
manufactured Class III implantable cardiovascular medical devices that featured
novel biomaterials, including Baxter, Novacor from 1992 to 1997 and Thoratec
Laboratories from 1997 to 2000 and, most recently for a start-up company that
was developing catheters for interventional cardiology. Ms. Baldwin hasover 20
years of management experience with various organizations, including University
of California, San Francisco Department of Biophysics and Biochemistry and the
State of Oregon. Ms. Baldwin received a BA in Romance Languages and an MA in
Psychology from the University of Oregon.

         Mr. Victor Barajas (age 38) was appointed as Senior Vice President of
Operations in October 2001 and was responsible for all operations and
manufacturing activity as our Vice President of Operations since August 1997.
From September 1995 until August 1997, Mr. Barajas was our Director of
Operations, from May 1994 until September 1995, Mr. Barajas was our Manager of
Operations, and from June 1993 until May 1994, Mr. Barajas was one of our senior
engineers. Prior to joining us, from 1990 until June 1993, Mr. Barajas was
Process Development Engineer and then Project Leader and Manager of the
Engineering Department for Target Therapeutics, Inc., which is now a division of
Bost Scientific Corporation. . From 1988 until 1990, Mr. Barajas was employed by
Critikon, Inc. as an R&D/Manufacturing Engineer in the medical disposables area.
Mr. Barajas received his B.S. degree in Industrial Technology from San Jose
State University.


                                       50

<PAGE>

         Mr. Ronald Bourquin (age 51) was appointed as Senior Vice President of
the Company in May 2001. Mr. Bourquin has been our Vice President and Chief
Financial Officer since July 1996 and our Corporate Secretary since December
1998. Prior to joining us, from July 1993 until July 1996, Mr. Bourquin was the
Corporate Controller of EP Technologies, Inc., an electrophysiology catheter
manufacturer that was acquired by Boston Scientific in January 1996. From April
1993 until July 1993, Mr. Bourquin served as a consultant to EP Technoloies.
From December 1991 until February 1993, Mr. Bourquin was the Controller of the
Endoscopy Division of Stryker Corporation, a medical instrument company. From
January 1979 until December 1991, Mr. Bourquin held various positions of
increasing responsibility at Coherent, Inc., a manufacturer of lasers,
ultimately serving as the Director of Finance of the Medical Group from November
1985 to December 1991. Mr. Bourquin is a Certified Management Accountant and
received a B.A. in Accounting and a M.B.A. in Finance from Golden Gate
University.

         Mr. Eric Chan, Ph.D. (age 44) has been our Vice President of Product
Development since June 1998. Prior to joining us, from August 1991 to March
1993, Mr. Chan was the Director of Engineering and from April 1993 to May 1998,
Vice President of Engineering at Arrhythmia Research Technology, Inc. where he
coordinated and directed the development of computerized cardiac
electrophysiology, high resolution ECG and cathlab systems. Mr. Chan received
his B.S.E.E. from Purdue University, his M.S.E. in Biomedical Engineering from
the University of Texas at Austin, and his Ph.D. in Biomedical Engineering from
the University of Texas at Austin.

         Mr. Gary Wilson (age 47) was appointed as our Vice President, Worldwide
Sales and Marketing since May 2001. Prior to join us, from March 1999 to October
2000, Mr. Wilson was the Vice President, Worldwide Sales and Marketing for
EndoSonics Corporation, a manufacturer of diagnostic and therapeutic devices for
coronary artery disease. He also served there as Director, Asia Pacific/Latin
America Sales from February 1996 until March 1999. Mr. Wilson was, from April
1992 until June 1995, Asia Pacific Sales for Advanced Technology Laboratories ,
a manufacturer of diagnostic medical ultrasound imaging equipment. He also held
positions as Director, Product Management and Product Manager from February 1988
until April 1992. Mr. Wilson began his medical industry career with General
Electric Medical Systems Division where he held positions in Engineering and
Marketing from October 1980 until February 1988. Mr. Wilson received a B.S. in
Electrical Engineering from the University of Califonia, Santa Barbara and an
M.B.A. in International Business from National University.

Item 11. Executive Compensation

         The response to this item is contained in our 2002 Proxy Statement
under the caption "Compensation of Directors" and "Compensation of Executive
Officers," and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

         The response to this item is contained in our 2002 Proxy Statement
under the caption "Common Stock Ownership of Certain Beneficial Owners and
Management," and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

         The response to this item is contained in our 2002 Proxy Statement
under the caption "Transactions with Management," and is incorporated herein by
reference.


                                       51

<PAGE>

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a) (1)   Financial Statements

         Our financial statements are indexed on page F-1.

         (2)   Financial Statement Schedules

         The following schedule is filed as part of this Form 10-K:

               Schedule II--Valuation and Qualifying Accounts for the years
               ended December 31, 2001, 2000, and 1999

         All other information is readily determinable from the Notes to our
financial statements or the schedule is not applicable, therefore, the schedules
have been omitted.

         (3)   Exhibits

         See paragraph (c) below.

     (b) Reports on Form 8-K:

           None

     (c) Exhibits

  Exhibits No.        Description of Exhibits
  ------------        ----------------------------------------------------------
     3.1 (1)          Certificate of Incorporation, as amended, of Cardima.
     3.2 (1)          Bylaws of Cardima.
     3.3 (1)          Form of Amended and Restated Certificate of Incorporation
                      of Cardima.
     4.1 (1)          Form of Common Stock Certificate.
    10.1 (1)          1993 Stock Option Plan, as amended.
    10.2 (1)          1997 Directors' Stock Option Plan.
    10.3 (1)          1997 Employee Stock Purchase Plan.
    10.4 (1)          Form of Indemnification Agreement.
    10.5 (1)          Fourth Amended and Restated Stockholders' Rights Agreement
                      dated March 7, 1997, between Cardima and certain
                      stockholders of Cardima.
    10.6 (1)          License Agreement dated May 21, 1993, between Cardima and
                      Target Therapeutics, Inc.
    10.7 (1)          Lease dated April 25, 1994, between Cardima and State of
                      California Public Employees' Retirement System.
    10.8 (1)          Sublease dated November 14, 1996, between Cardima and
                      Target Therapeutics, Inc.
    10.9 (2)          Master Lease Agreement dated January 26, 1996, between
                      Cardima and Comdisco, Inc., together with Equipment
                      Schedules VL-1, VL-2 and VL-3.
    10.10 (1)         Warrant Purchase Agreement dated December 9, 1993, between
                      Cardima and Target Therapeutics, Inc., together with the
                      Series A Preferred Stock Warrant.
    10.11 (1)         Series A Preferred Stock Warrant dated June 10, 1994,
                      issued to Silicon Valley Bank.
    10.12 (1)         Warrant Purchase Agreement dated July 1, 1994, between
                      Cardima and California Public Employees' Retirement
                      System, together with the Common Stock Warrant.
    10.13 (1)         Series A Preferred Stock Warrant dated October 26, 1994,
                      issued to Silicon Valley Bank.
    10.14 (1)         Form of Series A Preferred Stock Warrant issued to certain
                      investors in December 1994.
    10.15 (1)         Series D Preferred Stock Warrant dated October 31, 1995,
                      issued to Silicon Valley Bank.
    10.16 (1)         Form of Common Stock Warrant issued to certain investors
                      from April 1995 to December 1995.
    10.17 (1)         Warrant Agreement dated January 23, 1996, between Cardima
                      and Comdisco, Inc., together with the Series D Preferred
                      Stock Warrant.
    10.18 (1)         Electrophysiology Catheter License Agreement dated May 17,
                      1994, between Cardima and BSI Corporation, together with
                      the Credit Pool Agreement of same date.
    10.19 (1)         Distribution Agreement dated June 15, 1995, between
                      Cardima and Paramedic Co., Ltd.
    10.20 (1)         Distribution Agreement dated July 14, 1995, between
                      Cardima and Werfen Distribution AG, together with the May
                      15, 1996 letter amendment.
    10.21 (1)         Employment Agreement dated May 21, 1993, between Cardima
                      and Gabriel B. Vegh.
    10.22 (1)         Employment Letter Agreement dated October 31, 1994,
                      between Cardima and Phillip C. Radlick, Ph.D.
    10.23 (1)         Warrant Agreement dated April 7, 1997, between Cardima and
                      Comdisco, Inc.
    10.24 (1)         Distribution Agreement dated April 1, 1997, between
                      Cardima and Cardiologic, GmbH.
    10.25 (3)         Master Loan and Security Agreement dated June 1998,
                      between Cardima and Transamerica Business Credit Corp.
    10.26 (4)         (10.1) Form of Subscription Agreement between Cardima and
                      certain investors
    10.27 (4)         (4.1) Form of Share Purchase Warrant issued to Sunrise
                      Securities, Inc.
    10.28 (5)         St. Jude Investment Agreement

    10.29 (6)         Executive Agreement between Cardima and Victor J. Barajas.
    10.30 (6)         Executive Agreement between Cardima and Ronald Bourquin.
    10.31 (6)         Executive Agreement between Cardima and Eric K.Y. Chan,
                      Ph.D.
    10.32 (6)         Executive Agreement between Cardima and Gabriel B Vegh.

                                       52

<PAGE>

  Exhibits No.        Description of Exhibits
  ------------        ----------------------------------------------------------
    10.33 (6)         Executive Agreement between Cardima and William K.
                      Wheeler.
    10.34             Executive Agreement between Cardima and Marianne Baldwin.
    10.35             Executive Agreement between Cardima and Gary Wilson.
    10.36+(6)         Agreement dated December 19, 2000, between Cardima and
                      Medtronic Inc.
    23.1              Consent of Ernst & Young LLP, Independent Auditors.

---------------
(1) Incorporated by reference to the same exhibits filed with the Cardima
    Registration Statement on Form S-1 (File No. 333-23209) declared effective
    on June 5, 1997.
(2) Equipment Schedule VL-3 dated February 13, 1998 to the Master Lease
    Agreement dated January 23, 1996 is filed with Cardima's Annual Report on
    Form 10-K for the fiscal year ended December 31, 1999.
(3) Incorporated by reference to the same exhibit filed with the Cardima
    Statement on Form 10-Q for the Quarter ended June 30, 1998 (File No.
    000-22419).
(4) Incorporated by reference to Exhibits noted in parentheticals which were
    filed with the Cardima Report on Form 8-K filed with the Commission on
    February 2, 1999.
(5) Incorporated by reference to the exhibit of the same number filed with the
    Company's statement on Form 10-Q for the quarter ended March 31, 2000.
(6) Incorporated by reference to the exhibit of the same number filed with the
    Company's statement on Form 10-Q for the quarter ended September 30, 2000.
 *  The Company has received confidential treatment of certain portions of this
    agreement.
 +  The Company has required confidential treatment of certain portions of this
    agreement

                                       53

<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

DATE:    March 29, 2002                CARDIMA, INC.


                                       /s/ GABRIEL B. VEGH
                                       -----------------------------------------
                                       GABRIEL B. VEGH
                                       Chief Executive Office and Chairman of
                                       the Board

                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gabriel B. Vegh and Ronald E. Bourguin or
either of the , his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
in this Annual Report on Form 10-K, and to file the same, with exhibits thereto
and other documents in connections therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

         NAME                   TITLE                                 DATE
-----------------------------   ------------------------------   ---------------

   /s/ GABRIEL B. VEGH          Chief Executive Officer and       March 29, 2002
-----------------------------   Chairman
      Gabriel B. Vegh           (Principal Executive Officer)

  /s/ RONALD E. BOURQUIN        Senior Vice President, Chief      March 29, 2002
-----------------------------   Financial Officer and Secretary
    Ronald E. Bourquin          (Principal Financial and
                                Accounting Officer)

  /s/ WILLIAM K. WHEELER        President and Chief Operating     March 29, 2002
-----------------------------   Officer
     William K. Wheeler         (Principal Operating Officer)

/s/ PHILLIP C. RADLICK, PH.D.   Director                          March 29, 2002
-----------------------------
  Phillip C. Radlick, Ph.D.

   /s/ LAWRENCE J. SISKIND      Director                          March 29, 2002
-----------------------------
     Lawrence J. Siskind

   /s/ JESSE D. ERICKSON                                          March 29, 2002
-----------------------------

                                       54

<PAGE>

                                Director
-----------------------------
    Jesse D. Erickson
-----------------------------

   /s/ RUDOLFO C. QUIJAN        Director                          March 29, 2002
-----------------------------
     Rudolfo C. Quijano

                                       55

<PAGE>

                                  CARDIMA, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                                                       PAGE
                                                                                       ----

<S>                                                                                     <C>
Report of Ernst & Young LLP, Independent Auditors.......................................F-2
Balance Sheets at December 31, 2001 and 2000............................................F-3
Statements of Operations for the years ended December 31, 2001, 2000, and 1999, and.....F-4
Statement of Stockholders' Equity (Deficit)
  for the years ended December 31, 2001, 2000, and 1999.................................F-5
Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999..........F-6
Notes to Financial Statements...........................................................F-7
</TABLE>


                                      F-1

<PAGE>

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




The Board of Directors and Stockholders
Cardima, Inc.

We have audited the accompanying balance sheets of Cardima, Inc. as of December
31, 2001 and 2000, and the related statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial statement schedule
listed in the index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cardima, Inc. as December 31,
2001 and 2000, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in material
respects the information set forth therein.

As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and net capital deficiency raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.

                                                 /s/ ERNST & YOUNG LLP


Palo Alto, California
February 4, 2002


                                      F-2

<PAGE>
<TABLE>
<CAPTION>

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

                                                                                         December 31,
                                                                                   ------------------------
ASSETS                                                                                2001          2000
                                                                                   ----------    ----------
<S>                                                                                <C>           <C>
Current assets:
      Cash and cash equivalents ................................................   $    7,542    $    1,324
      Accounts receivable, net of allowances for doubtful accounts
            of $75 and $124 at December 31, 2001 and 2000, respectively ........          301           221
      Inventories ..............................................................        1,564         1,663
      Other current assets .....................................................          327           240
                                                                                   ----------    ----------
            Total current assets ...............................................        9,734         3,448
Property and equipment, net ....................................................        1,323         1,803
Notes receivable from officers .................................................          565           514
Other assets ...................................................................          196           138
                                                                                   ----------    ----------
                                                                                   $   11,818    $    5,903
                                                                                   ==========    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY)
Current liabilities:
      Accounts payable .........................................................   $    1,563    $    1,310
      Accrued compensation .....................................................        1,094           981
      Other current liabilities ................................................           42            31
      Capital lease obligation - current portion ...............................          279           474
                                                                                   ----------    ----------
             Total current liabilities .........................................        2,978         2,796

Deferred rent ..................................................................           19            21
Capital lease obligation - noncurrent portion ..................................           64           192

Commitments

Stockholders' equity:
     Common stock, $0.001 par value; 75,000,000 shares authorized,
      42,528,143 and 21,579,093 shares issued and outstanding at December 31,
      2001 and 2000 respectively; at amount paid in.............................       86,583        71,405
Deferred compensation ..........................................................           --           (26)
Accumulated deficit ............................................................      (77,826)      (68,485)
                                                                                   ----------    ----------
      Total stockholders' equity ...............................................        8,757         2,894
                                                                                   ----------    ----------
                                                                                   $   11,818    $    5,903
                                                                                   ==========    ==========
</TABLE>

                                      F-3

<PAGE>

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

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                                 --------------------------------
                                                                   2001        2000        1999
                                                                 --------    --------    --------
<S>                                                              <C>         <C>         <C>
Net sales                                                        $  1,861    $  2,570    $  3,495
Cost of goods sold                                                  3,717       3,667       3,384
                                                                 --------    --------    --------

            Gross profit (loss)                                    (1,856)     (1,097)        111

Operating expenses:
            Research and development                                4,873       4,432       5,694
            Selling, general and administrative                     6,675       6,185       8,173
                                                                 --------    --------    --------

                        Total operating expenses                   11,548      10,617      13,867
                                                                 --------    --------    --------

Operating loss                                                    (13,404)    (11,714)    (13,756)
Interest and other income                                             123         230         250
Interest expense                                                      (60)       (365)       (522)
Gain on sale of intellectual property                               4,000       4,000          --
                                                                 --------    --------    --------

Net loss                                                         $ (9,341)   $ (7,849)   $(14,028)
                                                                 ========    ========    ========

Basic and diluted net loss per share                             $  (0.30)   $  (0.38)   $  (0.89)
                                                                 ========    ========    ========

 Shares used in computing basic and diluted net loss per share
                                                                   31,114      20,818      15,746
                                                                 ========    ========    ========
</TABLE>

                 See accompanying notes to financial statements


                                      F-4

<PAGE>

<TABLE>
<CAPTION>
                                                             CARDIMA, INC.
                                             STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                         (In thousands, except share and per share amounts)

                                                                                                                          Total
                                                                                                Deferred     Accumu-   Stockholders'
                                                                                    Common       Compen-      lated       Equity
                                                                                    Stock        sation      Deficit     (Deficit)
                                                                                  -------------------------------------------------
<S>                                                                               <C>          <C>          <C>          <C>
Balances at January 1, 1999.....................................................  $   45,910   $     (478)  $  (46,608)  $   (1,176)
Issuance of 7,500,000 shares of common stock at $2.00 per share in
    January and February 1999 through private placement, and 354,806
    shares issued in lieu of commissions, net of issuance costs of $686 ........      14,314           --           --       14,314
Issuance of 91,834 shares of common stock, net of 45 repurchased
    shares, for cash upon exercise of employee stock options at $0.56-
   $1.75 per share .............................................................         114           --           --          114
Issuance of 57,419 shares of common stock for cash in employee stock
    Purchase plan at $2.24 and $1.49 per share .................................         103           --           --          103
Amortization of deferred compensation ..........................................          --          253           --          253
Net loss .......................................................................          --           --      (14,028)     (14,028)
                                                                                  -------------------------------------------------
Balances at December 31, 1999 ..................................................      60,441         (225)     (60,636)        (420)
Issuance of 4,666,611 shares of common stock at $2.25 per share in
   February 2000 through private placement, net of commissions and
   issuance costs of $604, including warrants to purchase 933,323 shares .......       9,896           --           --        9,896
of common stock at $2.48 per share
Issuance of 233,333 shares of common stock at for exercise of warrants
   at $2.25 per share
                                                                                         525           --           --          525
Issuance of 180,744 shares of common stock at for exercise of warrants
   at $2.20 per share
                                                                                         398           --           --          398
Issuance of 48,986 shares of common stock for cash upon exercise of
   employee stock options at $0.56-$1.40 per share..............................
                                                                                          33           --           --           33
Issuance of 93,064 shares of common stock for cash in employee stock
    Purchase plan at $1.49 and $1.04 per share .................................         112           --           --          112
Amortization of deferred compensation ..........................................          --          199           --          199
Net loss .......................................................................          --           --       (7,849)      (7,849)
                                                                                  -------------------------------------------------
Balances at December 31, 2000 ..................................................      71,405          (26)     (68,485)       2,894
Issuance of 183,258 shares of common stock for cash upon exercise of ...........         198           --           --          198
    employee stock options at $0.34 - $1.94 per share
Issuance of 203,370 shares of common stock for cash in employee ................          96           --           --           96
    Stock purchase plan at $0.48 and $0.45 per share
Amortization of deferred compensation ..........................................                       26                        26
Issuance of 11,746,916 shares of common stock at $0.87 per share in ............       6,222           --           --        6,222
    May 2001 through private placement, net of issuance
    costs of $591
Issuance of 2,822,471 shares of common stock at $1.27 - $1.38 per share ........       3,477           --           --        3,477
    In August 2001 through private placement, net of
    Issuance costs of $300
Issuance of 5,830,361 shares of common stock at $0.87 per share in .............       4,647           --           --        4,647
    December 2001 through warrant exercises, net
   Issuance costs of $425......................................................
Stock-based compensation expense related to stock option repricing .............         457           --           --          457
Compensation expense for options granted to non-employees ......................          81           --           --           81
Net Loss .......................................................................                                (9,341)      (9,341)
                                                                                  -------------------------------------------------
Balance at December 31, 2001 ...................................................  $   86,583   $       --   $  (77,826)  $    8,757
                                                                                  =================================================

</TABLE>


                                      F-5

<PAGE>

                                                 CARDIMA, INC.
                                           STATEMENTS OF CASH FLOWS
                                                (In thousands)
<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                                        --------------------------------------
                                                                           2001          2000          1999
                                                                        ----------    ----------    ----------
<S>                                                                     <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                $   (9,341)   $   (7,849)   $  (14,028)
Adjustments to reconcile net loss to net cash provided by operations:
      Depreciation and amortization                                            877         1,024         1,196
      Stock-based compensation                                                 564           199           253
      Loss on disposal of assets                                                35             2            15
      Changes in operating assets and liabilities:
            Accounts receivable                                                (80)          448          (157)
            Inventories                                                         99          (395)          709
            Other current assets                                               (87)           11           115
            Other assets                                                       (58)         (195)         (104)
            Accounts payable                                                   253          (126)         (850)
            Accrued employee compensation                                      113           (60)            9
            Other current liabilities                                           11           (29)          (16)
            Deferred rent                                                       (2)           20           (41)
                                                                        ----------    ----------    ----------
                        Net cash used in operating activities               (7,616)       (6,950)      (12,899)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments                                             --            --       (19,057)
Maturities and sales of short-term investments                                  --           497        18,560
Capital expenditures                                                          (350)         (122)         (248)
Proceeds from disposal of assets                                                --            --            14
                                                                        ----------    ----------    ----------
            Net cash provided by (used in)  investing activities              (350)          375          (731)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases                                       (405)       (1,302)         (993)
Principal payments under credit line                                            --        (2,183)         (817)
Restricted cash                                                                 --            --           105
Notes receivable from officers                                                 (51)         (149)          (45)
Net proceeds from sale of common stock                                      14,640        10,964        14,531
Proceeds from sale/leaseback of capital equipment                               --           146           627
                                                                        ----------    ----------    ----------
            Net cash provided by financing activities                       14,184         7,476        13,408
                                                                        ----------    ----------    ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         6,218           901          (222)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                 1,324           423           645
                                                                        ----------    ----------    ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                  $    7,542    $    1,324    $      423
                                                                        ==========    ==========    ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest                                  $       60    $      365    $      211
                                                                        ==========    ==========    ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Equipment acquired under capital lease arrangements                     $       82    $      180    $      771
                                                                        ==========    ==========    ==========
</TABLE>

                                      F-6

<PAGE>

                                  CARDIMA, INC.

                          NOTES TO FINANCIAL STATEMENTS

1.    Nature of Business and Summary of Significant Accounting Policies

Nature of Business

         The Company was incorporated in the State of Delaware on November 12,
1992. The Company designs, develops, manufactures and markets minimally
invasive, single-use, microcatheter systems for the mapping and ablation of the
two most common forms of cardiac arrhythmias: atrial fibrillation and
ventricular tachycardia. The Company has licensed its microcatheter technology
for use in the treatment of electrophysiological diseases affecting areas other
than the central nervous system from Target Therapeutics, Inc.

         As of December 31, 2001, the Company had cash and investments on hand
of $7.5 million, working capital of $6.8 million, and an accumulated deficit of
approximately $77.8 million. Management expects to continue to incur additional
losses in the foreseeable future as the Company completes its key clinical trial
in the United States, commercialization of the REVELATION Tx in the United
States and the commercialization of the REVELATION Helix in Europe. In December
2000, the Company executed a sale of certain intellectual property to Medtronic,
Inc. for $8.0 million, $4.0 million of which was received in December 2000, and
$4.0 million of which was received in January 2001. In January 2001, the Company
implemented several cost containment measures, which included a reduction of 22
employees, a reduction in specific research and development projects and the
postponement of our ventricular tachycardia clinical trial. The restructuring
involved the elimination of 12 full-time and 10 temporary positions or about 28%
of the workforce, with the objective of re-aligning resources to focus on the
Phase III clinical trial to treat atrial fibrillation and to reduce overall
operating expenses. These actions resulted in a restructuring charge in the
first quarter of fiscal 2001 of approximately $300,000. This charge is comprised
of employee severance of $289,000 and related benefits of $9,000, and as of
September 30, 2001, all severance and benefits related to restructuring were
paid. Management believes that the cash and investment balances as of December
31, 2001, will be sufficient to fund planned expenditures through at least July
2002. Management believes that it will be able to obtain additional funds
through public or private equity financings or arrangements with corporate
partners or other sources. But such additional fundings may not be available on
acceptable terms, if available at all. If additional financial resources are not
available, the Company may need to significantly curtail operations or even
cease operations.

Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Revenue Recognition

         Revenues are recognized when products are shipped. 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.

Research and Development


                                      F-7

<PAGE>

         Research and development costs, which include clinical and regulatory
costs, are charged to expense as incurred.

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. Excluded common stock equivalents included the following:


                                                      December 31
                                            ---------------------------------
                                              2001        2000        1999
                                            ---------   ---------   ---------
               Warrants                     6,143,863   2,421,331   1,213,756
               Stock Options                2,609,313   2,101,958   1,846,851
                                            ---------   ---------   ---------
               Total Options and Warrants   8,753,176   4,523,284   3,060,607
                                            =========   =========   =========

Cash and Cash Equivalents

         The Company considers investments in highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents. All other liquid investments are classified as short-term
investments. All of the Company's cash equivalents and short-term investments
are classified as available-for-sale as of December 31, 2001. Available-for-sale
securities were carried at fair value with unrealized gains and losses reported
as a separate component of stockholders' equity. To date, the Company has not
experienced any significant unrealized gains or losses on available-for-sale
securities and accordingly, no adjustments have been made to other comprehensive
income or stockholders' equity. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale securities are included
in investment income, if any. Such realized gains and losses are determined
using the specific identification method. The Company has not experienced any
realized gains or losses in any of the years ended December 31, 2001, 2000 or
1999. The fair value of investments is based on quoted market prices. The fair
value of these securities approximate the amortized cost at such dates. Cash and
cash equivalents at December 31consist of the following (in thousands):


                                       F-8

<PAGE>

                                                          December 31,
                                                     ----------------------
                                                        2001         2000
                                                     ----------------------
               Cash and cash equivalents:

                  Cash ...........................   $     301    $     133
                  Money market funds .............       7,241        1,191
                                                     ---------    ---------
               Total cash and cash equivalents ...   $   7,542    $   1,324
                                                     =========    =========


Inventories

         Inventories are stated at the lower of cost or market. Cost is based on
actual costs computed on a first-in, first-out basis. Inventories consist of the
following (in thousands):

                                             December 31,
                                       ----------------------
                                          2001         2000
                                       ---------    ---------

               Raw materials .....     $     653    $     751
               Work-in-process ...            50           95
               Finished goods ....           861          817
                                       ---------    ---------
                                       $   1,564    $   1,663
                                       =========    =========


         Inventory amounts shown above are net of reserves for excess and
obsolete inventory of $141,000 and $212,000 at December 31, 2000 and 2001,
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.

Property and Equipment

         Property and equipment, including equipment under capital leases, are
carried at cost less accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over the estimated
useful lives, generally three to five years. Leasehold improvements are
amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the remaining term of the lease. Depreciation
expense includes amortization of capital leases and leasehold improvements.

            Property and equipment consist of the following (in thousands):


                                                           December 31,
                                                      ----------------------
                                                         2001         2000
                                                      ---------    ---------

               Equipment .........................    $   6,019    $   5,776
               Leasehold improvements ............          176          115
                                                      ---------    ---------
                                                          6,195        5,891
               Less accumulated depreciation and
                   amortization ..................       (4,872)      (4,088)
                                                      ---------    ---------
                                                      $   1,323    $   1,803
                                                      =========    =========


                                       F-9

<PAGE>

         Equipment includes property and equipment financed under capital leases
which were $3,653,000 and $3,686,000 at December 31, 2001 and 2000,
respectively. Accumulated amortization related to leased assets was $3,345,000
and $3,014,000 at December 31, 2001 and 2000, respectively.

Concentrations of Risk

         To date, product sales have been direct to customers in the United
States and to distributors primarily in Europe and Japan. The total export sales
represented 61% of net sales for the year ended December 31, 2001. Japan and
Germany were the only two countries that account for more than 10% of the
Company's net sales. Provisions for doubtful accounts were $75,000 and $124,000
for the years ended December 31, 2001 and 2000, respectively. When necessary,
estimated provisions for product returns are recorded. The geographic
distribution of net sales was as follows (in thousands):

                                        Year Ended December 31,
                      ------------------------------------------------------
                             2001               2000               1999
                      ----------------   ----------------   ----------------

United States         $  743       39%   $1,334       52%   $1,915       55%
Europe                   613       33%      674       26%    1,127       32%
Japan                    501       27%      548       21%      341       10%
Rest of World              4        1%       14        1%      112        3%
                      ------             ------             ------

TOTAL NET SALES:      $1,861             $2,570             $3,495
                      ======             ======             ======

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

Recent Accounting Pronouncements

         On June 29, 2001, the Financial Accounting Standards Board (FASB),
approved the final standards resulting from its deliberations on the business
combinations project. The FASB issued statement of financial accounting SFAS No.
141, "Business Combinations" and SFAS 142 "Goodwill and Other Intangible
Assets." SFAS 141 which will be effective for any business combinations
initiated after June 30, 2001 and also includes the criteria for recognition of
intangible assets separately from goodwill. FAS 142 will be effective for fiscal
years beginning after December 15, 2001 and will require that goodwill not be
amortized, but rather be subject to an impairment test at least annually. The
adoption of FAS 141 and 142 is not expected have a significant impact on our
financial position or result of operations at transition.


                                      F-10

<PAGE>

         In October 2001, FASB issued SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets effective for fiscal years beginning after
December 15, 2001, with transition provisions for certain matters. The FASB's
new rules on asset impairment supersedes SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
and provide a single accounting model for long-lived assets to be disposed of.
We will evaluate the implementation of the impairment rules, if anyon the
earnings and financial position of the Company.

2.    Commitments

         The Company leases facilities under an operating lease, which was
extended in November 1999 and expires November 2002. The Company also leases
certain equipment under noncancelable capital leases (see Note 6). Following is
a schedule of future minimum lease payments under both operating and capital
leases (in thousands).

                                              Operating   Operating    Capital
                                               Lease      Sub-Lease    Leases
                                              ---------   ---------   ---------
Year ending December 31:
            2002 ..........................   $     727   ($    379)  $     300
            2003 ..........................                                  42
            2004 ..........................                                  25
            2005 ..........................                                   2
            2006 ..........................          --                      --
                                              ---------   ---------   ---------
Total minimum payments required ...........   $     727   ($    379)        369
                                              =========   =========
Less amount representing interest .........                                 (26)
                                                                      ---------
Present value of future lease payments ....                                 343
Less current portion ......................                                (279)
                                                                      ---------
Noncurrent portion ........................                           $      64
                                                                      =========

         Rent expense, was approximately $587,000 in 2001, $585,000 in 2000 and
$391,000 in 1999. In May, 2001 we entered into a sublease agreement to sublease
approximately 16,674 square feet of the second floor of the Company's facility.
This sublease expires October 14, 2002. The sublease calls for monthly rental
payments of $31,680 for base rent, approximately $5,500 for furniture rental and
payment for a proportional share of total utility expenses.

3.    Stockholders' Equity

1993 Stock Option Plan

         During 1993, the Board of Directors adopted the 1993 Stock Option Plan
and, as amended, has reserved 6,150,690 shares of common stock for issuance
under the plan. The plan provides for both incentive and non-statutory stock
options to be granted to employees, directors and consultants. Exercisability,
option price, fair value and other terms are determined by the Board of
Directors; however, the exercise price of each incentive stock option shall be
not less than 100% of the fair market value of the stock issuable upon exercise
of the option on the date the option is granted. The exercise price of each
non-statutory stock option shall be not less than 85% of the fair market value
of the stock subject to the option on the date the option is granted. All
options granted prior to the initial public offering shares were generally
exercisable upon grant, but shares received upon exercise prior to vesting are
subject to repurchase upon the stockholder's termination of service to the
Company. Subsequent to the Company's initial public offering, only fully vested
shares are exercisable. Shares purchased upon exercise of options generally vest
at the rate of 12.5% after six months from the date of grant, and monthly
thereafter over the following 42 months. No option shall have a maximum term in
excess of ten years from the


                                      F-11

<PAGE>

grant date and no option granted to a 10% stockholder shall have a maximum term
in excess of five years from the grant date.

         Activity under the plan is as follows:
<TABLE>
<CAPTION>

                                                                Outstanding Options
                                                   ---------------------------------------------
                                      Shares       Number of         Price       Weighted-Average
                                     Available       Shares        Per Share      Exercise Price
                                     ----------    ----------    -------------    --------------
<S>                                  <C>            <C>          <C>                <C>
Balance at December 31, 1998 ....       136,069     1,277,092    $0.56 - $7.00      $    2.87
Additional shares reserved ......     2,250,569            --               --             --
Options granted .................      (715,239)      715,239    $1.41 - $2.56      $    1.99
Options repurchased .............            45            --    $0.56 - $0.56      $    0.56
Options exercised ...............            --       (91,879)   $0.56 - $1.75      $    1.24
Options forfeited ...............       139,601      (139,601)   $0.56 - $7.00      $    4.79
                                     ----------    ----------

Balance at December 31, 1999 ....     1,811,045     1,760,851    $0.56 - $7.00      $    2.44
Additional shares reserved ......        57,005            --               --             --
Options granted .................    (1,237,001)    1,237,001    $1.09 - $1.65      $    1.21
Options exercised ...............            --       (48,986)   $0.56 - $1.40      $    0.67
Options forfeited ...............       936,908      (936,908)   $0.56 - $5.88      $    3.12
                                     ----------    ----------

Balance at December 31, 2000 ....     1,567,957     2,011,958    $0.56 - $7.00      $    1.41
                                     ----------    ----------

Additional shares reserved ......     2,300,000            --               --             --
Options granted .................      (859,400)      859,400    $0.34 - $2.09      $    0.58
Options exercised ...............            --      (183,258)   $0.34 - $1.94      $    1.08
Options forfeited ...............       170,787      (170,787)   $0.34 - $5.88      $    1.29
                                     ----------    ----------

Balance at December 31, 2001 ....     3,179,344     2,517,313    $0.34 - $7.00      $    1.16
</TABLE>

         At December 31, 2001, 2000, and 1999, approximately 1,314,092,
1,021,429 and 920,665 options, respectively, were outstanding and exercisable
under the plan. All options granted in 2001 were granted at fair value.

1997 Directors' Stock Option Plan

         In March 1997, the Board of Directors adopted the 1997 Directors' Stock
Option Plan. A total of 200,000 shares of common stock have been reserved for
issuance under this plan. This Plan provides for the grant of nonstatutory stock
options to nonemployee directors of the Company. In 2001, options to purchase
46,000 shares were granted with a weighted average exercise price of $1.47. In
November, 2001, options to purchase 44,000 shares were cancelled with a weighted
average exercise price of $2.11. There were no options exercised during the year
ended December 31, 2001. A total of 92,000 options are outstanding and
exercisable under this plan.

1997 Employee Stock Purchase Plan

         In March 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase, and as amended, has reserved 1,750,000 shares of common stock for
issuance under the purchase plan. The purchase plan is intended to provide an
opportunity for eligible employees of the Company and its designated
subsidiaries to acquire common stock on a favorable basis. The purchase plan is
implemented by a series of offering periods of twelve months duration, with two
consecutive purchase periods of six months in duration. New offering periods
commence on or about February 1 and August 1 of each year (or at such other time
or times as may be determined by the Board of Directors). Through periodic
payroll deductions, which may not exceed $25,000 per offering period or 10% of
any


                                      F-12

<PAGE>

employee's compensation, eligible employees may purchase common stock at a price
equal to the lower of: (i) 85% of the fair market value of the common stock on
the offering date; or (ii) 85% of the fair market value of the common stock on
the purchase date. As of December 31, 2001, 392,276 shares of common stock have
been issued under the purchase plan.

Warrants

     The following table summarizes information about warrants outstanding at
December 31, 2001:

<TABLE>
<CAPTION>
<S>       <C>                                     <C>                     <C>
Date           In Connection With                      Price Range        Outstanding
----           ------------------                      -----------        -----------
6/97           Bridge Loan                             $1.05 & $7.00          326,055
6/97           Facility Lease                             $7.00                 1,428
6/97 & 6/98    Letter of Credit                        $4.00 - $7.00          116,760
6/99           Capital Lease                              $2.56                19,513
5/01           Private Placement (PPM)                    $0.87                43,104
5/01           PPM Commission                             $0.64             1,107,930
8/01           PPM                                    $1.91 - $2.07         1,411,235
8/01           PPM Commission                         $1.40 - $1.52           282,247
6/01           Finance Consulting for PPM                 $1.20               450,000
08/01          Anti-dilution Shares 1999, 2000 PPM    $1.00 - $1.73         2,385,591
                                                                            ---------
               Total Warrants Outstanding                                   6,143,863
                                                                            =========
</TABLE>

     These warrants are exercisable immediately and expire at the earliest of
(i) between 3 to 10 years after the date of grant or (ii) the closing of the
company's sale of all or substantially all of its assets or (iii) the
acquisition of the company by another entity by means of a merger or other
transaction.

     In May 2001, the Company issued warrants to purchase an aggregate of 5,873,
465 shares of our common stock at an exercise price of $0.87 per share in
connection with the shares purchased in the May 2001 private placement
transaction. In connection with this transaction, the Company issued warrants to
purchase an aggregate of 1,174,691 shares of common stock at an exercise price
of $0.64 per share as additional commission for the placement again in this
transaction. The warrants were redeemable by the Company if its common stock
closed at or above $1.16 for fifteen consecutive trading days.

     In August 2001, the Company issued warrants to purchase an aggregate of
1,411,235 shares of its common stock at an exercise price of between $1.91 and
$2.07 per share in connection with the shares purchased in the August 2001
private placement transaction. In connection with this transaction, the Company
issued warrants to purchase an aggregate of 282,247 shares of its common stock
at an exercise price of between $1.40 and $1.52 per shares as additional
commission for this transaction. These warrants are redeemable by the Company if
its common stock closes at least 200% of the applicable warrant exercise prices
for fifteen consecutive trading days.

     In August 2001, the Company issued warrants to purchase an aggregate of
2,385,591 shares of its common stock at an exercise price of between $1.00 and
$1.73 when the Company adjusted certain warrants to purchase our common stock,
that were issued on April 12, 1999 and February 25, 2000 in connection with
certain private placements of the Company's common stock, to increase the number
of shares of common stock issuable upon exercise of these warrants by 813,894
shares.

     In September 2001, the Company announced that it intended to call for the
redemption, subject to certain criteria, its warrants to purchase an aggregate
of up to 5,873,465 shares of common stock issued in May 2001 in connection with
the private placement. The Company set November 22, 2001 as the date of
redemption for all unexercised warrants. As of December 31, 2001, the Company
received $4.6 million of net proceeds for the redemption of 5,830,361 shares of
its common stock.

                                      F-13

<PAGE>


         The Company has reserved 6,143,863 shares of common stock for issuance
upon exercise of the warrants described above.

Accounting for Stock-Based Compensation

         The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair-value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB Opinion 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant as determined by the Company's
Board of Directors, no compensation expense is recognized.

         Pro forma information regarding net loss and loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using the Black Scholes
option pricing model for 1999, 2000 and 2001 with the following weighted-average
assumptions for 2001, 2000 and 1999, respectively; risk-free interest rates of
approximately 2.5%, 6.5% and 6.0% ; dividend yields of 0.0%, volatility factors
of the expected market price of the Company's common stock of 1.42, 0.8 and 0.6;
and a weighted-average expected life of the options of four years.

         The option valuation models were developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


                                      F-14

<PAGE>

         For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information as follows:

                                                 Year Ended December 31,
                                         --------------------------------------
                                            2001          2000          1999
                                         ----------    ----------    ----------
                                          (In thousands, except per share data)

Net loss - as reported .............     $   (9,341)   $   (7,849)   $  (14,028)
                                         ==========    ==========    ==========

Net loss - pro forma ...............     $   (9,658)   $   (8,011)   $  (14,269)
                                         ==========    ==========    ==========

Net loss per share - as reported ...     $    (0.30)   $    (0.38)   $    (0.89)
                                         ==========    ==========    ==========

Net loss per share - pro forma .....     $    (0.31)   $    (0.38)   $    (0.91)
                                         ==========    ==========    ==========

         For fiscal years 2001, 2000 and 1999, the weighted average fair value
of options granted is $0.68, $1.24 and $1.71, respectively.

         The following table summarizes information about stock options
outstanding at December 31, 2001:
<TABLE>
<CAPTION>
                                      Options Outstanding                     Options Exercisable
                         --------------------------------------------    ----------------------------
                                           Weighted-
                                            Average        Weighted-                      Weighted-
                         Number of         Remaining       Average        Number of       Average
       Range of           shares          Contractual      Exercise        shares         Exercise
    Exercise Prices     Outstanding          Life           Price        Exercisable       Price
   ----------------     -----------       -----------     ----------    ------------    ------------
<S>                      <C>                <C>            <C>            <C>               <C>
    $0.34  - $1.10        711,968            8.52          $0.42           170,579          $0.67

     1.10  -  1.20        610,790            8.42           1.16           484,586           1.16

     1.20  -  1.40        741,274            6.45           1.29           412,147           1.35

     1.40  -  1.65         55,000            8.02           1.63            48,312           1.64

     1.65  -  2.65        360,659            6.86           2.01           164,321           2.05

     2.65  -  7.00         37,622            6.35           3.54            34,147           3.57
                        ---------                                        ---------
    $0.34  - $7.00      2,517,313            7.60           $1.16        1,314,092          $1.35
                        =========                                        =========
</TABLE>

4.    Notes Receivable from Officers

         In December 1997, the Company entered into a $300,000 note receivable
agreement with Phillip C. Radlick, Ph.D., a Director of the Company and then
President and Chief Executive Officer to facilitate the purchase of a principal
residence in the Bay Area. The note bears interest at the minimum Applicable
Federal Rate of 6.45% at the time the note was issued and is due and payable in
a single lump sum forty-eight months from the note date. The Board of Directors
has amended Dr. Radlick's agreement to extend this loan as long as Dr. Radlick
is a member of the Board of Directors. As security for the note, Dr. Radlick
granted the Company a security interest in his vested stock options. At December
31, 2001, $278,500 of the principal balance was remaining and approximately
$76,000 of interest has accrued. The note receivable and accrued interest are
included in the accompanying balance sheet.

         In June 2000, the Company entered into a note receivable agreement with
William Wheeler, its President and Chief Operating Officer, to facilitate the
purchase of a principal residence in the Bay Area. The note calls for an initial
payment by the Company of $142,500 with an additional $5,000 per month up to a
maximum of $300,000. The note bears interest at the minimum Applicable Federal
Rate of 6.42% at the time the note was

                                      F-15

<PAGE>

issued and is due and payable in a single lump sum forty-eight months from the
note date. The Board of Directors amended Mr. Wheeler's agreement by granting
Mr. Wheeler a $75,000 bonus in May 2001 in lieu of further additional monthly
payments to him. As security for the note, Mr. Wheeler granted Cardima a
security interest in his vested stock options. At December 31, 2001, $192,500 of
the principal balance was remaining and approximately $18,000 of interest has
accrued. The note receivable and accrued interest are included in the
accompanying balance sheet.

5.    Income Taxes

         As of December 31, 2001, the Company had federal and state net
operating loss carry forwards of approximately $74,700,000 an $17,200,000,
respectively. The Company also had federal and state research and development
tax credit carry forwards of approximately $101,000 and $356,000, respectively.
The net operating loss and credit carry forwards will expire at various dates
beginning in 2002 through 2020, if not utilized.

         Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.

         Significant components of the Company's deferred tax assets for federal
and state income taxes as of December 31 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                            2001         2000
                                                                         ---------    ---------
<S>                                                                      <C>          <C>
            Net operating loss carryforwards........................     $  26,440    $  21,900
            Research credits carryforwards (federal and state)......           340          900
            Manufacturing investment credit carryforwards...........            70          100
            Capitalized research and development....................           460          800
            Other, net..............................................           380          300
                                                                         ---------    ---------
            Total deferred tax assets                                       27,690       24,000
            Valuation allowance for deferred tax assets                    (27,690)     (24,000)
                                                                         ---------    ---------
                                                                         $      --    $      --
                                                                         =========    =========
</TABLE>

         As of December 31, 2001 and 2000, the Company had deferred tax assets
of approximately $27,690,000 and $24,000,000, respectively. Realization of the
deferred tax assets is dependent upon future taxable income, if any, the amount
and timing of which are uncertain. Accordingly, the net deferred tax assets have
been fully offset by a valuation allowance. The net valuation allowance
increased by approximately $3,690,000 and $600,000 during the years ended
December 31, 2001 and 2000, respectively. Deferred tax assets primarily relate
to net operating loss and tax credit carryforwards.

License Rights

         In May 1993, in exchange for an equity interest in the Company, Target
Therapeutics, Inc. granted the Company an exclusive royalty-free worldwide
license to use Target Therapeutic's technology and to make, use and sell or
otherwise distribute products for the diagnosis and treatment of
electrophysiological diseases in the body, other than in the central nervous
system, including the brain. The exclusive license grant applied to any Target
Therapeutic's technology developed through May 1996 and will expire upon the
expiration of the last of the patents relating to Target Therapeutic's
technology. Under the License Agreement, the Company granted back to Target
Therapeutic an exclusive royalty-free license to use technology developed
through May 1996 in the fields of neurology, interventional neuroradiology,
interventional radiology, reproductive disorders and vascular prostheses (the
"Target Field"). Such license will expire upon the expiration of the last of the
patents relating to Target Therapeutic's technology. Target Therapeutic granted
the Company a non-exclusive, royalty-free license to use Target Therapeutic's
technology to make, use and sell or otherwise distribute the Company's products
for use


                                      F-16

<PAGE>

within the cardiology field, provided the Company's products represent a
substantial improvement. A substantial improvement is any modification,
improvement or enhancement by the Company of Target Therapeutic's technology in
a particular product that results in a material change in the function, purpose
or application of such product. The Company believes that the incorporation of
electrodes in its microcatheter systems, together with other modifications,
satisfies the substantial improvement requirements. As part of the same
agreement, the Company granted to Target Therapeutic an exclusive, royalty-free
license to use the Company's technology to make, have made, use and sell or
otherwise distribute products within the Target Field.

         In addition, the Company agreed not to conduct material research and
development, acquire corporate entities or make or sell products in the Target
Field or to sell products, other than products utilizing Target Therapeutic's
technology, for use in diagnosis or treatment of diseases related to the
production of electrical current in tissue located in areas of the body other
than the heart, without first notifying Target Therapeutic and negotiating a
distribution agreement. The Company also agreed that it would not sell products
utilizing Target Therapeutic's technology for use in diagnosis or treatment of
diseases related to the production of electrical current in tissue located in
areas of the body other than the heart without, if selling to a distributor,
first notifying Target Therapeutic and offering it the right of first refusal
with respect to the terms of the distribution, or if selling directly to the
consumer, paying to Target Therapeutic an amount equal to 40% of the gross
profit for such product.


                                      F-17

<PAGE>
                                                                     SCHEDULE II

                                 CARDIMA, INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                  Years Ended December 31, 2001, 2000 and 1999
                                 (in thousands)



<TABLE>
<CAPTION>
                                                   Addition
                                        Balance    Charged                    Balance
                                           at          to                       at
                                       Beginning   Cost and                   End of
                                       of Period   Expenses   Deductions(1)   Period
                                       ---------   --------   -------------   -------
<S>                                   <C>         <C>        <C>             <C>
Allowance for doubtful accounts and
returns:
   Year Ended December 31, 2001:       $     124   $     19   $         (68)  $     75
                                       ---------   --------   -------------   --------
   Year Ended December 31, 2000:       $      92   $     26   $           6   $    124
                                       ---------   --------   -------------   --------
   Year Ended December 31, 1999:       $      41   $     55   $          (4)  $     92
                                       ---------   --------   -------------   --------

Inventory reserves:

   Year Ended December 31, 2001:       $     212   $     75   $        (146)  $    141
                                       ---------   --------   -------------   --------
   Year Ended December 31, 2000:       $     320   $    (89)  $         (19)  $    212
                                       ---------   --------   -------------   --------
   Year Ended December 31, 1999:       $     113   $    276   $         (69)  $    320
                                       ---------   --------   -------------   --------
</TABLE>


(1)  Represents amounts written off or returned against the allowance or
reserves.