<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
 
                               ----------------
 
                                  FORM 10-K/A
 
      [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
         SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR
         ENDED DECEMBER 31, 1998 OR
 
      [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
         THE SECURITIES EXCHANGE ACT OF 1934. FOR THE
         TRANSITION PERIOD FROM            TO           .
 
                        COMMISSION FILE NUMBER: 0-22419
 
                               ----------------
 
                                 CARDIMA, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                       94-3177883
       (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
</TABLE>
 
<TABLE>
<S>                                            <C>
      47266 BENICIA STREET, FREMONT, CA                          94538-7330
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)
</TABLE>
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 354-0300
 
                               ----------------
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
 
         SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
                         Common Stock, $.001 par value
 
                               ----------------
 
  Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) had been subject to
such filing requirements for the past 90 days. [X] Yes  [_] No
 
  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 $36,830,437 based on the last reported sales price of the
Common Stock on the Nasdaq National Market on March 10, 1999.
 
  As of March 10, 1999, there were 16,238,021 shares of Registrant's Common
Stock outstanding.
 
                               ----------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for the Annual Meeting of Stockholders to be
held June 23, 1999.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                               EXPLANATORY NOTE
                               ----------------

Cardima is filing this amendment to Form 10-K for one typographical error on
page F-8, footnote number 1, sub section "Net Loss Per Share" and one addition
to page 38, Item 14, Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. The net loss for 1998 and 1997 were stated incorrectly as $6,186,000
and $2,272,000, respectively. The correct net loss for 1998 and 1997 is
$16,186,000 and $12,272,000, respectively.


<PAGE>
 
 Year 2000 Disclosure Chart
 
                               Resolution Phases
 
<TABLE>
<CAPTION>
                                Assessment        Remediation      Testing     Implementation
---------------------------------------------------------------------------------------------
  <S>                     <C>                    <C>            <C>            <C>
  Information Technology  100% Complete          100% Complete  100% Complete  100% Complete
---------------------------------------------------------------------------------------------
  Operating Equipment     100% Complete          100% Complete  100% Complete  100% Complete
  with Embedded
  Chips or Software
---------------------------------------------------------------------------------------------
  Products                Not Applicable         Not Applicable Not Applicable Not Applicable
---------------------------------------------------------------------------------------------
  3rd Party               100% Complete for      100% Complete  100% Complete  100% Complete
                          system                  for system    for system     for system
                          interface; 60%         interface      interface      interface
                          Complete for
                          all other material
                          exposures.
                          Expected completion
                          date
                          for surveying all
                          third
                          parties, April 1999
</TABLE>
 
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  Not Applicable
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The Company's financial statements and the report of independent auditors
appear on pages F-1 through F-17 of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                      34
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) 1. FINANCIAL STATEMENTS
 
    The Company's financial statements are indexed on page F-1.
 
  (a) 2. FINANCIAL STATEMENT SCHEDULES
 
    All applicable information is readily determinable from the notes to the
  Company's financial statements or the schedule is not applicable,
  therefore, the schedules have been omitted.
 
  (a) 3. LISTING OF EXHIBITS
 
<TABLE>
<CAPTION>
   Exhibit #                             Description
   ---------                             -----------
   <C>       <S>
    3.1(1)   Certificate of Incorporation, as amended, of the Registrant.
    3.2(1)   Bylaws of Registrant.
             Form of Amended And Restated Certificate of Incorporation of
    3.3(1)   Registrant.
    4.1(1)   Form of Common Stock Certificate.
   10.1(1)   1993 Stock Option Plan.
   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 Registrant and certain stockholders of
             Registrant.
   10.6(1)   License Agreement dated May 21, 1993, between Registrant and
             Target Therapeutics, Inc.
   10.7(1)   Lease dated April 25, 1994, between Registrant and State of
             California Public Employees' Retirement System.
   10.8(1)   Sublease dated November 14, 1996, between Registrant and Target
             Therapeutics, Inc.
   10.9(2)   Master Lease Agreement dated January 26, 1996, between Registrant
             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
             Registrant 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 Registrant
             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 Registrant and
             Comdisco, Inc., together with the Series D Preferred Stock
             Warrant.
   10.18(1)  Electrophysiology Catheter License Agreement dated May 17, 1994,
             between Registrant and BSI Corporation, together with the Credit
             Pool Agreement of same date.
   10.19(1)  Distribution Agreement dated June 15, 1995, between Registrant and
             Paramedic Co., Ltd.
   10.20(1)  Distribution Agreement dated July 14, 1995, between Registrant and
             Werfen Distribution AG, together with the May 15, 1996 letter
             amendment.
   10.21(1)  Employment Agreement dated May 21, 1993, between Registrant and
             Gabriel B. Vegh.
   10.22(1)  Employment Letter Agreement dated October 31, 1994, between
             Registrant and Phillip C. Radlick, Ph.D.
   10.23(1)  Warrant Agreement dated April 7, 1997, between Registrant and
             Comdisco, Inc.
</TABLE>
 
                                       37
<PAGE>
 
<TABLE>
   <C>      <S>
   10.24(1) Distribution Agreement dated April 1, 1997, between Registrant and
            Cardiologic, GmbH.
   10.25(3) Master Loan and Security Agreement dated June, 1998 between
            Registrant and Transamerica Business Credit Corp.
   23.1     Consent of Ernst & Young LLP, Independent Auditors.
   24.1     Power of Attorney.
   27.1     Financial Data Schedule.
</TABLE>
--------
(1) Incorporated by reference to the same exhibits filed with the Registrant's
    Registration Statement on Form S-1 (File No. 33-23209) 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 this Annual Report on Form
    10-K.
(3) Incorporated by reference to the same exhibit filed with the Registrant's
    Statement on Form 10-Q (File No. 000-22419) dated June 30, 1999.
 
  (b) Reports on Form 8-K:
 
    On Demcember 24, 1998, the Company filed a report on Form 8-K with an
  attached communication to its stockholders.
 
                                      38
<PAGE>
 
                                   SIGNATURES
 
                                FOR FORM 10-K/A
 
  Pursuant to the requirements of the Securities Exchange Act of 2334, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
Date: March 23, 1999                      Cardima, Inc.
 
                                          /s/ Phillip C. Radlick, Ph.D.
                                          _____________________________________
                                          PHILLIP C. RADLICK, Ph.D.
                                          President, Chief Executive Officer
                                           and Director
 
  Pursuant to the requirements of the Securities Exchange Act of 2334, 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/ Phillip C. Radlick,    President, Chief Executive      March 23, 1999
           Ph.D.             Officer and Director         ---------------------
---------------------------  (Principal Executive
 Phillip C. Radlick, Ph.D.   Officer)
 
  /s/ Ronald E. Bourquin     Vice President and Chief        March 23, 1999
---------------------------  Financial Officer            ---------------------
    Ronald E. Bourquin       (Principal Financial and
                             Accounting Officer)
 
 /s/ Michael J.F. Du Cros    Director                        March 23, 1999
---------------------------                               ---------------------
   Michael J.F. Du Cros
 
 /s/ Neville J. Jeharajah    Director                        March 23, 1999
---------------------------                               ---------------------
   Neville J. Jeharajah
 
    /s/ Gabriel B. Vegh      Executive Vice President,       March 23, 1999
---------------------------  Chief Operating Officer      ---------------------
      Gabriel B. Vegh        and Director
 
 /s/ Charles P. Waite, Jr.   Director                        March 23, 1999
---------------------------                               ---------------------
   Charles P. Waite, Jr.
 
                                       39
<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, 1998 and 1997.............................  F-3
Statements of Operations for the years ended December 31, 1998, 1997, and
 1996....................................................................  F-4
Statements of Changes in Redeemable Convertible Preferred Stock and
 Stockholders' Equity (Net Capital Deficiency) for the years ended
 December 31, 1998, 1997, and 1996.......................................  F-5
Statements of Cash Flows for the years ended December 31, 1998, 1997, and
 1996....................................................................  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, 1998 and 1997, and the related statements of operations, changes
in redeemable convertible preferred stock and stockholders' equity (net
capital deficiency), and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
 
                                          /s/ ERNST & YOUNG LLP
 
Palo Alto, California
February 3, 1999
 
                                      F-2
<PAGE>
 
                                 CARDIMA, INC.
 
                                 BALANCE SHEETS
                    (In thousands except per share amounts)
 
<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents................................ $    645  $  8,578
  Short-term investments...................................       --     4,270
  Accounts receivable, net of allowances for doubtful
   accounts of $41 and $40 at December 31, 1998 and 1997,
   respectively............................................      512       268
  Inventories..............................................    1,977       532
  Other current assets.....................................      366       261
                                                            --------  --------
    Total current assets...................................    3,500    13,909
Property and equipment, net................................    2,998     2,488
Restricted cash............................................      105       192
Other assets...............................................      680     1,085
                                                            --------  --------
                                                             $ 7,283  $ 17,674
                                                            ========  ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
 DEFICIENCY)
Current liabilities:
  Accounts payable......................................... $  2,286  $    898
  Accrued compensation.....................................    1,032       753
  Other current liabilities................................       76        55
  Notes payable............................................       --         7
  Capital lease obligation--current portion................      903       587
  Line of credit obligation--current portion...............      817        --
                                                            --------  --------
    Total current Liabilities..............................    5,114     2,300
  Deferred rent............................................       42        90
  Capital lease obligation--noncurrent portion.............    1,120       840
  Line of credit obligation--noncurrent portion............    2,183        --
Commitments
Stockholders' equity (net capital deficiency):
  Common stock, $0.001 par value; 25,000,000 shares
   authorized, 8,352,296 shares issued and outstanding at
   December 31, 1998, 8,103,875 as of December 31, 1997; at
   amount paid in..........................................   45,910    45,597
  Deferred compensation....................................     (478)     (731)
  Accumulated deficit......................................  (46,608)  (30,422)
                                                            --------  --------
    Total stockholders' equity (net capital deficiency)....   (1,176)   14,444
                                                            --------  --------
                                                            $  7,283  $ 17,674
                                                            ========  ========
</TABLE>
 
 
                 See accompanying notes to financial statements
 
                                      F-3
<PAGE>
 
                                 CARDIMA, INC.
 
                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 ----------------------------
                                                   1998      1997      1996
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Net sales....................................... $  2,499  $  1,261  $    593
Cost of goods sold..............................    2,962     2,011     1,413
                                                 --------  --------  --------
  Gross profit (loss)...........................     (463)     (750)     (820)
Operating expenses:
  Research and development......................    7,230     5,320     3,319
  Selling, general and administrative...........    8,556     6,656     3,690
                                                 --------  --------  --------
    Total operating expenses....................   15,786    11,976     7,009
                                                 --------  --------  --------
Operating loss..................................  (16,249)  (12,726)   (7,829)
Interest and other income.......................      359       602       132
Interest expense................................     (296)     (148)      (57)
                                                 --------  --------  --------
Net loss........................................ $(16,186) $(12,272) $ (7,754)
                                                 ========  ========  ========
Basic and diluted net loss per share............ $  (1.96) $  (2.64) $(107.69)
                                                 ========  ========  ========
Shares used in computing basic and diluted net
 loss per share.................................    8,239     4,642        72
                                                 ========  ========  ========
</TABLE>
 
 
 
                 See accompanying notes to financial statements
 
                                      F-4
<PAGE>
 
                                 CARDIMA, INC.
      Statements of Changes in Redeemable Convertible Preferred Stock and
                 Stockholders' Equity (Net Capital Deficiency)
              (In thousands, except share and per share amounts)
 
<TABLE>
<CAPTION>
                                                           Stockholders' Equity (Net Capital Deficiency)
                                            ----------------------------------------------------------------------------
                     Series D    Series E                                                                      Total
                    Redeemable  Redeemable   Series A    Series B    Series C                              Stockholders'
                    Convertible Convertible Convertible Convertible Convertible         Deferred Accumu-      Equity
                     Preferred   Preferred   Preferred   Preferred   Preferred  Common  Compen-   lated    (Net Capital
                       Stock       Stock       Stock       Stock       Stock     Stock   sation  Deficit    Deficiency)
                    ----------- ----------- ----------- ----------- ----------- ------- -------- --------  -------------
<S>                 <C>         <C>         <C>         <C>         <C>         <C>     <C>      <C>       <C>
Balances at
December 31,
1995..............    $ 6,182    $     --     $ 2,949      $ --       $ 4,764   $     8  $  --   $(10,396)   $ (2,675)
Issuance of
703,128 shares of
Series D
redeemable
convertible
preferred stock to
investors for cash
and cancellation
of notes payable
at $5.11 per
share, net of
issuance costs of
$35...............      3,558          --          --        --            --        --     --         --          --
Issuance of 2,206
shares of common
stock for cash
upon exercise of
employee stock
options at $0.56-
$2.10 per share...         --          --          --        --            --         7     --         --           7
Deferred
compensation
related to grant
of certain stock
options...........         --          --          --        --            --       580    580         --          --
Amortization of
deferred
compensation......         --          --          --        --            --        --     54         --          54
Net Loss..........         --          --          --        --            --        --     --     (7,754)     (7,754)
                      -------    --------     -------      ----       -------   -------  -----   --------    --------
Balances at
December 31,
1996..............      9,740          --       2,949        --         4,764       595   (526)   (18,150)    (10,368)
Issuance of
2,356,741 shares
of Series E
redeemable
convertible
preferred stock to
investors for cash
and conversion of
bridge loans at
$5.74 per share,
net of issuance
costs of $90......         --      13,442          --        --            --        --     --         --          --
Issuance of
2,275,000 shares
of common stock at
$7.00 per share
through the
initial public
offering, net of
commissions and
issuance costs of
$2,286............         --          --          --        --            --    13,639     --         --      13,639
Conversion of
redeemable
convertible and
convertible
preferred stock in
connection with
the Company's
initial public
offering..........     (9,740)    (13,442)     (2,949)       --        (4,764)   30,895     --         --      23,182
Issuance of 27,338
shares of common
stock for cash
upon exercise of
employee stock
options at $0.56-
$1.75 per share...         --          --          --        --            --        36     --         --          36
Deferred
compensation
related to grant
of stock options..         --          --          --        --            --       432   (432)        --          --
Amortization of
deferred
compensation......         --          --          --        --            --        --    227         --         227
Net Loss..........         --          --          --        --            --        --     --    (12,272)    (12,272)
                      -------    --------     -------      ----       -------   -------  -----   --------    --------
Balances at
December 31,
1997..............         --          --          --        --            --    45,597   (731)   (30,422)     14,444
Issuance of 78,409
shares of common
stock for net
issuance exercise
of warrants at
$1.05 per share...         --          --          --        --            --        --     --         --          --
Issuance of 37,301
shares of common
stock for exercise
of warrants at
$1.05 per share...         --          --          --        --            --        39     --         --          39
Issuance of 94,289
shares of common
stock for cash
upon exercise of
employee stock
options at $0.56-
$1.75 per share...         --          --          --        --            --       121     --         --         121
Issuance of 38,423
shares of common
stock for cash in
employee stock
purchase plan at
$4.25 and $3.56
per share.........         --          --          --        --            --       153     --         --         153
Amortization of
deferred
compensation......         --          --          --        --            --        --    253         --         253
Net Loss..........         --          --          --        --            --        --     --    (16,186)    (16,186)
                      -------    --------     -------      ----       -------   -------  -----   --------    --------
Balances at
December 31,
1998..............    $    --    $     --     $    --      $ --       $    --   $45,910  $(478)  $(46,608)   $ (1,176)
                      =======    ========     =======      ====       =======   =======  =====   ========    ========
</TABLE>
 
                See accompanying notes to financial statements
 
                                      F-5
<PAGE>
 
                                 CARDIMA, INC.
 
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ---------------------------
                                                     1998      1997     1996
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(16,186) $(12,272) $(7,754)
Adjustments to reconcile net loss to net cash
 provided by operations:
  Depreciation and amortization...................      928       703      403
  Amortization of deferred compensation...........      253       227       54
  Loss on disposal of assets......................        6        --       15
  Loss on sale/leaseback of capital equipment.....       --        --       95
  Changes in operating assets and liabilities:
    Accounts receivable...........................     (244)     (200)     (18)
    Inventories...................................   (1,445)     (155)    (109)
    Other current assets..........................     (105)      (32)    (111)
    Restricted cash...............................       87        83       70
    Notes receivable..............................      (19)     (301)      --
    Other assets..................................     (905)     (446)    (526)
    Accounts payable..............................    1,388      (257)     896
    Accrued employee compensation.................      279       240      314
    Other current liabilities.....................       21         3        1
    Deferred rent.................................      (48)      (49)      10
                                                   --------  --------  -------
      Net cash used in operating activities.......  (15,990)  (12,456)  (6,660)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...............     (517)   (4,270)      --
Maturities and sales of short-term investments....    4,786        --       --
Capital expenditures..............................      (45)     (883)    (388)
Proceeds from disposal of assets..................       25         3       --
                                                   --------  --------  -------
    Net cash (used)provided in investing
     activities...................................    4,249    (5,150)    (388)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock.....       --    10,158    2,984
Proceeds from issuance of bridge loans............       --     1,610    1,674
Principal payments under capital leases...........     (745)     (469)    (286)
Payments under notes payable......................       (7)       --       --
Proceeds under line of credit.....................    3,000        --       --
Net proceeds from sale of common stock............      313    13,675        7
Proceeds from sale/leaseback of capital
 equipment........................................    1,247       303      583
                                                   --------  --------  -------
    Net cash provided by financing activities.....    3,808    25,277    4,962
                                                   --------  --------  -------
NET INCREASE(DECREASE) IN CASH AND CASH
 EQUIVALENTS......................................   (7,933)    7,671   (2,086)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......    8,578       907    2,993
                                                   --------  --------  -------
CASH AND CASH EQUIVALENTS, END OF YEAR............ $    645  $  8,578  $   907
                                                   ========  ========  =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest............ $    298  $    122  $    49
                                                   ========  ========  =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES
Equipment acquired under capital leases........... $  1,341  $    845  $   746
                                                   ========  ========  =======
Conversion of various related party payables,
 bridge loans and capital lease obligations and
 related accrued interest to convertible preferred
 stock............................................       --        --  $   574
                                                   ========  ========  =======
</TABLE>
 
                 See accompanying notes to financial statements
 
                                      F-6
<PAGE>
 
                                 CARDIMA, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. Nature of Business and Summary of Significant Accounting Policies
 
 Nature of Business
 
  Cardima, Inc., (the "Company" or "Cardima"), was incorporated in the State
of Delaware on November 12, 1992. The Company designs, develops, manufactures
and markets minimally invasive, single use, microcatheter-based 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 a major
stockholder, Target.
 
  The Company has incurred continuing operating losses and expects such losses
to continue over the next several years. Management plans to continue to
finance the operations with a combination of stock sales, product revenue and
other financing facilities. In January and February 1999, the Company sold a
total of 7,500,000 shares of common stock at $2.00 per share in a private
placement transaction to accredited investors. As commission, the Company
issued 354,806 shares of its common stock to the placement agent and paid
$490,388. In addition the Company issued 750,000 warrants, exercisable for
750,000 shares of common stock at an exercise price of $2.20 as a commission
for the transaction. The Company's net proceeds, after expenses of the
placement were $14.4 million.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles 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. To date, product sales
have been direct to customers in the United States and to distributors
primarily in Europe, Japan and South America. No one distributor or direct
customer accounted for more than 10% of the Company's net sales and export
sales represented 31% of net sales for the year ended December 31, 1998. Of
the export sales in 1998, 23% were to Japan, 71% were to Europe and 6% were to
the rest of the world. Essentially all of the Company's sales from inception
to December 31, 1996 were export sales. Provisions for doubtful accounts were
$29,000 and $119,000 for the years end December 31, 1998 and 1997,
respectively. When necessary, estimated provisions for product returns are
recorded.
 
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                          (In thousands)
                                                  ------------------------------
                                                     1998       1997      1996
                                                  ---------- ---------- --------
   <S>                                            <C>    <C> <C>    <C> <C>  <C>
   United States................................. $1,722 69% $  902 71% $  2  0%
   Europe........................................    554 22%    224 18%  401 68%
   Japan.........................................    177  7%    123 10%  190 32%
   Rest of World.................................     46  2%     12  1%    0  0%
                                                  ------     ------     ----
     TOTAL NET SALES............................. $2,499     $1,261     $593
                                                  ======     ======     ====
</TABLE>
 
 Research and Development
 
  Research and development costs, which include clinical and regulatory costs,
are charged to expense as incurred.
 
 
                                      F-7
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 Net Loss Per Share
 
  In 1997, the Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share." SFAS 128 requires the presentation of basic
earnings (loss) per share and diluted earnings per shares, if more dilutive,
for all periods presented.
 
  In accordance with SFAS128, basic 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 convertible debt, convertible preferred
stock, 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.
 
  The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                     --------------------------
                                                      1998     1997      1996
                                                     -------  -------  --------
   <S>                                               <C>      <C>      <C>
   Net loss........................................  $16,186  $12,272  $  7,754
                                                     =======  =======  ========
     Weighted average shares of common stock
      outstanding..................................    8,239    4,642        72
     Weighted average unvested common shares issued
      subject to repurchase agreements.............       --       --        --
                                                     -------  -------  --------
   Shares used to compute basic and diluted net
    loss per share.................................    8,239    4,642        72
                                                     =======  =======  ========
   Basic and diluted net loss per share............  $ (1.96) $ (2.64) $(107.69)
                                                     =======  =======  ========
</TABLE>
 
  Pro forma net loss per share for 1997 has been computed as described above
and also gives effect, pursuant to SEC staff policy, to the conversion of
convertible preferred shares not included above that were converted upon
completion of the Company's initial public offering (using the "if converted"
method) from the original date of issuance.
 
  Pro forma basic and diluted net loss per share information is as follows
  (in thousands except per share data):
 
<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                   December 31,
                                                                   ------------
                                                                       1997
                                                                       ----
   <S>                                                             <C>
   Shares used in computing basic and diluted net loss per
    share........................................................      4,642
                                                                      ------
   Adjusted to reflect assumed conversion of preferred stock from
    the date of issuance through the initial public offering in
    June 1997....................................................      1,454
                                                                      ------
   Shares used in computing pro forma basic and diluted loss per
    share........................................................      6,096
                                                                      ------
   Pro forma basic and diluted net loss per share................     $(2.01)
                                                                      ======
</TABLE>
 
 Cash, Cash Equivalents and Short-Term Investments
 
  The Company considers investments in highly liquid instruments purchased
with an original maturity of three months or less to be cash equivalents. All
of the Company's cash equivalents and short-term investments, consisting
principally of commercial paper and government securities, are classified as
available-for-sale as of December 31, 1997. There were no equity or debt
securities outstanding at December 31, 1998. There were no realized gains or
losses experienced in each of the years ended December 31, 1998, 1997 and
1996. The fair value of investments is based on quoted market prices at
December 31, 1997. The fair value of these securities
 
                                      F-8
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
approximated the amortized cost at December 31, 1997. Cash, cash equivalents
and short-term investments at December 31, 1997 consist of the following (in
thousands):
 
<TABLE>
   <S>                                                                   <C>
   Cash and cash equivalents:
     Cash............................................................... $  310
     Money market funds.................................................  3,044
                                                                         ------
                                                                          3,354
     Available for sale securities commercial paper.....................  5,224
                                                                         ------
       Total cash and cash equivalents.................................. $8,578
                                                                         ======
   Short-term investments:
   Commercial paper..................................................... $2,233
   Corporate notes......................................................  1,278
                                                                         ------
     Available for sale securities......................................  3,511
   Certificate of deposit...............................................    759
                                                                         ------
     Total short-term investments....................................... $4,270
                                                                         ======
   Restricted investments:
     Restricted certificate of deposit.................................. $  192
                                                                         ======
</TABLE>
 
  The restricted certificate of deposit is being held as collateral by a
financial institution against a letter of credit for the Company's primary
facilities in Fremont, California.
 
 Inventory
 
  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):
 
<TABLE>
<CAPTION>
                                                                      December
                                                                         31,
                                                                     -----------
                                                                      1998  1997
                                                                     ------ ----
   <S>                                                               <C>    <C>
   Inventories:
     Raw materials.................................................. $  502 $209
     Work-in-process................................................    217  119
     Finished goods.................................................  1,258  204
                                                                     ------ ----
                                                                     $1,977 $532
                                                                     ====== ====
</TABLE>
 
 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.
 
 
                                      F-9
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
  Property and equipment consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                1998     1997
                                                               -------  -------
   <S>                                                         <C>      <C>
   Property and equipment:
     Equipment................................................ $ 5,054  $ 3,715
     Leasehold improvements...................................     107       99
                                                               -------  -------
                                                               $ 5,161  $ 3,814
     Less accumulated depreciation............................  (2,163)  (1,326)
                                                               -------  -------
                                                               $ 2,998  $ 2,488
                                                               =======  =======
</TABLE>
 
  Property and equipment financed under a capital leases were $3,660,000 and
$2,357,000 at December 31, 1998 and 1997, respectively. Accumulated
amortization related to leased assets was $1,764,000 and $1,072,000 at
December 31, 1998 and 1997, respectively. Amortization related to capital
leases are included in depreciation expense.
 
 Long-Lived Assets
 
  The Company examines the carrying value of its long-lived assets to
determine whether there are any impairment losses. If indicators of impairment
are present in long-lived assets used in operations and future cash flows were
not sufficient to recover the assets' carrying amount, an impairment loss
would be charged to expenses in the period identified. No event has been
identified that would impair the value of long-lived assets recorded in the
accompanying financial statements.
 
 Concentrations of Risk
 
  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.
 
 Patents
 
  Patent costs deemed to have future benefits are capitalized and amortized
using the straight-line method over estimated useful lives of seven years,
beginning at their effective dates or over the remainder of such periods from
the dates acquired.
 
  The Company examines the carrying value of its patents to determine whether
there are any impairment losses. If indicators of impairment are present in
these assets used in operations, and future cash flows were not sufficient to
recover the assets' carrying amount, an impairment loss would be charged to
expenses in the period identified. No event has been identified that would
impair the value of patents recorded in the accompanying financial statements.
 
 Recent Accounting Pronouncements
 
  The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information ("SFAS
131"), at December 31, 1998. SFAS 131 establishes annual
 
                                     F-10
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
and interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas and major
customers. Under SFAS 131, the Company's operations are treated as one
operating segment as it only reports profit and loss information on an
aggregate basis to chief operating decision makers of the Company.
 
  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Financial Instruments and for Hedging Activities, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS No. 133 is effective for years
beginning after June 15, 1999 and is not anticipated to have a significant
impact on the Company's results of operations or financial condition when
adopted.
 
2. Leases
 
  The Company leases facilities under an operating lease which commenced in
August 1994 and expires November 1999. 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 at December 31, 1998 (in thousands):
 
<TABLE>
<CAPTION>
                                                              Operating Capital
                                                                Lease   Leases
                                                              --------- -------
   <S>                                                        <C>       <C>
   Year ending December 31;
     1999....................................................   $394    $1,075
     2000....................................................     --       662
     2001....................................................     --       405
     2002....................................................     --       196
                                                                ----    ------
   Total minimum payments required...........................   $394    $2,338
                                                                ====
   Less amount representing interest.........................             (315)
                                                                        ------
   Present value of future lease payments....................            2,023
   Less current portion......................................             (903)
                                                                        ------
   Noncurrent portion........................................           $1,120
                                                                        ======
</TABLE>
 
  Rent expense, net of rental income, was approximately $363,000 in 1998,
$316,000 in 1997 and $295,000 in 1996. In connection with its facilities lease
arrangements, the Company issued letters of credit to lessors which are
collateralized by certificates of deposit totaling approximately $105,000 at
December 31, 1998. Accordingly, this restricted cash amount has been
classified as a noncurrent asset.
 
3. Stockholders' Equity
 
 Initial Public Offering
 
  In June of 1997, upon completion of the Company's initial public offering,
Series A, B, C, D and E preferred stock converted into 5,726,538 shares of
common stock.
 
  In March and June 1997, the Company amended and restated its certificate of
incorporation to increase the total number of shares authorized to 30,000,000.
Of the shares authorized, 25,000,000 are designated for issuance of common
stock and 5,000,000 are designated for issuance of preferred stock.
 
 
                                     F-11
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 Common Stock
 
  In June 1997, the Company completed its initial public offering and issued
2,275,000 shares of its Common Stock at a price of $7.00 per share. The
Company received approximately $13.6 million in cash, net of underwriting
discounts, commission and other offering costs.
 
 1993 Stock Option Plan
 
  During 1993, the board of directors adopted the 1993 Stock Option Plan (the
"Plan") and, as amended, has reserved 1,300,000 shares of common stock for
issuance under the Plan. The Plan provides for both incentive and nonstatutory
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 nonstatutory 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 are
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 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 48 months. No option shall have a
maximum term in excess of ten years from the 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 1993 Stock Option Plan is as follows:
 
<TABLE>
<CAPTION>
                                                Outstanding Options
                                       --------------------------------------
                                                                 Weighted-
                             Shares    Number of     Price        Average
                            Available   Shares     Per Share   Exercise Price
                            ---------  ---------  ------------ --------------
   <S>                      <C>        <C>        <C>          <C>
   Balance at December 31,
    1995...................  111,220     148,255  $0.56--$2.10    $0.9705
   Additional shares
    reserved...............  640,079          --            --         --
   Options granted......... (733,778)    733,778  $0.56--$1.75    $1.2485
   Options exercised.......       --      (4,708) $0.56--$2.10    $1.2534
   Options forfeited.......   66,635     (66,635) $0.56--$2.10    $1.2534
                            --------   ---------
   Balance at December 31,
    1996...................   84,156     810,690  $0.56--$2.10    $1.2534
   Additional shares
    reserved...............  396,825          --            --         --
   Options granted......... (438,162)    438,162  $1.75--$7.00    $4.2533
   Options exercised.......       --     (27,338) $0.56--$7.00    $2.3861
   Options forfeited.......   80,899     (80,899) $0.56--$5.88    $2.3681
                            --------   ---------
   Balance at December 31,
    1997...................  123,718   1,140,615  $0.56--$5.88    $2.3681
   Additional shares
    reserved...............  243,117          --            --         --
   Options granted......... (290,508)    290,508  $2.88--$5.56    $4.3818
   Options exercised.......       --     (94,289) $0.56--$1.75    $1.2841
   Options forfeited.......   59,742     (59,742) $0.56--$7.00    $3.5926
                            --------   ---------
   Balance at December 31,
    1998...................  136,069   1,277,092  $0.56--$7.00    $2.8650
                            ========   =========
</TABLE>
 
  From April 1996 to April 1997, options to purchase a total of 835,928 shares
were granted at prices ranging from $0.56 to $5.74 per share. Deferred
compensation of approximately $1,012,000 was recorded for these option grants
based on the deemed fair value of common stock (ranging from $1.00 to $8.00
per share).
 
                                     F-12
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
  At December 31, 1998, 1997 and 1996 approximately 881,606, 827,920 and
810,685 options, respectively, were exercisable under the Plan. Of the options
granted in 1998, 60,275 were granted above fair value and 230,233 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. At December 31, 1998 no
options had been granted under this plan.
 
 1997 Employee Stock Purchase Plan
 
  In March 1997, the board of directors adopted the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). A total of 250,000 shares of common stock
has been reserved for issuance under the Purchase Plan. As of December 31,
1998, 38,423 shares had been issued under this purchase plan.
 
 Warrants
 
  At December 31, 1998, the Company had the following warrants outstanding:
warrants to purchase 308,512 shares of common stock at $1.05 per share issued
to certain investors in connection with bridge loans; warrants to purchase
1,428 shares of common stock at $7.00 per share issued in connection with the
facility lease; warrants to purchase 1,905 shares of common stock at $7.00 per
share and 2,142 shares of common stock at $5.11 per share issued in connection
with a letter of credit; warrants to purchase 23,776 shares of common stock at
$5.11 per share and 13,937 shares of common stock at $5.74 per share issued in
connection with a capital lease; warrants to purchase 17,543 shares of common
stock at $7.00 per share issued to certain investors in connection with bridge
financings and warrants to purchase 75,000 shares of common stock at $4.00 per
share issued in connection with a line of credit. 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 December 1994, the Company also issued warrants to Target to purchase
24,610 shares of the Company's Series C preferred stock at $10.50 per share in
connection with a guarantee of a letter of credit. These warrants were
exercised in March 1995 for cash. Also in connection with a capital lease line
agreement, the Company issued to Target in December 1993 a warrant for $766 to
purchase 10,427 shares of the Company's common stock at $7.00 per share. This
warrant expired on December 9, 1998.
 
  The Company has reserved 444,243 shares of common stock for issuance upon
exercise of the warrants described above.
 
 Accounting for Stock-Based Compensation
 
  The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair-value accounting provided for under FASB
Statement No. 123, ("Statement 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 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.
 
                                     F-13
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
 
  Pro forma information regarding net loss and loss per share is required by
Statement 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 minimum
value method for 1996 and the Black Scholes option pricing model for 1997 and
1998 with the following weighted-average assumptions for 1998, 1997 and 1996,
respectively; risk-free interest rates of approximately 6.0%, 6.0% and 7.0%;
dividend yields of 0.0%, volatility factors of the expected market price of
the Company's common stock of 0.6, 0.6 and 0.0 (as the Company was not public
in 1996); 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.
 
  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 follows:
 
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1998      1997      1996
                                                  --------  --------  --------
                                                  (In thousands, except per
                                                         share data)
   <S>                                            <C>       <C>       <C>
   Net loss--as reported......................... $(16,186) $(12,272) $ (7,754)
                                                  ========  ========  ========
   Net loss--pro forma........................... $(16,439) $(12,526) $ (7,776)
                                                  ========  ========  ========
   Net loss per share--as reported............... $  (1.96) $  (2.64) $(107.69)
                                                  ========  ========  ========
   Net loss per share--pro forma................. $  (2.00) $  (2.70) $(108.00)
                                                  ========  ========  ========
</TABLE>
 
  The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                         Options Outstanding            Options Exercisable
                -------------------------------------- ---------------------
                                             Weighted-             Weighted-
   Range of      Number of  Weighted-Average  Average   Number of   Average
   Exercise       shares       Remaining     Exercise    shares    Exercise
    Prices      Outstanding Contractual Life   Price   Exercisable   Price
   --------     ----------- ---------------- --------- ----------- ---------
<S>             <C>         <C>              <C>       <C>         <C>
$0.56 -- $1.05     205,787        6.49        $0.7885    205,787    $0.7885
 1.40 --  1.40     396,760        7.41         1.4000    396,760     1.4000
 1.75 --  3.75     222,116        9.10         2.6434    115,816     2.2161
 4.63 --  4.63       9,870        9.12         4.6300      6,215     4.6300
 5.00 --  5.00     255,000        8.59         5.0000    112,919     5.0000
 5.25 --  7.00     187,559        9.21         5.5095     44,109     5.5271
                 ---------                               -------
$0.56 -- $7.00   1,277,092        8.07        $2.8650    881,606    $2.0548
                 =========                               =======
</TABLE>
 
4. Notes Receivable
 
  In December 1997, the Company entered into a $300,000 note receivable
agreement with Phillip C. Radlick, Ph.D., its 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. As security for the note,
 
                                     F-14
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
Dr. Radlick granted Cardima a security interest in his vested stock options.
At December 31, 1998, approximately $20,000 of interest has accrued. The note
receivable and accrued interest are included in the accompany balance sheet.
 
5. Income Taxes
 
  As of December 31, 1998 and December 31, 1997, the Company had federal net
operating loss carryforwards of approximately $44,400,000 and $29,500,000,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $500,000 and $200,000 as of December 31, 1998
and 1997. The net operating loss and credit carryforwards will expire
beginning in 2008 through 2018, 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 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>
                                                               1998      1997
                                                             --------  --------
   <S>                                                       <C>       <C>
   Net operating loss carryforwards......................... $ 16,100  $ 10,800
   Research credits carryforwards (federal and state).......      800       500
   Manufacturing investment credit carryforwards............      100        --
   Capitalized research and development.....................      500       300
   Other, net...............................................      600       300
                                                             --------  --------
   Total deferred tax assets................................   18,100    11,900
   Valuation allowance for deferred tax assets..............  (18,100)  (11,900)
                                                             --------  --------
                                                             $     --  $     --
                                                             ========  ========
</TABLE>
 
  The net valuation allowance increased by $4,400,000 and $3,050,000 during
the year ended December 31, 1997 and 1996, respectively.
 
6. Related Party Transactions
 
 License Rights
 
  In May 1993, in exchange for an equity interest in the Company, Target
granted the Company an exclusive royalty-free worldwide license to use
Target'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 technology developed through May 1996 and
will expire upon the expiration of the last of the patents relating to the
Target technology. Under the License Agreement, Cardima granted back to Target
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 the Target technology. Target granted the Company a
nonexclusive, royalty-free license to use Target technology to make, use and
sell or otherwise distribute the Company's products for use 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 technology in a particular product that
results in a material change in the function, purpose or application
 
                                     F-15
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
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 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'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 and negotiating a distribution
agreement. Cardima also agreed that it would not sell products utilizing
Target'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 and offering Target the right of first refusal with respect to the
terms of the distribution, or if selling directly to the consumer, paying to
Target an amount equal to 40% of the gross profit for such product.
 
 Stock Transactions
 
  In February 1996, the Company issued 112,374 shares of common stock to
Target at $5.11 per share in exchange for the conversion of outstanding
capital lease obligations.
 
 Operations and Facilities
 
  In May 1993, in the Company entered into an agreement with Target whereby
Target agreed to supply and manufacture such products and components necessary
to proceed with research and development activity pursuant to the license
mentioned above. This Agreement expired in May 1996.
 
  The Company paid $1,000 per month for each employee using Target's
facilities, as well as other miscellaneous administrative expenses incurred by
Target on the Company's behalf.
 
  As of December 31, 1998, nothing has been paid and nothing is owed to Target
under these arrangements (approximately $28,000 and $234,000 was paid and
nothing owed and $38,000 owed at December 31, 1997 and 1996, respectively.
 
  Target had sublet certain facilities from the Company which can be renewed
annually. Net monthly rental income was approximately $4,500. In November
1997, this sublease arrangement was terminated. In January 1998, the Company
refunded Target their $7,500 security deposit held in connection with the
sublease.
 
 Capital Lease Arrangement
 
  In connection with a lease line agreement, the Company issued to Target a
warrant to purchase 10,427 shares of the Company's common stock. In December
1995 and February 1996, the outstanding capital lease obligation, plus accrued
interest, was converted into shares of Series D convertible preferred stock,
which was converted into 254,403 shares of common stock upon completion of the
Company's initial public offering.
 
7. Subsequent Events
 
  In January 1999, the Company reduced its full-time workforce by
approximately 30% and its temporary workforce by 75% in order to align
available cash resources and projected expenses. The reductions affected all
functional areas of the Company. The restructuring cost were approximately
$300,000.
 
 
                                     F-16
<PAGE>
 
                                 CARDIMA, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 
  Additionally in January and February 1999, the Company sold a total of
7,500,000 shares of common stock at $2.00 per share in a private placement
transaction to accredited investors. As commission, the Company issued 354,806
shares of its common stock to the placement agent and paid $490,388. In
addition the Company issued 750,000 warrants, exercisable for 750,000 shares
of common stock at an exercise price of $2.20 as a commission for the
transaction. The Company's net proceeds, after expenses of the placement were
$14.4 million.
 
                                     F-17