<PAGE>

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                                 UNITED STATES
                       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, 2000 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.)

      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 $8,792,407 based on the last reported sales price of the Common
Stock on the Nasdaq National Market on March 15, 2001.

   As of March 15, 2001, there were 21,640,184 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 May 10, 2001.

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<PAGE>

                                 CARDIMA, INC.

                                   FORM 10-K

                  For the Fiscal Year Ended December 31, 2000

                                     INDEX

<TABLE>
<CAPTION>
                                                                      Page No.
                                                                      --------

 <C>      <S>                                                         <C>
          PART I....................................................      4

 ITEM 1.  BUSINESS..................................................      4

 ITEM 2.  PROPERTIES................................................     24

 ITEM 3.  LEGAL PROCEEDINGS.........................................     24

 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......     24

          PART II...................................................     25

 ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS......................................     25

 ITEM 6.  SELECTED FINANCIAL DATA...................................     26

 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS......................     28

 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
           RISK.....................................................     42

 ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............     42

 ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
           ACCOUNTING AND FINANCIAL DISCLOSURE......................     42

          PART III..................................................     43

 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........     43

 ITEM 11. EXECUTIVE COMPENSATION....................................     44

 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT...............................................     44

 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............     44

          PART IV...................................................     45

 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
           FORM 8-K.................................................     45

 SIGNATURES..........................................................    47
</TABLE>

                                       2
<PAGE>

                           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. 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 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:

  . ""will likely result,"

  . ""are expected to,"

  . ""will continue,"

  . ""is anticipated,"

  . ""estimate,"

  . ""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
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 Securities and Exchange Commission.

   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.

                                       3
<PAGE>

                                     PART I

ITEM 1. BUSINESS

Overview

   We design, develop, manufacture and market minimally invasive, single-use,
microcatheter-based systems for the mapping and ablation of the two most common
forms of cardiac arrhythmias: atrial fibrillation, or AF, and ventricular
tachycardia, or VT, since our incorporation in November 1992. Arrhythmias are
abnormal electrical heart rhythms that adversely affect the mechanical
activities of the heart and can potentially be fatal. We develop microcatheter
systems designed to provide enhanced access to arrhythmia causing tissue, to
diagnose the arrhythmia by locating its origin, or mapping, and to restore
normal heart rhythms by isolating and destroying the arrhythmia causing sites,
ablation, using radiofrequency, RF energy. Our microcatheters incorporate
multiple electrodes at the distal end of the catheter that are designed to
record electrical signals for mapping purposes and, with some products, to emit
RF energy for ablation; thereby allowing physicians to both map and ablate
using the same catheter. Our microcatheters are also designed with variable
stiffness and a highly flexible distal tip to allow enhanced access to the
vasculature of the heart. In addition, they are designed to be compatible with
existing signal display systems and RF generators, eliminating the need for
significant new investment in capital equipment. Our microcatheter technology
was originally conceived at Advanced Cardiovascular Systems, Inc., ACS, now a
division of Guidant Corporation, from 1979 to 1982. Target Therapeutics, Inc.,
Target, now a division of Boston Scientific Corporation, Boston Scientific,
purchased this technology in 1985 from ACS for use in neurological
applications. In 1993, Target granted us an exclusive, royalty-free license to
use the microcatheter technology in the treatment of electrophysiological
diseases affecting areas other than the central nervous system.

   We marketed our diagnostic microcatheter system for VT and AF, including the
Pathfinder, Tracer and Revelation microcatheters, along with the Naviport,
Vueport and Venaport lines of guiding catheters in the United States through
January 31, 2000. On January 26, 2000, we signed an exclusive three-year
distribution agreement with St. Jude Medical Corporation, St. Jude, whereby St.
Jude's Daig Division, or Daig, was entitled to distribute Cardima's diagnostic
products in the United States. The distribution agreement included an equity
investment by St. Jude. We retain the rights for all other geographic areas and
maintain worldwide control of our therapeutic products. However, if we decide
to use distributors in other territories, Daig has a right of first refusal to
those territories. As of February 1, 2001, the agreement reverted to a non-
exclusive distribution arrangement due to Daig's failure to meet the
contractual first-year minimum sales level. We currently have three direct
sales people in the United States and will continue to utilize the Daig sales
force on a non-exclusive basis. We will continue to market our diagnostic
microcatheter systems for VT and AF in Europe, Japan, Australia, Canada and
other countries throughout the world. We continue to increase patient
enrollment in our Phase III therapeutic clinical trial to treat AF with the
Revelation Tx in the United States microcatheter system. In December 2000, we
sold certain patents and related intellectual property pertaining to
intravascular sensing and signal detection to Medtronic, Inc. for a total of $8
million in cash, $4 million of which we received in December 2000. We received
back a fully paid co-exclusive license for the right to use this intellectual
property in our core business. We recently restructured, including workforce
reductions and an increase in our regulatory resources, to focus solely on the
AF trial, due to the potential to complete patient enrollment in that trial and
submit for a Pre-market Approval (PMA) in late 2001 or early 2002. With regards
to VT, the Therastream microcatheter system trial has been temporarily put on
hold so that we can concentrate our focus on the AF trial. The Revelation
family of microcatheters is approved in the European Union (EU) for treating
AF.

Discussion of the 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 called the
atria, and the two lower chambers called the ventricles. The heart consists of
two pumps working

                                       4
<PAGE>

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 through the body. The process is repeated as venous blood
returns to the right side of the heart.

   The heart, as with any other organ, requires oxygen and nutrients to
function. Because the heart has large oxygen and nutrient demands, it requires
an extensive, well developed vascular network to bring blood to and carry blood
away from its tissue. This coronary 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
originates on the epicardium, or outer surface, of the ventricles and penetrate
into the tissues of the ventricular walls. Thus, the anatomy of the ventricular
walls consists of a thick mass of contracting muscle cells with a framework of
coronary blood vessels.

   The heart's pumping action is controlled by an electrical conduction system
comprised of a specialized network of cells within the heart muscle tissue.
This conduction system allows electrical signals to propagate through the heart
in a systematic and organized way. These specialized conduction cells are
placed throughout the walls of the chambers, from just underneath the inner, or
endocardial, surface of the heart to the outer, or epicardial, surface. 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, or SA, node.

   The SA node is the heart's "natural pacemaker," regularly discharging an
electrical signal that, under normal circumstances, is responsible for setting
the heart rate, usually 60 to 100 beats per minute. The signal generated in the
SA node is propagated through the atria until it reaches the Atrio-Ventricular,
or AV, node and is delayed momentarily. This momentary delay provides enough
time for the atria to fill the ventricles with blood before they contract.

   Once the electrical signal exits the AV 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 (while the atria only pump blood to the
ventricles), 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 against a high vascular resistance. In
the normal heart, the four chambers work rhythmically with each other to ensure
that properly oxygenated blood is delivered throughout the body.

 Arrhythmias

   Arrhythmias are abnormal electrical heart rhythms that adversely affect the
mechanical activities of the heart. Arrhythmias result in insufficient blood
flow, which may cause dizziness, inadequate function of important organs in the
body, stroke or even death. Arrhythmias have numerous causes, including
congenital defects, tissue damage from heart attacks or arteriosclerosis and
other conditions that accelerate, delay or redirect the normal transmission of
electrical activity, thereby disrupting the normal coordinated contractions of
heart muscle cells. 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: supraventricular
tachycardia, or SVT, which has its origin above the ventricles (typically in
the atria) with atrial fibrillation, or AF, being the most common form of SVT,
and ventricular tachycardia, or VT, which has its origin in the wall of the
ventricles. Generally, arrhythmias degenerate and worsen over time.

 Atrial Fibrillation

   AF is characterized by the irregular and very rapid beating of the heart and
results when the normal electrical conduction system of the atria malfunctions,
leading to irregular and chaotic electrical signals. During

                                       5
<PAGE>

AF, the regular pumping action of the atria is replaced by irregular,
disorganized and quivering spasms of atrial tissue. Symptoms of AF 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 AF 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 and the formation of blood clots. Blood clots in the
left atrium can dislodge and travel through the bloodstream to the brain,
resulting in stroke and even death.

   In the United States, AF affects an estimated 2.2 million people, with
approximately 350,000 new cases being diagnosed each year. It is estimated that
about 1.5 million outpatient hospital visits per year in the United States are
associated with AF and there are more than 200,000 admissions to hospitals for
AF each year. The American Heart Association estimates that AF is responsible
for over 70,000 strokes each year in the United States. We estimate that the
cost of treating these patients is more than $3.6 billion annually. The cost of
drug treatment for AF alone is estimated to be in excess of $400 million
worldwide each year.

   AF is routinely diagnosed using an electrocardiogram, in which electrodes
are placed on the skin to record the irregular beating of the heart. However,
electrocardiograms are unable to locate the origin, or focus, of the AF.
Another 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 of the arrhythmia. Since AF
is an arrhythmia that can affect both the right and left atria at the same
time, we believe that optimal mapping of AF requires the simultaneous
evaluation of electrophysiological information from both atria. We believe
electrophysiologists do not routinely map all forms of AF because currently
available competitor's catheters are inadequate to map the right and left
atrium simultaneously.

   Current AF treatments are directed at trying to re-establish a normal
heartbeat and prevent stroke, and are primarily supportive and palliative.
Anti-arrhythmic and anticoagulant drugs, the most common treatment for AF, are
typically used to attempt to control AF by restoring the heart's natural
rhythm, limiting the pooling action of the blood therefore reducing or
eliminating the potential of the natural clotting mechanism of the blood to
take effect. However, anti-arrhythmic drug therapy often becomes less effective
over time, with approximately half of the patients eventually developing
resistance to the drugs. In addition, anti-arrhythmic drugs have potentially
severe side effects, including pulmonary fibrosis and impaired liver function.
Another palliative procedure for AF is external cardioversion, or the
application of strong electrical current under general anesthesia attempting to
re-organize the heart's electrical activity. This treatment is usually
effective for a limited period of time as well. Another alternative treatment
is the purposeful destruction of the AV node followed by implantation of a
pacemaker, which is typically considered a treatment of last resort for AF
patients, but does not cure or treat the AF itself. The patient also is
dependent on the pacemaker for life. Pacemakers are battery-powered devices and
typically require replacement approximately every seven to ten years depending
on manufacturer, type of device and amount of electrical energy delivered.
Since atrial function remains poor following the procedure, chronic
anticoagulant therapy, which increases risk of hemorraghic stroke, is generally
required.

   We believe that the only curative therapy for AF used today is an open
heart, open chest operation commonly known as the "maze" procedure whereby a
surgeon makes several slices through the wall of the atrium with a scalpel and
then sews the cuts back together creating a scar pattern. The scars isolate and
contain the chaotic electrical impulses to control and channel the electrical
signal emanating from the SA node. This open heart operation is expensive and
associated with long hospital stays and high morbidity and mortality. Although
this approach is not commonly used because it is highly invasive, containing
the chaotic impulses in the atrium through scar creation is generally
considered effective in controlling AF.

   Electrophysiologists are also experimenting with minimally invasive,
catheter-based ablation procedures that attempt to mimic the results of the
maze procedure. Although catheters offer the benefit of a minimally invasive
approach, the procedures can be difficult to perform because of the
shortcomings of a majority of existing catheter technology and some appear
unable to create lesions that effectively isolate portions of the atria where
the arrhythmia causing tissue is located.

                                       6
<PAGE>

 Ventricular Tachycardia

   VT is a life-threatening condition in which heartbeats are improperly
initiated from within the ventricular wall, rather than from the SA node, thus
bypassing the heart's normal conduction system. The typical VT patient has
experienced a myocardial infarction, or heart disease, which can result in the
formation of a scar or electrical barrier inside the ventricular wall, leading
to improper electrical conduction in the cells immediately bordering the scar.
During episodes of VT, 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 pumped throughout the body. The resulting reduction in the
amount of oxygen transported to the tissues and organs of the body can cause
dizziness and loss of consciousness. VT can often progress into ventricular
fibrillation, VF, which is an extremely irregular, chaotic and ineffective
spasming of the ventricles. VF is fatal within a few minutes of its occurrence,
unless orderly contractions of the ventricles are restored through immediate
external electrical cardioversion or defibrillation.

   It is estimated that more than 300,000 people in the United States suffer
from sudden cardiac death each year. Of these, approximately 50,000 people
survive, primarily through emergency defibrillation. These survivors are at
risk of developing VT or subsequently VF. We estimate that each year over
100,000 people in the United States, who have never suffered VF, are diagnosed
with symptomatic VT. The American Heart Association 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 VT within the following year. We believe all of these individuals are
potential candidates for a safe and cost-effective mapping and ablation
procedure.

   VT may be diagnosed using a standard electrocardiogram in a manner similar
to the diagnosis of AF. The cardiac electrophysiologist typically attempts to
map VT to locate the focus of the arrhythmia within the heart's structure.
However, locating the arrhythmia causing tissue, which can occur at any point
in the thickness of the ventricular wall, from the endocardium, or inner
surface of the heart wall, to the intramyocardium, inside of the heart wall
itself, to the epicardium, or outer surface of the heart wall, can be
difficult.

   Similar to AF, current treatments for VT are primarily supportive and
palliative. Anti-arrhythmic drugs are the most common treatment, although these
drugs have been shown to have a number of unwanted side effects, and in some
circumstances may actually induce VT. The Multi-center Automatic Defibrillator
Implantation Trial, MADIT, demonstrated that the implantable cardiac
defibrillator, or ICD, is a more effective treatment for VT than anti-
arrhythmic drugs, but it also is a palliative treatment. Moreover, ICD's are
associated with a number of undesirable characteristics, such as patient
reliance on an implantable device with a limited battery life, the high cost of
the implantation procedure, the risks associated with implanting foreign
objects in the body and significantly impaired quality of life for the patient.
In addition, the ICD is only palliative and does not cure the VT or destroy the
arrhythmia causing tissue.

   Similar to the treatment of AF, electrophysiologists are also experimenting
with less invasive, catheter-based ablation procedures for the treatment of VT.
Currently, there is a competitive product approved to treat VT in the U.S.
that, in our belief, has had limited acceptance in the market because it
accesses VT sites endocardially and needs to deliver high power levels to
attempt to ablate the tissue deep in the ventricular walls. Therefore, we
believe current catheter size limitations and shortcomings of existing
endocardial catheter technology for ablation have limited the use of catheter
technology to treat VT.

   We have decided to focus our efforts our AF program and postpone our work on
the VT program until such time that we have the appropriate funding or receive
approval to market the Revelation Tx microcatheter system for the treatment of
AF in the United States.

 Limitations of Current Catheter-Based Diagnosis and Therapy

   The demonstrated medical benefits and cost efficiency of minimally invasive
surgical procedures have encouraged electrophysiologists to seek a means of
employing new, minimally invasive techniques for the

                                       7
<PAGE>

diagnosis and treatment of arrhythmias. In the case of AF, electrophysiologists
are experimenting with a treatment technique, often referred to as the "drag
and burn procedure," in which conventional RF ablation catheters are dragged
along the inside surface of an atrium while applying RF energy. However,
creating continuous, linear, transmural lesions to isolate portions of the
atria using this experimental procedure with standard catheters has proven time
consuming and difficult. Endocardial catheter technology is also being tested
for the treatment of VT. We believe that an endocardial approach is sub-optimal
because the muscle tissue of the ventricles is significantly thicker than the
muscle tissue in the atria, sometimes requiring the use of large amounts of RF
energy to reach the arrhythmogenic foci. As a consequence, the endocardial
approach generates larger, less focused lesions, increasing the amount of
ventricular tissue destroyed in the procedure and potentially reducing heart
muscle function.

   We believe that the disadvantages of existing catheter based approaches for
AF and VT are attributable not to the minimally invasive approach of the
procedure, but rather to existing catheter technology. The catheters currently
used are relatively large, typically six to eight French (French is a medical
term used to denote catheter size; i.e., 1 mm = 1 French in diameter), and
stiff, increasing the risk of trauma to the heart during the procedure, and
restricting access primarily to the chambers of the heart. When attempting to
diagnose and treat VT using standard electrophysiology catheters, the
electrophysiologist is unable to access smaller blood vessels within the
ventricular wall. As a result, generally only signals generated within one to
two millimeters adjacent to the inner wall can be recorded. The current
technology is inadequate because the normal ventricular wall is five to 20
millimeters thick, and arrhythmia-causing tissue, especially tissue causing VT,
can reside anywhere within that thickness. In addition, the information
generated by the endocardial diagnostic procedure is limited, as the
electrophysiologist can observe and evaluate only a limited number of signals
in a confined area. In order to observe more signals and ablate closest to the
foci, the user must mechanically manipulate the catheter within the rapid blood
flow of a heart in VT at up to 300 beats per minute, which can be very
difficult. As a result, an endocardial electrophysiology procedure with this
existing technology is extremely laborious and time consuming, in some cases
requiring up to 15 or more RF energy deliveries per treatment. Although there
are endocardial basket-type catheters in development that enable the
electrophysiologist to record information from multiple points in the ventricle
at once, we believe that these catheters suffer the same access limitations to
arrhythmia causing tissue located in the intramyocardium and epicardium as
standard endocardial catheters and require significant additional investment in
that competitor's proprietary capital equipment.

   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
AF or VT procedures. In the case of AF, we believe there is a need for
catheters that are able to access both right and left atria, if warranted, and
then immediately and appropriately ablate the tissue causing the AF. Our
current Phase III clinical trial to treat AF with the Revelation Tx involves
three anatomical ablation lines placed in pre-determined areas of the atria,
mimicking the surgically performed maze procedure. In the case of VT, we
believe there is a need for catheters that are able to map safely the entire
thickness of the ventricular wall, not just the endocardial surface, and
appropriately ablate the tissue causing the VT with minimal trauma to normal
rhythm-conduction of the heart's tissue.

Our Microcatheter System Solution

   The primary clinical goal in the diagnosis and treatment of AF and VT is
precise mapping and effective, less destructive ablation. To achieve this, the
electrophysiologist must be able to access areas of the heart that are
currently inaccessible, using techniques that are easy to perform and that do
not increase the trauma to the patient. We are working to achieve this goal by
designing microcatheter systems which provide enhanced access to the arrhythmia
causing tissue, by mapping the location of the arrhythmia and then ablating the
arrhythmia causing tissue using RF energy to cure the patient, all in one
procedure using the same catheter. Our microcatheter systems are designed to
offer the following perceived advantages:

  . Minimally invasive approach. Our microcatheter systems are designed to
    provide better access in a minimally invasive procedure to treat both AF
    and VT. This increased access results in decreased

                                       8
<PAGE>

   procedure time, shorter hospital stays, lower procedure costs and fewer
   complications than the surgical procedures currently in use.

  . Single catheter for rapid mapping and ablation. We developed microcathers
    which were capable of only diagnosing arrhythmias, initially. Our next
    generation microcatheters, including the Revelation Tx and Therastream,
    are capable of both mapping and ablating. By using microcatheters that
    can map, as well as ablate, we believe the electrophysiologist need only
    access the arrhythmia causing tissue once in order to map it, verify that
    it is causing the arrhythmia and then, using the same device, ablate the
    tissue to cure the patient. We believe this single catheter, dual
    function characteristic of our microcatheter systems will decrease
    procedure times and improve treatment of both AF and VT.

  . Enhanced access to the vasculature of the heart. Our microcatheters
    feature a significantly smaller diameter, approximately one half the size
    of standard electrophysiology catheters, and incorporate Target's
    variable stiffness technology, utilizing a central core guidewire and a
    highly flexible distal tip. As a result, our microcatheters are more
    torqueable and flexible than standard electrophysiology catheters and
    have varying degrees of flexibility at the distal end to allow enhanced
    and less traumatic access to the vasculature of the heart, to conform
    easily to the contours of the heart wall and to maintain controlled,
    regular contact even in a fast beating heart.

  . Ability to gather more information. Our microcatheter system designs
    include a large number (up to 16) of narrow electrodes, while maintaining
    a high degree of flexibility. We believe that this design permits the
    electrophysiologist to acquire and evaluate far more information in a
    mapping procedure than is available using standard electrophysiology
    catheters, which typically incorporate fewer electrodes. The increased
    amount of information recorded using our microcatheter approach should
    enable the electrophysiologist to target the arrhythmia causing tissue
    with greater precision, in order to permit effective ablation.

   Curative treatment for AF. Our Revelation, Revelation Tx and Revelation T-
Flex microcatheter systems are designed to treat AF by creating long, thin,
continuous, linear, transmural lesions in the right atria. We also recently
completed animal studies for a new design microcatheter for left atrial
ablation in or around the pulmonary veins. Many physicians believe the
pulmonary veins are suspected to initiate AF on the left side and may require
focal or circumferential ablation to isolate and contain the arrhythmia
causing tissue, thereby restoring normal electrical function by controlling
and reorganizing the random, chaotic electrical activity that characterizes
AF. In animal studies, our microcatheter systems typically deliver less RF
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 and Revelation T-Flex 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. 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 coagulum
during an ablation procedure. We believe this approach has the potential to
offer the effectiveness of the open-heart surgical cure for AF, but with less
trauma, fewer complications, reduced pain, shorter hospital stays and lower
procedure costs.

   Curative approach for VT. Our Pathfinder, Pathfinder mini and Tracer
microcatheter systems for mapping VT and the Therastream microcatheter system
for both mapping and ablation of VT 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 VT 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 VT ablation should
permit ourmicrocatheters 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

                                       9
<PAGE>

destruction of surrounding healthy tissue, thus maximizing and 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 Cardima Pathfinder,
Pathfinder mini, Tracer and Therastream under development.

   We decided to focus our efforts on our AF program and postpone our work on
the VT program until such time that we have the appropriate funding or receive
approval to market the Revelation Tx microcatheter system to treat AF in the
United States.

  . Compatible with existing capital equipment. Our microcatheter systems are
    designed to be compatible with leading electrophysiology signal display
    systems and RF generators, in order to eliminate the need for significant
    new investment in additional capital equipment. By facilitating the fast
    and precise location of the arrhythmia causing tissue with a system that
    is compatible with standard laboratory equipment, we believe our products
    will be more readily adopted by electrophysiologists.

  . Reduced procedure and radiation exposure times. We believe that our
    microcatheter systems will reduce procedure times and thereby decrease
    cumulative x-ray exposure to both patients and lab personnel. Standard
    electrophysiology procedures, in many cases, expose both the patient and
    the lab personnel to over one hour of accumulated x-ray time during
    fluoroscopy, which is used to visualize the placement of the catheters.
    We believe that the total procedure and fluoroscopy time associated with
    the use of our microcatheter systems are less due to shorter procedure
    times than those using standard electrophysiology catheters, thereby
    reducing procedure costs and the risk of disease resulting from extended
    exposure to x-ray fluoroscopy.

Strategy

   Our primary objective is to establish our Revelation Tx microcatheter system
as the first approved device in the U. S. for mapping and ablating AF, Once our
Revelation Tx is approved in the United States, we intend to focus our efforts
on our microcatheter systems for the mapping and ablation of VT To achieve
these objectives, we pursue the following strategies:

   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
focus on endocardial access for AF. We are designing systems which incorporate
variable stiffness guidewire technology originally developed at Target,
including guiding catheters and fixed-systems, in order to optimize the
physician's ability to access the areas of interest in the heart easily and
safely. Additionally, for treating AF, we believe our Revelation Tx creates
long, thin linear lesions which are designed to replicate the maze surgical
procedure, which is a highly invasive procedure, yet 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 AF and VT diagnostic and therapeutic
procedures significantly. As a result, time spent in high cost
electrophysiology laboratories should be reduced, lowering the overall cost of
AF or VT 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 AF or VT procedures and reduce the overall cost per
procedure. In addition, we intend to use data derived from our clinical studies
to establish reimbursement for AF and VT 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 AF and VT.

   Accelerate acceptance and adoption of our microcatheter systems by leading
electrophysiologists. We have formed relationships with leading medical centers
in the United States, and are developing relationships with medical centers in
Europe and Japan, to perform clinical trials of our microcatheter systems for
the

                                       10
<PAGE>

diagnosis and treatment of AF and VT. Based on data submitted upon completion
of the Phase II trial, we obtained FDA approval to expand to a Phase III
pivotal trial to treat 80 patients with AF at up to 20 clinical sites with the
Revelation Tx microcatheter system. We believe that successful acceptance and
adoption of these systems by widely recognized experts in the field of
electrophysiology is a critical 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 and adoption through peer-reviewed publications
concerning the clinical trials of our microcatheter systems.

   Distribution agreement with St. Jude Medical Corporation's Daig Division in
the U.S. On January 26, 2000, we signed an exclusive three-year distribution
agreement with St. Jude Medical Corporation, St. Jude, whereby St. Jude's Daig
Division, or Daig, would distribute our diagnostic products in the U.S. The
distribution agreement included an equity investment by St. Jude. We retained
the rights for all other geographic areas, subject to Daig's right of first
refusal if we seek a distributor in those areas, and maintain worldwide control
of our therapeutic products. As of February 1, 2001, the agreement reverted to
a non-exclusive distribution arrangement due to Daig's failure to meet the
contractual first year minimum sales level. We have three direct sales people
in the United States and will continue to utilize the Daig sales force on a
non-exclusive basis.

   Increase sales by further penetrating international markets. We intend to
continue to increase international sales 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, as well as the
right to affix the CE Mark to a number of our products. We received regulatory
approval in the United States, Europe, Japan, Australia and Canada for our
Pathfinder microcatheter system for mapping VT and have received regulatory
approval in the United States, Europe, Japan and Australia for our Revelation
microcatheter system for mapping AF. In addition, we received CE Mark approval
for marketing the Revelation, Revelation Tx and Revelation T-Flex ablation
microcatheter systems to treat AF in the European Union in August 1998,
December 1998 and June 2000, respectively.

Products

   We are currently focused on developing microcatheter systems for the
diagnosis and treatment of AF. This system is 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 AF through the creation of long, thin,
continuous, linear, transmural lesions. All of our microcatheters are available
with a variety of electrode numbers, electrode spacing configurations and outer
diameters. The series of electrodes at the distal ends, depending on the
particular product, may both receive electrical signals for mapping and emit RF
energy for ablation. In addition, these microcatheter systems are smaller in
diameter and are designed to be more flexible and torqueable than standard
electrophysiology catheters, providing better steerability for the
electrophysiologist. Our microcatheters are designed for single use. We are
designing our products to be used with existing electrophysiology recording
systems and RF ablation generators. Our ancillary products, including guiding
catheters, guidewires, 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
 AF Products       Description         Indication U.S. Regulatory Status(1)    Regulatory Status(1)
 -----------       -----------         ---------- -------------------------    --------------------
 <C>         <S>                       <C>        <C>                        <C>
 Revelation  Fixed-wire multi-          Mapping   510(k) clearance obtained. Approved in European
             electrode microcatheter                                         Union (CE Mark) and
             system designed to map                                          Canada.
             in both right and left
             atria.
             Also can be used for       Ablation                             Approved in the European
             ablation in approved                                            Union (CE Mark) for
             markets.                                                        ablation.
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   International
    AF Products             Description            Indication     U.S. Regulatory Status(1)    Regulatory Status(1)
    -----------             -----------            ----------     -------------------------    --------------------
 <C>                <S>                          <C>             <C>                          <C>
 Revelation Tx      Fixed-wire multi-electrode   Mapping and     Phase III IDE approved;      Approved in European
                    microcatheter system with    Ablation        clinical trial in progress.  Union (CE Mark).
                    temperature sensors
                    designed to map and create
                    long, thin, continuous,
                    linear, transmural lesions
                    in the right atrium.

 Revelation T-Flex  Deflectable fixed-wire       Mapping and                                  Approved in European
                    multi-electrode              Ablation                                     Union (CE Mark).
                    microcatheter system with
                    temperature sensors
                    designed to map and create
                    long, thin, continuous,
                    linear, transmural lesions
                    in the right atrium.

<CAPTION>
    VT Products
    -----------
 <C>                <S>                          <C>             <C>                          <C>
 Cardima Pathfinder Fixed-wire multi-electrode   Mapping         510(k) clearance obtained.   Approved in European
                    microcatheter system                                                      Union (CE Mark)
                    designed for accessing
                    coronary sinus vasculature
                    to locate arrhythmia-
                    causing tissue.

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

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

 Therastream        Over-the-wire multi-         Ablation        Feasibility trial. Q1 2000;  Trial on hold in the
                    electrode microcatheter                      trial on hold to focus on AF European Union.
                    system designed for                          clinical trial
                    mapping and ablation from
                    within the veins of the
                    heart wall.

<CAPTION>
  Support Products
  ----------------
 <C>                <S>                          <C>             <C>                          <C>
 Venaport           Coronary sinus guiding       Venous access   510(k) clearance obtained.   Approved in European
                    catheters with a family of                                                Union (CE Mark), Japan
                    curve shapes and lengths.                                                 and Switzerland.
                    Designed to deliver
                    Cardima microcatheters.

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

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

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

 Tx Select          Switch box designed to       Connectivity                                 Approved in European
                    interface with               for pacing,                                  Union (CE Mark).
                    existing electrophysiology   electrophysiol-
                    lab equipment and            ogy recording
                    multi-electrode catheters.   and radio
                                                 frequency
                                                 ablation.
</TABLE>
-------
(1) The regulatory status of our microcatheter systems reflects our current
    estimates of the timing of regulatory submission in the United States,
    Europe and Japan. See "--Government Regulation." The actual submission
    times could differ materially from those anticipated in these forward-
    looking statements 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.

                                       12
<PAGE>

 Products Designed for Mapping and Ablating AF

   We believe our microcatheter systems can access the right and left atria in
a minimally invasive procedure and are designed to effectively ablate AF by
creating long, thin, continuous, linear, transmural lesions in the atria.

   Cardima Revelation for AF 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 three
millimeter long platinum coil electrodes for added flexibility to enhance
contact to surrounding heart tissue. This microcatheter system is being sold
for mapping AF in the United States, Europe and Japan. The Revelation is also
approved for treatment of AF in the European Union.

   We believe that mapping prior to ablation may be useful to identify
different segments of the AF population, each of which could require slightly
different ablation procedures. For example, some electrophysiologists believe
most AF patients will need to be mapped and ablated in both the left and right
atria, while others believe only right atrial intervention is warranted. We
believe that our products will have clinical utility in either of these
situations.

   Cardima Revelation Tx for AF 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 six millimeter
long platinum coil electrodes for added flexibility to enhance contact to
surrounding heart tissue. Our animal studies have demonstrated the ability of
the Revelation Tx to create these thin continuous transmural linear lesions.
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 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 involve 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.

   The Revelation Tx microcatheter is designed with narrow electrodes that are
able to deliver ablation energy to the atrial tissue at much lower power
settings than documented with standard electrophysiology catheters. We have
designed our Revelation Tx microcatheter system to be used with leading cardiac
electrophysiology RF generators and electrophysiology mapping computer systems.

   We submitted data from our Phase II clinical study to treat AF in the United
States and received permission to expand to the Phase III clinical trial in
June 2000. We believe that PMA approval will be required before the Cardima
Revelation Tx can be marketed in the United States to treat AF. See "--
Government Regulation."

 Cardima Revelation T-Flex of Af Ablation

   The Revelation T-Flex has the same operational characteristics as the
Revelation Tx, but 5.0 french and is deflectable, or steerable. The addition of
the ability to deflect makes the Revelation T-Flex more maneuverable and
potentially easier to place in the atrial anatomy.

 Products Designed for Mapping and Ablating VT

   Our intravascular approach allows our microcatheters to be positioned in
close proximity to the VT causing tissue and provides stable positioning within
the vascular system. We believe this approach will result

                                       13
<PAGE>

in greater accuracy of diagnosis and more effective treatment. We are not
aware of any other epicardial mapping catheters in development.

Cardima Pathfinder, Pathfinder mini and Tracer for VT Mapping. Our
microcatheter systems used for diagnosing VT 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 and Tracer microcatheter systems can be used to sub select vessels
and even access the small veins located at the apex (lower tip) of the heart.
Our Pathfinder and Tracer microcatheter systems are configured with either
four, eight or 16 electrodes, which enable the physician to perform a narrow
focus evaluation using a smaller number of electrodes, if there is reason to
believe the VT causing tissue is located in a specific area, or a wider focus
evaluation using larger number of electrodes, if there is little indication
regarding the location of the VT causing tissue. The Pathfinder mini, our
smallest microcatheter system, was developed for VT mapping in the venous
system. The Pathfinder mini is 1.5 French in diameter (the typical catheter is
six to eight French) and provides more distal access to smaller vasculature of
the heart. Similar to the Pathfinder microcatheter, the Pathfinder mini
microcatheter is constructed around a finely ground core-wire to provide the
steerability necessary to access distal vasculature. The Pathfinder mini
microcatheter has a flexible platinum tip coil and contains a variable number
of electrodes with different spacing options.

We received 510(k) clearance and CE Mark approval for our Pathfinder
microcatheter system for mapping VT. We sell our Pathfinder for VT mapping in
the United States through our distributor, Daig, as well as our own sale
force, and in Europe through a small direct sales force and an expanding
network of distributors. Products in Japan, Australia and Canada are sold
through our distributor networks in each country. The Pathfinder can safely
map VT 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 VT.

Therastream for VT Ablation. Our epicardial approach to VT ablation is
intended to address the shortcomings of standard endocardial ablation
catheters. Once a VT focus has been identified as being epicardial or
intramyocardial, the electrophysiologist must currently decide whether or not
to attempt to ablate that focus from the endocardial side of the heart wall.
Physicians using existing ablation systems are faced with a fundamental
problem: the further the VT focus is from the endocardial side of the heart
wall, the larger the lesion size necessary to cure the condition.
Traditionally, electrophysiologists have had to use catheters and generators
capable of making larger lesions since they can only ablate the arrhythmia
causing tissue from the endocardial side. A large number of VT ablation cases
required multiple endocardial RF energy deliveries (up to 30 or more in one
electrophysiology study). Increased endocardial RF energy, if delivered in the
left side of the heart's ventricles may result in greater risk that the
patient will develop blood clots, which may dislodge and travel to the brain
causing stroke and decreased cardiac output. Our microcatheter systems are
intended to offer an alternative approach to current ablation techniques by
facilitating access to the arrhythmia causing tissue and providing greater
ablation accuracy using less RF energy. We are not aware of any epicardial RF
ablation catheter to treat VT other than our Therastream microcatheter system,
which is under development.

The Therastream microcatheter tracks over a guidewire in the coronary veins
and can access the important distal vasculature regions of the heart and
deliver RF energy in the epicardium. The Therastream is designed to map,
locate and ablate the VT focus using RF energy directly applied through the
veins. We have completed animal studies to demonstrate the ability of the
Therastream to access the distal venous system and safely deliver RF energy
with no damage to the adjacent arteries. In these experiments the Therastream
has required significantly less energy to ablate VT than standard endocardial
catheters.

We received approval of an IDE for the Therastream microcatheter system in the
second half of 1999, and completed a preliminary feasibility clinical trial in
2000. We received permission to expand the trial in July 2000. We must receive
PMA approval before the Therastream can be marketed in the United States for
VT ablation. See "Government Regulation."


                                      14
<PAGE>

   We have decided to focus our efforts on our AF program and postpone work on
this VT program until such time that we have the appropriate funding or receive
approval to market the Revelation Tx microcatheter system to treat AF in the
United States.

   Our intravascular electrophysiology microcatheters, exclusive of the guiding
catheters, are coated with a hydrophilic coating. This coating has been used on
Target'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.

   The Cardima Pathfinder and Pathfinder mini microcatheter systems for venous
mapping of VT have received 510(k) clearances from the FDA, as well as the
Venaport, Vueport and Naviport families of guiding catheters. Our other
microcatheter systems for mapping or ablation of VT have not received FDA
clearance or approval for marketing and distribution in the United States. Our
microcatheter systems for ablation are at an early stage of testing. There can
be no assurance that the results of our human clinical ablation studies will
validate the results of our animal studies.

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 development of our Revelation Tx microcatheter system
for AF ablation.

   Research and development expenses for the years ended December 31, 2000,
1999 and 1998, were $4.4 million, $5.7 million and $7.2 million, respectively.
We announced a restructuring and workforce reduction in January 2000 and in
January 1999, respectively, which affected all functional areas, including
research and development. We continue to focus our efforts on certain specific
projects, which has reduced our research and development expenses for 2000.

   In January 2001, we announced a restructuring that focuses all our efforts
on our phase III clinical trial to treat AF with the Revelation TX
microcatheter system. As a result, several R&D projects not related to AF have
been postponed, further reducing our work force.

Marketing and Distribution

   We marketed and sold our microcatheter systems through a direct sales force
in the United States, France and Germany, and medical device 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 through its Daig
Division sales force. As of February 1, 2001, the agreement reverted to a non-
exclusive distribution arrangement due to Daig's failure to meet the
contractual first-year minimum sales level. Sales by Daig did account for more
than 10% of our revenues, however. We have three direct sales people in the
United States and will continue to utilize the Daig sales force on a non-
exclusive basis.

   We have three sales people, responsible for sales in the United States,
focus on high-usage electrophysiology centers, and the Daig sales force, on a
non-exclusive basis, who assists in our efforts to sell our products. In
December 1999, we restructured our European sales force, specifically in
France, the Mediterranean area and Germany, to reduce expenditures in line with
sales in those particular regions. We are in the process of selecting a
distributor in France. We still maintain two sales people and a clinical
specialist in Europe, where we have products approved for ablation. We believe
there are between 500 and 600 hospitals in

                                       15
<PAGE>

the United States and an additional 600 hospitals internationally that perform
electrophysiology procedures on a routine basis. Further, we believe there are
over 600 board certified electrophysiologists in the United States, and an
equal number of practicing electrophysiologists internationally.

   To date, we have not established all of the international distribution
alliances necessary to fully market our products on a worldwide basis, nor do
we have written distribution agreements with all of our international
distributors. There can be no assurance that we will be able to enter into
written agreements with existing distributors or that any such distributors
will devote adequate resources to sell our products.

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 our custom-designed, proprietary process 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
braiding, hydrophilic coating, material cleaning and surface preparation.

   Catheter manufacturing involves complex operations with a number of separate
processes and components. Catheters are assembled and tested by us prior to
sterilization. The manufacturing process for the connecting cable consists
primarily of testing and packaging purchased units. If we receive additional
FDA clearance or approval for our products, we may need to expend significant
capital resources and develop additional manufacturing capacity to establish
large-scale manufacturing capabilities. We have no experience manufacturing our
products in the volumes that will be necessary for us to achieve significant
commercial sales, and there can be no assurance that reliable, high-volume
manufacturing capacity can be established or maintained at commercially
reasonable costs.

   Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality specifications. We expect to conduct
supplier quality audits and are establishing a supplier certification program.
A number of the components such as laminate tubing, core wire mandrels,
connector components and hydrophilic coating are provided by sole source
suppliers. For certain of these components there are relatively few alternative
sources of supply, and establishing additional or replacement suppliers for
such components, particularly laminate tubing, could not be accomplished
quickly. This would 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. We plan to qualify
additional suppliers if, and as, future production volumes increase. 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 QSR and ISO 9001 (EN
46001) compliance inspections conducted by the FDA and TUV, a notified body (a
regulatory agency) in the European Union, EU, respectively. 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

                                       16
<PAGE>

processes have recently undergone a successful annual recertification
inspection by TUV in August 2000. In November 2000, the FDA conducted a QSIT-
Audit of our Quality System, 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 16 issued United
States patents and 9 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 fully paid co-exclusive license for
these patents in the field of electrophysiology. We have also filed 51 patent
applications in major international markets, of which one was 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
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, we obtained an
exclusive, royalty-free, worldwide license under certain patents issued in the
United States and corresponding international patents 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
applies to any Target 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 technology developed prior to May 31, 1996. In addition
to this exclusive license to use Target's technology to develop products for
electrophysiological diseases, we obtained a non-exclusive license to use
Target's 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's technology that
results in a material change in the function, purpose or application of a
particular product incorporating Target's 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.

   Under the Target agreement, we granted back to Target 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'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. We also agreed that we 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 we intend to sell 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.


                                       17
<PAGE>

   Target is a subsidiary of Boston Scientific, BSC, and BSC develops, markets
and sells cardiac electrophysiology products that compete directly with the
microcatheter products being developed by us.

   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.

   U.S. patent applications are filed prior to November 29, 2000 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 have not been comprehensive. 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 been characterized by 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

                                       18
<PAGE>

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.

Competition

   We believe our primary competitors to be companies engaged in the
development and marketing of more established, but in our belief, less
effective therapies for the treatment of AF and VT, such as drugs, external
electrical cardioversion and defibrillation, implantable defibrillators, open
heart surgery and purposeful destruction of the AV node, followed by
implantation of a pacemaker. Several competitors are also developing new
approaches and new products for the mapping and ablation of AF and VT. These
approaches include mapping systems using contact mapping, single-point spacial
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 open-heart surgical maze
procedure in a minimally invasive manner. If any of these new approaches or new
products proves 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., Johnson & Johnson, through its Cordis 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. We have entered into an
exclusive three-year distribution agreement with St. Jude Medical, Inc.,
through its Daig division, or Daig, whereby Daig will distribute our line of
diagnostic products in the U.S. As of February 1, 2001, the agreement reverted
to a non-exclusive distribution arrangement due to Daig's failure to meet the
contractual first-year minimum sales level. We have three direct sales people
in the United States and will continue to utilize the Daig sales force on a
non-exclusive basis.

   Other companies are developing proprietary systems for the diagnosis and
treatment of cardiac arrhythmias, including Biosense, Inc., a division of
Johnson & Johnson, Cardiac Pathways, Inc. and Endocardial Solutions, Inc. Other
companies develop, market and sell alternative approaches to the treatment of
AF and VT, including Guidant, Medtronic, Inc., and Ventritex Inc., a subsidiary
of St. Jude Medical Inc., manufactures 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 more
established treatments, or the new approaches and products being developed and
marketed by our competitors. Furthermore, there can be no assurance that we
will succeed in developing new technologies and products that are available
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

                                       19
<PAGE>

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 we compete 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, distribution
and promotion of our products are subject to extensive and rigorous government
regulation in the United States and other countries. Noncompliance with
applicable requirements can result in enforcement action by the FDA or
comparable foreign regulatory bodies including, among other things, fines,
injunctions, civil penalties, recall or seizure of products, refusal to grant
pre-market clearances or approvals, withdrawal of marketing approvals and
criminal prosecution.

 United States

   A medical device may be marketed in the United States only with the FDA's
prior authorization. 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) for which the FDA has not called for PMA applications. 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 would constitute a major
change in the intended use of the device, will require a new 510(k) submission.
We believe that it usually takes from four to 12 months from the date of
submission to obtain 510(k) clearance, but it may take longer, 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 Cardima
Pathfinder, Pathfinder mini and Tracer over-the-wire microcatheter systems for
mapping VT and Revelation microcatheter system for mapping AF. In addition,
510(k) clearance has been received for marketing our line of Venaport, Vueport
and Naviport guiding catheters used for introducing 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 the greatest 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). A Class III device generally must receive PMA approval, which requires
the manufacturer to establish the safety and effectiveness of the device to the
FDA's satisfaction. A PMA application must provide extensive preclinical and
clinical trial data and also include information about the device and its
components regarding, among other things, manufacturing, labeling and
promotion. As part of the PMA review, the FDA will inspect the manufacturer's
facilities for compliance with the Quality System Regulation, or QSR, which
includes elaborate testing, design control, documentation and other quality
assurance procedures.

   Upon submission, the FDA determines if the PMA 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 we believe it 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

                                       20
<PAGE>

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. The FDA may visit us and/or our investigator's sites and audit
the clinical data. During the review of our PMA, an FDA advisory committee,
typically a panel of clinicians, likely will 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.

   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 a PMA for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA 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, which in turn would have a material adverse effect on us. The
PMA process can be expensive and lengthy, and no assurance can be given that
any PMA application will ever be approved for marketing. Even after approval of
a PMA, a new PMA or PMA supplement generally is required for any modification
to the device, its labeling or its manufacturing process.

   We have confirmed that our ablation products, including the Cardima
Revelation Tx and Therastream, will be 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 PMA application
generally requires an 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
approval 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 510(k) clearance for our Revelation microcatheter system for
mapping of AF. We also received approval to expand our clinical trial in
October 2000, with our Revelation Tx product. An IDE for our Therastream VT
ablation microcatheter system was approved by the FDA in November 1999. We have
decided to focus our efforts on our AF program and postpone work on our VT
program until such time that we have the appropriate funding or receive
approval to market our Revelation Tx microcatheter system to treat AF in the
United States. These studies are not expected to supply pivotal evidence of
safety and effectiveness; rather, they are intended to generate data to help
finalize the device's design and determine its potential for further
development, if any. Additional clinical trials will be necessary to support
PMA applications by us. There can be no assurance that any clinical study
proposed by us will be approved by the FDA, will be completed or, if completed,
will provide data and information that supports PMA approval or additional
clinical investigations of the type necessary to obtain PMA approval.

   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 QSR, the Medical
Device Reporting, or MDR regulation (which requires that a manufacturer

                                       21
<PAGE>

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,
postmarket 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.

   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
substance disposal. There can be no assurance we will not be required to 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.

 International

   In order for us to market our products in Europe and certain other foreign
jurisdictions, we must obtain required regulatory approvals and clearances and
otherwise comply with extensive regulations regarding safety and manufacturing
processes and quality. These regulations, including the requirements for
approvals or clearance to market and the time required for regulatory review,
vary from country to country. In addition, there may be foreign regulatory
barriers other than premarket approval. There can be no assurance we will
obtain regulatory approvals in such countries or that we will not be required
to incur significant costs in obtaining or maintaining its foreign regulatory
approvals. 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 EU has promulgated rules that require medical products to bear the CE
Mark. The CE Mark is recognized by the EU 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 avoid the costly and cumbersome requirements to obtain
approvals in each EU country. We received ISO 9001 (EN 46001) Quality Systems
certification for our manufacturing facilities in Fremont, California. In
December 1998, we received ISO 9001 re-certification. This certification is
required in order to affix the CE Mark to applicable products.

   We also have received the CE Mark for our Revelation and Revelation Tx
microcatheters for treatment of AF. We intend to seek international approvals
for our other ablation products; however, there can be no assurance we will be
successful in obtaining such approvals. Failure to receive approval to affix
the CE Mark would prohibit us from selling these products in member countries
of the EU, and would require significant delays in obtaining individual country
approvals. There can be no assurance that such approvals will ever be obtained.
In such event, we would be materially and adversely affected.

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,

                                       22
<PAGE>

inappropriate or used for a nonapproved indication. If FDA clearance or
approval were received, third-party reimbursement would also depend upon
decisions by the United States Health Care Financing Administration, or 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 patient's diagnosis and the
procedure performed, and unrelated 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, for
example if the treatment is not medically needed for the specific patient.
There can be no assurance that our systems 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, or APG, 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 APG 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 US 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 our procedures. We anticipate that hospital administrators and
physicians would justify the use of our products by the attendant cost savings
and clinical benefits that we believe would be 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

                                       23
<PAGE>

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 employing our products, would have a material
adverse effect on our business, financial condition and results of operations.

Product Liability and Insurance

   The development, manufacture and sale of our microcatheter systems may
expose us to product liability claims. Two claims were filed against us in
1999. Both claims were settled in 2000 for an aggregate amount of $32,500.
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 our Pathfinder, Tracer and Revelation products are labeled
for single use only, we are aware that some physicians are reusing such
products. Moreover, despite labeling of 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.

Employees

   At December 31, 2000, we had 71 employees, 10 of whom were engaged directly
in research and new product development, 5 in regulatory affairs, quality
assurance and clinical activities, 35 in manufacturing, 9 in sales and
marketing and 12 in finance and administration.

   In January 2001, we restructured and reduced our workforce to 59 employees
as follows: 8 in research and new product development, 5 in regulatory affairs,
quality assurance and clinical activities, 26 in manufacturing, 9 in sales and
marketing and 11 in finance and administration.

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

ITEM 2. PROPERTIES

   We lease approximately 44,000 square feet in Fremont, California. Our
facility includes a 4,000 square foot 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. We believe this facility will be adequate to meet
our requirements for the foreseeable future.

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

   No matters were submitted to a vote of our security holders, through
solicitation of proxies or otherwise, during the last quarter of our fiscal
year ended December 31, 2000.

                                       24
<PAGE>

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   Our Common Stock has traded on the Nasdaq National Market under the symbol
CRDM 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.

<TABLE>
<CAPTION>
                                                                   HIGH   LOW
                                                                  ------ ------
   <S>                                                            <C>    <C>
   YEAR ENDED DECEMBER 31, 2000
   First Quarter................................................. $4.063 $1.656
   Second Quarter................................................  2.531  1.000
   Third Quarter.................................................  1.500  1.000
   Fourth Quarter................................................  1.266  0.188

<CAPTION>
                                                                   HIGH   LOW
                                                                  ------ ------
   <S>                                                            <C>    <C>
   YEAR ENDED DECEMBER 31, 1999
   First Quarter................................................. $4.750 $2.031
   Second Quarter ...............................................  3.375  1.938
   Third Quarter.................................................  2.750  1.281
   Fourth Quarter................................................  2.703  0.781
</TABLE>

   As of March 15, 2001, there were approximately 216 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.

                                       25
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The data set forth below should be read in conjunction with the financial
statements and related notes attached to this report on Form 10-K as pages F-1
through F-18.

<TABLE>
<CAPTION>
                                        Year Ended December 31,
                              -----------------------------------------------
                               2000      1999      1998      1997      1996
                              -------  --------  --------  --------  --------
<S>                           <C>      <C>       <C>       <C>       <C>
Statements of Operations
 Data:
Net sales.................... $ 2,570  $  3,495  $  2,499  $  1,261  $    593
Cost of goods sold...........   3,667     3,384     2,962     2,011     1,413
                              -------  --------  --------  --------  --------
  Gross profit (loss)........  (1,097)      111      (463)     (750)     (820)
Operating expenses:
  Research and development...   4,432     5,694     7,230     5,320     3,319
  Selling, general and
   administrative............   6,185     8,173     8,556     6,656     3,690
                              -------  --------  --------  --------  --------
    Total operating
     expenses................  10,617    13,867    15,786    11,976     7,009
                              -------  --------  --------  --------  --------
Operating loss............... (11,714)  (13,756)  (16,249)  (12,726)   (7,829)
Interest and other income....     230       250       359       602       132
Interest expense.............    (365)     (522)     (296)     (148)      (57)
Gain on sale of intellectual
 property....................   4,000       --        --        --        --
                              -------  --------  --------  --------  --------
Net loss..................... $(7,849) $(14,028) $(16,186) $(12,272) $ (7,754)
                              =======  ========  ========  ========  ========
Basic and diluted net loss
 per share................... $ (0.38) $  (0.89) $  (1.96) $  (2.64) $(107.69)
                              =======  ========  ========  ========  ========
Shares used in computing
 basic and diluted net loss
 per share...................  20,818    15,746     8,239     4,642        72
                              =======  ========  ========  ========  ========

<CAPTION>
                                             December 31,
                              -----------------------------------------------
                              2000(1)    1999      1998      1997      1996
                              -------  --------  --------  --------  --------
<S>                           <C>      <C>       <C>       <C>       <C>
Balance Sheets Data:
Cash, cash equivalents and
 short-term Investments...... $ 1,324  $    920  $    645  $ 12,848  $    907
Working capital (deficit)....     652    (1,293)   (1,614)   11,609    (2,150)
Total assets.................   5,903     6,089     7,283    17,674     3,964
Capital lease obligation,
 noncurrent portion..........     192     1,012     1,120       840       722
Line of credit obligation,
 noncurrent portion..........     --      1,095     2,183       --        --
Accumulated deficit.......... (68,485)  (60,636)  (46,608)  (30,422)  (18,150)
Total stockholders' equity
 (deficit)...................   2,894      (420)   (1,176)  (14,444)  (10,368)
</TABLE>
--------
(1) In January 2001, we received $4,000,000 from Medtronic, Inc., representing
    the final payment on the transaction initiated in December 2000, whereby we
    sold a portion of our patent portfolio and related intellectual property
    pertaining to intravascular sensing and signal detection and certain
    guiding catheters. See Note 7 of Notes to Financial Statements for related
    pro forma information as of December 31, 2000.

                                       26
<PAGE>

                                 CARDIMA, INC.

                        QUARTERLY RESULTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                  (Unaudited)

<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 profit (loss)..................     (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 loss...............................  $(2,970)  $(2,774)   $(3,388) $ 1,283
                                         =======   =======    =======  =======
Basic and diluted net loss per share...  $ (0.16)  $ (0.13)   $ (0.16) $  0.06
                                         =======   =======    =======  =======
Shares used in computing basic and
 diluted net loss per share............   18,674    21,471     21,547   21,579
                                         =======   =======    =======  =======
</TABLE>

                                       27
<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 November 1992, we have been engaged in the
design, research, development, manufacturing and testing of microcatheter
systems for the mapping, or diagnosis, and ablation, or treatment, of cardiac
arrhythmias. We have generated revenues of approximately $10.9 million from
inception to December 31, 2000. Until January 1997, these revenues were
primarily in Europe and Japan from sales of our Cardima Pathfinder and Tracer
microcatheter systems for diagnosing VT and our Revelation microcatheter system
for diagnosing AF, as well as ancillary products such as the Venaport guiding
catheters. Subsequent to 1997, United States sales consist primarily of
Pathfinder and Revelation lines of microcatheters for diagnosis of VT and AF
following FDA 510(k) clearance. To date, our international sales have been made
primarily through distributors who sell our products to physicians and
hospitals. European sales consist primarily of the Revelation and Revelation Tx
microcatheters for treatment of AF following receipt of CE Mark in August 1998.

   We obtained the right to affix the CE Mark to our Pathfinder, Pathfinder
mini and Tracer microcatheter systems for mapping VT and our Revelation and
Revelation Tx microcatheter systems for both mapping and ablation of AF,
permitting us to market these products in the member countries of the EU. We
received 510(k) clearances for the Revelation microcatheter for mapping of AF
and the Pathfinder mini microcatheter for mapping VT and for the Vueport
balloon guiding catheter in July 1998. We received 510(k) clearance for our
Tracer mapping catheter for mapping of VT 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 designed for treatment of AF or VT in the United States.
Specifically, PMA approval will be required prior to the introduction in the
United States of the Revelation Tx microcatheter system for treatment of AF or
Therastream microcatheter system for treatment of VT.

   We are currently in Phase III in the United States to treat AF 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, preclinical and clinical trials, obtaining
regulatory approval, sales and marketing and manufacturing.

   Revenues are recognized when products are shipped. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," SAB 101. The adoption of SAB 101
had no impact on the results of operations or our financial position in 2000.

Results of Operations--Years Ended 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 as a result of converting from a direct sales force to

                                       28
<PAGE>

an exclusive distributor arrangement; European Union sales decreased 40% to
$674,000 from $1,127,000, primarily as a result of a restructuring and
reduction in staff; sales in Japan increased 61% to $548,000 from $341,000,
owing to strong sales of approved diagnostic products; and sales in the rest of
the world decreased 88% to $14,000 from $112,000 in 1999, which included sales
of products used in a clinical trial in 1999. As of February 1, 2001, the
distribution agreement reverted to a non-exclusive arrangement due to Daig's
failure to meet the contractual first-year minimum sales level. Therefore, we
will be marketing and distributing our products along with Daig in the United
States.

 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 is due primarily to
increased costs associated with the growth anticipated from the distribution
agreement with St. Jude. We expect costs per unit to continue to decrease as we
continue to work on process improvements, provide greater manufacturing
flexibility and cost savings in the production of our microcatheter systems.

 Research and Development Expenses

   Research and development expenses for 2000 decreased 22% to $4,432,000 from
$5,694,000 in 1999. The decrease is primarily due to the commercialization of
the Revelation Tx and the Revelation T-Flex research and development projects,
to production and our efforts to focus on key research projects and de-
emphasizing on certain other projects. We continue to experience substantial
cost savings due to the transition of animal studies from an out of state
facility to a local firm.

 Selling, General and Administrative Expenses

   Selling, general and administrative expenses for 2000 decreased 24% to
$6,185,000 from $8,173,000 in 1999. Selling expenses for 2000 decreased 45% to
$2,393,000 from $4,376,000 in 1999. The decrease is primarily due to the
reduction in our direct sales expenses, as 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 in
1999. The increase is primarily 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 in
1999. The decrease is due primarily to the reduction, decreased expenses for
trade shows and the reduction in our direct marketing expenses due to the
United States distribution agreement with Daig.

 Interest and Interest Expense

   Interest income for 2000 decreased to $230,000 from $250,000 in 1999. The
decrease is due primarily to lower balance of cash and investments in 2000.
Interest expense for 2000 decreased to $365,000 from $522,000 in 1999. The
decrease is due primarily to the payoff of our credit line with Transamerica.

 Gain on Sale of Intellectual Property

   The gain is 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 catheters to Medtronic for an aggregate price of
$8,000,000. As of December 2000 we received $4,000,000, representing the first
installment of this purchase price. The remaining $4,000,000 of the purchase
price from Medtronic was received in January 2001, upon completion of the
remaining obligations under the agreement.

                                       29
<PAGE>

Results of Operations--Years Ended 1999 and 1998

 Net Sales

   Net sales for 1999 increased 40% to $3,495,000 from $2,499,000 for 1998. The
majority of the increase in sales in 1999 was attributable to sales in the
United States and Europe. United States sales for 1999 increased 11% to
$1,915,000 from $1,722,000 in 1998. The increase in United States sales is due
primarily to the sales of Pathfinder and Revelation lines of microcatheters for
diagnosis of VT and AF following FDA 510(k). European sales for 1999 increased
103% to $1,127,000 from $554,000 for 1998. The increase in European sales is
due primarily to sales of the Revelation and Revelation Tx microcatheters for
treatment of AF following receipt of CE Marking in August 1998.

 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 1999 increased 14% to $3,384,000 from $2,962,000 for 1998.
The decrease of cost of goods sold as a percent of net sales is due primarily
to the purchase of several pieces of capital equipment to manufacture some
components in-house, rather than purchase the components from outside vendors.
Although this equipment was not fully functional until the second half of 1999,
we expect costs per unit to continue to decrease as it transitions from outside
vendors to our internal production. In addition, the internal production will
provide greater flexibility in production of our microcatheter systems.

 Research and Development Expenses

   Research and development expenses for 1999 decreased 21% to $5,694,000 from
$7,230,000 in 1998. The decrease in research and development expenses is due
primarily to staff reductions in research and development as a result of our
restructuring in January 1999, and the transition of all animal studies from
out of state to a local firm which significantly reduced costs for research and
development product testing.

 Selling, General and Administrative Expenses

   Selling, general and administrative expenses for 1999 decreased 4% to
$8,173,000 from $8,556,000 in 1998. Selling expenses for 1999 increased 16% to
$4,376,000 from $3,788,000 in 1998. The increase is due primarily to costs
associated with the expansion of our United States sales force, the ongoing
establishment of a direct sales force in several major markets in Europe and
the commencement of clinical trials, which requires training of participating
physicians by sales and clinical specialists. General and administrative
expenses for 1999 increased 1% to $2,878,000 from $2,844,000 in 1998. Marketing
expenses for 1999 decreased 52% to $919,000 from $1,924,000 in 1998. The
decrease in marketing expenses is due primarily to staffing reductions from our
restructuring in January 1999, the development of marketing materials and
programs in-house, and fewer trade shows attended in 1999.

 Interest and Other Income, Interest Expense

   Interest and other income for 1999 decreased by $109,000 to $250,000 from
$359,000 in 1998. The decrease is due primarily to lower cash, cash equivalent
and short-term investment balances. Interest expense for 1999 increased by
$226,000 to $522,000 from $296,000 in 1998. The increase is due primarily to
higher borrowing levels for purchases of capital equipment and interest expense
associated with borrowings under our $3.0 million line of credit with
Transamerica.

Liquidity and Capital Resources

   We have financed our operations to date, principally through private
placements of equity securities, which have yielded net proceeds of $57,700,000
through December 31, 2000, our initial public offering of

                                       30
<PAGE>

Common Stock in June 1997, which resulted in net proceeds of approximately
$13,600,000, together with interest income on such proceeds, borrowings under a
$3,000,000 line of credit, sale of certain of our non-core patents to
Medtronics for $8,000,000, of which $4,000,000 was received in 2000, and
equipment leases to finance certain capital equipment which have provided
proceeds in the amount of $4,700,000. As of December 31, 2000, we had
approximately $1,324,000 in cash, cash equivalents and short-term investments.

   Net cash used in operating activities was approximately $7,100,000,
$12,800,000 and $16,000,000 for the years ended December 31, 2000, 1999 and
1998, respectively, resulting primarily from operating losses incurred. Net
cash provided by investing activities of $375,000 and $4,249,000 for the years
ended December 31, 2000 and 1998, respectively, is attributable primarily to
the maturities of short-term investments. Net cash of $731,000 used in
investing activities for the year ended December 31, 1999 is attributable
primarily to the purchases of short-term investments. Net cash provided by
financing activities was approximately $7,600,000, $13,300,000 and $3,800,000
for the years ended December 31, 2000, 1999 and 1998, respectively, resulting
primarily from the sale of equity securities in private placement transactions
and proceeds from bridge loans and borrowings under the line of credit during
such periods and the sale of certain patents in 2000.

   In June 1998, we secured a $3,000,000 line of credit which may be used for
general working capital purposes. As of December 31, 1998, we had drawn the
entire $3,000,000 line of credit. In May 1999, we entered into an equipment
lease that permits us to borrow up to $1,000,000 for the purchase of office and
manufacturing equipment, software and custom-built equipment. As of December
31, 2000, we paid both the $3,000,000 line of credit and $1,000,000 equipment
lease in full. There are no unused available funds under these financing
instruments.

   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 a commission, we issued 354,806 shares of our common
stock to the placement agent as well a payment of $490,388. In addition, we
issued 750,000 warrants, exercisable for 750,000 shares of common stock at an
exercise price of $2.20, as commission for the transaction. Our net proceeds,
after expenses of the placement, were $14,300,000. 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
warrants to investors exercisable for 933,322 shares of common stock, at an
exercise price of $2.48 per share. As commission for the transaction, we paid
$524,891 in cash. In addition, we issued a warrant exercisable for 233,329
shares of common stock, at an exercise price of $2.48 per share, as commission
for the transaction. Our net proceeds, after expenses of the placement, were
approximately $9,900,000. 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, $4,000,000 of which was paid upon execution of the
agreement, and the balance was paid on completion of the transfer of the
property, which occurred in January 2001.

   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.

   Since inception, the Company has an accumulated deficit of approximately
$68.5 million. Management expects to continue to incur additional losses in the
foreseeable future as it completes new product development and
commercialization. Management recognizes the need to raise additional funds
from outside sources and has engaged investment bankers to assist in that
endeavor. In addition to the sale of patents, in January 2001, the Company
implemented several cost containment measures, which included a reduction in
headcount of 22 employees, a reduction in specific research and development
projects and the postponement of the Company's VT clinical trial. The Company
has engaged a real estate broker to assist in identifying a sublessee for
approximately 17,000 square feet of unused office space. Management believes
that cash balances as of December 31, 2000, together with the $4.0 million
received in January 2001 from Medtronic, will be sufficient to fund planned
expenditures through at least May 2001. Management believes that it will be
able to

                                       31
<PAGE>

obtain additional funds through either public, private equity or other
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, the Company may need to significantly
curtail operations or even cease operations. The Company's independent
auditors have concluded that there is substantial doubt as to the Company's
ability to continue as a going concern for a reasonable period time, and have,
therefore, modified their report in the form of an explanatory paragraph
describing the events that have given rise to this uncertainty.

Factors Affecting Future Results

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

   We have only sold a limited number of our microcatheter systems. In
addition, we will continue to incur substantial losses into the foreseeable
future as a result 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 $7.8 million, $14.0 million and $16.2
million for 2000, 1999 and 1998, respectively. As of December 31, 2000, our
accumulated deficit was approximately $68.5 million. Our limited sales history
makes it difficult to assess our future results. We cannot be certain that we
will ever generate substantial revenue or achieve profitability. Our failure
to generate substantial revenues would harm our business.

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

   In order to commercialize our products, we will need to raise additional
capital. One possibility for raising additional capital would be the public or
private sale of our shares of stock. Any sale by us of additional shares of
stock will dilute your percentage ownership in us.

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

   We will need to raise additional capital in order to complete the clinical
trials for, and market our microcatheter systems. In addition, we may have to
spend additional funds if unforeseen difficulties arise in the course of
developing our products, performing clinical trials, obtaining necessary
regulatory clearances and approvals or other aspects of our business. We
cannot be certain that additional funding will be available to us when needed,
if at all, or, if available, on terms attractive to us. Our inability to
obtain sufficient funds will require us to delay, scale back or eliminate some
or all of our research and product development programs, to limit the
marketing of our microcatheter products, or to license to third parties the
rights to commercialize products or technologies that we would otherwise try
to develop and market ourselves. Our failure to raise this additional capital
when needed could cause us to cease our operations. Debt financing, if
available, may involve restrictive covenants. We have financed our operations
to date primarily through private sales of equity securities, proceeds from
our initial public offering in June 1997, and loan-facilities. As of December
31, 2000, cash, cash equivalents, short-term investments and long-term
restricted cash totaled approximately $1.3 million. We received the final
payment of $4,000,000 from Medtronic on January 31, 2001. We believe that our
existing cash, cash equivalents and short-term investments along with cash
generated from the sale of a portion of our intellectual property to
Medtronic, Inc., as well as sales of our products and from financings, will be
sufficient to fund our operating expenses, debt obligations and capital
requirements through May 2001.

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

   We often rely on our contractual rights to access data collected by others
in phases of our clinical trials. We depend on the continued performance by
these third-parties of their contractual obligations to provide

                                      32
<PAGE>

access and cooperate with us in completing filings with the FDA. We cannot be
certain that the FDA will permit our reliance on these parties. If we are
unable to rely on clinical data collected by others, or if these parties do
not perform their contractual duties, we may be required to repeat clinical
trials; which could significantly delay commercialization of our products,
require us to spend more money on our clinical trials and cause our business
results to suffer.

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

   To date, we have completed two clinical trials and have received 510(k)
pre-market clearances from the FDA with respect to our Cardima Pathfinder and
Pathfinder mini microcatheter systems for venous mapping of VT, and our
Revelation microcatheter system for mapping and pacing of the atria. We also
received FDA 510(k) clearance for the Venaport and Vueport guiding catheters,
Tracer mapping catheter and for our Naviport deflectable-tip guiding catheter.
Our inability to timely obtain clearances for our other diagnostic products
and guiding catheters under development would have a material adverse effect
on our business, financial condition and results of operations.

   We are in the early stage of developing, testing and obtaining regulatory
approval for our microcatheter systems designed for ablation of AF and VT. We
are currently developing the Revelation Tx microcatheter system for ablation
of AF. The clinical feasibility trial for the Therastream microcatheter system
for ablation of VT has been postponed while we focus on completing our AF
Phase III clinical trials. We are required to obtain an Investigational Device
Exemption, or IDE, from the FDA prior to conducting human clinical trials of
our microcatheter systems for ablation. We completed the mapping phase of this
feasibility study in August 1997 and the AF ablation feasibility study in
December 1998. We received approval of an IDE supplement on December 1998
allowing us to expand the AF study. We received permission to expand the
clinical trial to Phase III in October 2000. The trial requires 80 patients to
be treated, up to 20 centers. We received approval for an IDE to begin
clinical testing of our Therastream microcatheter system for VT ablation in
December 1999 and approval to expand that trial in 2000. We must complete this
clinical trial, and a pivotal trial for the AF indication, in order to gather
data for the submission of a pre-market approval, or PMA, application to the
FDA for our AF ablation product. We must receive PMA approval prior to
marketing such products for ablation in the United States. Clinical trials of
our microcatheter systems will require substantial financial and management
resources and the completion of such trials will take several years. There can
be no assurance that:

  . necessary IDEs will be granted by the FDA,

  . human clinical trials, if initiated, will be completed,

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

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

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

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

   Our microcatheter systems represent a novel approach to diagnosing and
treating 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 procedures, our business could be harmed and our revenues would
decline.

                                      33
<PAGE>

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

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

  . drugs,

  . external electrical cardioversion and defibrillation,

  . implantable defibrillators,

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

  . Open-heart surgery and the "maze" procedure.

   Physicians will not recommend the use of our microcatheter systems unless
they can conclude that our systems provide a safe, effective and cost-
efficient alternative to current technologies for the mapping and ablation of
AF or VT. If our clinical data and other studies do not show that our products
are safe and effective, our products will not effectively compete against
establish treatments and our product may not be approved for sale or gain
market acceptance.

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

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

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

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

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

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

  . product design and development,

  . product testing,

  . product labeling,

  . product storage,

  . premarket clearance and approval,

  . advertising and promotion, and

  . product sales and distribution.

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<PAGE>

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

   We are required to seek PMA approval for our ablation products, including
the Revelation Tx microcatheter for ablation. The process of obtaining PMA
approval is much more expensive, lengthy and uncertain than the 510(k)
premarket notification clearance process. In order to prepare a PMA
application, we will be required to complete clinical trials to demonstrate
the safety and effectiveness of these products. We submitted an IDE
application for the Revelation microcatheter system for mapping and ablation
of AF in January 1997. We completed a mapping study at Stanford University
Hospital and Massachusetts General Hospital in September 1997. In addition, we
received conditional IDE approval in January 1998 and full approval in March
1998 for a feasibility clinical study for AF ablation using the Revelation Tx
microcatheter system. We completed a 10-patient AF ablation feasibility study
and submitted to the FDA a supplement to our IDE, requesting expansion of the
study in November 1998. We received permission to expand to Phase III in
October 2000. 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. The Therastream clinical trial has been
postponed while we focus on completed our AF Phase III clinical trial. There
can be no assurance that any clinical study that we propose will be permitted
by the FDA, will be completed or, if completed, will provide data and
information that supports PMA approval. We expect that a PMA application will
not be submitted for at least one year, if at all. No assurance can be given
that we will ever be able to obtain PMA approval for any of our ablation
products. Our failure to complete clinical testing or to obtain timely
PMA approval would have a material adverse effect on our business, financial
condition and results of operations.

   Regulatory agencies may limit the indications for which any of our products
are approved or cleared. 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.

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

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

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<PAGE>

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

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

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

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

  . fines,

  . injunctions,

  . recall or seizure of products,

  . withdrawal of marketing approvals or clearances,

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

  . civil and criminal penalties.

   We are also required to demonstrate and maintain compliance with the
Quality System regulations, or QSR, for all of our products. The FDA enforces
the QSR through periodic inspections, including a preapproval inspection for
PMA products. The QSR relates to product testing and quality assurance, as
well as the maintenance of records and documentation. If we or any third-party
manufacturer of our products does not conform to the QSR and cannot be brought
up to such a standard, we will be required to find alternative manufacturers
that do conform. Identifying and qualifying alternative manufacturers may be
along and difficult process. We are also 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 laws, our business results may suffer.

   If we do not comply with foreign regulatory requirements to market our
products outside the United States, our business will be harmed. Sales of
medical devices outside the United States are subject to international
regulatory requirements that vary from country to country. The time required
for approval varies from country to country and may be longer or shorter than
the time required in the United States. In order to market any of our devices
in the member countries of the European Union, or the EU, 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 the
Cardima Pathfinder, Pathfinder mini, Revelation, Revelation Tx and Tracer for
mapping in the EU. We have received CE mark to sell the Venaport, Vueport and
Naviport guiding catheters in the EU. We also received approval to sell the
Cardima Pathfinder, Pathfinder mini, Revelation, Revelation Tx, and Tracer in
Japan and Australia, and to sell the Cardima Pathfinder, Tracer, Vueport and
Naviport in Canada. The Company also received CE mark certification in
August1998 and December 1998 and November 1999, to sell the Revelation,
Revelation Tx AND Revelation T-Flex. microcatheters, respectively, for
ablation of AF in the EU. We intend to submit data in support of additional CE
mark applications. There can be no assurance we will be successful in
obtaining or maintaining the CE mark for these products, as the case may be.
Failure to receive approval to affix the CE mark would prohibit us from
selling these products in member countries of the EU, and would require
significant delays in obtaining individual country approvals. No assurance can
be given that such approvals will ever be obtained. If these approvals are not
obtained, our business could be harmed.

                                      36
<PAGE>

 Difficulties presented by international factors could negatively affect our
 business

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

  . export license requirements for our products,

  . exchange rate fluctuations or currency controls,

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

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

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

  . domestic or international trade restrictions, or

  . changes in tariffs.

   Any of these factors here could damage our business results.

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

   In January 1999, the new "Euro" currency was introduced and adopted by some
European countries that are part of the European Monetary Union, or EMU.
Beginning in 2003, all EMU countries are expected to be operating with the
Euro as their single currency. A significant amount of uncertainty exists as
to the effect the Euro will have on the marketplace generally. In particular
as a significant amount of our sales revenue is derived from sales to EMU
countries, these participating countries' adoption of a single currency may
likely result in greater price transparency, making the EMU a more competitive
environment for our microcatheter products. In addition, some of the rules and
regulations relating to the governance of the currency have not yet been
defined and finalized. 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 AF and VT is highly
competitive. Several of our competitors are developing different approaches
and products for these procedures. These approaches include mapping systems
using contact mapping, single-point spatial mapping and non-contact, multi-
site electrical mapping technologies, and ablation systems using RF,
ultrasound, microwave, laser and cryoablation technologies. Other companies
are also developing surgical procedures that could potentially be used by
physicians to perform the open-heart surgical maze procedure for the treatment
of AF in a minimally invasive manner. If any of these new approaches or
products proves to be safe, effective and cost effective, our products could
be rendered noncompetitive or obsolete, which would cause our business results
to suffer.

   Many of our competitors have an established presence in the field of
interventional cardiology and electrophysiology. These competitors include
Boston Scientific, C.R. Bard, Inc., Johnson & Johnson, through its Cordis
division, St. Jude Medical, Inc., through its Daig division, and Medtronic,
Inc. These competitors have

                                      37
<PAGE>

substantially greater financial and other resources than we do, including
larger research and development staffs and greater experience and capabilities
in conducting research and development activities, testing products in clinical
trials, obtaining regulatory approvals, and manufacturing, marketing and
distributing products. In addition, other companies are developing proprietary
systems for the diagnosis and treatment of cardiac arrhythmias. These companies
include Biosense, Inc. a division of Johnson and Johnson, Cardiac Pathways,
Inc. and Endocardial Solutions, Inc. Other companies develop, market and sell
alternative approaches to the treatment of AF and VT. These companies include
Guidant Corporation, Medtronic, Inc., and Ventritex, Inc., a subsidiary of St.
Jude, Inc., manufacturers of implantable defibrillators. 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 are available
prior to our competitors' products. Our failure to demonstrate the competitive
advantages and achieve market acceptance of our products would harm our
business.

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

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

   We have also licensed a proprietary surface coating material 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 equivalent technology could be developed internally
or identified, licensed and integrated. These delays would have a material
adverse effect on our business, financial condition and results of operations.

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

   We have conducted searches to determine whether our patent applications
interfere with existing patents. Based upon these searches, we believe that our
patent applications and products do not interfere with existing patents.
However, we cannot be sure that relevant patents have not been issued that
could block our ability to obtain patents or commercialize our products.
Moreover, since U.S. patent applications are not a matter of public record, a
patent application could currently be on file that would stand in our way of
obtaining an issued patent. In addition, the United States patent laws were
recently amended to exempt physicians, other health care professionals and
affiliated entities from infringement liability for medical and surgical
procedures performed on patients. The 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 USPTO 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

                                       38
<PAGE>

to significant liabilities to third parties, require us to cease using such
technology, or require us to license disputed rights from third parties.
However, we are not certain that any licenses will be available to us, 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, we are not indemnified against
claims brought by third parties alleging infringement of patent rights.
Consequently, we could bear the liability resulting from such claims. We
cannot be certain that we will have the financial resources to protect and
defend our intellectual property, as such defense is often costly and time-
consuming. Our failure to protect our patent rights, trade secrets, know-how
or other intellectual property would harm our business.

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

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

   Third-party payors may deny reimbursement if they determine that (1) a
prescribed device 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 FDA clearance or approval were received, third-party
reimbursement would also depend upon decisions by the United States Health
Care Financing Administration for Medicare, as well as by individual health
maintenance organizations, private insurers and other payors. Reimbursement
systems in international markets vary significantly by country and by region
within some countries, and reimbursement approvals may be obtained on a
country-by-country basis. Many international markets have government managed
health care systems that control reimbursement for new devices and procedures.
In most markets, there are private insurance systems as well as government-
managed systems. There can be no assurance that (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 have a material
adverse effect on our business, financial condition and results of operations.
Moreover, we are unable to predict what additional legislation or regulation,
if any, relating to the heath care industry or third-party coverage and
reimbursement may be enacted in the future, or what effect such legislation or
regulation would have on our business.

   The U. S. Congress has recently enacted and we have recently received pass-
through reimbursement allowance in March 2001 on all US 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.

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

   We currently manufacture our microcatheter systems in limited quantities
for United States and international sales and for pre-clinical and clinical
trials. However, we have no experience manufacturing our products in the
amounts necessary to achieve significant commercial sales. We currently
believe that our manufacturing capacity will be sufficient through December
2001. We expect that, if U.S. sales for the

                                      39
<PAGE>

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 manufacturing expertise to establish large-scale
manufacturing capabilities. However, we could encounter problems related to:

  . capacity constraints,

  . production yields,

  . quality control, and

  . shortages of qualified personnel.

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

   Our manufacturing facilities are subject to periodic inspection by
regulatory authorities. Our operations must either undergo QSR compliance
inspections conducted by the FDA or receive an FDA exemption from such
compliance inspections in order for us to be permitted to produce products for
sale in the United States. Our facilities and manufacturing processes are
subject to inspections from time to time by the FDA, State of California and
European Notified Bodies. We have demonstrated compliance with ISO 9001
(EN46001) quality standards, as well as compliance with 93/42/EEC, the Medical
Device Directive. We are in compliance with procedures to produce products for
sale in Europe. Any failure by us to comply with QSR requirements or to
maintain our compliance with ISO 9001 (EN 46001) standards and 93/42/EEC, the
Medical Device Directive, will require us to take corrective actions, such as
modification of our policies and procedures. In addition, we may be required to
cease all or part of our operations for some period of time until we can
demonstrate that appropriate steps have been taken to comply with QSR or ISO
9001 (EN 46001) standards. There can be no assurance that we will be found in
compliance with QSR by regulatory authorities, or that we will maintain
compliance with ISO 9001 (EN 46001) standards in future audits. Our failure to
comply with state or FDA QSR requirements, maintain compliance with ISO 9001
(EN 46001) standards, or develop our manufacturing capability in compliance
with such standards, would have a material adverse effect on our business,
financial condition and results of operations.

   Our facilities and manufacturing processes have recently undergone a
successful annual recertification inspection by TUV in August 2000. In November
2000, the FDA conducted a QSIT-Audit of the Cardima Quality System, which we
successfully passed. There is no assurance that our manufacturing facilities
will 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 laminated tubing and hydrophilic coating, 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. Expanding our marketing and sales capability to
adequately support sales in commercial quantities will require substantial
effort and require significant management and financial resources. Our failure
to establish an effective sales and marketing force will cause our revenues to
decline.


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<PAGE>

   On January 26, 2000, we announced that we had signed an exclusive three-year
distribution agreement for our diagnostic products in the United States with
St. Jude's Daig Division, or Daig, which included an investment by St. Jude. As
of February 1, 2001, the distribution agreement reverted to a non-exclusive
arrangement due to Daig's failure to meet the contractual first-year minimum
sales level. Therefore, we will be marketing and distributing our products
along with Daig in the United States.

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

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

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

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

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

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<PAGE>

 Trading in our shares could be subject to extreme price fluctuations, which
 could adversely affect your investment

   Prior to June 1997, there was no public market for our common stock. The
market price of our common stock has fluctuated widely in the past and is
likely to fluctuate in the future. The stock prices of medical device
companies over the last few years have been volatile and difficult to predict.

 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 credit
agreement requires the approval of our bank to declare or pay cash dividends.

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

   Since November 16, 2000, our common stock has been trading at less than
$1.00 per share. In a letter dated December 29, 2000, Nasdaq advised us that
our common stock will be delisted from the Nasdaq SmallCap Market, unless
before March 28, 2001, the bid price of our common stock is at least $1.00 per
share for a minimum period of ten consecutive days. If on March 29, 2001,
Nasdaq notifies us that we have not met the requirements for continued listing
on the Nasdaq SmallCap Market; we intend to appeal this decision. Pending the
resolution of the appeal, our shares will continue to trade on the SmallCap
Market. If the appeal is unsuccessful, we expect that our shares will trade on
the OTC Bulletin Board.

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

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, 2000, we do not have any material quantitative or
qualitative disclosures about market risk.

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-18 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

   Not applicable.

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<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 Proxy Statement for the Annual Meeting of Stockholders to be
held on May 10, 2000 (the "2001 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, the
Board, and serve at the discretion of the Board.

   Mr. Gabriel Vegh (age 61), our President, Chief Executive Officer and
Founder, has been a Director since November 1992. Mr. Vegh has been our
President and Chief Executive Officer since June 2000. From November 1994 until
June 2000, Mr. Vegh was our Chief Operating Officer, and our Executive Vice
President since January 1995. From May 1993 until November 1994, Mr. Vegh was
our President, and from May 1993 until July 1996, he served as our Chief
Financial Officer. Prior to joining us, from August 1985 until May 1993, Mr.
Vegh was the Vice President, Operations of Target, and from February 1983 until
August 1985, Mr. Vegh was General Manager, Pilot Operations of Advanced
Cardiovascular Systems. Mr. Vegh received a B.S. in Mechanical Engineering from
the New Jersey Institute of Technology.

   Mr. Victor J. Barajas (age 37) has been our Vice President of Operations
since August 1997 and is responsible for all operations and manufacturing
activity. 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. 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.

   Mr. Ronald Bourquin (age 50) has been our Vice President and Chief Financial
Officer since July 1996 and our Secretary since December 1998. Prior to joining
us, from July 1993 until July 1996, Mr. Bourquin was the Corporate Controller
of EP Technologies, Inc. ("EPT"), 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 EPT. 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 43) 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. William Wheeler (age 54) has been 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 private
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

                                       43
<PAGE>

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.

ITEM 11. EXECUTIVE COMPENSATION

   The response to this item is contained in our 2000 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 2000 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 2000 Proxy Statement under the
caption "Transactions with Management," and is incorporated herein by
reference.

                                       44
<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.

   (a) 2. Financial Statement Schedules

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

   3. Listing of Exhibits

     (a)

<TABLE>
<CAPTION>
 Exhibit #                              Description
 ---------                              -----------
 <C>       <S>
   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.

 10.22(1)  Employment Letter Agreement dated October 31, 1994, between Cardima
            and Phillip C. Radlick, Ph.D.
</TABLE>

                                       45
<PAGE>

<TABLE>
<CAPTION>
 Exhibit #                              Description
 ---------                              -----------
 <C>       <S>
 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(5)* Exclusive Distribution agreement between Daig Corporation and
           Cardima, Inc.

 10.30(6)  Executive Agreement between Cardima and Allan L. Abati, Ph.D.

 10.31(6)  Executive Agreement between Cardima and Victor J. Barajas.

 10.32(6)  Executive Agreement between Cardima and Sandra Berg.

 10.33(6)  Executive Agreement between Cardima and Ronald Bourquin.

 10.34(6)  Executive Agreement between Cardima and Eric K.Y. Chan, Ph.D.

 10.35(6)  Executive Agreement between Cardima and Phillip Radlick, Ph.D.

 10.36(6)  Executive Agreement between Cardima and Gabriel B Vegh.

 10.37(6)  Executive Agreement between Cardima and William K. Wheeler.

 10.38+    Agreement dated December 19, 2000, between Cardima and Medtronic
           Inc.

  23.1     Consent of Ernst & Young LLP, Independent Auditors.
</TABLE>
--------
(1) Incorporated by reference to the same exhibits filed with the Cardima
    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 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.

(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 requested confidential treatment for certain portions of
    this agreement.

   (b) Reports on Form 8-K

     Form 8-K filed by Cardima on December 22, 2000

                                       46
<PAGE>

                                   SIGNATURES

                                 for Form 10-K

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

                                          CARDIMA, INC.

Date: March 22, 2001
                                                   /s/ Gabriel B. Vegh
                                          By: _________________________________
                                                      Gabriel B. Vegh
                                                 President, Chief Executive
                                                    Officer and Director

   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.

<TABLE>
<CAPTION>
                Name                              Title                    Date
                ----                              -----                    ----


<S>                                  <C>                              <C>
       /s/ Gabriel B. Vegh           President, Chief Executive       March 22, 2001
____________________________________  Officer and Director (Principal
          Gabriel B. Vegh             Executive Officer)


      /s/ Ronald E. Bourquin         Vice President, Chief Financial  March 22, 2001
____________________________________  Officer and Secretary
         Ronald E. Bourquin           (Principal Financial and
                                      Accounting Officer)


  /s/ Phillip C. Radlick, Ph.D.      Chairman of the Board of         March 22, 2001
____________________________________  Directors
     Phillip C. Radlick, Ph.D.


     /s/ Neville J. Jeharajah        Director                         March 22, 2001
____________________________________
        Neville J. Jeharajah


      /s/ Rudolfo C. Quijano         Director                         March 22, 2001
____________________________________
         Rudolfo C. Quijano
</TABLE>

                                       47
<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, 2000 and 1999.............................  F-3

Statements of Operations for the years ended December 31, 2000, 1999, and
 1998....................................................................  F-4

Statement of Stockholders' Equity (Deficit) for the years ended December
 31, 2000, 1999, and 1998................................................  F-5

Statements of Cash Flows for the years ended December 31, 2000, 1999 and
 1998....................................................................  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, 2000 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2000. 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 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, 2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.

   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
January 31, 2001

                                      F-2
<PAGE>

                                 CARDIMA, INC.

                                 BALANCE SHEETS
                    (In thousands except per share amounts)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------
Current assets:
  Cash and cash equivalents................................ $  1,324  $    423
  Short-term investments...................................      --        497
  Accounts receivable, net of allowances for doubtful
   accounts of $124 and $92 at December 31, 2000 and 1999,
   respectively............................................      221       669
  Inventories..............................................    1,663     1,268
  Other current assets.....................................      240       251
                                                            --------  --------
    Total current assets...................................    3,448     3,108
Property and equipment, net................................    1,803     2,512
Notes receivable from officers.............................      514       365
Other assets...............................................      138       104
                                                            --------  --------
                                                             $ 5,903  $  6,089
                                                            ========  ========

      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
      ----------------------------------------------

Current liabilities:
  Accounts payable......................................... $  1,310  $  1,436
  Accrued compensation.....................................      981     1,041
  Other current liabilities................................       31        60
  Capital lease obligation--current portion................      474       776
  Line of credit obligation--current portion...............      --      1,088
                                                            --------  --------
    Total current liabilities..............................    2,796     4,401

Deferred rent..............................................       21         1
Capital lease obligation--noncurrent portion...............      192     1,012
Line of credit obligation--noncurrent portion..............      --      1,095

Commitments

Stockholders' equity (deficit):
  Common stock, $0.001 par value; 25,000,000 shares
   authorized, 21,579,093 shares issued and outstanding at
   December 31, 2000, 16,356,355 as of December 31, 1999;
   at amount paid in.......................................   71,405    60,441
Deferred compensation......................................      (26)     (225)
Accumulated deficit........................................  (68,485)  (60,636)
                                                            --------  --------
  Total stockholders' equity (deficit).....................    2,894      (420)
                                                            --------  --------
                                                            $  5,903  $  6,089
                                                            ========  ========
</TABLE>

                                      F-3
<PAGE>

                                 CARDIMA, INC.

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

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 ----------------------------
                                                   2000      1999      1998
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Net sales....................................... $  2,570  $  3,495  $  2,499
Cost of goods sold..............................    3,667     3,384     2,962
                                                 --------  --------  --------
  Gross profit (loss)...........................   (1,097)      111      (463)
Operating expenses:
  Research and development......................    4,432     5,694     7,230
  Selling, general and administrative...........    6,185     8,173     8,556
                                                 --------  --------  --------
    Total operating expenses....................   10,617    13,867    15,786
                                                 --------  --------  --------
Operating loss..................................  (11,714)  (13,756)  (16,249)
Interest and other income.......................      230       250       359
Interest expense................................     (365)     (522)     (296)
Gain on sale of intellectual property ..........    4,000       --        --
                                                 --------  --------  --------
Net loss........................................ $ (7,849) $(14,028) $(16,186)
                                                 ========  ========  ========
Basic and diluted net loss per share............ $  (0.38) $  (0.89) $  (1.96)
                                                 ========  ========  ========
Shares used in computing basic and diluted net
 loss per share.................................   20,818    15,746     8,239
                                                 ========  ========  ========
</TABLE>



                 See accompanying notes to financial statements

                                      F-4
<PAGE>

                  STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                      Total
                                               Deferred Accumu-   Stockholders'
                                       Common  Compen-   lated       Equity
                                        Stock   sation  Deficit     (Deficit)
                                       ------- -------- --------  -------------
<S>                                    <C>     <C>      <C>       <C>
Balances at December 31, 1998........  $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 $4.24 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)
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
 of common stock at $2.48 per share..    9,896    --         --        9,896
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
                                       =======  =====   ========    ========
</TABLE>

                                      F-5
<PAGE>

                                 CARDIMA, INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                   ---------------------------
                                                    2000      1999      1998
                                                   -------  --------  --------
<S>                                                <C>      <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.........................................  $(7,849) $(14,028) $(16,186)
Adjustments to reconcile net loss to net cash
 provided by operations:
  Depreciation and amortization..................    1,024     1,196       928
  Amortization of deferred compensation..........      199       253       253
  Loss on disposal of assets.....................        2        15         6
  Changes in operating assets and liabilities:
    Accounts receivable..........................      448      (157)     (244)
    Inventories..................................     (395)      709    (1,445)
    Other current assets.........................       11       115      (105)
    Restricted cash..............................       --       105        87
    Notes receivable from officers...............     (149)      (45)      (19)
    Other assets.................................     (195)     (104)     (905)
    Accounts payable.............................     (126)     (850)    1,388
    Accrued employee compensation................      (60)        9       279
    Other current liabilities....................      (29)      (16)       21
    Deferred rent................................       20       (41)      (48)
                                                   -------  --------  --------
      Net cash used in operating activities......   (7,099)  (12,839)  (15,990)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments..............       --   (19,057)     (517)
Maturities and sales of short-term investments...      497    18,560     4,786
Capital expenditures.............................     (122)     (248)      (45)
Proceeds from disposal of assets.................       --        14        25
                                                   -------  --------  --------
    Net cash provided by (used in) investing
     activities..................................      375      (731)    4,249

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases..........   (1,302)     (993)     (745)
Principal payments under credit line.............   (2,183)     (817)       --
Payments under notes payable.....................       --        --        (7)
Proceeds under line of credit....................       --        --     3,000
Net proceeds from sale of common stock...........   10,964    14,531       313
Proceeds from sale/leaseback of capital
 equipment.......................................      146       627     1,247
                                                   -------  --------  --------
    Net cash provided by financing activities....    7,625    13,348     3,808
                                                   -------  --------  --------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS.....................................      901      (222)   (7,933)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.....      423       645     8,578
                                                   -------  --------  --------
CASH AND CASH EQUIVALENTS, END OF YEAR...........  $ 1,324  $    423  $    645
                                                   =======  ========  ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest...........  $   365  $    211  $    298
                                                   =======  ========  ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES
Equipment acquired under capital leases..........  $   180  $    771  $  1,341
                                                   =======  ========  ========
</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-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 Target Therapeutics.

   As of December 31, 2000, the Company had cash and investments on hand of
$1.3 million and working capital of $652,000. Since inception, the Company has
an accumulated deficit of approximately $68.5 million. Management expects to
continue to incur additional losses in the foreseeable future as it completes
new product development and commercialization. Management recognizes the need
to raise additional funds from outside sources and has engaged investment
bankers to assist in that endeavor. In addition, in December 2000, the Company
executed a sale of certain intellectual property to Medtronic, In. 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 addition, in January 2001, the
Company implemented several cost containment measures which included a
reduction in headcount of 22 employees, a reduction in specific research and
development projects and the postponement of our VT clinical trial. The Company
has engaged a real estate broker to assist in identifying a sublessor for
approximately 17,000 square feet of unused office space. Management believes
that the cash balance as of December 31, 2000, together with the $4.0 million
received in January 2001 from Medtronic, will be sufficient to fund planned
expenditures through at least May 2001. Management believes that it will be
able to obtain additional funds through either public, private equity or other
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, 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 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. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). The adoption of SAB
101 had no impact on the results of the Company's operations or our financial
position in 2000.

 Research and Development

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

 Net Loss Per Share

   Basic and diluted 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, warrants and stock options from the
computation of diluted earnings per share because all such securities are anti-
dilutive for all periods presented.

                                      F-7
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


 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
other liquid investments are classified as short-term investments. All of the
Company's cash equivalents and short-term investments, consisting principally
of commercial paper, are classified as available-for-sale as of December 31,
2000. 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. The
fair value of investments is based on quoted market prices at December 31,
2000. The fair value of these securities approximated the amortized cost at
December 31, 2000. Cash, cash equivalents and short-term investments at
December 31, 2000 consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  --------------
                                                                   2000   1999
                                                                  ------- ------
     <S>                                                          <C>     <C>
     Cash and cash equivalents:
       Cash...................................................... $   133 $ 254
       Money market funds........................................   1,191   169
                                                                  ------- -----
       Total cash and cash equivalents........................... $ 1,324 $ 423
                                                                  ======= =====
     Short-term investments:
       Commercial paper.......................................... $    -- $ 497
                                                                  ------- -----
       Total short-term investments.............................. $    -- $ 497
                                                                  ======= =====
</TABLE>

 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):

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                   -------------
                                                                    2000   1999
                                                                   ------ ------
     <S>                                                           <C>    <C>
     Raw materials................................................ $  751 $  616
     Work-in-process..............................................     95    107
     Finished goods...............................................    817    545
                                                                   ------ ------
                                                                   $1,663 $1,268
                                                                   ====== ======
</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-8
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


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

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                2000     1999
                                                               -------  -------
     <S>                                                       <C>      <C>
     Equipment................................................ $ 5,776  $ 5,492
     Leasehold improvements...................................     115      109
                                                               -------  -------
                                                                 5,891    5,601
     Less accumulated depreciation............................  (4,088)  (3,089)
                                                               -------  -------
                                                               $ 1,803  $ 2,512
                                                               =======  =======
</TABLE>

   Property and equipment financed under capital leases were $3,686,000 and
$4,205,000 at December 31, 2000 and 1999, respectively. Accumulated
amortization related to leased assets was $3,014,000 and $2,476,000 at December
31, 2000 and 1999, respectively.

 Concentrations of Risk

   To date, product sales have been direct to customers in the United States
and to distributors primarily in Europe, Japan and South America. The total
export sales represented 48% of net sales for the year ended December 31, 2000.
Of total sales in 2000, 21% were to Japan, 26% were to Europe, of which 19% was
in Germany and 1% was to the rest of the world. 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 $46,000 and $55,000 for the years ended
December 31, 2000 and 1999, respectively. When necessary, estimated provisions
for product returns are recorded. The geographic distribution of net sales was
as follows:

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                --------------------------------
                                                   2000       1999       1998
                                                ---------- ---------- ----------
                                                         (In thousands)
   <S>                                          <C>    <C> <C>    <C> <C>    <C>
   United States............................... $1,334 52% $1,915 55% $1,722 69%
   Europe......................................    674 26%  1,127 32%    554 22%
   Japan.......................................    548 21%    341 10%    177  7%
   Rest of World...............................     14  1%    112  3%     46  2%
                                                ------     ------     ------
   Total Net Sales............................. $2,570     $3,495     $2,499
                                                ======     ======     ======
</TABLE>

   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 are expensed as they occur due to the uncertainty of a patent
actually issuing and the length of time before a patent is recognized and
allowed by the U. S. Patent Office.

 Recent Accounting Pronouncements

   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,

                                      F-9
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

which provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. SFAS No. 133, as delayed by
SFAS No. 137, is effective for years beginning after June 15, 2000, and is not
anticipated to have a significant impact on the Company's results of operations
or financial condition when adopted.

2. Commitments

   The Company leases facilities under an operating lease which commenced 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 at December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                                               Operating Capital
                                                                 Lease   Leases
                                                               --------- -------
     <S>                                                       <C>       <C>
     Year ending December 31:
       2001...................................................  $  677    $ 490
       2002...................................................     657      229
       2003...................................................     537        9
       2004...................................................     --         9
       2005...................................................     --         4
                                                                ------    -----
     Total minimum payments required..........................  $1,871      741
                                                                ======
     Less amount representing interest........................              (75)
                                                                          -----
     Present value of future lease payments...................              666
     Less current portion.....................................             (474)
                                                                          -----
     Noncurrent portion.......................................            $ 192
                                                                          =====
</TABLE>

   Rent expense, was approximately $585,000 in 2000, $391,000 in 1999 and
$363,000 in 1998. In connection with its facilities lease arrangements, the
Company issued letters of credit to lessors collateralized by certificates of
deposit which totaled approximately $105,000 at December 31, 1998. In November
of 1999, these letters of credit and their respective certificates of deposits
expired.

3. Stockholders' Equity

 1993 Stock Option Plan

   During 1993, the board of directors adopted the 1993 Stock Option Plan (the
"Plan") and, as amended, has reserved 3,850,690 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 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 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 grant date and no option granted to a 10%
stockholder shall have a maximum term in excess of five years from the grant
date.

                                      F-10
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


   Activity under the Plan is as follows:

<TABLE>
<CAPTION>
                                                Outstanding Options
                                       ---------------------------------------
                             Shares    Number of   Price Per  Weighted-Average
                           Available    Shares       Share     Exercise Price
                           ----------  ---------  ----------- ----------------
<S>                        <C>         <C>        <C>         <C>
Balance at January 1,
 1998.....................    123,718  1,140,615  $0.56-$5.88      $2.37
Additional shares
 reserved.................    243,117        --           --         --
Options granted...........   (290,508)   290,508  $2.88-$5.56      $4.38
Options exercised.........        --     (94,289) $0.56-$1.75      $1.28
Options forfeited.........     59,742    (59,742) $0.56-$7.00      $3.59
                           ----------  ---------
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
                           ----------  ---------
</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). The deferred compensation is being amortized are the resting period of
the options.

   At December 31, 2000, 1999, 1998 and approximately 1,021,429, 920,665 and
881,606 options, respectively, were exercisable under the Plan. All options
granted in 2000 were granted at fair value. The weighted average exercise price
for all options granted in 2000 is $1.21.

 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. On June 2, 2000, options
to purchase 4,000 shares were granted at fair value of $1.16 per share. There
were no options exercised or canceled during the fiscal period December 31,
2000. A total of 90,000 shares are outstanding 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") covering an aggregate of 250,000 shares of
common stock. The 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 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%

                                      F-11
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

of any 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, 2000, 188,906 shares of common
stock have been issued under the Plan.

 Warrants

   At December 31, 2000, 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, 13,937 shares of common stock at $5.74 per share, and 19,513
shares of common stock at $2.56 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 February 2000, the Company sold a total of 4,666,611 shares of common
stock at $2.25 per share in a private placement transaction to accredited
investors. The transaction included warrants to investors exercisable for
933,323 shares of common stock at an exercise price of $2.48 per share. As
commission for the transaction, the Company paid $524,891 in cash. In addition,
the Company issued warrants, exercisable for 233,329 shares of common stock at
an exercise price of $2.48 per share, as additional commission for the
transaction. These warrants are exercisable immediately and expire at the
earliest of (i) 5 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 June 2000, the Company issued warrants to purchase 221,667 shares of
common stock at an exercise price of $1.27 in connection with the shares
purchased in the February 2000 private placement transaction. These warrants
are exercisable immediately and expire at the earliest of (i) 5 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 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. 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. In February 2000, 180,744 of these warrants were exercised
for cash. 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.

   The Company has reserved 2,421,331 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,

                                      F-12
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

("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.

   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 Black Scholes
option pricing model for 1998, 1999 and 2000 with the following weighted-
average assumptions for 2000, 1999 and 1998, respectively; risk-free interest
rates of approximately 6.5%, 6.0% and 6.0%; dividend yields of 0.0%, volatility
factors of the expected market price of the Company's common stock of 0.8, 0.6
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.

   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,
                                                   ---------------------------
                                                    2000      1999      1998
                                                   -------  --------  --------
                                                   (In thousands, except per
                                                          share data)
     <S>                                           <C>      <C>       <C>
     Net loss--as reported........................ $(7,849) $(14,028) $(16,186)
                                                   =======  ========  ========
     Net loss--pro forma.......................... $(8,011) $(14,269) $(16,439)
                                                   =======  ========  ========
     Net loss per share--as reported.............. $ (0.38) $  (0.89) $  (1.96)
                                                   =======  ========  ========
     Net loss per share--pro forma................ $ (0.38) $  (0.91) $  (2.00)
                                                   =======  ========  ========
</TABLE>

   For fiscal years 2000, 1999 and 1998 the weighted average fair value of
options granted is $1.24, $1.71 and $2.12 respectively.

   The following table summarizes information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                         Options Outstanding              Options Exercisable
                 --------------------------------------  ------------------------
                                Weighted-
                                 Average     Weighted-                 Weighted-
    Range of      Number of     Remaining     Average     Number of     Average
    Exercise       shares      Contractual   Exercise      shares      Exercise
     Prices      Outstanding      Life         Price     Exercisable     Price
    --------     -----------   -----------   ---------   -----------   ---------
   <S>           <C>           <C>           <C>         <C>           <C>
   $0.56-$1.09      133,928       4.50         $0.85        132,278      $0.84
    1.16- 1.16      643,101       9.42          1.16        322,435       1.16
    1.22- 1.22      478,899       7.76          1.22          6,788       1.22
    1.40- 1.65      394,671       6.15          1.43        379,223       1.43
    1.75- 2.56      314,870       7.79          2.09        145,033       2.04
    2.88- 7.00       46,489       7.39          3.58         35,672       3.69
                  ---------                               ---------
   $0.56-$7.00    2,011,958       7.75         $1.41      1,021,429      $1.43
                  =========                               =========
</TABLE>

                                      F-13
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


4. Notes Receivable from Officers

   In December 1997, the Company entered into a $300,000 note receivable
agreement with Phillip C. Radlick, Ph.D., its Chairman of the Board 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. As security for the
note, Dr. Radlick granted Cardima a security interest in his vested stock
options and his principal residence. At December 31, 2000, approximately
$58,000 of interest has accrued. The note receivable and accrued interest are
included in the accompanying balance sheet.

   In August 1999, the Company entered into a $25,000 note receivable agreement
with David Carner, its Director of AF Systems to facilitate the purchase of a
principal residence in the Bay Area. Although Mr. Carner resigned from the
Company in May 2000, the Company continues to hold the note and Mr. Carner is
obligated to make regular monthly payments against the outstanding note. The
note bears interest at the minimum Applicable Federal Rate of 5.30% at the time
the note was issued and is due and payable in a single lump sum twenty-four
months from the note date. At December 31, 2000, approximately $1,100 of
interest has accrued. The note receivable and accrued interest are included in
the accompanying balance sheet. In March 2001, Mr. Carner paid off the
remaining principal and interest balance on this note.

   In June 2000, the Company entered into a note receivable agreement with
William Wheeler, its Senior Vice President of Sales and Marketing 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 issued and is due and payable in
a single lump sum forty-eight months from the note date. As security for the
note, Mr. Wheeler granted Cardima a security interest in his vested stock
options. At December 31, 2000, approximately $5,700 of interest has accrued.
The note receivable and accrued interest are included in the accompanying
balance sheet.

5. Income Taxes

   As of December 31, 2000, the Company had federal net operating loss
carryforwards of approximately $60,000,000. The Company also had federal
research and development tax credit carryforwards of approximately $600,000 as
of December 31, 2000. The net operating loss and credit carryforwards will
expire beginning in 2008 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 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>
                                                              2000      1999
                                                            --------  --------
     <S>                                                    <C>       <C>
     Net operating loss carryforwards...................... $ 21,900  $ 20,800
     Research credits carryforwards (federal and state)....      900       900
     Manufacturing investment credit carryforwards.........      100       100
     Capitalized research and development..................      800       700
     Other, net............................................      300       900
                                                            --------  --------
     Total deferred tax assets.............................   24,000    23,400
     Valuation allowance for deferred tax assets...........  (24,000)  (23,400)
                                                            --------  --------
                                                            $    --   $    --
                                                            ========  ========
</TABLE>


                                      F-14
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

   The net valuation allowance increased by $600,000, $5,300,000 and $6,200,000
during the years ended December 31, 2000, 1999 and 1998, respectively.

Related Party Transactions

 License Rights

   In May 1993, in exchange for an equity interest in the Company, Target
Therapeutics, Inc., or 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, the Company 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 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. The
Company 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.

                                      F-15
<PAGE>

                                 CARDIMA, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)


7. Subsequent Events

   In January 2001, the Company received $4,000,000 from Medtronic, Inc.,
representing final payment on the transaction initiated in December 2000
whereby the Company sold a portion of its patent portfolio and related
intellectual property pertaining to intravascular sensing and signal detection
and certain guiding catheters. The initial $4,000,000 was paid on execution of
the agreement in December of 2000, and the remaining $4,000,000 was paid upon
completion of the transfer of the intellectual property. Unaudited proforma
information, assuming the transaction had been completed on December 31, 2000,
is as follows:

<TABLE>
<CAPTION>
                                                             December 31, 2000
                                                             -------------------
                                                                      Proforma
                                                             Actual  (unaudited)
                                                             ------  -----------
     <S>                                                     <C>     <C>
     Cash and cash equivalents.............................. $1,324    $5,324
       Total assets.........................................  5,903     9,903
     Common stock........................................... 71,405    71,405
       Total stockholders' equity...........................  2,894     6,894
     Net loss............................................... (7,849)   (3,849)
</TABLE>

                                      F-16