UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2001

[ ] 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
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CARDIMA, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) had been subject to such filing
requirements for the past 90 days. X Yes _______No
---

As of May 7, 2001, there were _33,387,100 shares of Registrant's Common Stock
outstanding.

CARDIMA, INC.

INDEX

PART I ............................................................................................................... 3

ITEM 1. FINANCIAL STATEMENTS...................................................................................... 3
Condensed Balance Sheets as of March 31, 2001 and December 31, 2000.............................................. 3
Condensed Statements of Operations for the three months ended March 31, 2001 and 2000............................ 4
Condensed Statements of Cash Flows for the three months ended March 31, 2001 and 2000............................ 5
NOTES TO CONDENSED FINANCIAL STATEMENTS.......................................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 8

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 AND 2000.................................................... 9

LIQUIDITY AND CAPITAL RESOURCES....................................................................................... 11

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 26

PART II. OTHER INFORMATION......................................................................................... 27

ITEM 1. EXHIBITS AND REPORTS ON FORM 8-K.......................................................................... 27

SIGNATURES............................................................................................................ 28

PART I.

ITEM 1. FINANCIAL STATEMENTS

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

March 31, December 31,
2001 2000
ASSETS (Unaudited) (see note 1)
-------------- -------------

Current assets:
Cash and cash equivalents............................................. $ 1,699 $ 1,324
Accounts receivable, net of allowances for doubtful accounts
of $130 at March 31, 2001 and $124 at December 31, 2000........... 253 221
Inventories........................................................... 1,353 1,663
Other current assets.................................................. 211 240
------------- -------------
Total current assets.............................................. 3,516 3,448
Property and equipment, net................................................ 1,609 1,803
Notes receivable from officers............................................. 532 514
Other assets............................................................... 112 138
------------- -------------
$ 5,769 $ 5,903
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 928 $ 1,310
Accrued compensation.................................................. 611 981
Other current liabilities............................................. 45 31
Capital lease obligation - current portion............................ 457 474
------------- -------------
Total current liabilities......................................... 2,041 2,796

Deferred rent.............................................................. 21 21
Capital lease obligation - noncurrent portion.............................. 76 192
Commitments

Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares authorized,
21,640,184 shares issued and outstanding at March 31, 2001;
21,579,093 as of December 31, 2000; at amount paid in................ 71,425 71,405
Deferred compensation................................................ (1) (26)
Accumulated deficit.................................................. (67,793) (68,485)
------------- -------------
Total stockholders' equity ...................................... 3,631 2,894
------------- -------------
$ 5,769 $ 5,903
============= =============

See accompanying notes to condensed financial statements

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

Three months ended March 31,
(Unaudited)
----------------------------
2001 2000
---------- ---------
Net sales $ 539 $ 669
Cost of goods sold 974 846
---------- --------
Gross Margin (435) (177)

Operating expenses:
Research and development 1,357 1,166
Selling, general and administrative 1,509 1,569
---------- --------
Total operating expenses 2,866 2,735
---------- --------
Operating loss (3,301) (2,912)
Interest and other income 12 53
Interest expense (19) (111)
Gain on sale of intellectual property 4,000 --
---------- --------
Net income (loss) $ 692 $ (2,970)
========== ========
Basic net income (loss) per share $ 0.03 $ (0.16)
========== ========
Diluted net income (loss) per share $ 0.03 $ (0.16)
========== ========
Shares used net income (loss) basic 21,620 18,674
========== ========
Shares used net income (loss) diluted 21,620 18,674
========== ========

See accompanying notes to financial statements

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

CARDIMA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)

Three months ended March 31,
(Unaudited)
----------------------------
2001 2000
---------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 692 ($2,970)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation and amortization 224 252
Amortization of deferred compensation 25 50
Changes in operating assets and liabilities:
Accounts receivable (32) 118
Inventories 310 30
Other current assets 29 (8)
Notes receivable (18) (5)
Other assets 26 (16)
Accounts payable (382) (253)
Accrued compensation (370) (224)
Other current liabilities 14 9
Deferred rent -- 6
-------- --------
Net cash provided by (used) in operating activities 518 (3,011)

CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales of short-term investments -- 497
Capital expenditures (30) (22)
-------- --------
Net cash provided by (used in) investing activities (30) 475

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases and credit line (133) (473)
Net proceeds from sale of common stock and warrant exercises 20 10,908
Proceeds from sale/leaseback of capital equipment -- 94
-------- --------
Net cash provided by (used in) financing activities (113) 10,529
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 375 7,993
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,324 423
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,699 $ 8,416
-------- --------

CARDIMA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)

1. BASIS OF PRESENTATION

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

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

2. MANAGEMENT'S PLANS

As of March 31, 2001 the Company has approximately $1,699,000 in cash and cash
equivalents, working capital of $1,475,000 and an accumulated deficit of
$67,793,000. Assuming the Company has adequate funding to continue the course of
its development activities, the Company expects such losses to continue for at
least the next two years. Management is seeking to continue to finance
operations with a combination of funds from equity or debt offerings, revenue
from product sales, funds from potential corporate alliances and technology
licenses. The Company expects its existing capital resources will permit it to
meet its capital and operational requirements through at least December 2001.

On January 26, 2000, the Company signed an exclusive three-year distribution
agreement with St. Jude Medical Corporation, or St. Jude, whereby St. Jude's
Daig Division was to distribute Cardima's diagnostic products in the United
States. The distribution agreement included an equity investment by St. Jude.
St. Jude did not meet its minimum annual purchase quota for the first year under
the distribution agreement; therefore, the distribution agreement is now
non-exclusive. The Company plans to gear up its own small sales force in the
United States. The Company retains the rights for all other geographic areas and
maintains worldwide control of its therapeutic products.

In order to commercialize our products and continue operations, we will need to
raise additional capital by the end of 2001. Our failure to raise additional
capital to develop and market our products will cause our business to suffer and
would cause the Company to cease operations.

3. SUBSEQUENT EVENTS-PRIVATE PLACEMENT

In May 2001, the Company sold a total of 11,746,916 shares of common stock at
$0.58 per share in a private placement transaction to accredited investors. The
transaction included warrants to investors exercisable for 5,873,458 shares of
common stock at an exercise price of $0.87 per share. These warrants are
redeemable by the Company if the Company's common stock closes at $1.16 for
fifteen consecutive trading days. As a commission for the transaction, the
Company paid approximately $510,988 in cash and issued warrants, exercisable for
1,174,692 shares of common stock at an exercise price of $0.64 per share. The
Company's net proceeds, after expenses of the placement, were approximately
$6,200,000.

4. BALANCE SHEET COMPONENTS

Certain balance sheet components are as follows (in thousands):

March 30, December 31,
2001 2000
--------- ------------
(unaudited) (see note 1)

Inventories:
Raw materials $ 681 $ 751
Work-in-process 107 95
Finished goods 565 817
-------- --------
$ 1,353 $ 1,663
======== ========
Property and equipment:
Equipment 5,786 5,776
Leasehold improvements 115 115
-------- --------
$ 5,901 $ 5,891
Less accumulated depreciation (4,292) (4,088)
-------- --------
$ 1,609 $ 1,803
======== ========

5. NET LOSS PER SHARE

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

6. COMPREHENSIVE INCOME (LOSS)

Comprehensive loss equaled net loss for all periods presented.

compares with a net loss of $2,970,000 for the same period in 2000. Including
the final $4,000,000 payment from Medtronic for the gain on the sale of certain
intellectual property, for the first quarter of 2001, the Company reported net
income of $692,000.

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

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

OVERVIEW

Since its incorporation in November 1992, Cardima has been engaged in the
design, research, development, manufacturing and testing of microcatheter
systems for the mapping, or diagnosis, and ablation, or treatment, of cardiac
arrhythmias. We have generated revenues of approximately $11.4 million from
inception to March 31, 2001. Until January 1997, these revenues were primarily
in Europe and Japan from sales of our Cardima Pathfinder and Tracer
microcatheter systems for diagnosing VT and our Revelation microcatheter system
for diagnosing AF, as well as ancillary products such as the Venaport guiding
catheters. Subsequent to 1997, United States sales consist primarily of
Pathfinder and Revelation lines of microcatheters for diagnosis of VT and AF,
respectively, following FDA 510(k) clearance. In January 2000, the company
signed an exclusive three-year distribution agreement with St. Jude Medical
Corporation, or St. Jude. As of February 1, 2001, the distribution agreement
reverted to a non-exclusive arrangement due to Daig's failure to meet the
contractual first-year minimum sales level. The Company will be marketing and
distributing its products along with Daig in the United States. To date, the
Company's international sales have been made through a small direct sales force
and distributors in selected countries who sell the Company's products to
physicians and hospitals. European sales consist primarily of the Pathfinder,
microcatheter lines for diagnosis of VT and Revelation lines of microcatheters
for the diagnosing and treating of AF.

The Company has obtained the right to affix the CE Mark to its Cardima
Pathfinder, Pathfinder mini and Tracer microcatheter systems for mapping VT and
its Revelation, Revelation Tx and Revelation T-Flex microcatheter systems for
both mapping and ablation of AF, permitting the

Company to market these products in the member countries of the EU. The Company
received 510(k) clearances for the Revelation microcatheter for mapping of AF,
the Pathfinder mini microcatheter and the Tracer microcatheter for mapping VT,
for the Vueport balloon guiding catheter in July 1998 and for the Naviport
deflectable tip guiding catheter in August 1999. The Company will be required to
conduct clinical trials, demonstrate safety and effectiveness and obtain PMA
approval from the FDA in order to sell any of the Company's products designed
for treatment of AF or VT in the United States. Specifically, PMA approval will
be required prior to the introduction in the United States of the Revelation Tx
microcatheter system for treatment of AF or Therastream microcatheter system for
treatment of VT.

We have recently refocused the Company's efforts to complete our Phase III
clinical trials in the United States to treat AF with the Revelation Tx
microcatheter System.

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

Revenues are recognized when products are shipped.

RESULTS OF OPERATIONS - THREE MONTHS ENDED March 31, 2001 AND 2000

Net Sales

Net sales for the quarter ended March 31, 2001 decreased 19% to $539,000 from
$669,000 for the same period in 2000. The decrease was primarily the result of
converting the United States direct sales force to an exclusive distribution
agreement with Daig and restructuring within the sales and marketing
departments. Sales in the United States for the quarter ended March 31, 2001
decreased 11% to $250,000 from $282,000 in the same period in 2000.
International sales for the quarter ended March 31, 2001 decreased 25% to
$289,000 from $387,000 in the same period in 2000. This decrease was primarily
attributable to reductions in the European direct sales force to reduce
expenses.

As of February 1, 2001, the distribution agreement with Daig 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 with a small direct sales force along with Daig in the United
States.

Management has made a conscious decision to focus its resources on the
completion of the Phase III clinical trials to treat atrial fibrillation with
the Revelation Tx microcatheter system, while building a sales foundation on
which to grow future revenue opportunities.

Cost of Goods Sold

Cost of goods sold primarily includes raw materials costs, catheter fabrication
costs, system assembly, test costs and manufacturing overhead. Cost of goods
sold for the quarter ended March 31, 2001 increased 15% to $974,000 from
$846,000 for the same period in 2000. This increase was primarily due to fixed
costs being allocated over lower manufacturing volume. The reduction in
manufacturing volume was part of a targeted reduction in finished goods
inventory levels from the fourth quarter of 2000 to the end of the first quarter
of 2001.

Research and Development Expenses

Research and development expenses include product development, clinical testing
and regulatory expenses. Research and development expenses for the quarter ended
March 31, 2001 decreased 13% to $628,000 from $718,000 for the same period in
2000. The decrease is due to restructuring efforts to focus resources on
completing the development of our Revelation Tx microcatheter system for AF
ablation, as well as postponing certain projects not related to the Phase III
clinical trial. Regulatory and clinical expenses increased 62% to $729,000 from
$448,000 in the same period in 2000. The increased costs are related to our
efforts to enroll patients for the Phase III clinical trial.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended March 31,
2001 decreased 4% to $1,509,000 from $1,569,000 for the same period in 2000.
General and administrative expenses for the quarter ended March 31, 2001
increased 37% to $890,000 from $648,000 for the same period in 2000. The
increase is due to the costs associated with the reduction in staff in January
2001, as well as shifting the allocation of certain expenses into the general
and administrative category. Selling expenses for the quarter ended March 31,
2001 decreased 31% to $483,000 from $698,000 for the same period in 2000
primarily due to a reduction in sale staffing. Marketing expenses for the
quarter ended March 31, 2001 decreased 39% to $136,000 from $223,000 for the
same period in 2000. Sales and marketing expenses decreased in general due to
efforts to reduce expenses and focus on the Company's Phase III clinical trial.

Interest and Other Income

Interest and other income for the quarter ended March 31, 2001 decreased to
$12,000 from $53,000 for the same period in 2000. The decrease was due primarily
to lower cash balances and foreign currency adjustments of $10,500.

Interest Expense

Interest expense for the quarter ended March 31, 2001 decreased to $19,000 from
$111,000 for the same period in 2000. The decrease was primarily due to the
payoff of our debt with Transamerica of approximately $2,000,000 and the
expiration and payoff of certain capital equipment leases.

Gain on Sale of Intellectual Property

The gain on sale of certain intellectual property is due to the final $4,000,000
payment received from Medtronic in January 2001. The total purchase price of the
intellectual property was $8,000,000, $4,000,000 of which was recognized in
December 2000. The intellectual property was carried at virtually no value on
our balance sheets.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations to date, principally through private placements
of equity securities, which have yielded net proceeds of $57,800,000 through
March 31, 2001, our initial public offering of Common Stock in June 1997, which
resulted in net proceeds of approximately $13,600,000, together with interest
income on such proceeds, borrowings under a $3,000,000 line of credit, sale of
certain of our non-core patents to Medtronic for $8,000,000 and equipment
leases to finance certain capital equipment which have provided proceeds in the
amount of $4,700,000. As of March 31, 2001, the Company had approximately
$1,699,000 in cash and cash equivalents.

Net cash provided by operating activities was approximately $518,000 compared to
the net cash used of $3,000,000 for the three months ended March 31, 2001 and
2000, respectively. The change is related to the $4,000,000 gain on the sale of
intellectual property recognized in January 2001. Net cash used in investing
activities was $30,000 compared to $475,000 provided by investing activities,
for the three months ended March 31, 2001, and 2000, respectively. This change
is primarily attributable to increased capital equipment expenditures. Net
cash used in financing activities was approximately $113,000 compared to
$10,529,000 provided by financing activities for the three months ended March
31, 2001 and 2000, respectively. This change is primarily due to the sale of
equity securities in private placement transaction in the first quarter of 2000.

In May 1999, the Company entered into an equipment lease that permits the
Company to borrow up to $1,000,000 for the purchase of office and manufacturing
equipment, software and custom-built equipment. As of December 31, 2000 the
Company had paid off both the line of credit and certain equipment leases in
full. In January and February 1999, the Company sold a total of 7,500,000 shares
of common stock at $2.00 per share in a private placement transaction to
accredited investors. As commission, the Company issued 354,806 shares of its
common stock to the placement agent and paid approximately $490,000 in cash. In
addition the Company issued warrants, exercisable for 750,000 shares of common
stock at an exercise price of $2.20 as a commission for the transaction. The
Company's net proceeds, after expenses of the placement,

were approximately $14,300,000. 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 933,322 shares of common stock at an exercise price of
$2.48 per share. As commission for the transaction, the Company paid
approximately $525,000 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 commission for the transaction. The Company's net proceeds, after
expenses of the placement, were approximately $9,900,000.

In May 2001, the Company sold a total of 11,746,916 shares of common stock at
$0.58 per share in a private placement transaction to accredited investors. The
transaction included warrants to investors exercisable for 5,873,458 shares of
common stock at an exercise price of $0.87 per share. These warrants are
redeemable by the Company if the Company's Common Stock closes at $1.16 for
fifteen consecutive trading days. As a commission for the transaction, the
Company paid approximately $510,988 in cash and issued warrants, exercisable for
1,174,692 shares of common stock at an exercise price of $0.64 per share. The
Company's net proceeds, after expenses of the placement, were approximately
$6,200,000.

The Company's future liquidity and capital requirements will depend upon
numerous factors, including receipt of adequate funding, sales and marketing
activities, the progress of the Company's product development efforts, the
progress of the Company's clinical trials, actions relating to regulatory
matters, the costs and timing of expansion of product development,
manufacturing, the extent to which the Company's products gain market acceptance
and competitive developments. Since inception, the Company has an accumulated
deficit of approximately $67.8 million. Management expects to continue to incur
additional losses in the foreseeable future as it completes new product
development and product commercialization. The Company believes that available
cash will be sufficient to meet the Company's cash requirements through at least
December 2001. The Company will require additional financing. There can be no
assurance however, that such additional financing will be available on terms
acceptable to the Company, if at all. The Company may seek to raise additional
funds through public or private financing, collaborative relationships or other
arrangements. Furthermore, any additional equity financing is expected to be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital when needed will have a material adverse effect on the
Company's business, financial condition and would cause the Company to cease
operations.

FACTORS AFFECTING FUTURE RESULTS

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

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

bring our microcatheters to market. Since our inception, we have experienced
losses and we expect to experience substantial net losses into the foreseeable
future.

Our net losses were approximately $3.3 million for the quarter ended March
31, 2001, before the gain on the sale of certain patents to Medtronic, Inc.,
compared to $2.9 million for the same period in 2000, respectively. As of March
31, 2001, our accumulated deficit was approximately $67.8 million. Our limited
sales history makes it difficult to assess our future results. We cannot be
certain that we will ever generate substantial revenue or achieve profitability.
Our failure to generate substantial revenues would harm our business.

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. We believe that our existing cash, any sale
by us of additional shares of stock will dilute your percentage ownership in us.
On May 3, 2001, we received approximately $6.8 million, before commission and
expenses, from certain investors in a private placement of approximately 11.7
million shares of our common stock. Additionally, we issued redeemable warrants
to purchase up to an aggregate of 5,813,844 shares of our common stock at an
exercise price of $0.87 per share.

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

We will continue to raise additional capital in order to complete the
clinical trials for, and market, our microcatheter systems. In addition, we may
have to spend additional funds if unforeseen difficulties arise in the course of
developing our products, performing clinical trials, obtaining necessary
regulatory clearances and approvals or performing other aspects of our business.
We cannot be certain that additional funding will be available to us when
needed, if at all, or, if available, on terms attractive to us. Our inability to
obtain sufficient funds may require us to delay, scale back or eliminate some or
all of our research and product development programs, to limit the marketing of
our microcatheter products, or to license to third parties the rights to
commercialize products or technologies that we would otherwise try to develop
and market ourselves. Our failure to raise this additional capital when needed
could cause us to cease 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 March 31, 2001, cash, cash
equivalents, short-term investments and long-term restricted cash totaled
approximately $1.6 million. We received the final payment of $4,000,000 from
Medtronic on January 31, 2001. On May 3, 2001, we received net proceeds of
approximately $6.2 million from a private placement. 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 at least December 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 access and cooperate with us in completing
filings with the FDA. We cannot be certain that the FDA will permit our reliance
on these third parties. If we are unable to rely on clinical data collected by
others, or if these third parties do not perform their contractual duties, our
clinical trials may be delayed. Either of these scenarios could significantly
delay commercialization of our products, require us to spend more money on our
clinical trials and cause our business results to suffer.

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

To date, we have completed two clinical trials and have received 510(k)
pre-market clearances from the FDA with respect to our Pathfinder and Pathfinder
mini microcatheter systems for venous mapping of VT, and our Revelation
microcatheter system for mapping the atria. 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.
Currently, we are developing the Revelation Tx microcatheter system for ablation
of AF. We must obtain an Investigational Device Exemption, or IDE, from the FDA
before 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 in December 1998 allowing us to expand the AF
study. In October 2000, we received permission to expand the clinical trial to
Phase III. The Phase III trial requires 80 patients to be treated, in up to 20
centers. We also received approval for an IDE to begin clinical testing of our
Therastream microcatheter system for VT ablation in December 1999 and approval
to expand that trial in 2000. We have postponed the clinical feasibility trial
for the Therastream microcatheter system for ablation of VT, while we focus on
completing our AF Phase III clinical trials. We must complete the AF Phase III
clinical trial in order to gather data for the completion of our pre-market
approval, or PMA, application to the FDA for our AF ablation product. We must
receive PMA approval before 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 may take up
to 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

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

In addition, the clinical trials may identify significant technical or
other obstacles that we will have to overcome before obtaining the necessary
regulatory approvals or market acceptance. Our failure to 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 AF and VT. Acceptance of our products and procedures by physicians,
patients and health care payors will be necessary in order for us to be
successful. If the market does not accept our products and procedures, our
business could be harmed and our revenues would decline.

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

The market for catheters to diagnose or treat AF and VT is highly
competitive. Our microcatheter systems for the mapping and ablation of AF and VT
are new technologies. Safety, cost efficiency and effectiveness are the primary
competitive elements in our market. In addition, the length of time required for
products to be developed, receive regulatory approval 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 may not recommend the use of our microcatheter systems unless
they can conclude that our systems provide a safe, effective and cost-efficient
alternative to current technologies for the mapping and ablation of AF or VT. If
our clinical data and other studies do not show that our products are safe and
effective, the FDA will not approve our products for sale. If our products are
not approved, we will not effectively compete against establish treatments or
gain market acceptance. If we cannot effectively compete with established
treatments, our revenues will decline.

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

None of the products we currently are developing 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 we obtain the required regulatory
approvals, 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 commercialize successfully these
systems would harm our business and cause the value of your investment to
decline.

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

Although we label all of our microcatheter systems for single-use only,
we are aware that some physicians are 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.

Before we can market any of our products in the United States or
Europe, we must demonstrate that our products are safe and effective and obtain
approval or clearance from applicable governmental authorities, which we cannot
guarantee. In the United States, we must obtain 510(k) 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 our
Pathfinder, Pathfinder mini and Tracer microcatheter systems for mapping VT and
for the Revelation microcatheter system for mapping AF. Currently, the timing to
receive 510(k) clearance is approximately 120 days and PMA approval is six to 12
months, but timing can be uncertain and the process may be significantly longer.
We cannot guarantee either the timing or receipt of approval or clearance. These
products may require a PMA and the FDA may request extensive clinical data 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. The process of obtaining PMA approval
is much more expensive, lengthy and uncertain than the 510(k) premarket
notification clearance process. In order to complete our PMA application, we
will be required to complete clinical trials to demonstrate the safety and
effectiveness of these products. 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. We
postponed the Therastream clinical trial, while we focus on completing 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. In March 2001, the
FDA allowed us to file a modular PMA for our Revelation Tx in Phase III trials.
Under the modular PMA approach, we will file five separate submissions with the
FDA, all of which together will comprise our PMA application. We filed the first
module in March 2001. 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 they approve or clear
any of our products. Further, the FDA may restrict or withdraw approval or
clearance of a product if additional information becomes available to support
such action. Delays in the approval or clearance process, limitation of our
labeling claims or denial of our applications or notifications would cause our
business to be materially and adversely affected.

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

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

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

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

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

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

. fines,

. injunctions,

. recall or seizure of products,

. withdrawal of marketing approvals or clearances,

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

. civil and criminal penalties.

We also are required to demonstrate and maintain compliance with the
Quality System regulations, or QSR, for all of our products. The FDA enforces
the QSR through periodic inspections, including a 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 a
long and difficult process. We also are required to provide information to the
FDA on deaths or serious injuries alleged to have been associated with the use
of our medical devices, as well as product malfunctions that could contribute to
death or serious injury. If we fail to comply with these applicable laws, our
business results may suffer.

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

Difficulties presented by international factors could negatively affect our
business

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

. export license requirements for our products,

. exchange rate fluctuations or currency controls,

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

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

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

. domestic or international trade restrictions, or

. changes in tariffs.

Any of these factors here could damage our business results.

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, some European countries that are part of the European
Monetary Union, or EMU, introduced and adopted the new "Euro" currency.
Beginning in 2003, all EMU countries are expected to be operating with the Euro
as their single currency. A significant amount of uncertainty exists as to the
effect the Euro will have on the marketplace in general. In particular, as a
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, the EMU has not yet defined and/or
finalized some of the rules and regulations relating to the governance of the
currency. As a result, companies operating in or conducting business in Europe
will need to ensure that their financial and other software systems are capable
of processing transactions and properly handling the Euro.

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

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

The market for catheters to map and/or ablate 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 physicians could potentially use to
perform the open-heart surgical maze procedure for the treatment of AF in a
minimally invasive manner. If any of these new approaches or products proves to
be safe, effective and cost effective, our products could be rendered
noncompetitive or obsolete, which would cause our business results to suffer.

Many of our competitors have an established presence in the field of
interventional cardiology and electrophysiology. 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 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 & 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
before our competitors' products. Our failure to demonstrate the competitive
advantages and achieve market acceptance of our products would harm our
business.

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

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

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 we could internally develop or identify,
license and integrate, equivalent technology. These delays would have a material
adverse effect on our business, financial condition and results of operations.

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

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

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

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

U. S. healthcare providers, including hospitals and physicians, that
purchase microcatheter products generally rely on third-party payors,
principally federal Medicare, state Medicaid and private health insurance plans,
to reimburse all or a part of the costs and fees associated with the procedures
performed using our products. The success of our products will depend upon the
ability of health care providers to obtain satisfactory reimbursement for
medical procedures in which our microcatheter systems and the novel procedures
in which they are used.
21

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 we received FDA clearance or approval, third-party
reimbursement would also depend upon decisions by the United States Health Care
Financing Administration for Medicare, as well as by individual health
maintenance organizations, private insurers and other payors. Reimbursement
systems in international markets vary significantly by country and by region
within some countries, and reimbursement approvals may be obtained on a country-
by-country basis. Many international markets have government managed health care
systems that control reimbursement for new devices and procedures. In most
markets, there are private insurance systems as well as government-managed
systems. There can be no assurance that (1) reimbursement for our products will
be available domestically or internationally, (2) if available, that such
reimbursement will be available in sufficient amounts in the United States or in
international markets under either government or private reimbursement systems,
or (3) that physicians will support and advocate reimbursement for procedures
using our products. Failure by hospitals and other users of our products to
obtain reimbursement from third-party payors or changes in government and
private third-party payor policies toward reimbursement for procedures employing
our products would have a material adverse effect on our business, financial
condition and results of operations. Moreover, we are unable to predict what
additional legislation or regulation, if any, relating to the heath care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on our business.

In March 2001, the U. S. Congress enacted, retroactive to January 2001, and
we received, pass-through reimbursement allowance on all of our U.S. approved
diagnostic and guiding catheter products. 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 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 the FDA to permit us to produce products for
sale in the United States. Our facilities and manufacturing processes are
subject to inspections from time to time by the FDA, State of California and
European Notified Bodies. We have demonstrated compliance with ISO 9001
(EN46001) quality standards, as well as compliance with 93/42/EEC, the Medical
Device Directive. We comply with procedures to produce products for sale in
Europe. Any failure by us to comply with QSR requirements or to maintain our
compliance with ISO 9001 (EN 46001) standards and 93/42/EEC, the Medical Device
Directive, will require us to take corrective actions, such as modification of
our policies and procedures. In addition, we may be required to cease all or
part of our operations for some period of time until we can demonstrate that
appropriate steps have been taken to comply with 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 continue to meet such compliance audits and will maintain such compliance
standards.

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

We purchase 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 support
sales in commercial quantities adequately will require substantial effort and
require significant management and

financial resources. Our failure to establish an effective sales and marketing
force will cause our revenues to decline.

On January 26, 2000, we announced an exclusive three-year distribution
agreement with St. Jude's Daig Division, or Daig, for our diagnostic products in
the United States. Concurrently, St. Jude invested in our securities. 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 operate a remote sales force effectively will require additional
resources, time and expense, which could have a material adverse effect on our
business, financial condition and results of operations. We cannot be certain
that we will be able to build a European direct business, that it will be cost-
effective or that its efforts will be successful. Failure to establish an
adequate business in Europe would harm our business.

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

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

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

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

We face an inherent business risk of product liability claims in the
event that the use or misuse of our products results in personal injury or
death. In 2000, we settled two claims, which

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

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

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

We do not intend to pay cash dividends on our stock

We have never paid cash dividends on our capital stock and do not
anticipate paying cash dividends in the foreseeable future. Instead, we intend
to retain future earnings for reinvestment in our business. Our 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 traded below $1.00 per
share on the Nasdaq SmallCap Market. In a letter dated December 29, 2000, Nasdaq
advised us that our common stock would be delisted from the Nasdaq SmallCap
Market, unless before March 29, 2001, the bid price of our common stock was at
least $1.00 per share for a minimum period of ten consecutive days. On March 29,
2001, Nasdaq notified us that our common stock would be

delisted from the Nasdaq SmallCap Market, as we had not met the requirements for
continued listing, as outlined in the December 29, 2000 letter. We have appealed
this decision. Nasdaq will hear our appeal on May 18, 2001. Pending the
resolution of the appeal, our common stock will continue to trade on the Nasdaq
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

PART II. OTHER INFORMATION

ITEM 1 Exhibits and Reports on Form 8-K

(a) None.
(b) No reports on Form 8-K were filed in the quarter ended March 31,
2001.

CARDIMA, INC.

SIGNATURES

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

DATE: May 14, 2001 CARDIMA, INC.

/s/ Gabriel B. Vegh
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GABRIEL B. VEGH
President, Chief Executive Officer and
Director

/s/ Ronald E. Bourquin
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RONALD E. BOURQUIN
Vice President, Chief Financial Officer
and Secretary