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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

or

For the transition period from                      to                     .

Commission File Number: 0-22419

CARDIMA, INC.

(Exact name of registrant as specified in its charter)

47266 Benicia Street

Fremont, California 94538-7330

(510) 354-0300

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive offices)

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

Securities Registered Pursuant To Section 12 (g) of The Act:

Common Stock, $0.001 par value per share

Series A Participating Preferred Stock Purchase Rights

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes  ¨  No  x

As of June 30, 2003, the last day of the Registrant’s most recently completed second fiscal quarter, there were 62,950,415 shares of the Registrant’s Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the Nasdaq National Market on June 30, 2003) was $ 45,065,542. Shares of Registrant’s Common Stock held by each executive officer and director and by each person who owned 5% or more of the outstanding shares of the Registrant’s Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 18, 2004, there were 84,618,244 shares of Registrant’s Common Stock outstanding.

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CARDIMA, INC.

FORM 10-K

For the Fiscal Year Ended December 31, 2003

TABLE OF CONTENTS

Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Definitive Proxy Statement filed with the Securities and Exchange Commission (the “SEC”) pursuant to Regulation 14A in connection with our 2004 Annual Meeting of Stockholders are incorporated herein by reference into Part III of this report.

FORWARD-LOOKING STATEMENTS

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

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

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

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

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PART I

ITEM 1.    BUSINESS

Overview

We are focused on the diagnosis and treatment of cardiac arrhythmias. Arrhythmias are abnormal electrical heart rhythms that cause fast and/or otherwise irregular heartbeats, which can potentially be fatal. Our products have been developed for the diagnosis and treatment of the two most common forms of arrhythmias: atrial fibrillation (AF) and ventricular tachycardia (VT), however our current efforts are focused on products for the diagnosis and treatment of AF. We develop, manufacture and market those products for two distinct market segments, electrophysiology (EP) and cardiac surgery.

The principal clinical goal in the treatment of atrial fibrillation is effective, less destructive ablation of arrhythmia-causing tissue with thin linear lesions. Ablation involves the destruction of arrhythmia-causing tissue through the application of various forms of energy. To achieve this goal in the electrophysiology setting, doctors must be able to treat areas of the heart that currently are inaccessible with existing catheter technology by using easy to perform techniques that minimize trauma to the patient. Similarly, in the surgical setting doctors need a system that can mimic the surgical “maze” procedure while minimizing trauma to the patient and reducing overall procedure time. The “maze” procedure is an open chest, open heart surgical procedure in which a surgeon creates an anatomical scar pattern on the heart tissue by making cuts in the tissue.

Our EP system utilizes microcatheters that are designed to offer the following perceived advantages over existing, competitive catheters:

Our Surgical Ablation System utilizes a microcatheter-based surgical probe coupled to INTELLITEMP, a RF energy management device. On January 29, 2003, we were notified that the U.S. Food and Drug

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Administration, or FDA, had granted us 510(k) clearance to commercialize the Cardima Surgical Ablation System for use in cardiac surgery. 510(k) clearance is received when a product has been found by the FDA to be substantially equivalent to other similar and legally marketed devices and the product receives clearance for commercial distribution. This system connects the Cardima Surgical Ablation Probe with deflectable multi-electrode linear array microcatheter technology to a commercially available electro-surgical radio frequency generator and the INTELLITEMP, an RF energy management device. Our system allows surgeons to direct RF energy through any combination of up to eight probe electrodes simultaneously, a feature which we expect may significantly reduce the time required to perform the ablation procedure. Since September 2003, the Surgical Ablation System has been utilized on a limited basis to treat atrial fibrillation as an adjunct procedure to valve replacement. While early results are promising, six month patient follow-up data will be required to judge the long-term effectiveness and safety of our system.

Our primary focus is to obtain FDA approval of our REVELATION Tx linear ablation microcatheter system. On November 5, 2002, our Pre-Market approval application, or PMA, was accepted by the FDA and we were granted expedited review status. On May 29, 2003, the Circulatory System Devices Panel recommended that the FDA not approve our PMA for the REVELATION Tx linear ablation microcatheter system. The Circulatory System Devices Panel commented favorably on the safety and need for this type of device, however the Panel felt that efficacy data was not sufficiently clear and supportive for the approval. The Panel provided the FDA and the Company with several suggestions on how to possibly reexamine the existing data or how to collect more data on existing patients. On June 26, 2003 we received a letter from the FDA, which reiterated the recommendation of the Panel and stated that the FDA concurred with the panel recommendation. On January 20, 2004 we submitted an amendment to our PMA to the FDA which we believe was responsive to the suggestions provided by the Panel. We are currently waiting for FDA review of that amendment and response thereto.

As of March 15, 2004, we had cash and cash equivalents of approximately $7.1 million. Our management believes that our cash balances as of March 15, 2004, will be sufficient to fund planned expenditures into the fourth quarter of 2004. Although our management recognizes the need to raise funds in the near future, there can be no assurance that we will be successful in consummating any such transaction, or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. Any failure by us to obtain additional funding will have a material effect upon us and will likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

Heart and Arrhythmic Disorders

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

The heart, as with any other organ, requires oxygen and nutrients to function efficiently. Because the heart has large oxygen and nutrient demands of its own, it requires an extensive, well-developed vascular network to bring blood to and carry blood away from its muscle tissue. This vascular network is located throughout the majority of the heart’s walls and serves 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 both the atria and the ventricles, and penetrates into the tissues of the walls of the heart. Thus, the anatomy of the heart walls consists of a thick mass of muscle cells supported by a framework of blood vessels.

The heart’s pumping action is controlled by its electrical conduction system comprised of cells within the heart muscle tissue. This conduction system allows electrical signals to propagate through the heart in a

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systematic and very organized way. These specialized conduction cells are placed throughout the walls of the four chambers of the heart. In a systematically timed sequence, this conduction system carries electrical signals to the muscle cells throughout the heart. This electrical conduction cycle results in a normal heartbeat that originates in the right atrium, commencing in a specialized group of cells called the Sino-Atrial node.

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

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

Arrhythmias

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

Atrial Fibrillation

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

According to the American Heart Association, atrial fibrillation affects more than 2.2 million people in the United States. The American Heart Association estimates that atrial fibrillation is responsible for over 100,000 strokes each year in the United States. AF is an independent risk factor for stroke, increasing the risk five fold.

Standard electrocardiograms may be unable to locate the origin, or focus, of the atrial fibrillation. The preferred diagnostic method, called mapping, involves placing catheters with electrodes inside the chambers of

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the heart to record the electrical signals generated by the heart in order to locate the focus, or origin, of the arrhythmia.

Current atrial fibrillation treatments are primarily supportive and palliative and do not cure atrial fibrillation. The most common therapies used in treating atrial fibrillation are anti-arrhythmic and anticoagulant drugs. Anti-arrhythmic drugs are typically used in an attempt to reduce the number of episodes of atrial fibrillation severity and/or to reduce the duration of each individual episode. Anticoagulants are used to reduce the normal clotting mechanism of the blood, therefore reducing the potential of creating blood clots. Anti-arrhythmic drug therapy often becomes less effective over time, with approximately half of the patients developing resistance to the drugs. In addition, anti-arrhythmic drugs have potentially severe side effects, including pulmonary fibrosis and impaired liver function, and may significantly affect the patient’s quality of life. Another palliative procedure for atrial fibrillation is external cardioversion, or the application of a strong electrical current using an external defibrillator to attempt to shock the heart back into normal sinus rhythm. This treatment only affects a single episode of atrial fibrillation, therefore it has no effect on the basic cause of atrial fibrillation and is not curative. Another treatment is the deliberate destruction of the atrio-ventricular node and subsequent implantation of a pacemaker. This is typically considered a treatment of last resort for atrial fibrillation patients as it does not cure or treat the atrial fibrillation itself, but rather allows rate control of the ventricles. The patient still has atrial fibrillation. Also, the patient is dependent on the pacemaker for life. Pacemakers are a device implanted into the chest, are battery-powered and typically require replacement approximately every seven to ten years, depending on manufacturer, type of device and amount of electrical energy delivered. Patients with pacemakers are usually required to continue with chronic anticoagulant drug therapy to attempt to prevent clotting. Anticoagulant drug therapy may result in the weakening of the blood vessels in the brain that may increase the risk of hemorrhagic stroke.

The only curative therapy for atrial fibrillation used today is an open heart operation commonly known as the surgical “maze” procedure. In the maze procedure, concomitant with another heart procedure, such as valve replacement or coronary artery bypass surgery, a surgeon makes a series of cuts in a specific “maze-like” formation through the wall of the atrium with a scalpel and then sutures these cuts back together. These scars re-direct and contain the chaotic electrical impulses and channel the electrical signal emanating from the Sino-Atrial node, thereby returning the heart to normal sinus rhythm. This open-heart operation is traumatic to the patient, is very expensive and is associated with long hospital stays and may require a three to six month recovery time. Although this approach is not commonly used because it is limited to atrial fibrillation patients who also have some other surgical need, it is generally considered highly effective in controlling atrial fibrillation.

Some leaders in electrophysiology are experimenting with minimally invasive, catheter-based ablation procedures that replicate the surgical maze procedure from inside the heart, thereby reducing the procedure time, patient recovery time and overall procedural costs. If a catheter procedure is to successfully mimic the maze procedure, it is necessary to make various shaped lines, including straight, curvilinear and circumferential lesions. We developed the REVELATION Tx, REVELATION T-Flex and REVELATION Helix, respectively, to mimic these required shapes.

Ventricular Tachycardia

Ventricular tachycardia is a life-threatening condition in which heartbeats are improperly initiated from within the ventricular wall, in addition to the sino-atrial node, bypassing the heart’s normal conduction system. A typical ventricular tachycardia patient has experienced a myocardial infarction, or heart attack, which can result in the formation of a scar or electrical barrier inside the tissue of the ventricular wall, leading to improper electrical conduction in the cells immediately surrounding the scar. During episodes of ventricular tachycardia, the ventricles beat at such an abnormally rapid rate that they are unable to fill completely with blood, thus reducing the amount of oxygenated blood being pumped throughout the body. The resulting reduction in the amount of oxygen transported to the tissues and organs of the body can cause dizziness and loss of consciousness. Ventricular tachycardia can often progress into ventricular fibrillation, an extremely irregular,

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chaotic and ineffective spasming of the ventricles. Ventricular fibrillation is fatal within a few minutes of its occurrence, unless orderly contractions of the ventricles are restored through immediate external electrical cardioversion or defibrillation.

According to the American Heart Association, few deaths are statistically listed as being caused by ventricular tachycardia. However, it is estimated that approximately 340,000 sudden cardiac deaths per year from coronary artery disease may be attributed to ventricular tachycardia.

At this time, we have stopped all research and clinical development of the THERASTREAM microcatheter designed to treat ventricular tachycardia in order to focus our limited resources on our atrial fibrillation program.

Limitations of Current Catheter-Based Diagnosis and Therapy

The demonstrated medical benefits and cost efficiency of minimally invasive procedures have encouraged electrophysiologists to seek new, minimally invasive techniques for the diagnosis and treatment of arrhythmias. In the case of atrial fibrillation, electrophysiologists have experimented with a treatment technique, often referred to as the “drag and burn procedure,” in which conventional radiofrequency tip ablation catheters are dragged across the inside surface of an atrium to attempt to create a linear lesion and electrophysiologists have also experimented with the “dot to dot” procedure, whereby the surgeon attempts to make a line by connecting a series of dot burns in the atria. Creating continuous, linear, transmural lesions to isolate portions of the atria using either of these methods with standard tip catheters has proven time consuming, difficult and ineffective.

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

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

Our Microcatheter System Solution

We believe our microcatheter-based systems have the potential to offer the effectiveness of the only current open-heart surgical cure for atrial fibrillation—the “maze” procedure—, but with less trauma, fewer complications, reduced pain, shorter hospital stays and lower procedure costs. The principal clinical goals in the diagnosis and treatment of atrial fibrillation are effective mapping and safely creating appropriate lesions. To achieve those goals the electrophysiologist must be able to use easy-to-perform techniques to access areas of the heart that are currently inaccessible. We have designed microcatheter systems which we believe provide more extensive and safe access to the arrhythmia-causing tissue. We also believe it is important to be able to both map (diagnose) and ablate (treat) with a single catheter. A microcatheter that both maps and ablates may decrease procedure time, improve treatment outcomes and enhance the overall safety of the procedure. Our completed Phase III clinical trial to treat atrial fibrillation with the REVELATION Tx involved three anatomical ablation lines placed in pre-determined areas of the atria, mimicking the surgically performed maze procedure. All of our microcatheter systems are designed to offer the following perceived advantages over existing, competitive catheters:

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Curative Treatment for Atrial Fibrillation

Our REVELATION, REVELATION Tx and REVELATION T-Flex microcatheter systems are designed to diagnose and treat atrial fibrillation in the right atria by creating long, thin, continuous, linear, transmural lesions. Our REVELATION Helix microcatheter system is designed to diagnose and treat atrial fibrillation that originates from the pulmonary veins, located in the left atria. The REVELATION Helix can both diagnose and treat focal, or localized, atrial fibrillation. The REVELATION Helix makes circumferential or partially circumferential scar patterns within the pulmonary veins or on the ostia, or outer base of the pulmonary veins, to contain atrial fibrillation. The REVELATION Helix received CE Mark approval in December 2001 to treat atrial fibrillation originating in the pulmonary veins. Our REVELATION Tx Phase III clinical trial data was submitted to the FDA on September 30, 2002 to treat atrial fibrillation in the United States. In June 2003, the FDA notified us that it concurred in the non-approval recommendation of the Circulatory Systems Device Panel. On January 20, 2004, we filed an amendment to that original PMA in response to suggestions and comments made by the Circulatory System Devices Panel, following our May 29, 2003 meeting with the Panel. We are currently waiting for the FDA to complete their review of our amendment to the PMA for the REVELATION Tx.

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We believe our microcatheter systems 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. Our microcatheter systems typically deliver less radiofrequency energy and create thinner lesions than standard electrophysiology catheters, preserving a greater amount of atrial tissue following the procedure. Our microcatheter systems also incorporate temperature-sensing bands between each electrode that are designed to be in direct contact with the atrial tissue. This direct contact between the temperature sensing bands and the atrial tissue is designed to give a more accurate temperature reading during ablation. Temperature sensing is extremely important when treating tissue in the left atria. The delivery of radiofrequency energy creates scar tissue and has the potential to coagulate blood. Blood clots are extremely dangerous on the left side of the heart because these clots can flow through the arterial system to the brain and cause a stroke. Competitive systems use temperature sensors positioned under their electrodes that are not in direct contact with the tissue. Given concerns about creating clots or coagulum during an ablation procedure, we believe the direct contact design and more accurate temperature monitoring during an ablation is a competitive advantage. We believe this approach has the potential to offer the effectiveness of the open-heart surgical cure for atrial fibrillation, but with less trauma, fewer complications, reduced pain, shorter hospital stays and lower procedure costs.

Curative Approach for Ventricular Tachycardia

Our PATHFINDER, PATHFINDER mini and TRACER microcatheter systems for mapping ventricular tachycardia and our THERASTREAM microcatheter system for both mapping and ablation of ventricular tachycardia are all designed for use inside the vasculature of the heart wall, facilitating access to arrhythmia-causing tissue through the venous system. We believe that at least half of the ventricular tachycardia foci are located in the intramyocardium and the epicardium, areas that are ineffectively accessed using standard endocardial catheters or basket type catheters currently in development. The intravascular approach to ventricular tachycardia ablation should permit our microcatheters to be positioned in close proximity to the arrhythmia-causing tissue, facilitating the creation of smaller, more focused lesions. We believe that this approach has the potential to be more effective than standard endocardial ablation procedures, with reduced destruction of surrounding healthy tissue, thus 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 PATHFINDER, PATHFINDER mini, TRACER and THERASTREAM which was formerly under development. In January 2001, we decided to focus our efforts on our atrial fibrillation program and postpone our work on the therapeutic ventricular tachycardia program until such time that we have the appropriate funding and resources to resume this project.

Our Business Strategy

Our objective is to be a leading developer of innovative products that provide safe and more effective diagnosis and treatment of atrial fibrillation and ventricular tachycardia, however our current efforts are solely focused on the diagnosis and treatment of AF. We intend to commercialize products for the treatment of AF in both the surgical and electrophysiology markets.

Our Surgical Ablation System received 510(k) clearance for use in the United States and we intend to seek a distribution partnership with a larger organization which has the necessary relationships and infrastructure to leverage our products into the surgical market. We are currently waiting to complete six month follow-up data and analysis on an initial group of patients treated with the system. We expect to continue to self-manufacture this system.

With respect to the electrophysiology market, we are focusing our development efforts on getting regulatory approval in the United States for our REVELATION family of microcatheters which are designed to treat atrial fibrillation. Once our REVELATION Tx is approved in the United States, we intend to focus our efforts on commencement of a clinical trial in the United States for the REVELATION Helix for mapping and treating

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atrial fibrillation originating in the pulmonary veins of the heart. Our strategy incorporates the following key elements:

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Products

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

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

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Products Designed for Mapping and Ablating Atrial Fibrillation

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

REVELATION for Atrial Fibrillation Mapping.    The REVELATION microcatheter system is designed to facilitate mapping of the atria. The REVELATION is a thin, flexible, eight-electrode microcatheter. The REVELATION microcatheter system is a 3French diameter microcatheter that incorporates variable stiffness technology to permit access to any area of the atria and has eight coil electrodes for added flexibility to enhance contact and conformance to atrial tissue. This microcatheter system is being marketed for mapping atrial fibrillation in the United States, Europe and Japan. The REVELATION is also approved for treatment of atrial fibrillation in the European Union.

Mapping prior to ablation may be useful to identify different etiologies of the arrhythmia, each of which could require slightly different ablation procedures. For example, some electrophysiologists believe most atrial fibrillation patients will need to be mapped and ablated in both the left and right atria, while others believe each side individually and separately need intervention. During the ‘maze’ procedure, the surgeon does not map the atria, rather a set of predetermined cuts are made in anatomical areas of the atria. We believe that our products will have clinical utility in determining where to ablate and in ablating in either the right or the left atria.

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

The REVELATION Tx microcatheter is designed with narrow coiled electrodes that are able to deliver ablation energy to the atrial tissue at much lower power settings than documented with standard electrophysiology catheters. These lower power settings may improve the safety of the procedure. The REVELATION Tx microcatheter system was designed to be used with virtually all cardiac electrophysiology radiofrequency generators and electrophysiology mapping systems.

The REVELATION Tx microcatheter has been tested in clinical trials in the European Union and the U.S. The United States clinical study, in Phase III since August 2000, has, as of December 2003, treated and followed 98 patients, a sufficient number to provide the necessary volume of safety and effectiveness data required for acceptance by the FDA of our Pre-Market Approval (PMA) application. On September 30, 2002, we submitted our PMA application to the FDA and on November 5, 2002, our PMA was accepted and we were granted

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expedited review status. On March 6, 2003, we were notified by the FDA that we would meet with the Circulatory Systems Device Panel on May 29, 2003. After the May 29 meeting with the Panel, the application was deemed not approvable by FDA. Recruitment in the clinical trial continued, and on January 20, 2004 a PMA amendment was filed with the FDA. This amendment summarized the experience a total of 93 Phase III patients who underwent ablation and 88 who reached six months of follow-up. The timing and outcome of the FDA’s response are uncertain. This resubmission was intended to address the issues raised at the May 29, 2003 Panel meeting, but we cannot assure you it will meet FDA requirements for evidence of safety and effectiveness. Approval from the FDA of our PMA application will be required before the Cardima REVELATION Tx can be marketed in the United States to treat atrial fibrillation. See “Government Regulation”. The REVELATION Tx does have CE Mark approval in the European Economic Area and conditional approval for sale in Canada.

REVELATION T-Flex for diagnosing and treating Atrial Fibrillation.    The REVELATION T-Flex has the same operational characteristics as the REVELATION Tx, but is slightly larger in diameter (5.0 French ) and is deflectable/ steerable. The addition of the ability to deflect makes the REVELATION T-Flex more maneuverable, to enable formation of curvilinear lesions and potentially easier to position in the atrial anatomy. This product has CE Mark approval in the European Economic Area and in Canada.

We plan to submit a supplemental PMA to the FDA for the REVELATION T-Flex if and when the PMA application for REVELATION Tx receives FDA approval.

REVELATION Helix for Atrial Fibrillation Ablation.    The REVELATION Helix is a thin, flexible, eight-electrode microcatheter with a helical-shaped distal tip. The REVELATION Helix microcatheter system is a 4.0 to 5.0 French diameter microcatheter that incorporates variable stiffness, “memory metal” guidewire technology and permits access to the pulmonary vein areas of the atria where the anatomy requires circumferential contact with the endocardium. The REVELATION Helix also has temperature-sensing thermocouples placed between each coiled electrode to monitor tissue temperature during ablation. The eight or sixteen electrodes (depending on catheter type) are closely grouped and can be used to create a continuous lesion in the atrial wall.

Like the REVELATION Tx, the REVELATION Helix microcatheter is designed with narrow-coiled electrodes that are able to deliver ablation energy to atrial tissue at much lower power settings than documented with standard electrophysiology catheters. These lower power settings are crucial in left atrial therapy due to potential for creation of coagulum and pulmonary vein stenosis. Lower power settings may equate to less potential for creation of this coagulum and may also equate to less clotting or stroke potential. We have designed our REVELATION Helix microcatheter system to be used with leading cardiac electrophysiology radiofrequency generators and electrophysiology mapping computer systems.

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

On December 10, 2001, we received approval to market the REVELATION Helix in Europe under the CE Mark. A multi-center, 43-patient clinical investigation of the REVELATION Helix began with the first patient treated on August 9, 2001. As of June 6, 2002, all 43 patients had been treated and by December 31, 2002 and all 43 patients had achieved their six-month assessment. The clinical data from this investigation may be used to support a US application for an Investigational Device Exemption (IDE) and to provide clinical data to support sales and marketing of the device in Europe. As of December 31, 2003, no complications, specifically pulmonary vein stenosis, associated with the device had been reported.

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Products Designed for Mapping and Ablating Ventricular Tachycardia

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

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

PATHFINDER, PATHFINDER mini and TRACER for Tachycardia Mapping.    These microcatheter systems used for diagnosing ventricular tachycardia are designed to be positioned within the coronary vasculature using a guiding catheter or guidewire, similar to those used in angioplasty procedures, and which have a series of electrodes at their distal ends in order to perform as electrophysiology catheters. Our PATHFINDER and TRACER microcatheter systems can be used to sub-select vessels and even access the small veins located at the apex, or lower tip of the heart. Our PATHFINDER microcatheter systems are configured with four, eight, sixteen or twenty electrodes and our TRACER microcatheter systems are configured with four, eight and sixteen electrodes, which enable the physician to perform an evaluation over a greater area. The PATHFINDER mini, our smallest microcatheter, is 1.5 French in diameter and provides more distal access to the smaller vasculature of the heart. The PATHFINDER mini microcatheter is approximately one fifth the size of existing catheters used for mapping. The PATHFINDER can safely map ventricular tachycardia via the coronary veins. Up to four PATHFINDERs have been placed in various vessels of the coronary system simultaneously, thereby aiding in the diagnosis of ventricular tachycardia and placement of pacing leads.

We received 510(k) clearance in the United States and CE Mark approval in the European Union for our PATHFINDER microcatheter for mapping ventricular tachycardia. We sell our PATHFINDER for ventricular tachycardia mapping in the United States, whereas in Europe it is sold through one direct sales representative and a network of distributors. Our products are sold in Japan and Canada through our distributors in each country.

We have postponed further development on the THERASTREAM ventricular tachycardia program until such time that we have the appropriate funding. We expect to continue development of the ventricular tachycardia program after we have successfully commercialized both the Surgical Ablation System and our REVELATION Tx microcatheter.

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. If we are able to successfully commercialize the Surgical Ablation System and the REVELATION Tx, we expect to initiate research and development programs including U.S. clinical trials of REVELATION T-Flex system and use of the INTELLITEMP for pulmonary vein ablation.

Research and development expenses for the years ended December 31, 2003, 2002 and 2001, were $4.5 million, $4.5 million and $4.9 million, respectively.

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Marketing and Distribution

We have two direct sales representatives responsible for U.S. sales of our products which have received 510(k) clearance and we are focusing our efforts on expanding our domestic customer base. We believe that there are between 500 and 600 hospitals in the United States that perform electrophysiology procedures on a routine basis. Further, we believe there are over 700 board certified electrophysiologists practicing domestically.

Our European sales presence includes one clinical specialist and one new distributor supporting the new therapeutic ablation devices in Germany. On-going European distributor relationships provide coverage in France, the Mediterranean area, the United Kingdom, the Nordic area, and in central and eastern Europe. We believe there are about 400 hospitals that perform electrophysiology procedures and approximately 600 board certified electrophysiologists located outside of the U.S. We have, for the time being, eliminated our distributor in China but have otherwise maintained our Asian sales channels. We will be required to expend additional resources to operate this remote sales force effectively.

In 2003, Paramedic Co., LTD. accounted for 37.5% of our total net product sales. No customer accounted for more than 10% of our revenues in 2002 and 2001.

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

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

Components and raw materials are purchased from various qualified suppliers and subjected to stringent quality specifications. We conduct supplier quality audits and have established a supplier qualification program. Several of the components and equipment, such as laminate tubing, connector components and hydrophilic coating, are provided by sole source suppliers. Our intravascular electrophysiology microcatheters, exclusive of the guiding catheters, are coated with a hydrophilic coating. This coating has been used on Target Therapeutic products designed to access the vessels of the brain. Target Therapeutic is a subsidiary of Boston Scientific Corporation, a company that develops, markets and sells cardiac electrophysiology products that compete directly with the microcatheter products being developed by us. We believe the coating significantly improves product functionality. We have an exclusive license to use the hydrophilic coating technology in products designed to map and ablate cardiac arrhythmias while positioned within coronary vasculature. 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. The inability to identify and contract with alternate suppliers could have a material adverse effect on our ability to manufacture products and,

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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 FDA Quality System Requirements (QSR) and ISO 13485 compliance inspections conducted by the FDA and TÜV, a regulatory agency in the European Union, before we can market our products. We have obtained ISO 13485 Quality Systems certification from TÜV and have obtained the right to affix the CE Mark to certain electrophysiology mapping and ablation catheters and accessories as well as electrosurgical units. We are subject to periodic inspections by the FDA and California Department of Heath Services. Our facilities and manufacturing processes have undergone successful annual surveillance and audit re-certification by TÜV since 1995 with the most recent TUV audit in and December 2003. In November 2000, the FDA conducted a Quality System Inspection Technique (or QSIT) Audit, of our Quality System, which we successfully passed. Cardima also successfully passed a pre PMA inspection by the FDA in January 2003. 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 19 issued United States patents and 5 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. The pending patent has now issued and the provisional patent application has now been converted to a full application. In addition, a continuation-in-part has been filed for this full application. We received back a perpetual, worldwide co-license at no cost from Medtronic to use those patents and related intellectual property in our products for mapping and ablation of arrhythmia-causing tissue. In addition, Medtronic agreed not to sublicense the patents within our field of use to any party not affiliated with Medtronic, Inc. We have also licensed a proprietary surface-coating material from another vendor used on certain of our microcatheters. We have also filed 44 patent applications in major international markets, of which eight have been granted. No assurance can be given that these patent applications will provide competitive advantages for our products or that any patent application filed by us will issue as a patent. In addition, there can be no assurance that any of our 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 Therapeutic, we obtained an exclusive, royalty-free, worldwide license under certain patents issued in the United States and corresponding international patents to use Target Therapeutic’s technology and to make, use and sell or otherwise distribute products for the diagnosis and treatment of electrophysiological diseases in the body, other than in the central nervous system, including the brain. The exclusive license applies to any of Target Therapeutic’s 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 Therapeutic’s technology developed prior to May 31, 1996. In addition to this exclusive license to use Target Therapeutic’s technology to develop products for electrophysiological diseases, we obtained a non-exclusive

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license to use Target Therapeutic’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 Therapeutic’s technology that results in a material change in the function, purpose or application of a particular product incorporating Target Therapeutic’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 Therapeutic.

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

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

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

U.S. patent applications filed prior to November 29, 2000 are maintained in secrecy until patents are issued, however, U.S. patent applications filed after this date, unless foreign filing is specially disclaimed, 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. 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 receive, patents and will obtain additional proprietary rights relating to products, materials or processes used or proposed to be used by us.

The medical device industry has experienced extensive litigation regarding patents and other intellectual property rights, and companies in the medical device industry have employed intellectual property litigation to gain a competitive advantage. We have from time to time received inquiries and allegations from parties concerning their intellectual property rights, and we expect to receive intellectual property inquiries and claims in the future. 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

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enforceable in any litigation or administrative proceeding, we could be prevented from practicing the subject matter claimed in such patents, or could be required to obtain licenses from the patent owners of each patent, or redesign our products or processes to avoid infringement. There can be no assurance such licenses will be available or, if available, will be available on terms acceptable to us or that we will be successful in any attempt to redesign our products or processes to avoid infringement. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a material adverse effect on our business, financial condition, and results of operations. We intend to vigorously protect and defend our intellectual property. Costly and time-consuming litigation brought by us may be necessary to enforce patents issued to us, to protect trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others.

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

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

Competition

We believe our primary competitors to be large companies who are engaged in the development and marketing of existing catheter technology, which we believe to be less effective therapies for the treatment of atrial fibrillation and ventricular tachycardia. Their treatments include drugs, external electrical cardioversion and defibrillation, implantable defibrillators, open heart surgery and purposeful destruction of the atrio-ventricular node, followed by implantation of a pacemaker. Several competitors are also developing new approaches and new products for the mapping and ablation of atrial fibrillation and ventricular tachycardia. These approaches include mapping systems using contact mapping, single-point spatial mapping and non-contact, multi-site electrical mapping technologies and ablation systems using ultrasound, microwave, laser and cryoablation technologies. In addition, companies are developing surgical procedures that could potentially be used by physicians to perform the surgical maze procedure in a minimally invasive manner. If any of these 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/or electrophysiology, including Boston Scientific, C.R. Bard, Inc., St. Jude Medical, Inc. (through its Daig Division), 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 greater capabilities in conducting research and development activities, testing products in clinical trials, obtaining regulatory approvals, and manufacturing, marketing and distributing products.

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

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

Government Regulation

The pre-clinical and clinical testing, manufacturing, labeling, marketing and distribution of our products are subject to extensive and rigorous government regulation in the United States and other countries. Failure to comply with applicable regulatory 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 marketing clearances or approvals, withdrawal of marketing approvals and criminal prosecution.

U.S. Regulation

A medical device may be marketed in the United States only with prior authorization from the US Food and Drug Administration. 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 required a PMA application. The FDA recently has been requiring a more rigorous demonstration of substantial equivalence than in the past, including in some cases requiring clinical trial data. During this process, the FDA may determine that it needs additional information or that a proposed device is precluded from receiving clearance because it is not “substantially equivalent” to a legally marketed Class I or II device. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, which constitutes a major change in its intended use, will require a supplemental 510(k) clearance. We believe that generally it takes approximately 4 to 12 months from the date of submission to obtain 510(k) clearance. The process may, however, take substantially longer, depending on the circumstances, and there can be no assurance that 510(k) clearance will ever be obtained.

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To date, we have received 510(k) clearances from the FDA for our PATHFINDER, PATHFINDER mini and TRACER over-the-wire microcatheter systems for mapping ventricular tachycardia and REVELATION microcatheter system for mapping atrial fibrillation. In addition, we have received 510(k) clearance for our line of VENAPORT, VUEPORT and NAVIPORT guiding catheters used to introduce electrophysiology catheters into the heart. We have also received 510(k) clearance for a surgical probe, based on REVELATION catheter technology, for the ablation of cardiac tissue during surgery

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

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

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

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

A clinical trial in support of a 510(k) submission or a PMA application requires an Investigational Device Exemption (IDE) application approved in advance by the FDA for a specific number of patients. The IDE

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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. Failure to adhere to regulatory requirements generally applicable to clinical trials and to the conditions of an IDE could result in a material adverse effect on us, including termination of the IDE and an inability to obtain marketing clearance or approval for our products.

We received FDA approval to conduct a pivotal Phase III clinical trial of our REVELATION Tx microcatheter system for atrial fibrillation in August 2000. As of December 2003, 98 patients have been treated with the REVELATION Tx microcatheter and 88 have been followed for at least six months, the time at which the trial’s primary end point (reduction in the frequency of symptomatic AF) was assessed. In January 2004 a summary of these data was submitted to FDA as an amendment to our original September 2002 analysis which the FDA had indicated in June 2003 it would not approve. The FDA is in the process of evaluating these data.

An IDE for our THERASTREAM ventricular tachycardia ablation microcatheter system was approved by the FDA in November 1999 and approval to expand the study was received in 2000. We have decided to focus our efforts on our atrial fibrillation program and to postpone work on our ventricular tachycardia program by closing the investigational study for this device.

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. These regulatory requirements include, among others, manufacturing and design control regulations, labeling, Medical Device Reporting regulations which require that a manufacturer report to the FDA certain types of adverse events involving its products, and the FDA’s prohibitions against promoting approved products for unapproved, or “off-label,” uses. In addition, Class II devices, such as our mapping products, can be subject to additional special controls (e.g., performance standards, post-market surveillance, patient registries, and FDA guidelines) that do not apply to Class I devices. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, which could have a material adverse effect on us.

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

Foreign Regulation

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

The European Union has promulgated rules that require commercial medical products to bear the CE Mark. The CE Mark is recognized by the European Union as a symbol of adherence to strict quality systems

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requirements set forth in the ISO 9001, EN 46001 and ISO 13485 quality standards, as well as compliance with 93/42/EEC, the Medical Device Directive. The CE Mark allows us to market our products throughout the European Economic Area. We received ISO 9001 (EN 46001), Quality Systems certification for our manufacturing facilities in Fremont, California, which were re-certified in November 2002. These certifications and repeated inspections are required in order to continue to affix the CE Mark to our approved products in Europe. In addition, ISO 13485 certification was obtained in March 2004 to include electrosurgical generators and associated equipment.

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

Third-Party Reimbursement

In the United States, health care providers, including hospitals and physicians, that purchase medical products for treatment of their patients generally rely on third-party payors, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using these products. Our success will be dependent upon, among other things, the ability of health care providers to obtain satisfactory reimbursement from third-party payors for medical procedures in which our products are used. Third-party payors may deny reimbursement if they determine that a prescribed device has not received appropriate regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary, inappropriate or used for a nonapproved indication. If FDA clearance or approval were received, third-party reimbursement would also depend upon decisions by the United States Centers for Medicare & Medicaid Services (CMS), 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 CMS. The fixed rate of reimbursement is typically based on the patient’s diagnosis and the procedure performed, but may be related to the specific type or number of devices used in a procedure. There can be no assurance that reimbursement for our products will be available in sufficient amounts, if at all, or that future reimbursement policies of payors will not adversely affect our ability to sell products on a profitable basis.

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

There is also federal legislation that changed the traditional Medicare payment system by creating a new visit-based payment system called ambulatory payment classification (APC) groups, that establishes fixed payments for specific medical procedures that are performed on an outpatient basis. If our products increase the cost per procedure above the fixed rate under the ambulatory payment classification groups system, market

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acceptance of such products could be impaired, which would have a material adverse effect on our business, financial condition and results of operations.

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

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

Product Liability and Insurance

The development, manufacture and sale of our microcatheter systems expose us to an inherent risk of product liability claims. Although we currently have general liability insurance with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million annual limitation, and product liability insurance with coverage in the amount of $5.0 million per occurrence, subject to a $5.0 million annual limitation, there can be no assurance that such coverage will be available to us in the future on reasonable terms, if at all. In addition, there can be no assurance that all of the activities encompassed within our business are or will be covered under our policies. Although all our guiding, diagnostic and therapeutic products are labeled for single use only, we are aware that some physicians are resterilizing and reusing such products. Moreover, despite labeling our microcatheters for diagnostic use only, we believe physicians are using such mapping microcatheters for ablation. Multiple use or “off-label” use of our microcatheters could subject us to increased exposure to product liability claims, which could have a material adverse effect on our business, financial condition and results of operations. We may require additional product liability coverage if we significantly expand commercialization of our products. Such additional coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims or series of claims against us, regardless of their merit or eventual outcome, could have a material adverse effect on our business, financial condition and results of operations.

Employees

At December 31, 2003, we had 51 employees, of whom 6 were engaged directly in research and new product development, 8 in regulatory affairs, quality assurance and clinical activities, 19 in manufacturing, 7 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

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employees to be good. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Factors Affecting Future Results—We are dependent upon our key personnel and may need to hire additional key personnel in the future”.

ITEM 2.    PROPERTIES

We lease an approximately 44,000 square foot facility 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 expires in November 2005. We believe this facility will be adequate to meet our requirements until the lease’s expiration date.

ITEM 3.    LEGAL PROCEEDINGS

From time to time, we are subject to certain legal proceedings that arise in the ordinary course of business. In the opinion of management, no pending legal proceedings are reasonably likely to have a material adverse effect on our financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any legal proceeding or should several of these legal matters be resolved against us in the same reporting period, the operating results of particular reporting period could be materially adversely affected.

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

NONE.

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PART II

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

Our common stock began trading on the Nasdaq SmallCap Market under the symbol CRDM in June 2001. Our common stock traded on the Nasdaq National Market from the date of our initial public offering in June 1997 until June 2001. 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 closing prices of our common stock.

As of March 18, 2004, there were approximately 309 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.

On December 19, 2003, we sold by means of a private placement an additional 3,583,327 shares of our common stock at a price of $0.87 per share for gross proceeds of approximately $3,118,000. In addition, we issued to the investors warrants to purchase 1,074,993 shares of our common stock at an exercise price of $0.957 per share. The warrants will be exercisable beginning on June 19, 2004 and will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the six (6) month period between the closing and June 19, 2004. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been at least $1.74 (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days. We paid to the parties that acted as our agents in connection with this private placement a total of $218,225 in cash and issued to the agents warrants to purchase 303,608 shares of our common stock at an exercise price of $0.957 per share and warrants to purchase 20,689 shares of our common stock at an exercise price of $1.2375 per share.

We relied on the exemption provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act of 1933, as amended, in connection with the December 19, 2003 placement. A Registration Statement on Form S-3 was filed with the SEC in connection with this placement.

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ITEM 6.    SELECTED FINANCIAL DATA

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

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CARDIMA, INC.

QUARTERLY RESULTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

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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 or financial condition. Such statements are only predictions and the actual events or results may differ materially from the results discussed in or implied by 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 developed, produced and sold a variety of microcatheters, including those for the diagnosis of ventricular tachycardia. Since 2001, however, our efforts have primarily focused on developing differentiated products that diagnose and treat atrial fibrillation, including our REVELATION^® Tx microcatheter for use in the Electrophysiology (EP) market and our Surgical Ablation System for use in the surgical market.

Our EP products provide for the mapping (diagnosis) and ablation (treatment) of the two most common forms of cardiac arrhythmias: atrial fibrillation and ventricular tachycardia. Arrhythmias are abnormal electrical heart rhythms that adversely affect the mechanical activities of the heart and can significantly affect a person’s quality of life and be potentially fatal. We have developed microcatheter-based systems designed (1) to locate and provide more extensive and less traumatic access to arrhythmia-causing tissue for diagnosing the arrhythmia, referred to as mapping, and (2) to restore normal heart rhythms by isolating and destroying the arrhythmia-causing tissue using radio frequency energy, referred to as ablation. Our microcatheters incorporate multiple electrodes at the distal end to record electrical signals for mapping and, with certain microcatheters, to transfer radio frequency energy for tissue ablation, allowing physicians to both map and ablate arrhythmias using the same microcatheter.

More recently, we have leveraged our proprietary technologies for treating atrial fibrillation, or AF, into the development of products for the surgical market. On January 29, 2003, we received notice from the FDA that they had approved for commercialization the Cardima Surgical Ablation System for use in cardiac surgery. This new system connects the Cardima Surgical Ablation Probe with deflectable multi-electrode linear array microcatheter technology to a commercially available electro-surgical radio frequency generator and the INTELLITEMP^®, a radio frequency, or RF, energy management device, which allows surgeons to direct RF energy through any combination of up to eight probe electrodes simultaneously, a feature which can significantly reduce the time required to perform the ablation procedure. Since September 2003, the Surgical Ablation System has been utilized on a limited basis to treat AF as an adjunct procedure to valve replacement. While early results are promising, additional patient follow-up data will be required over a period of six months or more, to judge the long-term effectiveness and safety of our system.

We have generated revenues of approximately $17 million from inception to December 31, 2003. Prior to January 1997, these revenues were generated primarily in Europe and Japan from sales of our PATHFINDER and TRACER microcatheter systems for diagnosing ventricular tachycardia and our REVELATION microcatheter system for diagnosing atrial fibrillation, as well as ancillary products such as the VENAPORT guiding catheters. Since 1997 and the U.S. Food and Drug Administration’s clearance of certain of our products, sales in the United States consist primarily of our PATHFINDER and REVELATION lines of microcatheters for diagnosing ventricular tachycardia and atrial fibrillation, respectively. To date, our international sales have been made through our small direct sales force, which currently consists of one salesperson, and distributors who sell

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our products to physicians and hospitals. European sales consist primarily of the REVELATION Tx, REVELATION T-Flex and REVELATION Helix microcatheters for treatment of atrial fibrillation following receipt of CE Mark for those products in December 1998, December 2001 and November 2002, respectively.

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

Obtaining and maintaining regulatory approvals is critical to our business. We are required to conduct clinical trials, demonstrate safety and effectiveness and obtain either 510(k) or PMA approval from the U.S. Food and Drug Administration in order to sell any of our products for treating atrial fibrillation or ventricular tachycardia in the United States. While the Surgical Ablation System has received 510(k) approval from the FDA, PMA approval will be required prior to the introduction in the United States of the REVELATION Tx, REVELATION T-Flex and REVELATION Helix microcatheter systems for treating atrial fibrillation. Outside of the United States, our strategy has been to obtain regulatory approvals in those geographies that offer existing infrastructure to support medical technology as well as offer the potential for adequate product demand with the goal of positioning us to expand into these geographies once we have sufficient capital and other resources. To date, we have emphasized obtaining regulatory approvals in Western Europe and select portions of Asia. We cannot assure you that we will be able to obtain or maintain regulatory approval.

Our primary focus is to obtain FDA approval in the United States of the REVELATION Tx microcatheter system for the treatment of atrial fibrillation. On September 30, 2002, we submitted a PMA application for this system to the FDA. On November 5, 2002, the PMA was accepted by the FDA and was granted expedited review status. On May 29, 2003, we met with FDA’s Circulatory Systems Device Panel which recommended that the FDA not approve our PMA for the REVELATION Tx linear ablation microcatheter system. The Circulatory System Devices Panel commented favorably on the safety and need for this type of device. However, the Panel felt that efficacy data was not sufficiently clear and supportive for the approval. The Panel provided several suggestions on how to possibly reexamine the existing data or how to collect more data on existing patients. On June 26, 2003 we received a letter from the FDA, which stated that the FDA concurred with the Panels non-approval recommendation. On January 20, 2004 we submitted a supplement to our PMA filing, in which we provided new analysis and an expanded patient base. The timing and the outcome of the FDA’s response are uncertain.

We had cash and cash equivalents of approximately $7.1 million as of March 15, 2004. Our management believes that our cash balances as of March 15, 2004, will be sufficient to fund planned future expenditures into the fourth quarter of 2004. Although our management recognizes the need to raise funds in the near there can be no assurance that we will be successful in consummating any such transaction, or, if we do consummate a financing transaction, that the terms and conditions of such financing will not be unfavorable to us. Any failure by us to obtain additional funding will have a material and adverse effect upon us and will likely result in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

The Company operates in a single segment.

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Critical Accounting Policies—Estimates

Use of Estimates

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

Revenue Recognition

We recognize revenue from two types of customers – end users and distributors. Revenue is recognized in accordance with Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements when all of the following criteria are met: persuasive evidence of an arrangement exists, shipment of the product has occurred and title of products transferred at the point of shipment, payment of the product is reasonably assured and no substantive obligations to the customer remain. Customers are not entitled to any rights of product return.

Allowance for Doubtful Accounts

We establish estimates of the uncollectability of accounts receivable. Our management analyzes accounts receivable, historical write-offs as bad debts, customer concentrations, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We maintain an allowance for doubtful accounts at an amount that we estimate to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on receivables. We have not experienced significant bad debt expense and our reserve for doubtful accounts of $87,000 should be adequate for any exposure to loss in our December 31, 2003 accounts receivable.

Allowance for Excess and Slow-Moving Inventory

Inventories, which are composed of purchased parts and subassemblies, work in process and finished goods, are valued at the lower of cost or market with cost being determined by the first-in, first-out method. We have analyzed the level of inventory on hand, its cost in relation to market value and estimated customer requirements to determine whether write-downs for excess or slow-moving inventory are required. Actual customer requirements in any future periods are inherently uncertain and thus may differ from estimates. If actual and or expected requirements were significantly greater or lower than the established reserves, a reduction or increase to the obsolescence allowance would be recorded in the period in which such a determination was made. We have established reserves for excess and slow-moving inventories and believe the reserve of $412,000 at December 31, 2003 is adequate.

Research and Development

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

Stock Based Compensation

We have elected to follow Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for our employee stock options, including Financial Accounting Standard Board Interpretation (“FIN”) 44 “Accounting for certain Transactions Involving Stock Compensation.” Compensation expense is based on the difference, if any, between the fair value of the Company’s common stock and the exercise price of the option or share right on the measurement date, which is basically the date of the grant. This amount is recorded as “Deferred stock compensation” in the Balance Sheet and amortized as a charge to operations over the vesting period of the applicable options or share rights.

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Results of Operations—Years Ended December 31, 2003 and 2002

Net Sales

For the year ended December 31, 2003, net revenue increased 1% to $2,242,000 from $2,228,000 for the same period of 2002. U.S. sales increased by 22% to $888,000 from $729,000. European sales decreased by 40% to $443,000 from $734,000, as we reduced our sales force in Europe due to the change in our business strategy, refocusing our efforts on the PMA for the REVELATION Tx. Sales in the Asia/Pacific market increased 14% to $847,000 from $741,000 due to higher diagnostic product sales in this region. In 2004, we expect net sales to be generated from the following geographic regions: approximately 40% from sales in the United States, 30% from Asia and 30% from Europe, with limited clinical revenue and sales from regions of the rest of the world at 10%. We expect overall net sales to slightly increase in 2004 as compared to 2003, although our actual sales could differ materially from this estimate. See “Factors Affecting Future Results.”

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

Cost of Goods Sold

Cost of goods sold primarily includes raw material costs, catheter fabrication costs, system assembly and testing costs and manufacturing overhead. Cost of goods sold for 2003 increased to $3,607,000 from $3,594,000 for 2002. This represents an increase of less than 1%, or $13,000, which corresponds directly to the 1% increase in net sales in 2003 as compared to 2002. We expect costs per unit to continue to slightly decrease as we plan to increase sales and related production volume, which will further allocate fixed costs over an increased number of units produced. We will continue to work on process improvements to provide greater manufacturing flexibility and cost savings in the production of our microcatheter systems.

Research and Development Expenses

Overall research and development expenses decreased 2% to $4,458,000 in 2003 from $4,530,000 in 2002. This net decrease was a result of lower research and development expenses due to a reduction in force, as well as lower travel and other operating expenses offset by an increase of clinical and regulatory expenses due to increased consulting and travel related expenses as a result of the meeting with the Circulatory Systems Device Panel on May 29, 2003. We expect total research and development expenses in 2004 to slightly increase as compared to 2003, while costs associated with clinical and regulatory expenses will decrease as compared to 2003. The costs associated with research and pre-clinical programs and clinical development programs were approximately (in thousands):

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

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microcatheter system in ablation make it difficult for us to accurately predict the time or cost until completion of any product development efforts.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses for 2003 decreased by 3% to $6,566,000 from $6,787,000 in 2002. Selling expenses for 2003 decreased 31% to $1,746,000 from $2,520,000 in 2002. Selling expenses decreased due to the reduction in workforce of 6 employees, including the associated decrease in compensation, benefits, travel and general operating expenses. General and administrative expenses for 2003 increased 12% to $4,097,000 from $3,642,000 in 2002. The net increase of $455,000 was primarily due to additional expenses incurred following the replacement of a senior officer, including accrued compensation for severance, non-cash stock compensation for the vesting of options for both the former and the replacement officer and related legal expenditures. Marketing expenses for 2003 increased 16% to $723,000 from $624,000 in 2002. The increase was due primarily to compensation and benefits and increased marketing of our Surgical Ablation System after receiving 510(k) clearance for that system in 2003 . We expect sales expenses to increase in 2004 if the FDA approval is obtained for the REVELATION Tx in the United States. In general, we expect total selling, general and administrative expenses to increase slightly during 2004, as we prepare for the launch of our therapeutic family of products in the United States.

Interest and Other Income, and Interest Expense

Interest and other income for 2003 decreased 4% to $72,000 from $75,000 in 2002. The decrease was due primarily to average yields on cash equivalents declining from 2% in 2002 to 1% in 2003. We expect interest and other income to remain approximately the same in 2004 compared to 2003. Interest expense for 2003 decreased 24% to $14,000 from $19,000 in 2002. The decrease was due primarily to the expiration and buyout of capital lease obligations. We expect interest expense to remain relatively stable in 2004 as compared to 2003.

Other Non-Cash Expense

Other non-cash expense for the year ended December 31, 2003 was $904,000. No such expense was recorded for the same period in 2002. This non-cash expense relates to the warrants issued in connection with our August 2003 private placement, and represents the difference in the warrants’ valuation between their dates of issuance and the registration of the shares underlying the warrants.

Results of Operations—Years Ended December 31, 2002 and 2001

Net Sales

For the year ended December 31, 2002, revenues increased 20% to $2,228,000 from $1,861,000 in 2001. U.S. sales remained relatively flat, decreasing only 2% to $729,000 from $743,000. European sales increased 20% to $734,000 from $613,000, due to increased therapeutic revenues primarily related to the REVELATION Helix, which was introduced in early 2002. Sales in the Asia/Pacific market increased 48% to $741,000 from $501,000 due to higher diagnostic product sales in this region. Sales in the rest of the world remained flat with sales in 2002 of $24,000 compared to sales of $4,000 in 2001.

Cost of Goods Sold

Cost of goods sold primarily includes raw material costs, catheter fabrication costs, system assembly and testing costs and manufacturing overhead. Cost of goods sold for 2002 decreased 3% to $3,594,000 from $3,717,000 for 2001. The decrease of cost of goods sold as a percent of net sales was primarily due to the reduced impact of under absorption of overhead costs due to the $370,000 increase in sales volume to $2,228,000 in 2002 from $1,861,000 in 2001. Production operated at approximately 60% of capacity and overall the standard

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cost was reduced due to the allocation of fixed costs over an increased number of units produced and tighter controls of costs for purchased material.

Research and Development Expenses

Research and development expenses decreased 7% to $4,530,000 in 2002 from $4,873,000 in 2001. The decrease was due to lower costs associated with REVELATION Tx product development, which was partially offset by higher product development expenses for the REVELATION Helix and the CARDIMA^® Ablation System which received FDA clearance in early 2003 as part of the surgical ablation system. The costs associated with research and pre-clinical programs and clinical development programs were approximately (in thousands):

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2002 increased 2% to $6,787,000 from $6,675,000 in 2001. Selling expenses for 2002 decreased 17% to $2,520,000 from $2,160,000 in 2001. Marketing expenses for 2002 decreased 76% to $624,000 from $354,000 in 2001. The increase was due primarily to the addition of a product manager to prepare for the launch of our therapeutic marketing campaign.

Interest and Other Income, Interest Expense

Interest and other income for 2002 decreased 39% to $75,000 from $123,000 in 2001. The decrease was due primarily to average yields declining from 4.04% in 2001 to 1.83% in 2002 and to lower average cash and investment balances in 2002 as compared to 2001. Interest expense for 2002 decreased 68% to $19,000 from $60,000 in 2001. The decrease was due primarily to the payoff of a line of credit and a buyout of certain capital lease obligations.

Gain on Sale of Intellectual Property

The gain on sale of intellectual property in 2001 was due to the sale of a portion of our patent portfolio and related intellectual property pertaining to intra vascular sensing and signal detection and certain guiding catheters to Medtronic, Inc. for an aggregate purchase price of $8,000,000. In December 2000 we received $4,000,000 of the purchase price. The remaining $4,000,000 was received in January 2001, upon completion of the remaining transfer obligations under the agreement. There were no such sales of our patent portfolio since then.

Liquidity and Capital Resources

We had cash and cash equivalents of approximately $7.1 million as of March 15, 2004. Our management believes that our cash balances as of March 15, 2004 will be sufficient to fund planned expenditures into the fourth quarter of 2004. Although our management recognizes the need to raise funds in the near future there can be no assurances that we will be successful in consummating any such transaction, or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. Any failure by us to obtain additional funding will have a material effect upon us and will likely results in our inability to continue as a going concern. Our independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.

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We have financed our operations to date principally through private placements of equity securities, which have resulted in net proceeds of approximately $109,988,000 through December 31, 2003, the initial public offering of our common stock in June 1997, which resulted in net proceeds of approximately $13,600,000, together with interest income on such proceeds, borrowings under a $3,000,000 former 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 December 31, 2003 we had approximately $6,446,000 in cash and cash equivalents.

Net cash used in operating activities was approximately $12,474,000, $11,074,000 and $7,616,000 for the years ended December 31, 2003, 2002 and 2001, respectively, resulted primarily from operating losses incurred. Net cash used in investing activities was $57,000 in 2003 and related to the capital expenditures of property and equipment, as compared to $703,000 and $350,000 used in 2002 and 2001 for the same expenditures. Net cash provided by financing activities was approximately $15,592,000, $7,620,000 and $14,184,000 for the years ended December 31, 2003, 2002 and 2001, respectively, resulting primarily from the sale of equity securities in private placement transactions and borrowings under the line of credit during such periods.

Contractual Commitments:

Following is a schedule of future contractual commitments at December 31, 2003 (in thousands):

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

As of December 31, 2003, we had an accumulated deficit of approximately $103.7 million. Our management expects to continue to incur additional losses in the foreseeable future as we complete new product development and commercialization.

Equity Financings

Since early 2001, our principal source of the cash needed to fund our operations has been private placements of common stock and warrants to purchase common stock. In recent years, we have been required to effect these equity financings at a discount to the then-prevailing market price of our common stock, and in June 2003, we obtained our stockholders’ approval for the issuance of up to 25,000,000 shares at a discount through December 31, 2003. The following summarizes our equity financings over the last three years, including the cash and equity fees that we have paid to financial advisors in connection with those financings.

In May 2001, we sold 11,746,916 shares of common stock at $0.58 per share in private placement transactions to accredited investors. The transaction included the issuance of warrants to investors for the purchase of 5,873,465 shares of common stock at an exercise price of $0.87 per share. These warrants were subsequently exercised for approximately $4,600,000. As a commission, we paid approximately $510,988 in

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cash and issued warrants to purchase 1,174,691 shares of common stock at an exercise price of $0.64 per share. Our net proceeds, after deducting placement expenses, were approximately $6,200,000. We used these proceeds for development activities, clinical trial expenses, commercialization of product offerings, operating costs and other general corporate purposes.

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

In November 2001, all of the warrants to purchase an aggregate of up to 5,873,465 shares of common stock issued in the May 2001 private placement were exercised, resulting in net proceeds of approximately $4,600,000. We used these proceeds for development activities, clinical trial expenses, commercialization of product offerings, operating costs and other general corporate purposes.

On August 5, 2002, we received net proceeds of approximately $4,300,000 from a private placement of 6,788,325 shares of our common stock with at purchase price of $0.72 per share. As part of the private placement, we also issued redeemable warrants to purchase up to an aggregate of 2,036,491 additional shares of our common stock at an exercise price per share of $0.90. On August 12, 2002, we completed a second closing of our private placement in which we received net proceeds of approximately $186,000 from the sale of 194,552 shares of our common stock with a purchase price of $1.028 per shares and issued redeemable warrants to purchase up to an aggregate of 58,365 additional shares of our common stock at an exercise price of $1.285. We also issued to a financial advisor a warrant to purchase 678,832 shares of common stock at a price per share of $0.792 and a warrant to purchase 19,455 shares of common stock at a price per share of $1.131.

On December 31, 2002 and January 22, 2003, we sold by means of a private placement an aggregate of 5,333,319 shares of our common stock at prices of $0.74955 per share for gross proceeds of $4,000,000. In addition, we issued to the investors warrants to purchase 2,400,000 shares of our common stock at an exercise price of $0.8245 per share. The warrants became exercisable March 2003, subject to reduction on a share-for-share basis to the extent that an investor sells our common stock or other securities during the specified sixty day periods ending in March 2003. The warrants allow for a “cashless exercise” whereby the exercising party may use shares issuable upon exercise of the warrant in payment of the exercise price. We may not redeem the warrants. We paid to the party that acted as finder in connection with this private placement upon execution of a letter agreement a fee of $325,000 in cash plus 66,667 shares of our common stock and warrants to purchase 533,331 shares of our common stock at an exercise price of $0.8245. The warrants issued to the finder are not redeemable and allow for “cashless exercise” whereby the finder may use shares issuable upon exercise of the warrant in payment of the exercise price.

On March 28, 2003, we sold by means of a private placement an aggregate of 2,941,175 shares of our common stock at a price of $0.85 per share for gross proceeds of $2,500,000. In addition, we issued to the investors warrants to purchase 1,176,470 shares of our common stock at an exercise price of $1.25 per share. The warrants became exercisable beginning on September 28, 2003, subject to reduction on a share-for-share basis to the extent that an investor sells our common stock or other securities during the six-month period between the closing and September 28, 2003. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been at least $1.70 (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days and other conditions are met. We paid to the party that acted as agent in connection with this private placement a total of $175,000 in cash and warrants to purchase

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294,117 shares of our common stock at an exercise price of $0.935. We used the net proceeds of our offerings from August 2002 through April 2003 for development activities, clinical trial expenses and increased regulatory activities in preparation for our May 2003 FDA Panel meeting, commercialization of product offerings, operating costs and other general corporate purposes.

On April 11, 2003, we sold by means of a private placement an additional 4,395,587 shares of our common stock at a price of $0.85 per share for gross proceeds of approximately $3,700,000. In addition, we issued to the investors warrants to purchase 1,758,234 shares of our common stock at an exercise price of $1.25 per share. The warrants became exercisable beginning on October 11, 2003, subject to reduction on a share-for-share basis to the extent that an investor sold our common stock during the six-month period between the closing and October 11, 2003. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been at least $1.70 (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days and other conditions are met. We paid to the parties that acted as agents in connection with this private placement upon the closing of the transaction, a total of $270,000 in cash and warrants to purchase 448,557 shares of our common stock at an exercise price of $0.935.

On August 13, August 14 and August 18, 2003, we sold by means of a private placement an aggregate of approximately 10,282,800 shares of our common stock at a price of $0.5296 per share, 2,421,980 shares of Common Stock at a price of $0.5664 per share and 977,176 shares of common stock at a price of $0.6064 per share for net proceeds of approximately $6.8 million. In addition, we issued to the investors warrants to purchase 3,084,840 shares of our common stock at an exercise price of $0.7282 per share, warrants to purchase up to 726,590 shares at an exercise price of $0.7788 per share and warrants to purchase up to 293,152 shares of our common stock at an exercise price of $0.8338 per share. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been at least $1.0592, $1.1328 or $1.2128, respectively (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days, so long as our stock remains listed on specified securities exchanges or trading markets and a registration statement covering the resale of the warrant shares is effective, among other conditions. We used net proceeds of our August 2003 offering for development activities, commercialization of product offerings, operating costs, severance payments associated with our June 2003 reduction in force, and other general corporate purposes.

In October 2003, we called the warrants dated August 13, 2003 with exercise prices of $0.7282 for redemption on March 15, 2004. All of the warrants issued to August 13, 2003 were exercised prior to the redemption date, as well as some warrants issued on August 14 and August 18, 2003, resulting in net proceeds of $3.1 million. In November 2003, we called the warrants dated August 14, 2003 with exercise prices of $0.7788 for redemption on March 15, 2004, but conditions to this redemption were not met and the redemptions did not occur. We paid approximately $520,000 in cash to parties that acted as our agents in connection with this private placement, and issued to the agents warrants to purchase 321,057 shares of our common stock at an exercise price of $0.8375 and warrants to purchase up to 440,812 shares of our common stock at exercise prices that range from $0.90 per share to $1.1025 per share. The closing of this transaction caused additional shares of common stock to be issued under the antidilution provisions of certain of our previously issued securities. Additionally, an expense of $904,000 was recorded as “Other non-cash expense” for the difference in the valuation between the issuance dates and the date of the registration of the warrants issued in this transaction. In March 2004, we agreed to reduce the exercise price of 440,812 shares of the agents’ warrants from $1.10, $1.1025 and $0.90 per share to $0.8375 per share, to encourage the agent to exercise the warrants for cash.

On December 19, 2003, we sold by means of a private placement an additional 3,583,327 shares of our common stock at a price of $0.87 per share for gross proceeds of approximately $3,118,000. In addition, we issued to the investors warrants to purchase 1,074,993 shares of our common stock at an exercise price of $0.957 per share. The warrants will be exercisable beginning on June 19, 2004 and will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the six (6) month period between the closing and June 19, 2004. We may redeem the warrants for a price of $0.001 per share of common

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stock if the average closing price per share of our common stock has been at least $1.74 (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days and other conditions are met. Redemptions initiated prior to June 19, 2004 are subject to deferral and certain other conditions. We paid to the parties that acted as our agents in connection with this private placement a total of $218,225 in cash and issued to the agents warrants to purchase 303,608 shares of our common stock at an exercise price of $0.957 per share and warrants to purchase 20,689 shares of our common stock at an exercise price of $1.2375 per share.

Factors Affecting Future Results

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

If we fail to raise additional capital when needed, our business will fail.

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

We have financed our operations since inception primarily through the private placement of equity securities, proceeds from our initial public offering in June 1997, loan facilities and the sale of certain of our patents and other intellectual property. Although our management recognizes the need to raise funds in the near future, there can be no assurance that we will be successful in consummating any fundraising transaction, or if we do consummate such a transaction, that its the terms and conditions will not be unfavorable to us. Among other things, the agreements under which we issued some of our existing securities include, and any securities that we may issue in the future may also include, terms that could impede our ability to raise additional funding, such as terms requiring the consent of certain security holders before we issue additional securities. The issuance of additional securities will likely dilute the interests of existing common stockholders, and could impose additional restrictions on how we operate and finance our business.

We have sold a limited number of our microcatheter products, and we will continue to incur substantial losses for the foreseeable future.

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, regulatory approval efforts and manufacturing, sales, marketing and other expenses as we seek to obtain necessary approvals and bring our microcatheters to market. Since our inception, we have experienced losses, and we expect to experience substantial net losses into the foreseeable future.

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Our net losses were approximately $13.2 million, $12.6 million and $9.4 for the years ended December 31, 2003, 2002 and 2001 respectively. As of December 31, 2003, our accumulated deficit was approximately $103.7 million. Our limited sales history and the uncertainties associated with our efforts to obtain regulatory approvals for our products make it difficult to assess our future results. We cannot be certain that we will ever generate substantial revenue or achieve profitability. Our failure to generate substantial revenues would harm our business.

Our need to raise additional capital in the future could have a dilutive effect on your investment.

In order to complete the required regulatory approval process and commercialize our products, we will need to raise additional capital. One possibility for raising additional capital is the public or private sale of our common stock or securities convertible into or exercisable for our common stock.

If we sell additional shares of our common stock, such sales will further dilute the percentage of our equity that you own. In addition, our recent private placement financings have involved the issuance of securities at a price per share that represented a discount to the closing price of our common stock and it is possible that we will close future private placements involving the issuance of securities at a discount to prevailing market prices. Depending upon the price per share of securities that we sell in the future, your interest in us could be further diluted by any adjustments to the number of shares and the applicable exercise price required pursuant to the terms of the agreements under which we previously issued securities. No assurance can be given that previous or future investors, finders or placement agents will not claim that they are entitled to additional antidilution adjustments or dispute the Company’s calculation of any such adjustments. Any such claim or dispute could require us to incur material costs and expenses regardless of the resolution and, if resolved unfavorably to us, to effect dilutive securities issuances or adjustments to previously issued securities. In addition, certain of our prior securities issuances have included, and future financings may also include, provisions requiring us to make additional payments to the investors if we fail to obtain or maintain the effectiveness of SEC registration statements by specified dates or take other specified action. Our ability to meet these requirements may depend on actions by regulators and other third parties, over which we will have no control. These provisions may require us to make payments or issue additional dilutive securities, or could lead to costly and disruptive disputes. In addition, these provisions could require us to record additional non-cash expenses, as we were required to do in the third quarter of 2003 with respect to certain warrants issued in that quarter.

The audit report accompanying our 2003 financial statements indicates there is substantial doubt as to our ability to continue as a going concern.

As a result of our losses to date and accumulated deficit, the audit report on our 2003 financial statements contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern. Our continuation as a going concern will depend upon our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain profitable operations. Concern about our ability to continue as a going concern may make it more difficult for us to obtain additional funding to meet our obligations or adversely affect the terms of any additional funding we are able to obtain. We anticipate that we will continue to incur significant losses until successful commercialization of one or more of our products. There can be no assurance that we can or will operate profitably in the future, or that we will continue as a going concern.

We have entered into engagement letters in connection with our actual and proposed private placements that have in the past and may in future lead to disputes and also may lead to additional payments of cash or issuances of securities in connection with past or future sales of our securities.

In connection with our private placement of units of common stock and warrants in 2001, we entered into a letter agreement in April 2001, or the 2001 Letter Agreement, with a financial advisor. This financial advisor, or the 2001 Advisor, assisted us with our 2001 private placement of units and received a commission in connection with the 2001 offering.

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On July 15, 2002, we retained a different financial advisor, or the July 2002 Advisor, in connection with a proposed offer and sale of shares of our common stock and warrants to purchase shares of our common stock. The letter agreement with the July 2002 Advisor, or the July 2002 Letter Agreement, provides for the payment of fees to the July 2002 Advisor equal to 7% of the gross proceeds of the offering. In addition to the cash fee, the July 2002 Advisor has the right to receive warrants to purchase that number of shares of our common stock equal to 10% of the number of shares sold in the offering. The July 2002 Advisor will also receive cash proceeds equal to 7% of the aggregate exercise price of any warrants issued to the investors in the offering and subsequently exercised.

Shortly before the August 5, 2002 closing of our August 2002 private placement which was arranged by the July 2002 Advisor, the 2001 Advisor communicated to us that it believes that it is entitled under the 2001 Letter Agreement to fees and warrants in connection with the August 2002 private placement. We strongly disagree with the 2001 Advisor’s interpretation of the 2001 Letter Agreement. Even if the 2001 Advisor’s interpretation is determined to be correct, we believe that the 2001 Advisor waived any rights to compensation it might have in connection with the August 2002 private placement. We sent to the 2001 Advisor on August 21, 2002 a termination letter relating to the 2001 Letter Agreement. Pursuant to the terms of the 2001 Letter Agreement, our obligations to pay the 2001 Advisor a commission or to issue to it warrants in connection with sales of our securities terminated thirty (30) days from the date of this termination letter, or September 20, 2002. On August 29, 2002, the 2001 Advisor sent to us an invoice for cash commissions and warrants that the 2001 Advisor claims are owed to it pursuant to the 2001 Letter Agreement as a result of the closing of the August 2002 private placement. On September 10, 2002, we sent a letter to the 2001 Advisor to express our position that no fees or warrants are due to the 2001 Advisor in connection with the closings of the August 2002 private placement. On September 26, 2002 we received a letter from legal counsel to the 2001 Advisor reasserting the 2001 Advisor’s claim that it must receive payment of commissions and warrants in connection with the August 2002 private placement.

In the event the 2001 Advisor prevails on any claims in connection with the August 2002 private placement, we would be required to pay to the 2001 Advisor $381,570, or 7.5% of the gross proceeds that we received from the sale of shares of common stock, and issue to the 2001 Advisor warrants to purchase up to 698,287 shares of common stock, or 10% of the number of shares of common stock sold in the August 2002 private placement. In the event of the warrants issued to the investors in the August 2002 private placement are exercised, we would be required to pay to the 2001 Advisor an additional cash amount equal to $133,549 or 7% of the aggregate exercise price of those warrants. Any payments to the 2001 Advisor or warrants issued to the 2001 Advisor would be in addition to placement fees and warrants paid to the July 2002 Advisor in connection with the terms of the July 2002 Letter Agreement.

On November 13, 2002, we retained a party to act as our financial advisor and finder in connection with a proposed offer and sale of shares of our common stock and warrants to purchase shares of our common stock. The letter agreement with this advisor, or the November 2002 Advisor, provides for, among other things, the payment of fees to the November 2002 Advisor equal to 7.5% of the gross proceeds of the offering, including any proceeds from the exercise of the warrants. In addition to the cash fee, the November 2002 Advisor has the right to receive warrants to purchase a number of shares equal to 10% of the number of securities sold in such offering. The letter agreement also provided for the payment of a cash fee of $25,000 upon execution of the agreement, and a break-up fee of $100,000 (net of the fee paid upon execution) for financings or transactions undertaken by us without the November 2002 Advisor’s assistance. The December 2002 and January 2003 closings of our private placement were undertaken without the November 2002 Advisor’s assistance, and in April 2003 we paid to the November 2002 Advisor a net break-up fee of $75,000. On April 17, 2003, we terminated this letter agreement, effective May 18, 2003. In a letter dated September 19, 2003, this former advisor claimed that under its November 13, 2002 agreement with us, we are obligated to pay such advisor cash fees of $157,500 and warrants to purchase “Units” of the Company’s securities (compromising 396,514 shares of Common Stock and warrants to purchase 118,954 shares of Common Stock at an exercise price per share of $0.7282) at an exercise price per Unit of $0.58256, in connection with four enumerated purchasers’ investments in our August

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2003 private placement. The letter also stated that the November 2002 Advisor believed that the Company would have additional obligations to the advisor in the event that it was determined that other investors in the August 2003 private placement were investors as to which the November 2002 Advisor is entitled to compensation under its November 13, 2002 agreement with us. In a letter dated January 29, 2004, the November 2002 Advisor advised us that it was no longer claiming compensation with respect to one of the four purchasers, reduced its claim to cash fees of $82,500 and warrants to purchase “Units” comprising 207,698 shares of Common Stock and warrants to purchase 62,309 shares of Common Stock, submitted information alleged to support a portion of its claim, and stated its belief we are obligated to register the claimed securities for resale. In our opinion, the November 2002 Advisor has not established the merit of this claim. We cannot predict whether additional claims will be made, or the resolution of any current or future claims, by this former advisor.

On December 9, 2002, we retained another party as our financial advisor and finder in connection with a proposed offer and sale of shares of our common stock and warrants to purchase shares of our common stock. The letter agreement with this advisor, or the December 2002 Advisor, provides for, among other things, the payment of fees to the December 2002 Advisor equal to 8% of the gross proceeds of the offering, including any proceeds from the exercise of the warrants. In addition to the cash fee, the December 2002 Advisor has the right to receive warrants to purchase a number of shares equal to 7.5% of the number of securities issued in such offering.

On December 28, 2002, we retained another party as our financial advisor and finder in connection with the sale of shares of common stock and warrants to purchase shares of our common stock that closed on December 31, 2002 and January 22, 2003. This Finder received a cash finder’s fee of $300,000 and warrants to purchase 533,331 shares of our common stock at a price per share of $0.8245 in connection with the December 31, 2002 and January 23, 2003 closings of our private placements. On January 13, 2003, we entered into a new letter agreement with this Finder, or the January 2003 Finder, to act as our financial advisor and finder in connection with the offer and sale of shares of Company common stock and warrants to purchase shares of our common stock that closed on March 28, 2003 and April 11, 2003. The January 2003 Finder received 24,746 shares of our common stock upon execution of the letter agreement. The letter agreement with this finder also provides for the payment of fees to the January 2003 Finder equal to 7.5% of the gross proceeds of the March 28, 2003 and April 11, 2003 closings of the private placement received from investors introduced to us by the January 2003 Finder, including any proceeds from the exercise of the warrants and those warrants to purchase a number of shares equal to 10% of the number of shares sold in the March 28, 2003 and April 11, 2003 closings of the private placement to those investors.

On March 11, 2003, we retained another party as our financial advisor in connection with a proposed debt or equity financing. The letter agreement with this advisor, or the March 2003 Advisor, provided for, among other things, the payment of fees to the advisor equal to 6% of the gross proceeds of the offering and warrants to purchase a number of shares equal to 6% of the number of securities issued in such offering at 110% of the market price. We terminated this letter agreement, effective May 6, 2003. The March 2003 Advisor has acknowledged and agreed to the terms of that termination, including that no fees are owed by us under this letter agreement.

Despite the termination letter that we delivered to the 2001 Advisor on August 21, 2002 terminating our obligations to pay the 2001 Advisor a commission or to issue them warrants in connection with sales of our securities after September 20, 2002, we received on January 7, 2003, a letter from the 2001 Advisor asserting that it also is owed (i) approximately $245,000 plus (ii) five year warrants to purchase approximately 436,000 shares of the our common stock at an exercise price of $0.8245 per share, in each case arising in connection with a private placement of securities consummated by us in December 2002. In addition, on February 2, 2003 we received another letter from the 2001 Advisor asserting that it is also owed (i) approximately $54,717 plus (ii) five year warrants to purchase approximately 97,332 shares of our common stock at an exercise price of $0.8245 per share, in each case in connection with the January 22, 2003 closing of our private placement. Any payments to the 2001 Advisor or warrants issued to the 2001 Advisor would be in addition to placement fees and warrants paid to the December 2002 Finder pursuant to the terms of our letter agreement with the December 2002 Finder.

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We have not yet received a letter from the 2001 Advisor claiming additional fees or warrants in connection with the March 2003, April 2003, August 2003 and December 2003 closings of our recent financings, but there can be no guarantee that such a claim will not be made in connection with any prior or future financing.

In connection with the March 28, 2003 and April 11, 2003 closings of our private placement, in addition to the cash fee and warrants to purchase common stock issued to the January 2003 Finder, (i) the July 2002 Advisor received an aggregate cash finder’s fee of $351,400 and warrants to purchase 590,588 shares of our common stock at a price per share of $0.935, (ii) the November 2002 Advisor received an aggregate cash finder’s fee of $15,937.50 and warrants to purchase 25,000 shares of our common stock at a price per share of $0.935 and (iii) the December 2002 Advisor received an aggregate cash finder’s fee of $40,000 and warrants to purchase 44,117 shares of our common stock at a price per share of $0.935, in each case, for placement of securities with parties introduced through the respective advisor.

On July 15, 2003, we retained another party as our financial advisor in connection with a proposed debt or equity financing. The letter agreement with this advisor, or the July 15, 2003 Advisor, provides for, among other things, the payment of fees to the advisor equal to 7% of the purchase price of shares sold to purchasers introduced to us by the July 15, 2003 Advisor and warrants to purchase 93,750 shares of our common stock per $1 million raised by this advisor (up to a maximum of 750,000 shares) at a price per share of $0.8375.

On July 18, 2003, we retained another party as our financial advisor in connection with a proposed equity financing. The letter agreement with this advisor, or the July 18, 2003 Agent, provides for, among other things, the payment of fees to the agent equal to 7% of the gross subscription proceeds of any equity offering by us from purchasers procured by the agent. In addition to the cash fee, the agent has the right to receive warrants to purchase six percent (6%) for every dollar raised by the July 18, 2003 Agent in connection with the placement at an exercise price equal to 125% of the closing bid price of our common stock on the date of the closing. Pursuant to an oral agreement entered into in August 2003, we retained another party as our financial advisor in connection with a proposed debt or equity financing. Our oral agreement with this advisor, or the August 2003 Advisor, provides for cash fees and warrants to be issued to this advisor with respect to investors introduced by this advisor, at the same rates as described above with respect to the July 15, 2003 Advisor.

In connection with the August 2003 private placement, we paid to the July 15, 2003 Advisor, the July 18, 2003 Agent and the August 2003 Advisor aggregate cash fees of approximately $520,000. In addition, the advisors received warrants to purchase an aggregate of 705,620 shares of our common stock at exercise prices ranging from $0.8375 to $1.1025 per share. We subsequently agreed to reduce the exercise price of certain of these warrants to $0.8375 to encourage the adviser to exercise them for cash in March 2004. In August 2003, one of the foregoing advisors notified us of such advisor’s belief that it was entitled to an additional fee of approximately $35,000 and additional warrants to purchase approximately 47,000 shares of Common Stock in connection with the August 2003 private placement. We responded that, based on the information in our possession, we believe that such advisor is not entitled to such fees and warrants. To date, we have received no further information from such advisor in support of its claim.

On November 18, 2003, we entered into another letter agreement with the July 15, 2003 Advisor, which provides for, among other things, the payment of cash fees to the July 15, 2003 Advisor equal to seven percent (7%) of our gross proceeds of sales of stock to purchasers whose purchases are procured by the July 15, 2003 Advisor or its designated dealers before the expiration of the agreement. In addition to the cash fee, the July 15, 2003 Advisor has a right to four-year warrants to purchase shares of common stock equal in number to 9.375% of the common stock sold to investors procured by this advisor at an exercise price per share equal to one hundred ten percent (110%) of the per share price paid at the closing. In connection with the closing of our December 2003 private placement, we paid this advisor and its designated dealers, and the July 18, 2003 agent cash fees equal to $218,225 and issued warrants to purchase 324,297 shares of our common stock at exercise prices that range from $0.957 to $1.2375 per share.

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Due to the existence of these various letter agreements, there is a possibility that we may be obligated to pay fees, cash commissions, and issue warrants to one or more financial advisors in connection with closings of any of our private placements. In addition, we may in the future enter into further agreements with financial advisors, finders or placement agents, similar to those discussed above, in connection with private placements or public offerings of our securities. We might agree to pay to these parties a commission on any sales of securities to investors introduced to us by such parties or a commission based upon the exercise price of any warrants or other securities exercised by investors introduced to us by such parties, and that such commissions will be in addition to commissions payable to other financial advisors, finders and placement agents working on our behalf. In addition, we may agree to issue to these additional financial advisors, finders and placement agents securities such as warrants to purchase shares of our common stock, which could dilute your investment in us. We also may be obligated to pay termination or break-up fees to our current or future financial advisors, finders and placement agents in connection with our financings. These commissions paid or warrants or other securities issued may be in addition to the commissions payable or securities issuable to other financial advisors, finders or placement agents in respect of the same transaction, and could be substantial. Disputes have arisen from time to time concerning our financial advisors’ entitlement to cash and equity compensation associated with our past financings, and additional disputes may arise in the future.

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. Currently, we are solely responsible for marketing and distributing our products in the United States. We had previously signed an exclusive three-year distribution agreement with St. Jude Medical Corporation in 2000, but St. Jude did not meet the first year minimum annual sales quota under the distribution agreement and, in June 2001, we mutually agreed with St. Jude to terminate the agreement. If we receive FDA approval of our PMA for REVELATION Tx, we may not have an adequate marketing and sales force to adequately sell our product. 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 prevent us from being able to generate significant revenues from the sale of our products.

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

Currently, sales and marketing of our PATHFINDER, PATHFINDER mini, REVELATION and TRACER microcatheter systems are conducted through a number of exclusive distributors in certain European countries and Japan and a direct salesperson in Europe. We have sold only a limited number of PATHFINDER, PATHFINDER mini, REVELATION and TRACER microcatheter systems through these distributors. We cannot be certain that these distributors will be able to effectively market and sell our products in international markets. In addition, we cannot assure you that we will be able to enter into additional agreements with desired distributors on a timely basis or at all, or that these distributors will devote adequate resources to selling our products. Our failure to establish and maintain appropriate distribution relationships would harm our business.

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

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

We cannot assure the safety or effectiveness of our products.

To obtain and maintain required regulatory approvals and secure the confidence of physicians and others whose acceptance is needed for our products, we will need to demonstrate that our products are safe and effective. We cannot assure you that our products will be deemed safe and effective. Many of our products, such as our surgical ablation system which has begun to be used by cardiac surgeons only recently, have not been used to a sufficient extent to permit us to predict their safety and effectiveness. In addition, our products include components and materials supplied by third parties, whose safety and reliability we cannot guarantee. We have occasionally experienced quality issues with some elements of our products, and we may face additional issues in the future. The perceived safety and effectiveness of our products can also depend on their manner of use by physicians and other third parties, which we cannot control. If safety and effectiveness issues arise with any of our products in the future, we may incur liabilities to third parties, lose any regulatory approvals for the applicable product, or be required to redesign the product. These issues will reduce our sales and increase our expenses, possibly substantially.

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

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Physicians will not recommend the use of our microcatheter systems unless they can conclude that our systems provide a safe, effective and cost-efficient alternative to current technologies for the mapping and ablation of atrial fibrillation or ventricular tachycardia. If our clinical data and other studies do not show that our products are safe and effective, the FDA and other regulators will not approve our products for sale. If our products are not approved, we will not be able to enter the market and we will not be able to generate revenues from their sale.

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

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

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

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

Before we can market any of our products in the United States or Europe, we must demonstrate that our products are safe and effective and obtain approval or clearance from the applicable governmental authorities. In the United States, we must obtain from the FDA 510(k) pre-market notification clearance or a PMA in order to market a product. We have received 510(k) pre-market notification clearances for our PATHFINDER, PATHFINDER mini and TRACER microcatheter systems for mapping ventricular tachycardia, for the REVELATION microcatheter system for mapping atrial fibrillation and for the Cardima Ablation System to ablate Cardiac tissue during cardiac surgery using radio-frequency energy. Currently, the process for 510(k) clearance requires approximately 120 days and PMA approval is six to twelve months. However, the timing of such processes can be uncertain and may involve significantly more time. We cannot guarantee either the timing or receipt of regulatory approval or clearance for any of our products in development. These products may require a PMA, and the FDA may request extensive clinical data to support either 510(k) clearance or a PMA.

We are required to seek a PMA for our ablation products, including the REVELATION Tx microcatheter. The process of obtaining a PMA is much more expensive, lengthy and uncertain than the 510(k) pre-market notification clearance process. In order to complete our PMA application, we will be required to complete

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clinical trials to demonstrate the safety and effectiveness of these products. In December 1997, the FDA approved a 10-patient atrial fibrillation feasibility study for mapping and ablation with the REVELATION Tx. In June 2000, we received conditional approval from the FDA and full approval in August 2000 for our Phase III clinical trial. In March 2001, the FDA allowed us to file a modular PMA for our REVELATION Tx in Phase III clinical trial. Under the modular PMA submission, we filed four of five modules in 2001. The fifth module is the clinical data and formal PMA application. Three of the first four modules have been accepted and closed by the FDA and the remaining module has been left open for reference during the review of the clinical data in the fifth and final module. On September 20, 2002, we submitted our PMA application to the FDA with the fifth module containing data on more than 80 patients treated with our REVELATION Tx microcatheter system. Subsequently, on November 5, 2002, we announced that the FDA had accepted our filing and granted our request for expedited review. On March 6, 2003, we were notified by the FDA that we would meet with the Circulatory Systems Device panel on May 29, 2003. On May 29, 2003, the Circulatory System Devices Panel unanimously recommended that the FDA not approve our PMA for the REVELATION Tx linear ablation microcatheter system. The Circulatory System Devices Panel commented favorably on the safety and need for this type of device. However, the Panel felt that efficacy data was not sufficiently clear and supportive for the approval. The Panel provided the FDA and the Company with several suggestions on how to possibly reexamine the existing data or how to collect more data on existing patients. On June 26, 2003, we received a letter from the FDA, which reiterated the recommendation of the Panel and stated the FDA concurred with the recommendation of the Panel. On January 20, 2004, we submitted an amended PMA that provides new analysis, including data from an expanded patient base, to the FDA. The timing and outcome of the FDA’s consideration of any submission are currently uncertain.

We are restricted from selling the product until the entire PMA process is complete and approved by the FDA. No assurance can be given that we will ever be able to obtain a PMA for any of our ablation products. Our failure to obtain a PMA on a timely basis would have a material adverse effect on our business, financial condition and results of operations.

We filed an investigational device exemption, or IDE, application for a feasibility trial with the THERASTREAM microcatheter system in December 1998 and received permission to expand that trial in July 2000. We have postponed the THERASTREAM clinical trial while we focus our resources on completing our atrial fibrillation Phase III clinical trial. There can be no assurance that any additional clinical studies that we may propose will be permitted by the FDA, will be completed or, if completed, will provide data and information that supports a PMA. Furthermore, we cannot assure you that our Phase III clinical trial for ablation of atrial fibrillation will provide us with data and information that supports a PMA.

Regulatory agencies may limit the indications for which they approve or clear any of our products. Further, the FDA or regulatory agencies in other countries 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. No assurance can be given that our future clinical trials will demonstrate the safety and effectiveness of any of our products or will result in regulatory approval to market our products. As a result, if we are unable to commence and complete our clinical trials as planned, or demonstrate the safety and effectiveness of our products, our business will be harmed. In addition, no assurance can be given that we can begin any future clinical trials or successfully complete these trials once started. We may never meet our development schedule for any of our products in development. Even if a product is successfully developed and

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clinically tested, we cannot be certain that it will be approved by the FDA or other regulatory agency on a timely basis or at all. If the FDA does not approve our products for commercial sales, our business will be harmed. As described above, we have devoted considerable resources to developing, testing and seeking regulatory approval for our REVELATION Tx microcatheter systems designed for ablation of atrial fibrillation. On May 29, 2003, the FDA’s Circulatory System Devices Panel recommended that the FDA not approve our premarket approval application, or PMA, for the REVELATION Tx linear ablation microcatheter system. On June 26, 2003, we received a letter from the FDA, which reiterated the recommendation of the Panel and stated the FDA concurred with the recommendation of the Panel. On January 20, 2004, we submitted an amended PMA to the FDA, but the timing and outcome of any response from the FDA are currently uncertain. We must receive PMA approval before marketing our products for ablation in the United States.

Additionally, in August 2001, we began a clinical trial in Germany involving our REVELATION Helix microcatheter in the treatment of atrial fibrillation originating from the pulmonary veins. Enrollment in this study was completed in June 2002. By December 2002, all enrolled study subjects had completed the six-month follow-up. Data from the six-month follow-up on these subjects will be analyzed and prepared for publication targeted for the fourth quarter of 2004. In December, 2001, the REVELATION Helix received the CE mark allowing sales in the European Economic Area. We also received in December 1999 approval for an IDE to begin clinical testing of our THERASTREAM microcatheter system for ablation of ventricular tachycardia and during calendar year 2000 approval to expand that trial; however, we have postponed the clinical feasibility trial for the THERASTREAM microcatheter system for ablation of ventricular tachycardia to focus on completing our REVELATION Tx clinical trial for atrial fibrillation. We have no estimate as to when, or if, we will resume the clinical trial for our THERASTREAM microcatheter system. If we resume the clinical trial for our THERASTREAM microcatheter system, the completion of this clinical trial could take several years. Clinical trial of our microcatheter systems will require substantial financial and management resources. In addition, the clinical trials may identify significant technical or other obstacles that we will need to overcome before obtaining the necessary regulatory approvals or market acceptance. Our failure to complete our clinical trials, demonstrate product safety and clinical effectiveness, or obtain regulatory approval for the use of our microcatheter system for the ablation of atrial fibrillation would have a material adverse effect on our business, financial condition and results of operations.

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

The rate at which we may complete our pre-clinical and clinical trials is dependent upon, among other things, the rate of patient enrollment. Patient enrollment depends on many factors, including the size of the patient population, the nature of the procedure, the proximity of patients’ residences to clinical sites, the eligibility criteria for the study and impact of other clinical studies competing for the same patient population and/or the same physicians’ time and research efforts. Delays in planned patient enrollment may result in increased costs and delays, which could cause our business results to suffer.

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

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

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We also are required to demonstrate and maintain compliance with the FDA’s Quality System Regulations for all of our products. The FDA enforces the Quality System Regulations through periodic inspections, including a pre-approval inspection for PMA products. The Quality System Regulations relates to product testing and quality assurance, as well as the maintenance of records and documentation. If we do not, or any third-party manufacturer of our products does not, comply with the Quality System Regulations and cannot be brought into compliance, we will be required to find alternative manufacturers. Identifying and qualifying alternative manufacturers would likely 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. Foreign regulatory agencies may also impose burdensome and costly requirements on us. If we fail to comply with these applicable regulations, we may incur substantial business disruption, expenses, penalties, fines and other liabilities and our business results, and financial conditions will 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 products in the member countries of the European Union, we are required to obtain CE Mark certification. CE Mark certification is an international symbol of adherence to quality assurance standards and compliance with the European Medical Device Directives. We have received CE Mark certification to sell our PATHFINDER, PATHFINDER mini, REVELATION, REVELATION Tx, REVELATION Helix, and TRACER microcatheters and VENAPORT, VUEPORT and NAVIPORT guiding catheters for mapping in the European Union.

We received approval to sell our PATHFINDER, PATHFINDER Mini, REVELATION, and TRACER in Japan and Australia, and to sell our PATHFINDER, TRACER, VENAPORT, VUEPORT and NAVIPORT in Canada. We also received CE Mark certification to sell our REVELATION, REVELATION Tx, REVELATION T-Flex, REVELATION Helix, REVELATION Helix ST and REVELATION Helix STX microcatheter systems for both mapping and ablation of atrial fibrillation, permitting us to market these products in the member countries of the European Union.

We intend to submit data in support of additional CE Mark applications. However, there can be no assurance we will be successful in obtaining or maintaining the CE Mark for any of our products, as the case may be. Failure to receive or maintain approval to affix the CE Mark would prohibit us from selling these products in member countries of the European Union, and would require significant delays in obtaining individual country approvals. No assurance can be given that we will ever obtain or maintain such approvals. If we do not receive or maintain these approvals, our business could be harmed.

In July 2003, we received a Section 40 Letter (intention to suspend a medical device license) from the Medical Devices Bureau of the Health Products and Food Branch of Health Canada. On December 1, 2003, after meeting with the Medical Devices Bureau and providing additional analysis from our current trial, we received notification from the Bureau that the medical device license would not be suspended. We may receive similar notices in the future from U.S. or foreign agencies relating to approvals previously obtained or pending regulatory submissions.

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

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

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:

Any of these factors could damage our business results.

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

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

Many of our competitors have an established presence in the field of interventional cardiology and electrophysiology, or the study of the electrical system of the heart. These competitors include C.R. Bard, Inc. Medtronic, Inc., Boston Scientific, through its EP Technologies and Cardiac Pathways divisions, Johnson & Johnson, through its Biosense-Webster division, and St. Jude Medical, Inc., through its Daig division. These competitors have substantially greater financial and other resources than we do, including larger research and development staffs and greater experience and capabilities in conducting clinical trials, obtaining regulatory approvals, and manufacturing, marketing and distributing products. In addition, other companies are developing proprietary systems for the diagnosis and treatment of cardiac arrhythmias, including Biosense-Webster, a division of Johnson & Johnson, and Endocardial Solutions, Inc. Other companies are also developing, marketing and selling alternative approaches for the treatment of atrial fibrillation and ventricular tachycardia, including manufacturers of implantable defibrillators such as Guidant Corporation, Medtronic, Inc. and St. Jude Medical, Inc. We cannot be certain that we will succeed in developing and marketing technologies and products that are

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safer, more clinically effective and cost-effective than the more established treatments or the new approaches and products being developed and marketed by our competitors. Furthermore, there can be no assurance that we will succeed in developing new technologies and products that will be available before those of our competitors. Our failure to demonstrate the competitive advantages and achieve market acceptance of our products would significantly harm our business.

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

We rely on license agreements for some of our product technology from potential competitors. A license from Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation, is the technological basis for our microcatheter systems for mapping and ablation. Boston Scientific Corporation currently has research efforts in the field of electrophysiology that may compete with our products. Under the Target Therapeutics license agreement we have an exclusive license under specific issued United States patents. The exclusive license from Target Therapeutics covers the diagnosis and treatment of electrophysiological disorders in areas other than the central nervous system. In addition, we have obtained a non-exclusive license to use Target Therapeutics’ 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, Target Therapeutics has the right to terminate the license earlier if we fail to comply with various commercialization, sublicensing, insurance, royalty, product liability, indemnification, non-competition and other obligations. Furthermore, either party can terminate the license if a material breach remains uncured for thirty days or if either party ceases to be actively engaged in its present business for a period of twelve months. The loss of our exclusive rights to the Target Therapeutics-based microcatheter technology would significantly harm our business.

In December 2000, we sold certain patents and related intellectual property pertaining to intravascular sensing and signal detection to Medtronic, Inc., which currently has research efforts in the field of electrophysiology that may compete with our products. We received a perpetual, worldwide license at no cost from Medtronic to use these patents and related intellectual property in our products for mapping and ablation of arrhythmia-causing tissue. In addition, Medtronic agreed not to sublicense the patents within our field of use to any non-affiliated party. We have also licensed a proprietary surface-coating material from another vendor used on certain of our microcatheters.

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

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

We 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, because U.S. patent applications are not a matter of public record, a patent application could currently be on file that would prevent us from obtaining a patent issuance. In addition, Congress recently amended the U.S. patent laws to exempt physicians, other health care professionals and affiliated entities from infringement liability for medical and surgical procedures performed on patients. The issuance of any potentially competing patent could harm our business.

We have received in the past and expect to continue to receive letters from others threatening to enforce patent or other intellectual rights against us. We cannot be certain that we will not become subject to patent or intellectual property infringement claims or litigation, interference proceedings in the U.S. Patent and Trademark

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Office to determine the priority of inventions, or oppositions to patent grants in foreign countries. Any such claim, litigation or proceeding, regardless of the outcome, would likely require us to expend substantial defense costs and would disrupt our business. An adverse determination in litigation, interference or opposition proceedings could subject us to significant liabilities to third parties, require us to cease using important technology invalidate our intellectual property rights, or require us to license disputed rights from third parties. However, we cannot be certain that any licenses will be available to us on commercially reasonable terms or at all. Our inability to obtain such a license could materially delay the commercialization of our products, require us to expend substantial resources to design and develop alternative to the disputed technology, and otherwise harm our business. Our license with Target Therapeutics does not provide us with indemnification against claims brought by third parties alleging infringement of patent rights. Consequently, we would 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 healthcare providers to obtain satisfactory reimbursement for medical procedures in which our microcatheter systems are used. If these healthcare providers are unable to obtain reimbursement from third-party payors, the market may not accept our products and our revenues may decline.

Third-party payors may deny reimbursement if they determine that a prescribed device (1) has not received appropriate regulatory clearances or approvals, (2) is not used in accordance with cost-effective treatment methods as determined by the payor, or (3) is experimental, unnecessary or inappropriate. If we receive FDA clearance or approval, third-party reimbursement also would depend upon decisions by the United States Health Care Financing Administration for Medicare, as well as by individual health maintenance organizations, private insurers and other payors. Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals may be obtained on a country-by-country basis. Many international markets have government-managed health care systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. There can be no assurance that (1) reimbursement for our products will be available domestically or internationally, (2) if available, that such reimbursement will be available in sufficient amounts in the United States or in international markets under either government or private reimbursement systems, or (3) that physicians will support and advocate reimbursement for procedures using our products. Failure by hospitals and other users of our products to obtain reimbursement from third-party payors or changes in government and private third-party payor policies toward reimbursement for procedures employing our products would harm our business. Moreover, we are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business.

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

We currently manufacture our microcatheter systems in limited quantities for U.S. and international sales and for pre-clinical and clinical trials. However, we have limited experience manufacturing our products in the amounts necessary to achieve significant commercial sales. We expect that if U.S. sales for the PATHFINDER^™ microcatheter products, REVELATION microcatheter products, and our Surgical Ablation System, increase or if we receive FDA clearance or approvals for other products, we will need to expend significant capital resources

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and develop additional manufacturing capacity to establish large-scale manufacturing capabilities. However, we could encounter problems related to:

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 Quality System Regulations 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, the State of California and European Notified Bodies. We have demonstrated compliance with EN 46001 (ISO 13485 or ISO 9001) quality standards, as well as compliance with 93/42/EEC, the Medical Device Directive. We comply with procedures to produce products for sale in Europe. Any failure by us to comply with the Quality System Regulations requirements or to maintain our compliance with EN 46001 (ISO 13485 or ISO 9001) 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 Quality System Regulations or EN 46001 (ISO 13485 or ISO 9001) standards. There can be no assurance that we will be found in compliance with the Quality System Regulations by regulatory authorities, or that we will maintain compliance with EN 46001 (ISO 13485 or ISO 9001) standards in future audits. Our failure to comply with state or FDA Quality System Regulations, maintain compliance with EN 46001 (ISO 13485 or ISO 9001) 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 undergone a successful annual surveillance audit by the European Notified Body in November 2002 and a pre-PMA inspection in December 2003. In November 2000 and in January 2003, the FDA conducted an inspection of our quality system, which we successfully passed. There is no assurance that our manufacturing facilities will continue to meet such compliance audits and will maintain such compliance standards.

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

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

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

We face an inherent business risk of product liability claims in the event that the use or misuse of our products results in personal injury or death. We have received claims of this type in the past and may receive additional claims in the future. 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

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with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million annual limitation. We have product liability insurance with coverage in the amount of $5.0 million per occurrence, subject to a $5.0 million annual limitation. We cannot be certain that such coverage will be adequate or continue to be available to us on reasonable terms, if at all. In addition, there can be no assurance that all of the activities encompassed within our business are or will be covered under our policies. Although we label our microcatheter products for single-use only, we are aware that some physicians are re-using such products. Moreover, despite labeling our microcatheters for diagnostic use only, we believe that physicians are using such mapping microcatheters for ablation. Multiple use or “off-label” use of our microcatheters could subject us to increased exposure to product liability claims, which could have a material adverse effect on our business, financial condition and results of operations. We may require additional product liability coverage if we significantly expand commercialization of our products. Such additional coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims or series of claims against us, regardless of their merit or eventual outcome, could have a material adverse effect on our business, financial condition and results of operations.

Our stock may be delisted from Nasdaq and may become subject to penny stock rules, which may make it more difficult for investors to sell their shares and may lead to financial penalties under certain of our agreements.

Currently, our common stock trades on the Nasdaq SmallCap Market. We cannot assure you that we will be able to maintain our listing on Nasdaq or any other established trading market. Among other things, Nasdaq has considerable discretion with respect to listing standards, which include qualitative criteria as well as quantitative criteria, such as minimum stock price requirements, some of which are out of our control. Among other things, Nasdaq listing rules provide that if the closing bid price of a company’s stock is below $1.00 for more than thirty (30) consecutive trading days, the company faces possible delisting. We have faced possible delisting from Nasdaq in the past and may receive notices of potential delisting in the future. For example, the NASD advised us that beginning on April 9, 2001, our common stock would no longer be listed on the Nasdaq SmallCap Market. We appealed the NASD’s decision, met the continued listing requirements and on June 7, 2001, the NASD notified us that our common stock would continue to trade on the Nasdaq SmallCap Market.

In addition, due to our stock trading below $1.00 per share over various periods, we have received notices from the NASD that our stock could be delisted if its closing bid price did not equal or exceed $1.00 per share for at least ten consecutive trading days before a date specified by the NASD. For example, we received such a notice on October 28, 2002, but because the closing bid price of our common stock remained equal to or greater than $1.00 per share for more than ten consecutive trading days as of January 23, 2003, we regained compliance with Rule 4310(c)(4), and that the matter was therefore closed.

Subsequently, on July 22, 2003, we received another notification from the NASD that our common stock had closed below the minimum $1.00 per share required for continued inclusion on the Nasdaq for a period of more than thirty consecutive trading days. In its notification, the NASD informed us that we had 180 calendar days, or until January 12, 2004, to comply with NASD Marketplace Rule 4310(c)(4). In order to comply with this rule, the NASD indicated that the bid price of our common stock must close at $1.00 per share or more for a minimum of ten consecutive trading days at any time before January 12, 2004. On October 14, 2003, we were notified by the NASD that we regained compliance with Nasdaq Marketplace Rule 4310(c)(4), because the closing price of our common stock had been at $1.00 per share or greater for at least ten consecutive trading days.

We cannot assure you that we will be able to maintain our listing on the Nasdaq SmallCap Market. Delisting would have material and adverse effects on our business and the value of your investment. If our common stock were to be delisted from Nasdaq SmallCap Market, our common stock would be considered a penny stock under regulation 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.

In addition, the purchase agreements signed in connection with the December 31, 2002 and the January 22, 2003 closings of our private placement provide that if at any time during the two year period beginning on the respective closing dates of that placement our common stock is delisted from the Nasdaq National SmallCap

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Market for any reason, the investors shall receive an amount in cash equal to 1.5% of the aggregate purchase price of all shares and warrants purchased under those agreements for each month or portion thereof from the date of such delisting until our common stock is again listed on the Nasdaq National SmallCap Market. We may incur other substantial liabilities under the terms of other financings, if our common stock is delisted.

We are dependent upon our key personnel and may 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 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.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

Among other factors contributing to the potential volatility of our stock price, additional sales of our common stock in the public market, or the perception that such sales could occur, could cause the market price of our common stock to decline.

Delaware law, our corporate charter and bylaws and our stockholder rights plan could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control of our company. These provisions include:

Each of these provisions could discourage potential takeover attempts.

In May 2002, we adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock on May 21, 2002. Each right, when exercisable, entitles the registered holder to purchase from us one one-hundredth of a share of a new series of preferred stock on the terms stated in our rights plan. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our stockholder rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

These provisions in our charter, bylaws and rights plan and under Delaware law could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.

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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, 2003, we do not have any material quantitative or qualitative disclosures about market risk.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements and the report of independent auditors appear on pages F-1 through F-22 of this report.

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

On October 17, 2003, Ernst & Young LLP informed us that they would resign as Cardima’s independent accountant effective upon the completion of the quarterly review of our fiscal quarter ending September 30, 2003. In connection with its audits of each of the two most recent fiscal years and through October 24, 2003, the date of the Form 8-K reporting this event, there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

On December 22, 2003, we engaged BDO Seidman, LLP as our principal independent accountants to audit our financial statements. The engagement of BDO Seidman, LLP was approved by our Audit Committee on December 11, 2003.

Neither we nor anyone engaged on its behalf has consulted with BDO Seidman, LLP during our two most recent fiscal years nor during any subsequent interim period prior to its appointment as auditor for the fiscal year 2003 audit regarding (i) the application of accounting principles to a specified transaction either completed or proposed, or the type of audit opinion that might be rendered on our financial statements or (ii) any other matters or reportable events as set forth in Items 304(a)(2)(i) and 304(a)(2)(ii) of Regulation S-K.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.    We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.

Changes in internal control over financial reporting.    There were no changes in our internal control over financial reporting during the quarter ended December 31, 2003, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The response to this item is contained in part below and the remainder is contained in our Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2004 (the “2004 Proxy Statement”) under the caption “Election of Directors” and is incorporated herein by reference.

Executive Officers

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

Mr. Gabriel Vegh (age 64), the founder of the Company with the additional position of Chairman of the Board of Director since May 2001 has been a Director of Cardima since November 1992, serving as President and Chief Executive Officer from June 2000 to May 2001. Mr. Vegh was the President and Chief Financial Officer in May 1993 until November 1994 and July 1996, respectively, Chief Operating Officer from November 1994, and Executive Vice President from January 1995 until June 2000. Prior to joining Cardima, from August 1985 until May 1993, Mr. Vegh was the Vice President, Operations of Target Therapeutics, Inc., which is now a division of Boston Scientific Corporation. From February 1983 until August 1985, Mr. Vegh was General Manager, Pilot Operations of Advanced Cardiovascular Systems, Inc, which is now a division of Guidant Corporation. Mr. Vegh received a B.S. in Mechanical Engineering from the New Jersey Institute of Technology.

Mr. Barry D. Michaels (age 53) has been our interim Chief Financial Officer since July 2003. Mr. Michaels has been an independent consultant to medical device and technology companies since 1997, with more than 24 years of combined industry experience. In addition to his consulting practice, Mr. Michaels served as Chief Financial Officer of Lipid Sciences, a biotechnology company, from May 2001 through January 2003. Prior to joining Lipid Sciences, Mr. Michaels served as the Chief Financial Officer of IntraTherapeutics, Inc., an endovascular company, from March 2000 until its acquisition by Sulzer Medica in May, 2001. From June 1993 through July 1997 Mr. Michaels served as the Chief Financial Officer of Webster Laboratories, now know as Biosense-Webster, the largest electrophysiology company in the world. Mr. Michaels additionally served as interim President of the company following its acquisition by Johnson & Johnson in 1996. Mr. Michaels began his medical industry career in 1979 with American Hospital Supply, now known as Baxter Healthcare, where he held various management and executive positions in accounting and finance through 1988, most recently as Vice President and Controller of the Parenteral Products Group, before continuing his career as Vice President and Corporate Controller of Medtronic, Inc. Mr. Michaels received an MBA in finance from San Diego State University and is a graduate of the Executive Program at the University of California, Los Angeles.

Ms. Marianne Baldwin (age 57) was appointed as our Vice President, Worldwide Regulatory and Quality in October 2001 after serving as our Director of Regulatory and Clinical and Quality from February to October 2001. Prior to joining us, Ms. Baldwin held various positions over a period of more than 10 years. These positions involved increasing responsibility in regulatory and clinical affairs for companies that manufactured Class III implantable cardiovascular medical devices that featured novel biomaterials, including Baxter, Novacor from 1992 to 1997 and Thoratec Laboratories from 1997 to 2000 and, most recently for a start-up company that was developing catheters for interventional cardiology. Ms. Baldwin has over 20 years of management experience with various organizations, including University of California, San Francisco Department of Biophysics and Biochemistry and the State of Oregon. Ms. Baldwin received a B.A. in Romance Languages and Masters Degree in Psychology from the University of Oregon.

Mr. Victor Barajas (age 40) was appointed as Senior Vice President of Operations in October 2001 and has been responsible for all operations and manufacturing activity as our Vice President of Operations since August 1997. From September 1995 until August 1997, Mr. Barajas was our Director of Operations, from May 1994 until September 1995, Mr. Barajas was our Manager of Operations, and from June 1993 until May 1994, Mr. Barajas was one of our senior engineers. Prior to joining us, from 1990 until June 1993, Mr. Barajas was Process

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Development Engineer and then Project Leader and Manager of the Engineering Department for Target Therapeutics, Inc., which is now a division of Boston Scientific Corporation. From 1988 until 1990, Mr. Barajas was employed by Critikon, Inc. as a Research and Design/Manufacturing Engineer in the medical disposables area. Mr. Barajas received his B.S. degree in Industrial Technology from San Jose State University.

Mr. Eric Chan, Ph.D., F.E.S.C. (age 46) 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 and catheter lab systems, digital Holter and high resolution ECG 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. He was elected a Fellow of the European Society of Cardiology and a Senior Member of the Institute of Electrical and Electronic Engineers in 2003.

Mr. William Wheeler (age 57) was appointed as our President and Chief Operating Officer in May 2001. From May 2000 until May 2001, Mr. Wheeler was our Senior Vice President, Worldwide Sales and Marketing. 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 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.

Code of Ethics

We have adopted a Code of Business Conduct that applies to all our directors, officers and employees. A copy of the code of ethics will be provided free of charge upon written request to our Secretary at the address shown on the cover page of this report and will be made accessible, free of charge at our Internet website, http://www.cardima.com by the end of the second quarter of 2004. If we grant waivers from or make amendments to this code of ethics that are required to be disclosed pursuant to the Securities Exchange Act of 1934 or applicable listing requirements, we will make those disclosures on this website. Our website and the information contained in or connected to our website are not part of this report.

ITEM 11.    EXECUTIVE COMPENSATION

The response to this item will be contained in our 2004 Proxy Statement under the caption “Compensation of Directors” and “Compensation of Executive Officers,” and is incorporated herein by reference.

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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is contained in part below and the remainder will be contained in our 2004 Proxy Statement under the caption “Common Stock Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.

The following table sets forth information as of the end of December 31, 2003, with respect to compensation plans under which equity securities of the Company are authorized for issuance.