SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------
FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended June 30, 2005

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.

For the transition period from _________________ to _____________________.

Commission File Number: 0-22419

CARDIMA, INC.
(Exact name of registrant as specified in its charter)

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

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

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

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

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__X__No

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). ___ Yes ___X____No

As of September 1, 2005 there were 101,437,889 shares of Registrant's Common
Stock outstanding.

CARDIMA, INC.
TABLE OF CONTENTS
PART I. Financial Information

Page
----
Description
-----------

Item 1. Financial Statements (unaudited) 3
Condensed Balance Sheets as of June 30, 2005 and December 31, 2004 3
Condensed Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004 4
Condensed Statement of Cash Flows for the Six Months Ended June 30, 2005 and Year ended December 31, 2004 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Factors Affecting Future Results 24
Item 3. Quantitative and Qualitative Disclosure About Market Risk 43
Item 4. Controls and Procedures 43

PART II. Other Information

Page
----
Description
-----------

Item 1. Legal Proceedings 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
Item 3. Defaults Upon Senior Securities 44
Item 4. Submission of Matters to a Vote of Security Holders 45
Item 5. Other Information 45
Item 6. Exhibits 45

Signatures 46

PART I.

Item 1. Financial Statements

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

June 30, December 31,
2005 2004
(Unaudited) (1)
------------ ------------
ASSETS

Current assets:
Cash and cash equivalents ............................................. $ 23 $ 3,854
Accounts receivable, net of allowances for doubtful accounts
of $35 for June 30, 2005 and December 31, 2004 ................ 193 303
Inventories ........................................................... 736 878
Prepaid expenses ...................................................... 640 456
Notes receivable from officers ........................................ 282 575
Other current assets .................................................. 44 38
------------ ------------
Total current assets .......................................... 1,918 6,104
Property and equipment, net ................................................... 33 395
Other assets .................................................................. - 38
Total assets .................................................. $ 1,951 $ 6,537
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ...................................................... $ 1,474 $ 870
Accrued compensation .................................................. 563 604
Other current liabilities ............................................. 75 321
Credit obligation and Agility line of credit .......................... 387 79
Deferred rent ......................................................... 18 41
Capital lease obligation - current portion ............................ 23 31
------------ ------------
Total current liabilities ........................................ 2,540 1,946
------------ ------------
Capital lease obligation - noncurrent portion ................................. 40 52
------------ ------------
Commitments and contingencies (Note 2)

Stockholders' equity (deficit) (Note 3):
Common stock, $0.001 par value; 300,000,000 shares authorized,
101,437,889 and 101,305,613 shares issued and outstanding at June 30,
2005 and December 31,2004, respectively.................................. 117,984 117,973
Accumulated deficit .............................................. (118,613) (113,434)
------------ ------------
Total stockholders' equity (deficit) ............................. (629) 4,539
------------ ------------
Total liabilities & equity (deficit) ............................. $ 1,951 $ 6,537
============ ============

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

(1) The balance sheet as of December 31, 2004 was derived from the audited
financial statements included in the Company's 2004 Annual Report on Form
10-K filed with the Securities and Exchange Commission, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.

See accompanying notes to condensed financial statements

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

Three months ended Six months ended
June 30, June 30,
======================= =======================
2005 2004 2005 2004
---------- ---------- ---------- ----------

Net sales $ 510 $ 578 $ 1,065 $ 1,214

Cost of goods sold 611 510 1,055 1,228
---------- ---------- ---------- ----------
Gross margin (101) 68 10 (14)
---------- ---------- ---------- ----------
Operating expenses:
Research and development 758 1,204 1,400 2,192
Selling, general and administrative 1,319 1,548 3,016 2,775
Impairment of long-lived assets 46 - 404 -
Impairment of inventory 133 - 133 -
---------- ---------- ---------- ----------
Total operating expenses 2,256 2,752 4,953 4,967
Operating loss (2,357) (2,684) (4,943) (4,981)
Interest and other income 4 15 263 (9)
Interest expense (497) (4) (499) (8)
Warrant expense - - - (33)
---------- ---------- ---------- ----------
Net loss $ (2,850) $ (2,673) $ (5,179) $ (5,031)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.03) (0.03) $ (0.05) $ (0.06)
========== ========== ========== ==========
Shares used in computing basic and diluted
net loss per share 101,438 84,624 101,438 84,624
========== ========== ========== ==========

See accompanying notes to condensed financial statements

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

Six months ended
June 30,
-------------------------
2005 2004
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,179) $ (5,031)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 61 131
Non-cash stock-based compensation 1 60
Derivative revaluation -- 33
Impairment of long-lived assets 404 --
Impairment of inventory 133 --
Write-off of payroll tax refund liability (245) --
Loss on disposal of assets -- 2
Non-cash interest (income) charge on notes receivable from officers (7) 57
Reserve on notes receivable from officers 300 --
Changes in operating assets and liabilities:
Accounts receivable, net 110 (92)
Inventories 9 (82)
Prepaid expenses (5) (150)
Other assets 32 21
Accounts payable 604 246
Accrued employee compensation (41) (52)
Other current liabilities (1) (8)
Deferred rent (23) 1
------------ ------------
Net cash used in operating activities (3,847) (4,864)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (103) (43)
------------ ------------
Net cash used in investing activities (103) (43)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases and credit facility (185) (45)
Proceeds from Agility line of credit & accrual of exit fee 750 --
Payment of loan and partial exit fee (456) --
Payments of issuance costs (31) (70)
Net proceeds from sale of common stock 41 3,146
------------ ------------
Net cash provided by financing activities 119 3,031
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,831) (1,876)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,854 6,446
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23 $ 4,570
============ ============

See accompanying notes to condensed financial statements.

CARDIMA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)

1. BASIS OF PRESENTATION

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

The operating results for the six month period ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 2005 or for future operating results. The accompanying
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2004. The accompanying balance sheet
at December 31, 2004 has been derived from those audited financial statements.

Year-ended
Q1 2003 Q2 2003 Q3 2003 Q4 2003 2003 Q1 2004
------------------------------------------------------------
COGS
Original filing 1,085 821 840 861 3,607 835
Change (124) (144) (131) (94) (493) (117)
COGS restated 961 677 709 767 3,114 718
-------- --------- --------- --------- ---------- ----------

R & D
Original filing 950 1,495 967 1,046 4,458 871
Change 124 144 131 94 493 117
-------- --------- --------- --------- ---------- ----------
R & D restated 1,074 1,639 1,098 1,140 4,951 988

Certain reclassifications have been made to prior period amounts to conform to
the current period presentation. After cost analysis studies were performed, to
properly reflect costs of goods sold of the company, certain staff salaries were

transferred out of the manufacturing to the research and development department.
These reclassifications had the following effect on prior reported results of
operations.

2. MANAGEMENT'S PLANS

As of June 30, 2005 Cardima, Inc. had approximately $23,000 in cash and
cash equivalents, negative working capital of $622,000, and an accumulated
deficit of $118,613,000.

On May 27, 2005, the Company entered into a $1.5 million secured loan agreement
with Agility Capital, LLC which funded the Company $300,000 of the loan on
closing. Under the terms of the agreement, the lender at its sole discretion
could fund the remainder in $200,000, $500,000 and $500,000 installments
dependent on the Company achieving certain milestones. To secure its obligations
under the loan agreement, the Company granted Agility Capital a security
interest in substantially all of its assets, including its intellectual
property. Also, according to the loan agreement, all amounts outstanding become
due and payable the earlier of an event of default by the company or August 15,
2005. The Company was also required to pay Agility an "Exit Fee" of $450,000
upon an Event of Default.

On June 16, 2005, the lender notified the Company that in its view an event of
default had occurred and that all amounts outstanding were then due and payable.
The lender also swept the Company's bank accounts containing approximately
$456,000 and used the proceeds for repayment of the loan and a portion of the
"Exit Fee" due under the loan agreement. Agility Capital also indicated that it
was unwilling to fund further loans under the loan agreement.

On June 17, 2005, the Company's cash balances were insufficient to continue
operations and all the Company's employees were placed on indefinite furlough in
order to conserve cash.

On August 12, 2005, the Company entered into a Loan Facility Term Sheet with
Apix International Limited, which provided the Company with up to $2 million in
new financing. Cardima received the first $500,000, a portion of which was used
to retire the Company's outstanding secured loan agreement with Agility Capital,
LLC.

On August 15, 2005 the Company re-hired certain furloughed employees and
re-started operations.

On August 28, 2005, the Company signed a loan agreement with Apix International,
which increased the total amount to be financed from $2 million to $3 million.
The principal amount of the promissory note dated August 12, 2005 for $500,000
was rolled over into the new loan agreement. The Company received an additional
$500,000 on this closing date and received another $500,000 on September 8,
2005. The remainder of the loan will be received as follows: $500,000 on or
after October 12, 2005, $350,000 on or after November 18, 2005, $350,000 on or
after December 18, 2005 and $300,000 on or after January 18, 2006. The loan
agreement will be secured by a first lien on all the Company's assets and
intellectual property. All funds will bear interest at a rate of 10% per annum.
The Company will pay a facility fee of $60,000 and an exit fee of $900,000 at
the end of the loan agreement. The facility, exit fees and accrued interest due

under the loan are convertible into shares of the Company's common stock at a a
rate of $0.10 per share. Additionally, the Company will provide the lender, Apix
International, with Warrants to purchase capital stock in the amount of
30,000,000 shares with a strike price of $0.10 per share. The financing facility
has a term of 6 months ending February 28, 2006. The facility fee and the exit
fee will be amortized as non-cash interest expense over the life of the loan. In
addition, any beneficial conversion effect resulting from the excess of the
average market price of the stock over the $0.10 per share conversion price will
also be charged to non-cash interest during the periods the loan is outstanding.
Based on Management's current expectations, Apix International $3 million loan
agreement gives the company sufficient cash to operate through December 2005.
Only if the Company is able to raise sufficient funds will Cardima be able to
continue to work towards regulatory approval and commercialization of the
REVELATION(R) Tx in the United States, commercialization of the Cardima
SurgSurgical Ablation System and the commercialization of the REVELATION(R)
Helix in Europe.

On May 6, 2005, the Company received a Nasdaq Staff Determination indicating
that we had not regained compliance with the requirements for continued listing
set forth in Marketplace Rule 4310(c)(4), which we refer to as the "Rule" for
purposes of this discussion, and that our securities were, therefore, subject to
delisting from The Nasdaq SmallCap Market at the opening of business on May 17,
2005. The Rule provides that if the closing bid price of a company's stock is
below $1.00 for more than thirty consecutive trading days, the company faces
possible delisting. On May 17, 2005 our stock was delisted from the Nasdaq
SmallCap Market and now is being traded on the "Pink Sheets".

We may appeal the Nasdaq Staff's Determination to a Listing Qualification Panel,
pursuant to the procedures set forth in the Nasdaq Marketplace Rule 4800 Series.
There can be no assurance that we will appeal the Nasdaq Staff's Determination
or, if we do appeal the Nasdaq Staff's Determination, that such appeal will be
successful. In the meantime, management is currently working toward obtaining
listing on the Nasdaq Bulletin Board.

Cardima, Inc. continues to pursue regulatory approvals and distribution
relationships in significant market opportunities worldwide. We currently have
distribution agreements for various products covering eight countries with an
emphasis on Europe and the Pacific Rim, and we are currently seeking a strategic
transaction for our Surgical Ablation System, which received United States Food
and Drug Administration 510(k) clearance for use in ablating cardiac tissue in
2003. We have arranged for warehousing capacity in Europe to support both
distribution and direct customer sales. Securing FDA approval of the
REVELATION(R) Tx remains one of our primary goals. We plan to continue to pursue
U.S. regulatory approvals for the REVELATION Tx, as well as other therapeutic
products already approved in Europe and in other markets which we believe have
both the clinical potential and adequate medical support structure to accept a
developing technology application.We are continuing to develop broader
applications of our Surgical Ablation System as a minimally invasive,
stand-alone surgical procedure to treat atrial fibrillation. We cannot assure
you that we will be able to obtain or maintain any necessary regulatory
approvals or that, if such regulatory approvals are obtained, that we will be
able to successfully market our products, or that we will be able to establish a
successful distribution channel for our Surgical Ablation System.

Although our management recognizes the need to raise funds in the immediate
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
terms and conditions will not be unfavorable to us. We are also contractually
prohibited from issuing certain kinds of convertible securities without the
consent of some of our investors. We are evaluating various courses of action
including selling or licensing some of our proprietary technologies. If we fail
to obtain additional funding later this year, our business will fail and our
stockholders will likely lose the entire value of their investment. Our
independent registered public accountants have stated in their opinion on our
December 31, 2004 financial statements that there is substantial doubt as to our
ability to continue as a going concern.

3. CRITICAL ACCOUNTING POLICIES

Use of Estimates

We have prepared our financial statements in conformity with generally
accepted accounting principles in the United States, which requires management
to make estimates and assumptions that effect the amounts reported in financial
statement and accompanying notes. Actual results could differ from these
estimates. Significant estimates made by us include those related to accounts
receivable and inventory reserves.

Revenue Recognition

We recognize revenue from two types of customers, end users and
distributors. Revenue is recognized in accordance with Staff Accounting Bulletin
104, "Revenue Recognition in Financial Statements," when all of the following
criteria are met:

a) Persuasive evidence that an arrangement exists (purchase orders from
customers);
b) Prices are fixed and determinable (purchase orders from customers and
our invoices);
c) Shipment of the product has occurred and title of products transferred
at the point of shipment (shipping documents); and,
d) Payment of the product is reasonably assured and no substantive
obligations to the customer remain (collectability is reasonable
assured by the Company, making sure that credit is extended to worthy
customers).

Revenue is presented net of discounts, allowances, and returns. Payment
terms are either open trade or cash. Customers are not entitled to any rights of
product return. Although our customers are not legally entitled to returns, on
occasion returns have occurred in such circumstances as shipping or order
errors, product complaints or for customer relations purposes. Returns are at
the sole discretion of the Company and can be reasonably estimated based on
prior history. Net revenue for the quarter ended June 30, 2005 was $510,000, net
of $4,000 in product returns in the quarter. We have distributors in Asia and
Europe and we record as revenue the wholesale price we charge our distributors.
Title and risk of loss are assumed by the distributors and end users at shipping
point.

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 we believe our reserve for doubtful accounts of
$35,000 is adequate for any exposure to loss in our June 30, 2005 accounts
receivable

Inventory Revaluation

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 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. Excess and slow-moving
inventories have been written-down by the amount of $682,000 to state inventory
at the lower of net realizable value or cost.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No.
("APB") 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its 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 our common stock and
the exercise price of the option or share right on the measurement date, which
is typically the grant date.

This amount is recordable as "deferred stock compensation" in the Balance Sheets
and amortized as a charge to operations over the vesting period of the
applicable options or share rights. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," we have provided below the pro forma disclosures of the effect on
net loss and loss per share as if SFAS 123 had been applied in measuring
compensation expense for all periods presented.

The following information regarding pro forma net loss and net loss per share
has been determined as if we had accounted for our employee stock options and
employee stock plan under the fair value method prescribed by SFAS 123. The
resulting effect on net loss and net loss per share pursuant to SFAS 123 is not
likely to be representative of the effects on net loss and loss per share
pursuant to SFAS 123 in future periods, due to subsequent periods including
additional grants and periods of vesting.

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

For purposes of disclosures pursuant to SFAS 123 as amended by SFAS 148, the
estimated fair value of options is amortized to expense over the options'
vesting period.

The following table illustrates the effect on reported net loss per share if we
had applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation (in thousands, except per share amounts):

Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------------------

2005 2004 2005 2004
---- ---- ---- ----

Net loss applicable to common shareholders
- as reported $ (2,850) (2,673) (5,179) (5,031)
Add:
Stock-based employee compensation expense
included in reported net income,
net of applicable tax effects --- 2 --- 94
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of applicable tax effects (198) (201) (398) (600)
--------------------------------------------------
Pro forma net loss $ (3,048) (2,872) (5,577) (5,537)
==================================================

Basic and diluted net loss per share:
==================================================

As reported $ (0.03) (0.03) (0.05) (0.06)

Pro forma $ (0.03) (0.03) (0.05) (0.07)
Shares used in computing basic and diluted
net loss per share 101,438 84,624 101,438 84,624
--------------------------------------------------

The fair value of options was estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted-average
assumptions:

Three Months
Ended June 30,

2005 2004
---- ----
Expected life (years)................................. 3.2 4.0
Interest Rate......................................... 3.73% 3.50%
Volatility............................................ 120.22% 127.8%

Dividend Yield........................................ 0% 0%

Research and Development

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

4. WARRANTS

During the first quarter of 2004, warrants were exercised for a total of
4,144,839 shares of common stock at exercise prices ranging from $0.7282 to
$0.8375 per share; Total net proceeds from the exercise of these warrants was
$3.1 million.

The Company filed a registration statement with the SEC with respect to the
shares underlying the warrants issued in December 2003, which was declared
effective in February 2004. Accordingly, the warrant liability was transferred
to additional paid in capital during the first quarter of 2004.

5. CONCENTRATIONS OF RISK

During the quarter ended June 30, 2005, our net sales to foreign customers
increased to 59% of total net sales, with 47% to Asia (Japan) and 12% to Europe.
During the quarter ended June 30, 2004, net sales to foreign customers were 54%
of total net sales, with 37% to Asia (Japan), 16% to Europe, and 1% to other.
The countries which produced the largest net sales in the quarter ending June
30, 2005 were the US at 41% and Japan at 47% for the same quarter in 2004, the
countries which produced the largest net sales were the US at 46% and Japan at
37%.

During the first six months of 2004, our net sales to foreign customers
increased to 55% of total net sales, with 43% to Asia (Japan) and 12% to Europe.
During the six months ended June 30, 2004, net sales to foreign customers were
52% of total net sales, with 33% to Asia (Japan), 18% to Europe, and 1% to
other. The countries which produced the largest net sales in the six months
ending June 30, 2005 were the US at 45% and Japan at 43% and for the same six
months in 2004, the countries which produced the largest net sales were the US
at 48% and Japan at 33%.

During the quarter ended June 30, 2005 revenues to one customer comprised
47% of the company's total product sales. During the quarter ending June 30,
2004, one customer comprised 37% of the company's total net product sales.

For the first six months of 2005 revenues to one customer comprised 43% of
the company's total net product sales. This is an increase from the first six
months of 2004 where one customer comprised 33% of the company's total net
sales.

6. INVENTORIES

Inventories consist of the following (in thousands):

June 30, December 31,
2005 2004
------------ ------------
Raw materials $ 94 $ 152
Work-in-process 115 99
Finished goods 527 627
$ 736 $ 878

Inventory amounts shown above are net of write-downs for excess and
obsolete inventory of $682,000 at June 30, 2005 and $655,000 December 31, 2004.
The Company provides reserves for inventory amounts by considering the potential
excess inventory in relation to sales forecasts and the obsolescence of
inventory as a result of technological advancements. Included in the net
inventory value is an impairment charge of $133,000 to bring the net inventory
to their fair value less disposal costs in the second quarter of 2005.

7. IMPAIRMENT OF ASSETS

Because there were indicators of impairment, including continued losses, the
Company conducted an analysis during the first and second quarter of 2005 to
determine if there was impairment of any long-lived assets. This analysis
involved a review of the Company's fixed assets and took an impairment charge
against fixed assets of $358,000 in the first quarter and an additional $46,000
in the second quarter of 2005. The Company determined based on the conditions of
impairment to reduce the net value of the fixed assets by impairing assets
greater than six months of age. This charge was required to bring the fixed
assets to their fair value less disposal costs. Based on the same impairment
indicators, the Company conducted an analysis of inventory during the second
quarter of 2005 to determine if there was an impairment charge required. This
analysis included a review of the inventory and based on this analysis an
impairment charge of $133,000 was recorded in the second quarter 2005 to bring
inventory asset to their fair value less disposal costs.

8. NET LOSS PER SHARE

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

June 30, December 31,
2005 2004
---------- ----------
Warrants........................................ 22,137,341 24,717,722
Stock Options................................... 6,747,770 6,684,112
---------- ----------
Total Warrants and Options...................... 28,885,111 31,401,834

9. RECENT ACCOUNTING PRONOUNCEMENTS

In the fourth quarter of 2004, the Financial Accounting Standards Board
("FASB") issued and renamed SFAS No. 123R, "Share-Based Payment", which replaces
SFAS No. 123, and supersedes ABP No. 25. SFAS No. 123R establishes accounting
standards for equity instruments that an entity exchanges for goods or services.
It also addresses transactions where an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for share-based payment
transactions as it relates to employee services. SFAS No. 123R requires a public
entity to measure an award of equity instruments based on the grant-date fair
value of the award, and recognize that cost over the period during which an
employee is required to provide services (usually the vesting period). The
grant-date fair value of share options and similar instruments is to be
estimated using option-pricing models adjusted for the unique characteristics of
those instruments.

SFAS No. 123R eliminates the alternative to use ABP No. 25's intrinsic
value method of accounting, under which issuing stock options to employees
generally resulted in recognition of no compensation cost. Alternative phase-in
methods are allowed under Statement No. 123R, which is effective as of the
beginning of the first fiscal year that begins after June 15, 2005. Cardima has
not yet determined the phase-in method or potential effects on the Company's
future results of operations.

In November 2004, Statement of Financial Accounting Standards ("SFAS") No.
151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4", was issued which
amends the guidance in Accounting Research Bulletin ("ARB") No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material. Among other
provisions, the new rule requires that items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151 is effective for
fiscal years beginning after June 15, 2005. We are currently evaluating the
effect that the adoption of SFAS 151 will have on our results of operations and
financial condition upon adoption.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS 154") which replaces APB 20 Accounting Changes and SFAS No.
3, Reporting Accounting Changes in Interim Financial Statements--An Amendment of
APB Opinion. 28. SFAS 154 provides guidance on the accounting for and reporting
of accounting changes and error corrections. It establishes retrospective
application, or the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of a correction of
an error. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 and is required to be
adopted in the first fiscal quarter of 2006. The Company does not anticipate any
impact on its consolidated results of operations and financial condition upon
adoption of SFAS 154.

10. COMMITMENTS AND CONTINGENCIES

The Company currently is a party to various claims, including claims from
private placement agents in conjunction with prior private placements. While the
Company currently believes that the ultimate outcome of these claims will not
have a material adverse effect on our results of operations, claims and
litigation are subject to inherent uncertainties, and unfavorable rulings could
occur. Depending on the amount and timing, an unfavorable outcome of some or all
of these matters could have a material adverse effect on the Company's cash
flows, business, results of operations or financial position. An estimate of
potential loss from pending claims cannot be made at this time.

Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations

This quarterly report on Form 10-Q, including management's discussion and
analysis of financial condition and results of operations, contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including, without limitation, statements regarding our goals, plans
and efforts to secure regulatory approvals and to raise necessary capital,
marketing plans, operating results and capital requirements. Except for
historical information, the matters discussed in this Form 10-Q are
forward-looking statements that are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected,
estimated or contemplated by the forward-looking statements. These factors
include:

o the risk that we will default on our loan agreement with Apix
International Limited and not be able to obtain any additional funds
provided for under the terms of the agreement,

o the risk that if we do not meet our payment obligations under our Loan
Agreement with Apix International Limited, our secured lender, by the
loan due date of February 28, 2006, Apix will exercise its rights
under the loan agreement and liquidate the company to satisfy the
outstanding loan balance.

o the risk that we will be unable to obtain U.S. Food and Drug
Administration, or FDA, approval for our pre-market approval
application, or PMA, for the REVELATION(R) Tx linear ablation
microcatheter system, including uncertainties associated with our
ability to revise our study design and collect data acceptable to the
FDA,

o uncertainties associated with our ability to secure distribution
partners,

o uncertainties associated with our prospects for entering into a
strategic transaction for our Surgical Ablation System,

o the risk that the approval process for the REVELATION Tx or any other
product, including additional clinical trials, will require
substantial unanticipated expenses and management attention, the
limited number of cases employing our products and the limited amount
follow-up information involving these cases,

o the possibility of unanticipated expenses due to our staffing
reduction and financing efforts, and

o uncertainties associated with our ability to conduct successful
clinical trials, obtain and maintain regulatory approvals, gain
acceptance for our products from the marketplace, secure distribution,
licensing or other strategic partners or successfully manufacture,
market, sell and distribute our products, as well as the risk factors
discussed below under "Factors Affecting Future Results" and those
disclosed from time to time in our SEC reports.

We assume no obligation to update the forward-looking statements included
in this Form 10-Q. This discussion and analysis should be read in conjunction
with the Financial Statements and related Notes thereto included elsewhere in
this Form 10-Q and in the Company's most recent 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(R) Tx microcatheter for use in the
Electrophysiology (EP) market, and our Surgical Ablation System for use in the
surgical market. Our EP products allow 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 potentially can be
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/or blocking 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. Our microcatheters are designed with variable stiffness guidewire
technology and a highly flexible distal tip to allow more extensive and less
traumatic access to the chambers and vasculature of the heart. In addition, all
of our microcatheters are disposable, single-use products that we believe can be
adapted to and used with conventional ECG-recording systems and with existing
compatible radio frequency generators, eliminating the need for significant new
investment in capital equipment by hospitals.

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 it had
approved for commercialization the Cardima Surgical Ablation System for use in
ablating cardiac tissue during cardiac surgery. This new system connects the
Cardima Surgical Ablation Probe, a deflectable multi-electrode linear array
microcatheter technology, to a commercially available electrosurgical radio
frequency generator through the INTELLITEMP(R), a multi-channel radio frequency,
or RF, energy management device. This system allows surgeons to direct RF energy
through any combination of up to eight probe electrodes simultaneously into

cardiac tissue, a feature which can significantly reduce the time required to
perform an ablation-based "maze" 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. In the first quarter of 2004, the Surgical
Ablation System (SAS) was utilized in two less invasive cases for the treatment
of AF, opening the door to the prospect of the SAS technology being broadly used
in a stand-alone procedure to treat AF. We do not currently plan to market our
Surgical Ablation System ourselves, and are currently seeking to sell or
otherwise consummate a strategic transaction for this system.

We have generated revenues of approximately $20.6 million from inception,
September 1, 1994 to June 30, 2005. 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 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 experienced significant operating losses since inception. Should we
be able to obtain financing, we plan to continue to invest substantial resources
in product development, pre-clinical and clinical trials, seeking regulatory
approval, sales and marketing and manufacturing. We expect that our operating
losses would continue for the foreseeable future. Because the company has a
short-term loan facility, we must raise additional capital in the immediate
future, otherwise our business will fail and our stockholders will likely lose
the entire value of their investment.

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 FDA in order to legally 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 for the ablation of cardiac tissue during cardiac surgery
using radio frequency energy, 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.
Obtaining PMA for any of these products will require additional clinical trials,
which will require substantial time and expense.

Our focus is on obtaining FDA approval in the United States of the
REVELATION(R) 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 May 29, 2003, we met with the Circulatory System Devices Panel, which
recommended that the FDA not approve our PMA application. 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 Panel's non-approval recommendation. On January 20,
2004 we submitted an amendment to our PMA filing, in which we provided new
analysis and an expanded patient base. On May 28, 2004 we received a letter,
dated May 21, 2004, from the FDA, stating that our PMA application for the
REVELATION Tx linear ablation microcatheter system was not approvable based on
the requirements of applicable regulations. The letter stated that, although we
had provided information on an additional 32 patients in the clinical trial in
our PMA application amendment submitted in January 2004, the concerns identified
in the FDA's initial non-approvable letter of June 26, 2003 remain unresolved.
Among other things, the FDA's letter stated that the FDA believes that the least
burdensome approach to demonstrate the safety and effectiveness of REVELATION Tx
for the intended indication is to collect additional clinical data using a
randomized clinical trial design. We have been engaged in continuing dialogue
with the FDA since our receipt of the non-approvable letter on May 28, 2004. At
a meeting with the FDA's Center for Devices and Radiological Health on June 18,
2004, the FDA representatives reiterated the view that data from an additional
study would be necessary to demonstrate the effectiveness of REVELATION Tx for
atrial fibrillation, and that the nature of the trial's primary goal would
require a randomized clinical trial design. The development and implementation
of a new clinical trial would require substantial expenditures and management
attention, and the timing and success of any such trial cannot be assured.

On May 27, 2005, we entered into a loan agreement with Agility Capital,
LLC, which included a security interest in all the Company's assets. On June 16,
2005, the lender notified us that in its view, an event of default had occurred
and that all amounts outstanding were then due and payable. The lender also
swept our bank accounts containing approximately $456,000 and used the proceeds
to pay a portion of a $450,000 "Exit Fee" due under the loan agreement. We had
cash and cash equivalents of approximately $23,000 as of June 30, 2005.

On June 17, 2005, our cash balances were insufficient to continue
operations, and all our employees were furloughed in order to conserve cash. On
August 12, 2005, the Company entered into a loan agreement with Apix
International Limited, receiving the first $500,000 of a $3 million loan
facility. Subsequently, we received two additional advances of $500,000, on
August 28, 2005 and September 8, 2005. There remains $1.5 million in unused
financing available under the Apix loan facility. These funds will be received:
$500,000 on or after October 12, 2005, $350,000 on or after November 18, 2005,
$350,000 on or after December 18, 2005 and $300,000 on or after January 18,
2006.

Although our management recognizes the need to raise additional funds in
the immediate future, we cannot assure you that we will be successful in
consummating any fundraising transaction, or, if we do consummate such a
transaction, that its terms and conditions will not be unfavorable to us. We are
evaluating various courses of action including selling or licensing some of our
proprietary technologies. If we fail to obtain additional funding in the
immediate future, our business will fail and our stockholders will lose the
entire value of their investment. In their opinion accompanying our December 31,
2004 financial statements, our independent registered public accountants
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.

Results Of Operations - Three and Six Months Ended June 30, 2005 and 2004

Net Sales

For the six month period ended June 30, 2005, net sales decreased 12% to
$1,065,000 in 2005 from $1,214,000 for the same period in 2004. By region, net
sales in the United States decreased 18% to $476,000 for the six month period
ended June 30, 2005 from $582,000 for the same period in 2004, while European
net sales decreased 40% to $131,000 for the six month period ended June 30, 2005
from $219,000 for the same period in 2004. The decline in European sales is due
to the competition our single-use catheter is facing from multi-use catheters.
In the United States, the decrease in net sales was due to the company-wide
furlough on June 17, 2005, which included our sales team and the cessation of
operations in the later half of June 2005. By product, therapeutic net sales
decreased for the six month period ended June 30, 2005 to $48,000 from $206,000
net sales for the same period in 2004. Diagnostic product net sales increased 3%
to $731,000 for the six month period ended June 30, 2005 from $709,000 for the
same period in 2004. Guiding catheters product net sales decreased 13% to
$235,000 for the six month period ended June 30, 2005 from $269,000 for the same
period in 2004.

Net sales for the quarter ended June 30, 2005 decreased 12% to $510,000
from $578,000 for the same period in 2004. Regionally, net sales in Europe
decreased 30% to $63,000 in the second quarter of 2005, from $90,000 in the same
period of 2004. Net sales in the United States decreased 22% to $208,000 in the
second quarter of 2005 from $265,000 for the same period in 2004. This decrease
was partially offset by an increase in Japan (Asia) net sales to $239,000 in the
second quarter of 2005 from $212,000 for the same period in 2004. The decrease
in net sales in Europe and the United States in this quarter was caused by the
company wide furlough starting June 17, 2005.

Accounts receivable decreased 36% to $193,000 as of June 30, 2005 from
$303,000 as of December 31, 2004. This decrease is due to lower sales in this
quarter compared to the quarter ending December 31, 2004. The allowance for
doubtful accounts was $35,000 as of June 30, 2005 and also as of December 31,
2004.

Cost of Goods Sold

Cost of goods sold primarily includes raw materials costs, catheter
fabrication costs, system assembly and testing costs, and manufacturing labor
and overhead. Cost of goods sold for the quarter ended June 30, 2005 increased
20%, or $101,000 to $611,000 from $510,000 for the same period in 2004. Cost of
goods sold for the six month period ended June 30, 2005 decreased 14% to
$1,055,000 from $1,228,000 for the same period in 2004. The gross margin for the
second quarter of 2005 was negative 20%, as compared to 12% for the same period
in 2004. The decline in gross margin was due to greater destructive testing of
product in preparation for FDA approvals and inventory write-downs of $27,000 in
the six months ended June 30, 2005.

Research and Development Expenses

Research and development expenses include product development, clinical
testing and regulatory expenses. Total research and development expenses for the
quarter ended June 30, 2005 decreased 37% to $758,000 from $1,204,000 for the
same period in 2004.

Total research and development expenses for the six months ended June 30,
2005 decreased 36% to $1,400,000 from $2,192,000 for the same period in 2004.
This decrease was due to a reduction in regulatory and clinical expenses for the
first six months of 2005, or 19%, to $566,000 from $702,000 for the same period
in 2004, which was attributable to a reduction in headcount following the
submission of the REVELATION(R) Tx PMA to the FDA in 2004. Also, our direct
product development costs for the first six months of 2005, decreased $656,000,
or 44%, to $834,000 from $1,490,000 for the same period in 2004. This decrease
was due to the completion of the Intellitemp project costs as this project moved
from research and development to production.

Clinical trials of our products and regulatory approval efforts have
required substantial financial and management resources. We will be required to
fund additional clinical trials to obtain U.S. FDA approval of REVELATION Tx and
other products for which we plan to seek U.S. regulatory approval. These trials
will be expensive and time-consuming. In addition, clinical trials may identify
significant technical or other obstacles that we will have to overcome before
obtaining the necessary regulatory approvals or market acceptance. Due to the
uncertainties associated with our ability to complete clinical trials,
demonstrate product safety and effectiveness and obtain regulatory approval for
our products, it is difficult for us to accurately predict the time or cost
until completion of product development efforts.

3 months ended 6 months ended
June 30, June 30,
-------------------------------- ----------------------------
2005 2004 2005 2004
-------------- -------------- ------------ ------------

NPD/Pilot 424 856 834 1,490
RA/QA 334 348 566 702
-------------- -------------- ------------ ------------
758 1,204 1,400 2,192
============== ============== ============ ============

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended June
30, 2005 increased $241,000, or 9%, to $3,016,000 from $2,775,000 for the same
period in 2004. More specifically, selling expenses for the six months ended
June 30, 2005 decreased $107,000, or 20%, to $421,000 from $528,000 for the same
period in 2004. General and administrative expenses for the first six months of
2005 increased by $396,000, or 20%, to $2,375,000 from $1,979,000 for the first
six months of 2004. The increase was due to increased costs relating to the
implementation of a Sarbanes-Oxley Act compliance program of $279,000, a bad
debt reserve of $300,000 that was established against notes receivable from
officers and directors of the company due to the declining value of the stock
option collateral. Offsetting these increases was expense decreases of $217,000
in executive bonuses previously accrued but later deemed non-payable and
expenses related to the June 17, 2005 furlough reducing salary expenses over the
period. Marketing expenses for the first six months of 2005 also decreased
$48,000, or 18%, to $220,000 from $268,000 for the same period in 2004.

Selling, general and administrative expenses for the quarter ended June 30,
2005 decreased $229,000, or 15%, to $1,319,000 from $1,548,000 for the same
period in 2004. The decrease in selling, general and administrative expenses was
due to in part to the company-wide furlough, which took place on June 17, 2005
and the write off of $217,000 in executive bonuses in the period. This decrease
contributed in the reduction of $291,000 in compensation and benefits costs for
the quarter. In addition, the company experienced substantially higher costs
related to the implementation of the Sarbanes-Oxley Act compliance program in
the same period in 2004.

3 months ended 6 months ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
-------------- -------------- ------------ -------------

General and
Administrative 1,024 1,125 2,375 1,979
Marketing 103 143 220 268
Sales 192 280 421 528
-------------- -------------- ------------ -------------
1,319 1,548 3,016 2,775
============== ============== ============ =============

Interest and Other Income

The Company recognized a gain of $263,000 in other income in the six months
of 2005. This was a payroll tax refund received in 2002 but not recognized in
income until this year when we received final confirmation of the nature of the
refund from our payroll service.

Interest expense

There was interest expense of $499,000 in the first six months of 2005
compared to $8,000 in the same period in 2004. This increase in interest expense
for the quarter ended June 30, 2005 was primarily attributed to the loan with
Agility Capital, which included an exit fee of $450,000 under the agreement.

Warrant Expense

There was no Warrant expense for the first six months ended June 30, 2005
compared to $33,000 for the same period in 2004. The warrant expense of $33,000
for the six months ended June 30, 2004 was related to the warrants issued in
connection with our December 2003 private placement that were carried as
liabilities, and represented the 2004 portion of the difference of the warrants'
valuation between their date of issuance and the date of registration of the
shares underlying the warrants.

Impairment Charges

second quarter of 2005 from $358,000 in the first quarter of 2005 for a total of
$404,000 in the first six months of 2005. There were no impairment of assets
charges in 2004.

The Company also took an impairment of inventory charge of $133,000 in the
second quarter of 2005. There were no inventory impairment charges in 2004.

Liquidity and Capital Resources

Cardima had cash and cash equivalents of approximately $23,000 as of June 30,
2005. On May 27, 2005, the company entered into a $1.5 million secured loan
agreement with Agility Capital, LLC which funded the company $300,000 of the
loan on closing. Under the terms of the agreement, the lender at its sole
discretion could fund the remainder in $200,000, $500,000 and $500,000
installments dependent on the company achieving certain milestones. To secure
its obligations under the loan agreement, the company granted Agility Capital a
security interest in substantially all of its assets, including its intellectual
property. Also, according to the loan agreement, all amounts outstanding became
due and payable the earlier of an event of default by the company or August 15,
2005. The company was also required to pay Agility Capital an "Exit Fee" of
$450,000 upon an Event of Default.

On June 17, 2005, the company's cash balances were insufficient to continue
operations and all the company's employees were placed on indefinite furlough in
order to conserve cash.

On August 12, 2005, the company entered into a Loan Facility Term Sheet with
Apix International Limited, which provided the company with up to $2 million in
new financing. Cardima received the first $500,000, a portion of which was used
to retire the Company's outstanding secured loan agreement with Agility Capital,
LLC.

On August 15, 2005 the Company re-hired certain furloughed employees and
re-started operations.

$900,000 at the end of the loan agreement. The facility, exit fees and accrued
interest due under the loan are convertible into shares of the Company's common
stock at a rate of $0.10 per share. Additionally, the Company will provide the
lender, Apix International, with Warrants to purchase capital stock in the
amount of 30,000,000 shares with a strike price of $0.10 per share. The
financing facility has a term of 6 months ending February 28, 2006.

We have financed our operations to date principally through private placements
of equity securities, which have resulted in net proceeds of approximately
$117,177,000 through December 31, 2004, 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 line of credit, sale of certain of our non-core patents to Medtronic,
Inc. for $8,000,000 in 2001, and equipment leases to finance certain capital
equipment which have provided proceeds in the amount of $4,700,000. As of June
30, 2005 we had approximately $ 23,000 in cash and cash equivalents.

Net cash used in operating activities for the first six months of 2005 was
approximately $3,847,000 compared to the net cash used of $4,864,000 for the
first six months of 2004. The decrease of $1,017,000, or 21%, in net cash used
in operating activities is mainly due to an increase in our payables and lower
operating expenses. Net cash used in investing activities was $103,000 in the
first six months of 2005 related to the capital expenditures of property and
equipment, as compared to $43,000 for the same period in 2004. Net cash used by
financing activities was approximately $119,000 for the first six months of
2005, compared to net cash provided of $3,031,000 for the same period in 2004.
This change was due to the exercise of warrants during the first quarter of
2004, following our redemption call for warrants issued as part of the August
2003 private placement. Also, in the first six months of 2005, the Company
received $300,000 in loans from Agility Capital with exit fees associated with
the Agility loan of $450,000, which resulted in cash used of $502,000 and a
balance owed of $294,000 as of June 30, 2005.

Although our management recognizes the need to raise additional funds in the
remaining quarters of this year, 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 terms and conditions will not be unfavorable to us.
We are evaluating various courses of action including selling or licensing some
of our proprietary technologies. If we fail to obtain additional funding in the
immediate future, our business will fail and our stockholders will likely lose
the entire value of their investment. Our independent registered public
accountants have stated in their opinion on our December 31, 2004 financial
statements that there is substantial doubt as to our ability to continue as a
going concern.

Our future liquidity and capital requirements will depend upon numerous factors,
including whether we succeed in raising adequate funding in the immediate term,
whether we are successful in consummating a strategic sale, distribution or
licensing transaction for our surgical business, the scope and cost of new
clinical trial activities that may be required by the FDA or other regulatory
agencies, the progress of our clinical trials, the progress and cost of our
product development efforts, actions relating to regulatory matters, the costs
and timing of expansion of product development, the level of sales and marketing
activities, manufacturing costs, the extent to which our products gain market
acceptance, the outcome of legal proceedings, and competitive developments.

FACTORS AFFECTING FUTURE RESULTS

If we fail to raise additional capital later this year, we will not be able to
continue operations and our business will fail.

We currently have only $463,000 in cash as of September 21, 2005. We will
need to raise additional capital by the end of the year through a sale or other
strategic transaction involving our Surgical Ablation System, public or private
financings or other arrangements. We are evaluating various potential courses of
action including selling or licensing some of our proprietary technologies, or
selling debt or equity securities, to raise funds. If we are unable to raise
funds in the immediate future, our business will fail. Management estimates that
our cash balance as of the filing of this report will be sufficient to fund
planned expenditures only for a limited period of time, not extending beyond
December 2005 and possibly earlier. The actual level of our expenditures cannot
be predicted with certainty and it is possible that our cash balance may be
exhausted sooner in the four quarter of 2005 than currently anticipated. We
cannot assure you that additional capital will be available to us in the
immediate future, if at all, or, if available, will be obtained on terms that
preserve the value of your investment.

On August 12, 2005, the company entered into a Loan Facility Term Sheet
with Apix International Limited, which provides the company up to $2 million in
new financing. Cardima received the first $500,000 on August 12, 2005, a portion
of which was used to retire the Company's outstanding secured loan agreement
with Agility Capital, LLC.

On August 28, 2005, the Company signed a loan agreement with Apix
International Limited, which increased the total amount to be financed from $2
million to $3 million. The principal amount of the promissory note dated August
12, 2005 for $500,000 was rolled over into the new loan agreement. The Company
received an additional $500,000 on this closing date and received another
$500,000 on September 8, 2005. The remainder of the loan will be received as
follows: $500,000 on or after October 12, 2005, $350,000 on or after November
18, 2005, $350,000 on or after December 18, 2005 and $300,000 on or after
January 18, 2006. The loan agreement will be secured by a first lien on all the
Company's assets and intellectual property. All funds will bear interest at a
rate of 10% per annum. The Company will pay a facility fee of $60,000 and an
exit fee of $900,000 at the end of the loan agreement. The facility and exit
fees and accrued interest due under the loan are convertible into shares of the
Company's common stock at a rate of $0.10 per share. Additionally, the Company
will provide the lender, Apix International, with Warrants to purchase capital
stock in the amount of 30,000,000 shares with a strike price of $0.10 per share.
The financing facility has a term of 6 months ending February 28, 2006. The
facility fee and the exit fee will be amortized as non-cash interest expense
over the life of the loan. In event of a default all loan related fees will be
expensed. In addition, any beneficial conversion effect resulting from the
excess of the average market price of the stock over the $0.10 per share
conversion price will also be charged to non-cash interest during the periods
the loan is outstanding. The Apix International, $3 million loan agreement gives
the company sufficient cash to operate through December 2005.

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. We had negative cash flow from operations of
$3.8 million for the first six months of 2005, and for the twelve month period
ending December 31, 2004 of over $9.3 million. If we are able to re-start the
company, we can expect to continue to incur substantial negative cash flow from
operations for the foreseeable future. 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. Even if we raise
capital in the near term, our future cash needs may, at a minimum, cause us 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. Our failure to raise
capital when needed would likely cause us to cease our operations.

Although our management recognizes the need to raise funds in the immediate
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
terms and conditions will not require us to give investors valuable rights with
respect to our products or technology, warrants or other valuable rights to
purchase additional interests in our company, or be otherwise 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 will
likely include, terms that could impede our ability to raise additional funding,
such as terms requiring the consent of certain security holders before we issue
or register additional securities and anti-dilution protection giving those
holders the right to receive additional shares of our common stock depending on
the terms of our later financings. We may be required to issue preferred stock,
debt or other securities with rights and preferences senior to the rights of
holders of our common stock. These rights and preferences may reduce or
eliminate the value of our common stock upon liquidation of our company or other
events. In addition, 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 products, and we will continue to incur
substantial losses for the foreseeable future.

We have sold only a limited number of our microcatheter and surgical
products. 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
and surgical products to market. Since our inception, we have experienced
losses, and we expect to experience substantial net losses into the foreseeable
future.

Our net losses were approximately $5.2 million for the six months ended
June 30, 2005 and approximately $9.7 million, $13.2 million, and $12.6 million
for the years ended December 31, 2004, 2003 and 2002, respectively. As of June
30, 2005, our accumulated deficit was approximately $118.6 million. Our limited
sales history, and the fact that we have very limited cash resources, makes it
difficult to assess or predict 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 stock was delisted from Nasdaq on May 17, 2005. This could make it more
difficult for investors to sell their shares and may lead to costly claims by
investors.

On May 6, 2005, we received a Nasdaq Staff Determination indicating that we
had not regained compliance with the requirements for continued listing set
forth in Marketplace Rule 4310(c)(4), which we refer to as the "Rule" for
purposes of this discussion, and that our securities are, therefore, subject to
delisting from The Nasdaq SmallCap Market at the opening of business on May 17,
2005. As a consequence, our stock was delisted on May 17, 2005.

The Rule provides that if the closing bid price of a company's stock is
below $1.00 for more than thirty consecutive trading days, the company faces
possible delisting. On May 10, 2004, we received a letter from Nasdaq stating
that for the last thirty consecutive business days the closing bid price of our
common stock had remained below $1.00 per share. We were provided 180 calendar
days to regain compliance with the $1.00 closing bid price requirement for the
time period required by Nasdaq, as well as Nasdaq's other requirements. Although
we had not regained compliance by November 8, 2004, Nasdaq granted us an
additional 180 calendar days, or until May 5, 2005, to regain compliance with
the $1.00 minimum closing bid price requirement for at least 10 consecutive
trading days. We did not regain compliance with the Rule by May 5, 2005.

We may appeal the Nasdaq Staff's Determination to a Listing Qualification
Panel, pursuant to the procedures set forth in the Nasdaq Marketplace Rule 4800
Series. There can be no assurance that we will appeal the Nasdaq Staff's
Determination or, if the Company does appeal the Nasdaq Staff's Determination,
that such appeal will be successful.

In addition, Nasdaq Marketplace Rule 4310(c)(2)(B) requires a company to
maintain at least $2.5 million in stockholders' equity or a market
capitalization of at least $35 million, or to have specified levels of net
income that we do not anticipate meeting for the foreseeable future. As of June
30, 2005, as reported in this quarterly report on Form 10-Q, our stockholders'
equity was below $2.5 million and our market capitalization was below $35
million as of the filing of this report. We also expect to continue to incur net
losses, which will cause continued reductions in our stockholders' equity.
Accordingly, we are not currently in compliance with Rule 4310(c)(2)(B) and our
ability to comply with these additional listing requirements will depend on our
ability to raise substantial additional equity capital or on our market
capitalization increasing and remaining above $35 million, over which we have
limited or no control.

In addition to the notices from Nasdaq described above, we have received
other notices of possible delisting from Nasdaq in 2001, 2002, 2003 and 2004.

Our stock is no longer listed on the Nasdaq SmallCap Market. Cardima stock
is currently listed in the "pink sheets". This delisting may adversely affect
the liquidity and value of your investment and could impair our ability to raise
additional equity capital, which we may need to continue to operate our
business. Among other things, if our common stock is delisted, it 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. These
requirements could discourage broker-dealers from effecting transactions in our
common stock, which could severely limit the market liquidity of the common
stock and your ability to sell our securities in the secondary market. Delisting
makes it more difficult and expensive for us to register our shares for resale,
which would impair our ability to raise equity capital and increase our costs.

In addition, we may face contractual claims under purchase agreements from
our past private placement financings, and possibly non-contractual claims from
other stockholders, now that our common stock is delisted. Any such claim would
likely be costly and disruptive, even if resolved favorably to us.

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

In order to continue operations beyond the fourth quarter of 2005, we will
need to raise additional capital. Subject to the contractual restrictions
described above, we may attempt to raise capital through the public or private
sale of our common stock or securities convertible into or exercisable for our
common stock. Any 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 any future private placements will
likely involve 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, if any, 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 2004 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 2004 financial statements contains an explanatory paragraph indicating
that there is substantial doubt as to our ability to continue as a going
concern. The audit reports on our 2003 and 2002 financial statements contained
similar explanatory paragraphs. 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 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:

o product design and development;

o product testing;

o product labeling;

o product storage;

o premarket clearance and approval;

o advertising and promotion; and

o product sales and distribution.

Before we can market any of our products in the United States or other
countries, 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 for devices that are classified as Class II or lower, or a PMA for
devices classified as Class III, such as REVELATION Tx, in order to market a
product. Currently, the process for 510(k) clearance requires approximately 120
days and PMA review process requires approximately six to twelve months. The PMA
review process is in addition to the time required to conduct clinical trials
demonstrating safety and effectiveness. 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. The FDA may request extensive clinical data to support
either 510(k) clearance or a PMA. The approval process, including any necessary
clinical trials, can involve substantial expense. No assurance can be given that
we will ever be able to obtain the necessary approvals for any of our products.
Our failure to do so on a timely basis would have a material adverse effect on
our business, financial condition and results of operations.

Even if regulatory approvals are obtained, the applicable 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.

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

To date, although we received 510(k) clearance for the use of the Surgical
Ablation System to ablate cardiac tissue, none of our electrophysiology products
in development for the ablation of atrial fibrillation or ventricular
tachycardia has received regulatory approval in the United States. Our Surgical
Ablation System has received 510(k) clearance only for ablating cardiac tissue
and not for any other purpose or any specified treatment. If we cannot gain U.S.
regulatory approvals, our business will be materially harmed and we may be
unable to secure the funding needed to continue operations. Even if we raise the
funding necessary to continue operations, successfully develop our ablation
products and 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.

In the United States, we are required to seek a PMA for our ablation
products, including the REVELATION Tx microcatheter, since they have been
classified as Class III devices. The process of obtaining a PMA is expensive,
lengthy and uncertain and requires clinical trials to demonstrate the safety and
effectiveness of the product. In December 1997, the FDA approved a 10-patient
atrial fibrillation feasibility study for mapping and ablation with the
REVELATION Tx. We received FDA approval to conduct a Phase III clinical trial
for this system in 2000, and filed portions of the PMA in 2001. On September 20,
2002, we submitted our PMA to the FDA with data on more than 80 patients treated
with our REVELATION Tx microcatheter system. We met with the Circulatory Systems
Device Panel on May 29, 2003, and on that date, the Panel recommended that the
FDA not approve our PMA for the REVELATION Tx linear ablation microcatheter
system. The Circulatory System Devices Panel felt that the 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 provided new analysis,
including data from an expanded patient base, to the FDA.

On May 28, 2004 we received a letter, dated May 21, 2004, from the FDA,
stating that our PMA for the REVELATION Tx linear ablation microcatheter system
was not approvable based on the requirements of applicable regulations. The
letter stated that, although we had provided information on an additional 32
patients in the clinical trial in our PMA amendment submitted in January 2004,
the concerns identified in the FDA's initial non-approvable letter of June 26,
2003 remain unresolved. Among other things, the FDA's letter stated that the FDA
believes that the least burdensome approach to demonstrate the safety and
effectiveness of REVELATION Tx for the intended indication is to collect
additional clinical data using a randomized clinical trial design. At a meeting
with the FDA's Center for Devices and Radiological Health on June 18, 2004, the
FDA representatives reiterated the view that data from an additional study would

be necessary to demonstrate the effectiveness of REVELATION Tx for atrial
fibrillation, and that the nature of the trial's primary goal would require a
randomized clinical trial design. The development and implementation of a new
clinical trial would require substantial expenditures and management attention,
and the timing and success of any such trial cannot be assured.

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

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, even if we are
able to afford to conduct future clinical trials, those trials will demonstrate
the safety and effectiveness of any of our products or will result in regulatory
approval to market our products. We may never meet our development schedule for
any of our products in development. Even if a product is successfully developed
and clinically tested, we cannot be certain that it will be approved by the FDA
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 28, 2004 we received a
letter, dated May 21, 2004, from the FDA, stating that our PMA for the
REVELATION Tx linear ablation microcatheter system was not approvable based on
the requirements of applicable regulations. Among other things, the FDA's letter
stated that the FDA believes that the least burdensome approach to demonstrate
the safety and effectiveness of REVELATION Tx for the intended indication is to
collect additional clinical data using a randomized clinical trial design. At a
meeting with the FDA's Center for Devices and Radiological Health on June 18,
2004, the FDA representatives reiterated the view that data from an additional
study would be necessary to demonstrate the effectiveness of REVELATION Tx for
atrial fibrillation, and that the nature of the trial's primary goal would
require a randomized clinical trial design. The development and implementation
of a new clinical trial would require substantial expenditures and management
attention, and the timing and success of any such trial cannot be assured. We
must receive PMA approval before marketing our products for ablation in the
United States.

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 obtaining regulatory approval of our REVELATION Tx 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 that trial,
completing it could take several years.

Current or future clinical trials 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.

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.

We have entered into several agreements with parties to act as our
financial advisors, finders or agents in connection with actual and proposed
equity financings, including agreements entered into in April 2001 and on July
15, 2002, November 13, 2002, December 9, 2002, December 28, 2002 (with another
agreement signed with the same party in January 2003), March 11, 2003, July 15,
2003, July 18, 2003, August 2003 (oral agreement), November 2003, September 2004
and October 2004. These agreements have provided that we will pay cash fees,
generally expressed as 6% to 8% of the funds raised, and issue warrants to
purchase specified numbers of shares of our common stock, generally not
exceeding 10% of the number of shares sold, to these parties in connection with
our financings. Additional details concerning the terms of these various
agreements, and the fees and warrants previously paid to these parties, can be
reviewed in our Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on March 31, 2005.

In connection with our prior financings, some of these advisors, finders
and agents have alleged that they are owed additional cash and warrant
compensation to which we have felt they were not entitled, and which would be in
addition to fees and warrants paid to other advisors with respect to the same
investors. Our financial advisors, finders and agents may assert similar claims
in the future.

For example, the advisor that assisted us with a 2001 private placement,
which we refer to as the 2001 Advisor, communicated to us in 2002 that it
believes that it is entitled to cash fees and warrants in connection with the
August 2002 private placement. We strongly disagree with the 2001 Advisor's
interpretation of its letter agreement with us. In August 2002, we sent the 2001
Advisor a termination letter relating to its 2001 agreement. If the 2001 Advisor
prevails on its claims in connection with the August 2002 private placement, we
would be required to pay this advisor $381,570, or 7.5% of the gross proceeds
that we received from the sale of common stock, and issue to the advisor
warrants to purchase up to 698,287 shares of common stock (and if all of the

warrants issued to the investors in that private placement are exercised, an
additional $133,549 in cash). We also received letters from this advisor in
early 2003 asserting that it is also owed approximately $300,000 plus warrants
to purchase approximately 533,332 shares of our common stock at an exercise
price of $0.8245 per share, arising in connection with private placements we
consummated in December 2002 and January 2003. There can be no guarantee that
the 2001 Advisor will not claim additional fees or warrants in connection with
our financings closed after January 2003 or in connection with any future
financing.

In addition, by letters dated September 19, 2003 and January 29, 2004, an
advisor that we had retained in November 2002 (under an agreement that we
terminated effective May 18, 2003) has claimed that under its November 13, 2002
agreement with us, we are obligated to pay such advisor cash fees of $82,500 and
warrants to purchase "Units" (comprising 207,698 shares of our common stock and
warrants to purchase 62,309 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
three enumerated purchasers' investments in our August 2003 private placement.
This advisor has also stated its belief that we would have additional
obligations to the advisor in the event that other investors in the August 2003
private placement were investors as to which the advisor is entitled to
compensation under its agreement. In a letter dated January 29, 2004, the
advisor submitted information alleged to support a portion of its claim, and
stated its belief that we are obligated to register the claimed securities for
resale. In our opinion, this advisor has not established the merits of its
claim. We cannot predict whether additional claims will be made, or the
resolution of any current or future claims, by this former advisor.

In August 2003, one of the advisors that we retained in connection with our
August 2003 private placement notified us of its 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 believed 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.

Due to the existence of these various letter agreements, we may be
obligated to pay cash fees and issue warrants to one or more financial advisors
in connection with the closing 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 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 our company. 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. Any issuances of
equity compensation to advisor could also be restricted by, or give rise to
disputes under, the terms or our previously issued securities. Any dispute
relating to these advisors will tend to divert management's time and attention
from running our business and may cause us to incur material costs and expenses.

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(R) Tx, we may not have an adequate marketing and sales force to
adequately sell that 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 only have only a single direct salesperson in Europe. Building and
managing a larger remote sales force effectively, in Europe or elsewhere, would
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 successful European
business. Failure to do so would harm our business.

Currently, international 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 systems through
these distributors. We cannot be certain that these distributors will be able to
effectively market and sell our products. For example, we have terminated
several distribution arrangements in Europe because of the distributors' failure
to meet minimum sales levels under those agreements. We do not currently plan to
market our Surgical Ablation System ourselves, and are currently seeking a
strategic transaction for this system. We cannot assure you that we will be able
to enter into such an agreement on a timely basis or at all, that any
distributor or licensee will devote adequate resources to selling our products,
or that distribution relationships will not lead to costly and disruptive
disputes. Our failure to establish and maintain successful distribution
relationships would harm our business.

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 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 novel approaches to diagnosing and
treating atrial fibrillation and ventricular tachycardia and our surgical
ablation system represents a novel approach to ablating cardiac tissue during
surgery. 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 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:

o conventional catheters using the "drag and burn" or "dot to dot"
technique;

o anti-arrhythmic and anti-coagulant drugs;

o external electrical shock to restore normal heart rhythms and
defibrillation;

o implantable defibrillators;

o purposeful destruction of the atrial-ventricular node followed by
implantation of a pacemaker; and

o open-heart surgery known as the "maze" procedure.

Physicians will not recommend the use of our 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.

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:

o fines;

o injunctions;

o recall or seizure of products;

o withdrawal of marketing approvals or clearances;

o refusal by the FDA to grant clearances or approvals; and

o civil and criminal penalties.

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. 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 condition could 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, and approval to sell some of our products in
Canada. We received CE Mark Clearance for the INTELLITEMP radio frequency energy
management devices during the first quarter of 2004.

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.

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:

o export license requirements for our products;

o exchange rate fluctuations or currency controls;

o changes in the regulation of medical products by the European Union or
other international regulatory agencies;

o the difficulty in managing a direct sales force from abroad;

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

o domestic or international trade restrictions; and

o changes in tariffs.

Any of these factors could damage our business results.

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

Many of our competitors have an established presence in the field of
interventional cardiology and electrophysiology, or the study of the electrical
system of the heart. These competitors include 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 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, particularly because of our financial position.
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. We may lose the licensed rights in the event of
an assignment for the benefit of creditors or other bankruptcy or
insolvency-related event. 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 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:

o has not received appropriate regulatory clearances or approvals;

o is not used in accordance with cost-effective treatment methods as
determined by the payor; or

o 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:

o reimbursement for our products will be available domestically or
internationally;

o 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

o 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. For example, we currently do
not have the ability to manufacture one of the components of our Surgical
Ablation System in substantial quantities. We expect that if U.S. sales of our
PATHFINDER(TM) microcatheter products, our REVELATION(R) microcatheter products,
or our Surgical Ablation System increase or if we receive FDA clearance or
approvals for other products, we will need to expend significant capital
resources and develop additional manufacturing capacity to establish large-scale
manufacturing capabilities. However, we could encounter problems related to:

o capacity constraints;

o production yields;

o quality control; and

o shortages of qualified personnel.

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

Our manufacturing facilities are subject to periodic inspection by
regulatory authorities. Our operations must either undergo 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
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 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 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
ISO 13485 or ISO 9001 standards in future audits. Our failure to comply with
state or FDA Quality System Regulations, maintain compliance with 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 December 2004 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. Although we currently have general liability and product liability
insurance coverage, this coverage is subject to per-occurrence and annual
limitations, as well as substantial deductibles. 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.

We are dependent upon our key personnel.

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, if we are able to raise
additional capital in amounts sufficient to maintain and expand our operations,
we will be able to attract or retain other highly qualified scientific,
technical, clinical, regulatory and managerial personnel in the future.

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:

o the ability of the board of directors to alter our bylaws without
stockholder approval;

o the ability of the board of directors to issue, without stockholder
approval, up to five o million shares of preferred stock with rights
set by the board of directors, which rights could be senior to those
of our common stock; and

o the elimination of the rights of stockholders to act by written
consent.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We did not have material exposure to market risk from derivatives, interest
rates or other financial instruments as of June 30, 2005, and we do not expect
any significant effect on our results of operations from interest rate and
foreign currency fluctuations.

Item 4. 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.

Subject to the limitations noted above, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the fiscal year covered by this
Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of such date, our
disclosure controls and procedures were not effective to meet the objective for
which they were designed and operate at the reasonable assurance level due to
lack of segregation of duties caused by the Company wide Furlough on June 17,
2005.

Changes in internal control over financial reporting

On June 17, 2005 the Company furloughed all of its employees and on August
15, 2005 the Company re-hired approximately one-half of the pre-furlough
employees. The loss of so many employees may affect our ability to maintain
adequate internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company has been subject to certain legal proceedings and claims that
arose in the ordinary course of business. The Company currently is a party to
various claims, including claims from private placements agents in conjunction
with private placements. While the Company currently believes that the ultimate
outcome of these claims will not have a material adverse event on our results of
operations, claims and litigation is subject to inherent uncertainties, and
unfavorable outcomes could occur. Depending on the amount and timing, an
unfavorable outcome of some or all of these matters could have a material
adverse effect on the Company's cash flows, business, results of operations or
financial position. An estimate of potential loss from pending claims cannot be
made at this time.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of the Security Holders None.

Item 5. Other Information

None

Item 6. Exhibits

31.1 Certification of the Chief Executive Officer and Chief Financial Officer
of Cardima, Inc., pursuant to Sarbanes Oxley Section 302

32.1 Certification of the Chief Executive Officer and Chief Financial Officer
of Cardima, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002

CARDIMA, INC.

SIGNATURES

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

DATE: October 12, 2005 CARDIMA, INC.
/S/ GABRIEL B. VEGH
------------------------------------------------
GABRIEL B. VEGH
Chairman of the Board, Chief Executive
Officer, and Chief Financial Officer
(Principal Executive, Financial and Accounting
Officer)