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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



| | x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | 
| | - |  | ---------------------------------------------------------------------------------------- | 



| |  |  | For the quarterly period ended March 31, 2003
| |  |  | ---------------------------------------------



OR



| |  ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | 
| | - |  | ----------------------------------------------------------------------------------------- | 



| |  |  | For the transition period from  to
.
| |  |  | ------------------------------------





Commission File Number: 0-22419



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CARDIMA, INC.

(Exact name of registrant as
specified in its charter)



|Delaware                                                       |  |  |  | 94-3177883                          
|-------------------------------------------------------------- |  |  |  | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  |  |  | (I.R.S. Employer 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



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



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



As of May 12, 2003, there were 62,931,248 shares of Registrants Common Stock outstanding.



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CARDIMA, INC.



TABLE OF
CONTENTS



PART
I.    Financial Information



|                               |  | Description                                                                           |  | Page
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                              
|Item 1.                        |  | Financial Statements (unaudited)                                                      |  | 1   
|                              
|                               |  | Condensed Balance Sheets for the Three Months Ended March 31, 2003 and 2002           |  | 1   
|                              
|                               |  | Condensed Statements of Operations for the Three Months Ended March 31, 2003 and 2002 |  | 2   
|                              
|                               |  | Condensed Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 |  | 3   
|                              
|                               |  | Notes to Condensed Financial Statements                                               |  | 4   
|                              
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 9   
|                              
|                               |  | Factors Affecting Future Results                                                      |  | 15  
|                              
|Item 3.                        |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 29  
|                              
|Item 4.                        |  | Controls and Procedures                                                               |  | 29  
|                              
|PART II.     Other
Information |  |                                                                                      
|                              
|                               |  | Description                                                                           |  | Page
|                              
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                             |  | 29  
|                              
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                      |  | 30  
|                              
|Signatures                     |  | 31                                                                                   
|                              
|Certifications                 |  | 32                                                                                   



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PART I.



Item
1.Financial Statements



CARDIMA, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share amounts)



|ASSETS                                                                                                                                                                           |  | March 31, 2003 (Unaudited) |         |   | December 31, 2002 (1) |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | --------------------- | -
|Current assets:                                                                                                                                                                  |  |                            |         |   |                       |  
|Cash and cash equivalents                                                                                                                                                        |  | $                          | 2,827   |   |                       | $
|Accounts receivable, net of allowances for doubtful accounts of $80 at March 31, 2003
and $79 at December 31, 2002                                                               |  |                            | 420     |   |                       |  
|Inventories                                                                                                                                                                      |  |                            | 1,061   |   |                       |  
|Other current assets                                                                                                                                                             |  |                            | 427     |   |                       |  
|                                                                                                                                                                                 |  |                            |         |   |                       |  
|Total current assets                                                                                                                                                             |  |                            | 4,735   |   |                       |  
|Property and equipment, net                                                                                                                                                      |  |                            | 891     |   |                       |  
|Notes receivable from officers                                                                                                                                                   |  |                            | 603     |   |                       |  
|Other assets                                                                                                                                                                     |  |                            | 89      |   |                       |  
|                                                                                                                                                                                 |  |                            |         |   |                       |  
|                                                                                                                                                                                 |  | $                          | 6,318   |   |                       | $
|                                                                                                                                                                                 |  |                            |         |   |                       |  
|                                                                                                                                                                                
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                             |  |                            |         |   |                       |  
|Current liabilities:                                                                                                                                                             |  |                            |         |   |                       |  
|Accounts payable                                                                                                                                                                 |  | $                          | 1,191   |   |                       | $
|Accrued compensation                                                                                                                                                             |  |                            | 1,099   |   |                       |  
|Other current liabilities                                                                                                                                                        |  |                            | 617     |   |                       |  
|Capital lease obligationcurrent portion                                                                                                                                         |  |                            | 43      |   |                       |  
|                                                                                                                                                                                 |  |                            |         |   |                       |  
|Total current liabilities                                                                                                                                                        |  |                            | 2,950   |   |                       |  
|                                                                                                                                                                                
|Deferred rent                                                                                                                                                                    |  |                            | 16      |   |                       |  
|Capital lease obligationnoncurrent portion                                                                                                                                      |  |                            | 98      |   |                       |  
|                                                                                                                                                                                
|Commitments                                                                                                                                                                      |  |                            |         |   |                       |  
|                                                                                                                                                                                
|Stockholders equity:                                                                                                                                                            |  |                            |         |   |                       |  
|Common stock, $0.001 par value; 100,000,000 shares authorized, 58,472,803 shares issued
and outstanding at March 31, 2003; 54,394,264 as of December 31, 2002; at amount paid in |  |                            | 96,928  |   |                       |  
|Accumulated deficit                                                                                                                                                              |  |                            | (93,674 | ) |                       |  
|                                                                                                                                                                                 |  |                            |         |   |                       |  
|Total stockholders equity                                                                                                                                                       |  |                            | 3,254   |   |                       |  
|                                                                                                                                                                                 |  |                            |         |   |                       |  
|                                                                                                                                                                                 |  | $                          | 6,318   |   |                       | $
|                                                                                                                                                                                 |  |                            |         |   |                       |  

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|(1) |  | The balance sheet as of December 31, 2002 was derived from the audited financial statements included in the Companys 2002 Annual Report on Form 10-K filed with
the Securities and Exchange Commission.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to condensed financial statements



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CARDIMA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                              |  | Three months ended March 31, |       
|------------------------------------------------------------- |  | ---------------------------- | ------
|                                                              |  | 2003                         |       
|Net sales                                                     |  | $                            | 638   
|Cost of goods sold                                            |  |                              | 1,085 
|                                                              |  |                              |       
|Gross margin                                                  |  |                              | (447  
|                                                             
|Operating expenses:                                           |  |                              |       
|Research and development                                      |  |                              | 950   
|Selling, general and administrative                           |  |                              | 1,834 
|                                                              |  |                              |       
|Total operating expenses                                      |  |                              | 2,784 
|                                                              |  |                              |       
|Operating loss                                                |  |                              | (3,231
|                                                             
|Interest and other income                                     |  |                              | 12    
|Interest expense                                              |  |                              | (2    
|                                                              |  |                              |       
|Net loss                                                      |  | $                            | (3,221
|                                                              |  |                              |       
|Basic and diluted net loss per share                          |  | $                            | (0.06 
|                                                              |  |                              |       
|Shares used in computing basic and diluted net loss per share |  |                              | 55,344
|                                                              |  |                              |       



See
accompanying notes to financial statements



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CARDIMA, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                      |  | Three months ended March 31, |       
|--------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                      |  | 2003                         |       
|CASH FLOWS FROM OPERATING ACTIVITIES                                  |  |                              |       
|Net loss                                                              |  | $                            | (3,221
|Adjustments to reconcile net loss to net cash provided by operations: |  |                              |       
|Depreciation and amortization                                         |  |                              | 220   
|Reversal of stock-based compensation                                  |  |                              |      
|Loss on disposal of assets                                            |  |                              | 7     
|Non-cash interest income on notes receivable from officers            |  |                              | (8    
|Changes in operating assets and liabilities:                          |  |                              |       
|Accounts receivable                                                   |  |                              | (102  
|Inventories                                                           |  |                              | 165   
|Other current assets                                                  |  |                              | 153   
|Other assets                                                          |  |                              | 42    
|Accounts payable                                                      |  |                              | (838  
|Accrued employee compensation                                         |  |                              | (139  
|Other current liabilities                                             |  |                              | 341   
|Deferred rent                                                         |  |                              | 12    
|                                                                      |  |                              |       
|Net cash used in operating
activities                                 |  |                              | (3,368
|                                                                     
|CASH FLOWS FROM INVESTING ACTIVITIES                                  |  |                              |       
|Capital expenditures                                                  |  |                              | (88   
|                                                                      |  |                              |       
|Net cash used in investing
activities                                 |  |                              | (88   
|                                                                     
|CASH FLOWS FROM FINANCING ACTIVITIES                                  |  |                              |       
|Principal payments under capital leases                               |  |                              | (27   
|Net proceeds from sale of common stock                                |  |                              | 2,925 
|                                                                      |  |                              |       
|Net cash provided by (used in) financing
activities                   |  |                              | 2,898 
|                                                                      |  |                              |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  |  | $                            | (558  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                        |  | $                            | 3,385 
|                                                                      |  |                              |       
|CASH AND CASH EQUIVALENTS END OF PERIOD                               |  | $                            | 2,827 
|                                                                      |  |                              |       



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CARDIMA, INC.



NOTES
TO CONDENSED FINANCIAL STATEMENTS

March 31, 2003

(Unaudited)



1.    BASIS OF PRESENTATION



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



The operating results for the three month period ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the entire fiscal year ending December 31, 2003 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, 2002. The accompanying balance sheet at December 31, 2002 has been derived from these audited financial statements.



2.    MANAGEMENTS PLANS



As of March 31, 2003, the Company had approximately
$2,827,000 in cash and cash equivalents, working capital of $1,785,000 and an accumulated deficit of $93,673,000. Management expects to continue to incur additional losses in the foreseeable future as the Company completes its key clinical trial in
the United States, commercialization of the REVELATION®Tx in the United States and the commercialization of the
REVELATION®Helix in Europe. Management believes that the Companys cash balances will be sufficient to
fund planned expenditures through September 30, 2003. Although management recognizes the need to raise funds in the near future, there can be no assurance that the Company will be successful in consummating any such transaction, or, if such a
transaction is consummated, that the terms and conditions of such financing will not be unfavorable to us. Any failure by management to obtain additional funding will have a material effect upon us and will likely result in our inability to continue
as a going concern.



The Company continues to
initiate relationships with new distributors worldwide. As of March 31, 2003, the Company had distributors in place in eight countries that provide service and sales support in twelve countries, consultants and sales agents in place in two countries
that provide service and sales support in five countries and a European distribution center in place which provides service and sales support to an additional nine European countries. The Company is currently seeking regulatory approval of all its
therapeutic products in China, but cannot predict if its products will ultimately be approved for sale in that region. In addition, the Company cannot predict whether or not it will be successful in marketing and selling its diagnostic and
therapeutic products in China and other Asian countries. Recent foreign regulatory approval developments affecting the Companys product registrations include the



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acceptance by Turkey of the CE Mark already in place in Europe for the Companys diagnostic and therapeutic products and the
ratification of an agreement between the EU and Switzerland, granting approval to market and sell CE Mark products in that country.



3.    PRIVATE PLACEMENTS



On December 31, 2002 and January 22, 2003, we sold by means of a private placement an aggregate of 5,333,319 shares of our common stock at
a price per share of $0.74955 for an aggregate net proceeds of approximately $3.5 million. In addition, we issued to the investors warrants to purchase 2,400,000 shares of our common stock at an exercise price of $0.8245 per share. The warrants
became exercisable on March 1, 2003 and March 23, 2003, respectively, and will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the sixty (60) day period between each of the
closings and March 1, 2003 and March 23, 2003, respectively. The warrants allow for a cashless exercise whereby the exercising party may use shares issuable upon exercise of the warrant in payment of the exercise price. We may not redeem
the warrants and the warrants are subject to a mandatory exchange or termination in the case of certain reorganizations, mergers, or divestitures. We paid to the party which acted as finder in connection with this private placement a fee of $25,000
in cash plus 66,667 shares of our common stock upon execution of a letter agreement. Upon the closing of the transactions, we also paid to the finder a total of $300,000 in cash and issued to the finder warrants to purchase 533,331 shares of our
common stock at an exercise price of $0.8245. The warrants issued to the finder are not redeemable and allow for cashless exercise whereby the finder may use shares issuable upon exercise of the warrant in payment of the exercise price.



On March 28, 2003, we sold by means of a private
placement an aggregate of 2,941,175 shares of our common stock at a price of $0.85 per share for net proceeds of approximately $2.3 million. In addition, we issued to the investors warrants to purchase 1,176,470 shares of our common stock at an
exercise price of $1.25 per share. The warrants will be exercisable beginning on September 28, 2003 and will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the six (6) month
period between the closing and September 28, 2003. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been at least $1.70 (as adjusted for subsequent stock splits
and the like) for fifteen consecutive trading days. We paid to the party that acted as agent in connection with this private placement upon the March 28, 2003 closing, a total of $175,000 in cash and issued to the agent warrants to purchase 294,117
shares of our common stock at an exercise price of $0.935.



On April 11, 2003, we sold by means of a private placement an additional 4,395,587 shares of our common stock at a price of $0.85 per share for net proceeds of approximately $3.5 million. In addition, we issued to the investors
warrants to purchase 1,758,234 shares of our common stock at an exercise price of $1.25 per share. The warrants will be exercisable beginning on October 11, 2003 and will be reduced on a share-for-share basis to the extent that an investor sells our
common stock or other securities during the six (6) month period between the closing and October 11, 2003. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been
at least $1.70 (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days. We are obligated to issue to a party which acted as finder in connection with this closing of the recent private placement 24,746 shares of
our common stock as consideration for its execution of a new letter agreement. We also paid to the parties that acted as agents in connection with this private placement upon the April 11, 2003 closing, a total of $270,000 in cash and issued to the
agents warrants to purchase 448,557 shares of our common stock at an exercise price of $0.935.



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4.    INVENTORIES



Inventories consists of the following (in thousands):



|                |  | March 30, 2003 |       | December 31, 2002
|--------------- |  | -------------- | ----- | -----------------
|Raw materials   |  | $              | 516   |                  
|Work-in-process |  |                | 190   |                  
|Finished goods  |  |                | 355   |                  
|                |  |                |       |                  
|                |  | $              | 1,061 |                  
|                |  |                |       |                  



The
amounts shown above are net of reserves for excess and obsolete inventory of $276,000 and $242,000 at March 31, 2003 and December 31, 2002, respectively. The Company provides reserves for potential excess quantities and obsolescence as a result of
technological advances which impact inventories on hand.



5.    REVENUE RECOGNITION



Revenues are recognized when products are shipped. The Company recognizes revenue from two types of customers, end users and distributors. Revenue is recognized upon the shipment of product, provided the title of products has been
transferred at the point of shipment, there is persuasive evidence of an agreement, the payment for the product is reasonably assured, and no substantive obligations to the customer remain. Customers are not entitled to rights of product return.



6.    STOCK OPTION RE-PRICING



On March 20, 2000, the Companys Board of Directors
approved a reduction, effective June 2, 2000, in the exercise price of 462,576 outstanding stock options held by executive officers and employees of the Company to the fair market value of the Companys common stock on June 2, 2000, which was
$1.16 per share. These options were granted between July 29, 1997 and July 6, 1999 at exercise prices ranging from $1.91 to $5.88 per share.



Of the initial 462,576 shares that were re-priced, 25,011 shares have been cancelled, 29,700 shares have been exercised and 407,865 shares
remain outstanding as of March 31, 2003. The cumulative non-cash compensation expense for the re-valuation of these re-priced options is $25,000 from the date of repricing in 2000 until March 31, 2003. No expenses related to the re-pricing were
recorded for the quarter ended March 31, 2003 because the closing price of $1.00 on March 31, 2003 was below the re-price strike price of $1.16 per share, therefore, no adjustment was required.



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7.    NET
LOSS PER SHARE



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



8.    COMPREHENSIVE INCOME (LOSS)



Comprehensive loss equaled net loss for all periods presented.



9.    RECENT ACCOUNTING PRONOUNCEMENTS



In June 2002, the Financial Accounting Standards Board (or FASB) issued FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for
restructuring, discontinued operation, plant closing, or other exit or disposal activity. FAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 on January 1, 2003 did not have a significant impact on our financial position and results of
operations.



In November 2002, the Financial
Accounting Standards Board (or FASB) issued Interpretation No. 45 (or FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligation it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. Our adoption of the recognition requirements of FIN 45 did not
have a material impact on our financial position or results of operations.



In January 2003, the FASB issued Interpretation No. 46 (or FIN 46), Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. A variable interest entity is a corporation,
partnership, trust, or any other legal structures used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support
its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research



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and development or other activities on behalf of another company. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN 46 in January 2003 did not have a material impact on the Companys financial position or results of operations.



The following information regarding pro forma
net loss and loss per share prepared in accordance with FAS 123 has been determined as if we had accounted for our employee stock options and employee stock plan under the fair value method prescribed by FAS 123. The resulting effect on net loss and
loss per share pursuant to FAS 123 is not likely to be representative of the effects on net income and earnings per share pursuant to FAS 123 in future periods, due to subsequent periods including additional grants and periods of vesting. The fair
value of options was estimated at the date of grant using a Black-Scholes option valuation model with the following weighted-average assumptions for the three months ended March 31, 2003 and 2002, respectively: risk-free interest rates of 2.8% and
2.5%; dividend yields of 0%; volatility factors of the expected market price of our Common Stock of 89.0% and 85.0%; and a weighted-average expected life of the option of four years.



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 FAS 123 as amended by FAS 148, the estimated fair value of options is amortized to expense over the options vesting period.



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



|                                                                                                        |  | Three Months Ended March 31, |       
|------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                                                        |  | 2003                         |       
|Net lossas reported                                                                                    |  | $                            | (3,221
|Add:                                                                                                    |  |                              |       
|Stock-based employee compensation expense included in reported net
income                               |  |                              |      
|                                                                                                       
|Deduct:                                                                                                 |  |                              |       
|Total stock-based employee compensation expense determined under fair value based method
for all awards |  |                              | (186  
|                                                                                                        |  |                              |       
|Pro forma net loss                                                                                      |  | $                            | (3,407
|                                                                                                        |  |                              |       
|Basic and diluted net loss per share                                                                    |  |                              |       
|As reported                                                                                             |  | $                            | (0.06 
|                                                                                                        |  |                              |       
|Pro forma                                                                                               |  | $                            | (0.06 
|                                                                                                        |  |                              |       



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



This Form 10-Q, including managements discussion and analysis of financial condition and results of
operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements
regarding regulatory approvals, operating results and capital requirements. Except for historical information, the matters discussed in this Form 10-Q are forward-looking statements that are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. Such factors include our ability to obtain adequate funding, whether our premarket approval application, or PMA, will be approved by the U.S. Food and Drug Administration, whether we
will be able to conduct successful clinical trials, whether we will be able to obtain timely regulatory approvals and gain acceptance from the marketplace for our products, whether we will be able to successfully market, sell and derive sufficient
revenue from our products, as well as the risk factors discussed below in Factors Affecting Future Results and those listed from time to time in the Companys SEC reports. 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 our Annual Report on Form 10-K.



Overview



Since our incorporation in November 1992, we have been engaged in the design, research, development,
manufacturing and testing of microcatheter systems for the mapping (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



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and be potentially fatal. We develop microcatheter systems designed (1) to locate and provide more extensive and less traumatic access to
arrhythmia-causing tissue for diagnosing the arrhythmia, referred to as mapping, and (2) to restore normal heart rhythms by isolating and destroying the arrhythmia-causing tissue using radio frequency energy, referred to as ablation. Our
microcatheters incorporate multiple electrodes at the distal end to record electrical signals for mapping and, with certain microcatheters, to emit radio frequency energy for ablation, allowing physicians to both map and ablate arrhythmias using the
same microcatheter. Our microcatheters are also 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 can be adapted to and used with all conventional ECG-recording systems and radio frequency generators, eliminating the need for significant new investment in capital equipment by
hospitals.



We have generated revenues of
approximately $15.6 million from inception to March 31, 2003. Prior to January 1997, these revenues were generated primarily in Europe and Japan from sales of our PATHFINDER and TRACER microcatheter systems for diagnosing ventricular tachycardia and
our REVELATION microcatheter system for diagnosing atrial fibrillation, as well as ancillary products such as the VENAPORT guiding catheters. Since 1997 and the U.S. Food and Drug Administrations clearance of certain of our products, sales in
the United States consist primarily of our PATHFINDER and REVELATION lines of microcatheters for diagnosing ventricular tachycardia and atrial fibrillation, respectively. To date, our international sales have been made through our small direct sales
force and distributors who sell our products to physicians and hospitals. European sales consist primarily of the REVELATION and REVELATION Tx microcatheters for treatment of atrial fibrillation following receipt of CE Mark for those products in
August 1998 and March 1999, respectively.



We
have obtained the right to affix the CE Mark to our REVELATION, REVELATION Tx, REVELATION T-Flex, REVELATION Helix and REVELATION Helix ST microcatheter systems for both mapping and ablation of atrial fibrillation and for our PATHFINDER, PATHFINDER
mini and TRACER microcatheter systems for mapping ventricular tachycardia, permitting us to market these products in the member countries of the European Union. We received 510(k) clearances for the (1) REVELATION microcatheter for mapping
and pacing diagnostic electrophysiology studies including atrial fibrillation; (2) PATHFINDER, PATHFINDER mini and the TRACER microcatheters for mapping and pacing epicardial electrophysiological studies from the coronary venous vasculature
including ventricular tachycardia; (3) VUEPORT balloon guiding catheter and (4) NAVIPORT deflectable tip guiding catheter. On July 25, 2000, we announced that we submitted a 510(k) pre-market notification application for a surgical ablation system
for use in minimally invasive cardiac surgery. This new system will use commercially available electro-surgical radio frequency, or RF, generators, a Cardima surgical prove using multi-electrode linear array microcatheter technology and INTELLITEMP,
a novel power-channeling device which allows the surgeon to apply RF energy to any or all of the individual electrodes on the probe.



We will be required to conduct clinical trials, demonstrate safety and effectiveness and obtain PMA approval from the U.S. Food and Drug
Administration, or FDA, in order to sell any of our products for treating atrial fibrillation or ventricular tachycardia in the United States. Specifically, 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.



While we produce and sell microcatheters for the diagnosis of ventricular tachycardia, our current efforts focus on the development of
microcatheters to diagnose and treat



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atrial fibrillation. During 2001, management decided to conserve and concentrate resources on the clinical trials for our atrial fibrillation
products with the objective of completing the regulatory approval process in both the United States and in Europe. We have completed the Phase III clinical trial in the United States of the REVELATION Tx microcatheter system for the treatment of
atrial fibrillation and on September 30, 2002 submitted the PMA application to the FDA. On November 5, 2002, the PMA was accepted by the FDA and was granted expedited review status. On March 6, 2003, we were notified by the FDA that we would meet
with the Circulatory Systems Device Panel on May 29, 2003.



We began a left-sided atrial clinical trial in Germany with the REVELATION Helix microcatheter system for the treatment of atrial fibrillation originating in the pulmonary veins. To date, 43 patients have been treated at five sites.
The purpose of this study is to gain clinical data that will be important to future marketing efforts of the REVELATION Helix in Europe and potentially used as initial data for our planned REVELATION Helix clinical trial in the United States. We
received CE mark approval for the REVELATION Helix in the European Union in December 2001 and for the REVELATION Helix ST in May 2002.



As of April 30, 2003, following the closing on April 11, 2003 of our private placement, we have cash and cash equivalents of approximately
$4,500,000. Our management believes that our cash balances as of April 30, 2003, will be sufficient to fund planned expenditures through September 30, 2003. Although our management recognizes the need to raise funds in the near future, there can be
no assurance that we will be successful in consummating any such transactions, or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us. Our failure to raise capital as needed will
have a material adverse effect on our business and financial condition and will likely cause us to cease our operations. Our independent auditors have concluded that there is a substantial doubt as to our ability to continue as a going concern for a
reasonable period of time and have, therefore, modified their report included in our Report on Form 10-K for the year ended December 31, 2002 in the form of an explanatory paragraph describing events that have given rise to this uncertainty.



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



Critical
Accounting Policies



Use of Estimates



We have prepared our financial statement 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.



Revenue Recognition



We recognize revenue when products are
shipped. We recognize revenue from two types of customersend users and distributors. Revenue is recognized upon the shipment of product, provided the title of products has been transferred at the point of shipment, there is persuasive evidence
of an agreement, the payment for the product is reasonably assured, and no substantive obligations to the customer remain. Customers are not entitled to rights of product return.



Inventories



Our inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis.
Inventory amounts are shown net of reserves for excess and obsolete



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inventory at the lower cost or market. We provide reserves for potential excess quantities and obsolescence as a result of technological
advancements which impact inventories on hand.



Results Of
OperationsThree Months Ended March 31, 2003 And 2002



Net Sales



Net sales for
the quarter ended March 31, 2003 decreased 17% to $638,000 from $766,000 for the same period in 2002. This decrease was primarily due to 52% lower revenues in Europe, comparing $159,000 in the first quarter of 2003 to $328,000 in the first quarter
of 2002, which included significant revenues from the initial product launch of the REVELATION®Helix in Europe
during the first three months of 2002. Revenues in Asia/Pacific decreased 17%, comparing $209,000 in the first quarter of 2003 to $252,000 in the first quarter of 2002, while sales in the United States increased 33% to $244,000 for the first quarter
of 2003 compared with $184,000 for the equivalent quarter in 2002. Revenues in the United States are reflective of strong sales of existing diagnostic and guiding catheters. The first quarter of 2003 marks the fourth consecutive quarter of increased
sales, from $423,000 in the second quarter of 2002, to $444,000 in the third quarter of 2002, to $595,000 in the fourth quarter of 2002 and finally to $638,000 in the first quarter of 2003.



Accounts receivable increased 32% to $420,000 at March 31,
2003 from $318,000 at December 31, 2002, which correlates directly to the 34% increase in revenue when comparing the quarter ended March 31, 2003 to the fourth quarter ended December 31, 2002. Allowance for doubtful accounts increased slightly to
$80,000 at March 31, 2003 from $79,000 at December 31, 2002.



We have continued to focus our resources on the submission of the PMA of the REVELATION®Tx
microcatheter system, while awaiting the outcome of our scheduled Circulatory Systems Device Panel Meeting with the FDA on May 29, 2003. We also plan to increase our sales and marketing capabilities in the diagnostic electrophysiology market so that
we may increase future revenue opportunities.



Cost of Goods Sold



Cost
of goods sold primarily includes raw materials costs, catheter fabrication costs, system assembly and testing costs and manufacturing overhead. Cost of goods sold for the quarter ended March 31, 2003 increased 22% to $1,085,000 from $890,000 for the
same period in 2002. This increase was primarily due to the lower unit sales of higher margin therapeutic products sold in the first quarter of 2003 when compared to the product mix sold in the first quarter of 2002. Inventory reserves for excess
and obsolete inventory increased $34,000, or 14%, from December 31, 2002 to March 31, 2003. This increase was primarily due to a higher number of units in finished goods with shelf live expiration dates within six months of March 31, 2003. We
reserve 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 and shelf life expirations. When we write off specific inventory
or have determined that inventory is obsolete, we subsequently dispose of that inventory.



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Research
and Development Expenses



Research and
development expenses include product development, clinical testing and regulatory expenses. Total research and development expenses, including regulatory and clinical functions for the quarter ended March 31, 2003 increased 14% to $950,000 from
$833,000 for the same quarter in 2002. More specifically, our investment in new product development for the quarter ended March 31, 2003 increased only 4% to $422,000 from $404,000 for the same period in 2002, as all programs not directly related to
the atrial fibrillation clinical trial have been postponed. Regulatory and clinical expenses for the quarter ended March 31, 2003 increased 23% to $528,000 from $429,000 for the same quarter in 2002. The increase was due to the costs associated with
finalizing the Phase III clinical trials for REVELATION®Tx and preparing all the supporting data in preparation
for the May 29, 2003 meeting of the Circulatory Systems Device Panel of the FDA.We expect total research and development expenses to decrease in 2003, while costs associated with clinical and regulatory expenses will increase throughout the year.



Selling, General and Administrative Expenses



Selling, general and administrative
expenses for the quarter ended March 31, 2003 increased 12% to $1,834,000 from $1,633,000 for the same period in 2002. Selling expenses for the quarter ended March 31, 2003 remained essentially flat between the periods, comparing $757,000 in 2003
with $763,000 for the same period in 2002, while general and administrative expenses for the quarter ended March 31, 2002 increased 24% to $1,077,000 from $870,000 for the same period in 2002. The increase in general and administrative expenses in
this period is due primarily to the administrative costs indirectly associated with the financing activities and increased expenses related to investor and public relation activities.



Interest and Other Income



Interest and other income for the quarter ended March 31, 2003 decreased to $12,000 from $28,000 for the same
period in 2002. The decrease was primarily due to lower average cash balances and lower interest rates during the first quarter of 2003 compared to the same period in 2002.



Interest Expense



Interest expense for the quarter ended March 31, 2003 decreased to $2,000 from $8,000 for the same period in
2002. This decrease was primarily due to the expiration and payoff of certain capital equipment leases.





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Liquidity And Capital
Resources





We have financed our operations to date, principally through (1) private placements of equity securities, which have yielded net proceeds of $98,500,000 through March 31, 2003, (2) our initial public
offering of Common Stock in June 1997, which resulted in net proceeds of approximately $13,600,000, together with interest income on such proceeds, (3) borrowings under a $3,000,000 line of credit, (4) sale of certain of our non-core patents to
Medtronic for $8,000,000 and (5) equipment leases to finance certain capital equipment, which have provided proceeds in the amount of $4,700,000. As of March 31, 2003, we had approximately $2,827,000 in cash and cash equivalents. On January 22,
2003, March 28, 2003 and April 11, 2003, we sold a total of 8,310,087 shares of common stock in private placements to accredited investors resulting in net proceeds, after expenses, of approximately $6.8 million.



Net cash used in operating activities was approximately
$3,368,000 in the quarter ended March 31, 2003, compared to $3,094,000 for the quarter ended March 31, 2002. The 9% increase of cash used in operating activities is due to the higher net loss offset by the increase in the collection of accounts
receivable and accrued payables. Net cash provided by financing and investing activities was approximately $2,810,000 for the first quarter of 2003, compared to net cash used by financing and investing activities of $437,000 in the comparable
quarter of 2002. This change was primarily due to the closing of private placements in January and March of 2003 and the expiration and subsequent payoff of certain capital leases during the quarters following the first quarter of 2002.



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



As of March 31, 2003, we have an accumulated deficit of approximately $93,700,000. Our management expects to continue to incur additional
losses in the foreseeable future as it completes new product development and product commercialization. As of March 31, 2003, our cash balance was approximately $2.8 million, we had accounts receivable of approximately $0.5 million and we had total
liabilities of approximately $3.0 million. As of April 30, 2003, following the closing on April 11, 2003 of our private placement, we have cash and cash equivalents of approximately $4,500,000. Our management believes that our cash balances as of
April 30, 2003, will be sufficient to fund planned expenditures through September 30, 2003. Although our management recognizes the need to raise funds in the near future, there can be no assurance that we will be successful in consummating any such
transactions, or, if we do consummate such a transaction, that the terms and conditions of such financing will not be unfavorable to us.



We must seek to raise additional funds prior to September 30, 2003 through public or private financing, collaborative relationships or
other arrangements. We expect equity financing will be dilutive to stockholders and debt financing, if available, may include restrictive covenants. Collaborative arrangements, if necessary, may require us to relinquish our rights to certain
technologies, products, or marketing territories. Our failure to raise capital as needed will have a material adverse effect on our business and financial condition and will likely cause us to cease operations. Our independent auditors have
concluded that there is a substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have, therefore, modified their report included in our Report on Form 10-K for the year ended December 31, 2002 in the
form of an explanatory paragraph describing events that have given rise to this uncertainty.



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Factors Affecting Future Results



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



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



Our net losses were approximately $12.6 million for the year ended December 31, 2002, $9.3 million for the year ended December 31, 2001
and $7.8 for the year ended December 31, 2000. As of March 31, 2003, our accumulated deficit was approximately $93.7 million. Our limited sales history makes it difficult to assess our future results. We cannot be certain that we will ever generate
substantial revenue or achieve profitability. Our failure to generate substantial revenues would harm our business.



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



In order to complete the required regulatory approval process
and commercialize our products, we will need to raise additional capital. One possibility for raising additional capital is the public or private sale of our common stock. In May 2001, we received net proceeds of approximately $6.2 million from a
private placement of 11,746,916 shares of our common stock. As part of this private placement, we also issued redeemable warrants to purchase up to an aggregate of 5,873,465 additional shares of our common stock at an exercise price per share of
$0.87. In addition, in August 2001, we received net proceeds of approximately $3.5 million from a private placement of 2,822,471 shares of our common stock along with the issuance of redeemable warrants to purchase up to an aggregate of 1,411,234
shares of our common stock at exercise prices between $1.91 and $2.07. In September 2001, we announced that we had elected to redeem the warrants issued in the May 2001 private placement for $0.001 per warrant share; all of the May 2001 warrants
were exercised by the redemption date, and we received net proceeds of approximately $4.6 million.



On August 5, 2002, we received net proceeds of approximately $4.5 million from a private placement of 6,788,325 share of our common stock
with a purchase price of $0.72 per share. As part of this private placement, we also issued redeemable warrants to purchase up to an aggregate of 2,036,491 additional shares of our common stock at an exercise price per share of $0.90. On August 12,
2002, we completed an additional closing of our private placement in which we received net proceeds of approximately $186,000 from the sale of 194,552 share of our common stock with a purchase price of $1.028 per share. As part of this closing, we
also issued a redeemable warrant to purchase up to an aggregate of 58,365 additional shares of our common stock at an exercise price of $1.285. In addition to warrants issued to the investors who participated in the August 2002 private placement, we
also issued to a financial advisor a warrant to purchase 678,832 shares of common stock at a price per share of $0.792 and a warrant to purchase 19,455 shares of common stock at a price per share of $1.131. The warrants issued to the financial
advisor are not redeemable.



On December 31, 2002
and January 22, 2003, we sold by means of a private placement an aggregate of 5,333,319 shares of our common stock a price per share of $0.74955 for an aggregate purchase price of $4.0 million. In addition, we issued to the investors warrants to
purchase 2,400,000 shares of our common stock at an exercise price of $0.8245 per share. The warrants became exercisable on March 1, 2003 and March 23, 2003, respectively, and will be reduced on a share-for-share basis to the extent that an investor
sells our common stock or other securities during the sixty (60) day period between each of the closing dates and March 1, 2003 and March 23, 2003, respectively. The warrants allow for a cashless exercise whereby the exercising party may
use shares issuable upon exercise of the warrant in payment of the exercise price. We may not redeem the warrants and the warrants are subject to a mandatory exchange or termination in the case of certain reorganizations, mergers, or divestitures.
We paid to the party which acted as finder in connection with this private placement a fee of $25,000 in cash plus 66,667 shares of our common stock upon execution of a letter agreement. Upon the closing of the transactions, we also paid to the
finder a total of $300,000 in cash and issued to the finder warrants to purchase 533,331 shares of our common stock at an exercise price of $0.8245. The warrants issued to the finder are not redeemable and allow for cashless exercise
whereby the finder may use shares issuable upon exercise of the warrant in payment of the exercise price.



On March 28, 2003, we sold by means of a private placement an aggregate of 2,941,175 shares of our common stock at a price of $0.85 per
share for gross proceeds of $2,500,000. In addition, we issued to the investors warrants to purchase 1,176,470 shares of our common stock at an exercise price of $1.25 per share. The warrants will be exercisable beginning on September 28, 2003 and
will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the six (6) month period between the closing and September 28, 2003. We may redeem the warrants for a price of $0.001 per
share of common stock if the average closing price per share of our common stock has been at least $1.70 (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days. We paid to the party that acted as agent in
connection with this private placement upon the March 28, 2003 closing, a total of $175,000 in cash and issued to the agent warrants to purchase 294,117 shares of our common stock at an exercise price of $0.935.



On April 11, 2003, we sold by means of a private placement an
additional 4,395,587 shares of our common stock at a price of $0.85 per share for gross proceeds of approximately $3,700,000. In addition, we issued to the investors warrants to purchase 1,758,234 shares of our common stock at an exercise price of
$1.25 per share. The warrants will be exercisable beginning on October 11, 2003 and will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the six (6) month period between the
closing and October 11, 2003. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been at least $1.70 (as adjusted for subsequent stock splits and the like) for
fifteen consecutive trading days. We paid to the parties that acted as agents in connection with this private placement upon the April 11, 2003 closing, a total of $270,000 in cash and issued to the agents warrants to purchase 448,557 shares of our
common stock at an exercise price of $0.935. We are also obligated to issue to a party that acted as finder in connection with this closing of the recent private placement 24,746 shares of our common stock as consideration for its execution of a new
letter agreement.



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If we sell
additional shares of our common stock, such sales will further dilute the percentage of our equity that you own. In addition, the price per share of the common stock sold in the December 31, 2002 and the January 22, 2003 closings of our private
placement and the exercise price of the warrants issued to the investors and the finder who participated in the closings were discounted from the closing price of our common stock on those dates. Also, the price per share of the common stock sold in
the March 28, 2003 and April 11, 2003 closings of our recent private placement represented a discount to the closing price of our common stock on those dates. It is possible that we may close future private placements involving the issuance of
securities at a price per share that represents a discount to the closing price of our common stock. Depending upon the price per share of securities that we sell in the future, your interest in us could be further diluted by any adjustments to the
number of shares and the applicable exercise price required pursuant to the terms of the agreements under which certain shares of our common stock and certain warrants were issued. Currently, the number of shares of our common stock issued to the
investors who participated in the December 31, 2002 and January 22, 2003 closings of our private placement and the number of shares of common stock issuable upon the exercise of warrants held by those investors and the number of shares of common
stock issuable upon exercise of warrants held by the participants in our 1999 and 2000 private placements have antidilution protections that may be triggered in certain instances.



If we fail to raise additional capital to develop and market our microcatheter systems, our business will
fail.



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



We have financed our operations since inception primarily through the private placement of equity securities, proceeds from our initial public offering in June 1997, loan facilities and the sale of certain of our patents and
other intellectual property. As of March 31, 2003, our cash balance was approximately $2.8 million, we had accounts receivable of approximately $0.5 million and we had total liabilities of approximately $3.0 million. Following the closings on March
28, 2003 and April 11, 2003 of our private placement, as of April 30, 2003, we have cash and cash equivalents of approximately $4.5 million. Our management believes that our cash balances as of April 30, 2003, will be sufficient to fund planned
expenditures through September 30, 2003. Controllable expenses, such as overtime and travel, have been curtailed and all expenses are being closely monitored. There can be no assurance that we can or will obtain additional financing to fund our
operations after September 30, 2003.



Our
independent auditors believe that there is substantial doubt as to our ability to continue as a going concern.



As a result of our losses to date, working capital deficiency and accumulated deficit, our independent auditors have concluded that there
is substantial doubt as to our ability to continue as a going concern for a reasonable period of time, and have modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. 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. Our independent auditors going concern modification
may make it more difficult for us to obtain additional funding to meet our obligations or adversely affect the terms of any additional funding we are able to obtain. We anticipate that we will continue to incur significant losses until successful
commercialization of one or more of our products. There can be no assurance that we can or will operate profitably in the future, or that we will continue as a going concern.



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



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



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2001 Advisor, assisted us with our 2001 private placement of units and received a commission in connection with the 2001 offering. The 2001
Advisor has the right to continue to provide certain services to us in connection with the development of potential strategic alliances.



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



Shortly before the August 5, 2002 closing of our August 2002 private placement which was arranged by the July 2002 Advisor, the 2001
Advisor communicated to us that it believes that it is entitled under the 2001 Letter Agreement to fees and warrants in connection with the August 2002 private placement. We strongly disagree with the 2001 Advisors interpretation of the 2001
Letter Agreement. Even if the 2001 Advisors interpretation is determined to be correct, we believe that the 2001 Advisor waived any rights to compensation it might have in connection with the August 2002 private placement.



We sent to the 2001 Advisor on August 21, 2002 a termination
letter relating to the 2001 Letter Agreement. Pursuant to the terms of the 2001 Letter Agreement, our obligations to pay the 2001 Advisor a commission or to issue to it warrants in connection with sales of our securities terminated thirty (30) days
from the date of this termination letter, or September 20, 2002. On August 29, 2002, the 2001 Advisor sent to us an invoice for cash commissions and warrants that the 2001 Advisor claims are owed to it pursuant to the 2001 Letter Agreement as a
result of the closing of the August 2002 private placement. On September 10, 2002, we sent a letter to the 2001 Advisor to express our position that no fees or warrants are due to the 2001 Advisor in connection with the closings of the August 2002
private placement. On September 26, 2002 we received a letter from legal counsel to the 2001 Advisor reasserting the 2001 Advisors claim that it must receive payment of commissions and warrants in connection with the August 2002 private
placement.



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



On November 13, 2002, we retained a party to act as our financial advisor and finder in connection with a proposed offer and sale of
shares of our common stock and warrants to purchase shares of our common stock. The letter agreement with this advisor, or the November 2002 Advisor, provides for, among other things, the payment of fees to the November 2002 Advisor equal to 7.5% of
the gross proceeds of the offering, including any proceeds from the exercise of the warrants. In addition to the cash fee, the November 2002 Advisor has the right to receive warrants to purchase a number of shares equal to 10% of the number of
securities sold in such offering. The letter agreement also provided for the payment of a cash fee of $25,000 upon execution of the agreement, and a break-up fee of $100,000 (net of the fee paid upon execution) for financings or transactions
undertaken by us without the November 2002 Advisors assistance. The December 2002 and January 2003 closings of our private placements were undertaken without the November 2002 Advisors assistance, and in April 2003 we paid to the
November 2002 Advisor a net break-up fee of $75,000. On April 17, 2003, we terminated this letter agreement, effective May 18, 2003. The November 2002 Advisor has acknowledged and agreed to the terms of that termination, including that no additional
fees will be owed by us under this letter agreement other than those owed upon subsequent exercise of any warrants held by purchasers introduced through the November 2002 Advisor.



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



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



On March 11, 2003, we retained another party as our financial advisor in connection with a proposed debt or equity financing. The letter
agreement with this advisor, or the March 2003 Advisor, provides for, among other things, the payment of fees to the advisor equal to 6% of the gross proceeds of the offering. In addition to the cash fee, the advisor has the right to receive
warrants to purchase a number of shares equal to 6% of the number of securities issued in such offering at an exercise price equal to 110% of the market price. On April 29, 2003, we terminated this letter agreement, effective May 6, 2003. The March
2003 Advisor has acknowledged and agreed to the terms of that termination, including that no fees are owed by us under this letter agreement.



Despite the termination letter that we delivered to the 2001 Advisor on August 21, 2002 terminating our obligations to pay the 2001
Advisor a commission or to issue them warrants in connection with sales of our securities after September 20, 2002, we received on January 7, 2003, a letter from the 2001 Advisor asserting that it also is owed (i) approximately $245,000 plus (ii)
five year warrants to purchase approximately 436,000 shares of the our common stock at an exercise price of $0.8245 per share, in each case arising in connection with a private placement of securities consummated by us in December 2002. In addition,
on February 2, 2003 we received another letter from the 2001 Advisor asserting that it is also owed (i) approximately $54,717 plus (ii) five year warrants to purchase approximately 97,332 shares of our common stock at an exercise price of $0.8245
per share, in each case in connection with the January 22, 2003 closing of our private placement. Any payments to the 2001 Advisor or warrants issued to the 2001 Advisor would be in addition to placement fees and warrants paid to the January 2003
Finder pursuant to the terms of our letter agreement with the January 2003 Finder. We have not yet received a letter from the 2001 Advisor claiming additional fees or warrants in connection with the March 28, 2003 and April 11, 2003 closings of our
recent private placement, but there can be no guarantee that such a claim will not be made.



In connection with the March 28, 2003 and April 11, 2003 closings of our private placement, (i) the July 2002 Advisor received an aggregate cash finders fee of $351,400 and warrants to purchase
590,587 shares of our common stock at a price per share of $0.935, (ii) the November 2002 Advisor received an aggregate cash finders fee of $15,937.50 and warrants to purchase 25,000 shares of our common stock at a price per share of $0.935,
(iii) the December 2002 Advisor received an aggregate cash finders fee of $40,000 and warrants to purchase 44,117 shares of our common stock at a price per share of $0.935, and (iv) the January 2003 Finder received an aggregate cash fee of
$37,781 and warrants to purchase 82,970 shares of our common stock at a price of $0.935.



Due to the existence of these various letter agreements, there is a possibility that we may be obligated to pay fees, cash commissions, and issue warrants to one or more financial advisors in
connection with the closing of any of our private placements. In addition, we may in the future enter into further agreements with financial advisors,



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finders or placement agents, similar to those discussed above, in connection with private placements of our securities. There is the
possibility that 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 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 warrants to purchase shares of our common stock. 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 the recent closings of
our private placement or subsequent placements. These commissions paid or warrants issued to the may be in addition to the commissions payable or warrants issuable to other financial advisors, finders or placement agents in respect of the same
transaction.



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. In January 2000, we signed an exclusive three-year distribution agreement with St. Jude Medical Corporation whereby St. Judes Daig division was to distribute our diagnostic products in the United States. St.
Jude did not meet the first year minimum annual sales quota under the distribution agreement. In June 2001, we mutually agreed with St. Jude to terminate the agreement and to allow for a transition period to transfer customer accounts by the
termination date of September 1, 2001. As a result, we expanded our own small sales force to three sales representatives in the United States. Therefore, we will be solely responsible for marketing and distributing our products in the United States.
If we receive FDA approval of our PMA, we may not have an adequate marketing and sales force to adequately sell our product. Expanding our marketing and sales capability to support sales in commercial quantities adequately will require substantial
effort and require significant management and financial resources. Our failure to establish an effective sales and marketing force will prevent us from being able to generate significant revenues from the sale of our products.



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



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



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



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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 date, we have received from the FDA 510(k) pre-market clearances with respect to our PATHFINDER and
PATHFINDER mini microcatheter systems for venous mapping of ventricular tachycardia, and our REVELATION microcatheter system for mapping the atria of the heart. We also received FDA 510(k) clearance for our VENAPORT, VUEPORT and NAVIPORT
guiding catheters and our TRACER microcatheter for mapping ventricular tachycardia.



We are in the final stages of developing, testing and obtaining regulatory approval for our REVELATION Tx microcatheter systems designed for ablation of atrial fibrillation. We completed the mapping
phase of this atrial fibrillation feasibility study in August 1997 and the ablation feasibility study in December 1998. We received approval of an investigational device exemption, or IDE, supplement in December 1998 allowing us to expand the
ablation study. In June 2000, we received permission from the FDA to expand the clinical trial to Phase III pivotal study with up to 128 patients at up to 20 centers. On September 20, 2002, we submitted to the FDA our PMA application for our
REVELATION Tx microcatheter system, data from a trial involving 80 patients and follow-up data relating to those 80 patients for the six months after completion of the trial. As part of the submission of the PMA application, we have asked the FDA
for an expedited review of our PMA. On November 5, 2002, the FDA accepted our request for expedited review. On March 6, 2003, we were notified by the FDA that we would meet with the Circulatory Systems Device panel on May 29, 2003. Currently we are
targeting approval for our REVELATION®Tx microcatheter system in the second quarter of 2003. We must receive
PMA approval before marketing our products for ablation in the United States.



Additionally, in August 2001, we began a clinical trial in Germany involving our REVELATION Helix microcatheter in the treatment of atrial fibrillation originating from the pulmonary veins. Enrollment
in this study was completed in June 2002. By December 2002, all enrolled study subjects had completed the six month follow-up. Data from the six month follow-up on these subjects will be analyzed and prepared for publication targeted for the first
half of 2003. In December, 2001, the REVELATION Helix received the CE mark allowing sales in the European Economic Area. We also received in December 1999 approval for an IDE to begin clinical testing of our THERASTREAM microcatheter system for
ablation of ventricular tachycardia and during calendar year 2000 approval to expand that trial; however, we have postponed the clinical feasibility trial for the THERASTREAM microcatheter system for ablation of ventricular tachycardia to focus on
completing our REVELATION Tx clinical trial for atrial fibrillation. We have no estimate as to when, or if, we will resume the clinical trial for our THERASTREAM microcatheter system. If we resume the clinical trial for our THERASTREAM microcatheter
system, the completion of this clinical trial could take several years.



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



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



Our microcatheter systems represent a novel approach to diagnosing and treating atrial fibrillation and ventricular tachycardia. Acceptance of our products and procedures by physicians, patients and
health care payors will be necessary in order for us to be successful. If the market does not accept our products and the procedures involved in their use, our business would be harmed and our revenues would decline.



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



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



| |  |  | conventional catheters using the drag and burn or dot to dot technique;
| | - |  | ---------------------------------------------------------------------------



| |  |  | anti-arrhythmic and anti-coagulant drugs;
| | - |  | -----------------------------------------



| |  |  | external electrical shock to restore normal heart rhythms and defibrillation;
| | - |  | -----------------------------------------------------------------------------



| |  |  | implantable defibrillators;
| | - |  | ---------------------------



| |  |  | purposeful destruction of the atrio-ventricular node followed by implantation of a pacemaker; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | open-heart surgery known as the maze procedure.
| | - |  | -------------------------------------------------



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



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



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



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.



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 extensive regulation in the United States and internationally. These regulations are wide ranging and govern, among other things:



| |  |  | product design and development;
| | - |  | -------------------------------



| |  |  | product testing;
| | - |  | ----------------



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| |  |  | product labeling;
| | - |  | -----------------



| |  |  | product storage;
| | - |  | ----------------



| |  |  | premarket clearance and approval;
| | - |  | ---------------------------------



| |  |  | advertising and promotion; and
| | - |  | ------------------------------



| |  |  | product sales and distribution.
| | - |  | -------------------------------



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



We are required to seek a PMA for our ablation products, including the REVELATION Tx microcatheter. The
process of obtaining a PMA is much more expensive, lengthy and uncertain than the 510(k) pre-market notification clearance process. In order to complete our PMA application, we will be required to complete clinical trials to demonstrate the safety
and effectiveness of these products. In December 1997, the FDA approved a 10-patient atrial fibrillation feasibility study for mapping and ablation with the REVELATION Tx. In June 2000, we received conditional approval from the FDA and full approval
in August 2000 for our Phase III clinical trial. In March 2001, the FDA allowed us to file a modular PMA for our REVELATION Tx in Phase III clinical trial. Under the modular PMA submission, we filed four of five modules in 2001. The fifth module is
the clinical data and formal PMA application. Three of the first four modules have been accepted and closed by the FDA and the remaining module will be left open for reference during the review of the clinical data in the fifth and final module. On
September 20, 2002, we submitted our PMA application to the FDA with the fifth module containing data on more than 80 patients treated with our REVELATION Tx microcatheter system. Subsequently, on November 5, 2002, we announced that the FDA had
accepted our filing and granted our request for expedited review. On March 6, 2003, we were notified by the FDA that we would meet with the Circulatory Systems Device panel on May 29, 2003. The modular PMA submission process may reduce the time for
FDA approval by allowing an applicant to submit data on pre-clinical testing while clinical testing is occurring. In addition, dialogue with the FDA during the modular submission process allows us to improve our final submission. Closure and
acceptance of any one module does not allow marketing of any part of the product. We are restricted from selling the product until the entire PMA process is complete and approved by the FDA. No assurance can be given that we will ever be able to
obtain a PMA for any of our ablation products. Our failure to obtain a PMA on a timely basis would have a material adverse effect on our business, financial condition and results of operations.



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



Regulatory agencies may limit the indications for which they approve or clear any of our products. Further, the FDA may restrict or
withdraw approval or clearance of a product if additional information becomes available to



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support such action. Delays in the approval or clearance process, limitation of our labeling claims or denial of our applications or
notifications would cause our business to be materially and adversely affected.



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



Through pre-clinical studies and clinical trials, we must
demonstrate that our products are safe and effective for their indicated uses. Results from pre-clinical studies and early clinical trials may not allow us to predict results in later-stage testing. No assurance can be given that our future clinical
trials will demonstrate the safety and effectiveness of any of our products or will result in regulatory approval to market our products. As a result, if we are unable to commence and complete our clinical trials as planned, or demonstrate the
safety and effectiveness of our products, our business will be harmed. In addition, no assurance can be given that we can begin any future clinical trials or successfully complete these trials once started. We may never meet our development schedule
for any of our products in development. Even if a product is successfully developed and clinically tested, we cannot be certain that it will be approved by the FDA on a timely basis or at all. If the FDA does not approve our products for commercial
sales, our business will be harmed.



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



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



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



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



| |  |  | fines;
| | - |  | ------



| |  |  | injunctions;
| | - |  | ------------



| |  |  | recall or seizure of products;
| | - |  | ------------------------------



| |  |  | withdrawal of marketing approvals or clearances;
| | - |  | ------------------------------------------------



| |  |  | refusal by the FDA to grant clearances or approvals; and
| | - |  | --------------------------------------------------------



| |  |  | 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, our business results may suffer.



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If we do
not comply with foreign regulatory requirements to market our products outside the United States, our business will be harmed.



Sales of medical devices outside the United States are subject to international regulatory requirements that vary from country to country.
The time required for approval varies from country to country and may be longer or shorter than the time required in the United States. In order to market any of our products in the member countries of the European Union, we are required to obtain
CE Mark certification. CE Mark certification is an international symbol of adherence to quality assurance standards and compliance with the European Medical Device Directives. We have received CE Mark certification to sell our PATHFINDER, PATHFINDER
mini, REVELATION, REVELATION Tx, REVELATION Helix, and TRACER microcatheters and VENAPORT, VUEPORT and NAVIPORT guiding catheters for mapping in the European Union.



We received approval to sell our PATHFINDER, PATHFINDERMini, REVELATION, and TRACER in Japan and Australia,
and to sell our PATHFINDER, TRACER, VENAPORT, VUEPORT and NAVIPORT in Canada. We also received CE Mark certification to sell our REVELATION, REVELATION Tx and REVELATION T-Flex, REVELATION Helix and REVELATION Helix ST microcatheters for ablation of
atrial fibrillation in the European Union. In July 2002, we announced that we submitted to the FDA a 510(k) pre-market notification application for a surgical ablation system for use in minimally invasive cardiac surgery. This new system is designed
to use a Cardima surgical probe using multi-electrode linear array microcatheter technology, a novel power-channeling device, the INTELLITEMP, which allows the surgeon to apply radio frequency, or RF, energy to any or all of the individual
electrodes on the probe and commercially available electro-surgical RF generators.



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 these 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.



Difficulties presented by international factors could negatively affect our business.



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



| |  |  | export license requirements for our products;
| | - |  | ---------------------------------------------



| |  |  | exchange rate fluctuations or currency controls;
| | - |  | ------------------------------------------------



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



| |  |  | the difficulty in managing a direct sales force from abroad;
| | - |  | ------------------------------------------------------------



| |  |  | the financial condition, expertise and performance of our international distributors and any future international distributors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | domestic or international trade restrictions; or
| | - |  | ------------------------------------------------



| |  |  | changes in tariffs.
| | - |  | -------------------



Any of these factors could damage our business results.



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



All European countries that are part of the European Monetary Union, or EMU, began operating with the new
Euro currency in 2002. A significant amount of uncertainty exists as to the effect the Euro will have on the marketplace in general. In particular, as a portion of our sales revenue is derived from sales to EMU countries, the adoption by
these participating countries of a single currency could result in greater price transparency, making the EMU a more competitive environment for our products. We have assessed the effect the introduction of the Euro could possibly have on our
internal accounting systems and potential sales of our products. Recently, we have routinely updated our accounting and financial software, which included appropriate accounting for foreign currencies, including the Euro. This issue and its related
costs could have a material adverse effect on our business, financial condition and results of operations.



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



The market for catheters to map and/or
ablate atrial fibrillation and ventricular tachycardia is highly competitive. Several of our competitors are developing different approaches and products for these procedures. These approaches include mapping systems using contact mapping,
single-point spatial mapping and 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
Boston Scientific, through its EP Technologies and Cardiac Pathways divisions, C.R. Bard, Inc., Johnson & Johnson, through its Biosense-Webster division, St. Jude Medical, Inc., through its Daig division, and Medtronic, Inc. These competitors
have substantially greater financial and other resources than we do, including larger research and development staffs and greater experience and capabilities in conducting 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. 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



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with various commercialization, sublicensing, insurance, royalty, product liability, indemnification, non-competition and other obligations.
Furthermore, either party can terminate the license if a material breach remains uncured for thirty days or if either party ceases to be actively engaged in its present business for a period of twelve months. The loss of our exclusive rights to the
Target Therapeutics-based microcatheter technology would significantly harm our business.



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



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



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



We have conducted searches to
determine whether our patent applications interfere with existing patents. Based upon these searches, we believe that our patent applications and products do not interfere with existing patents. However, we cannot be sure that relevant patents have
not been issued that could block our ability to obtain patents or commercialize our products. Moreover, 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.



Although we have not received any letters from others threatening to enforce intellectual property rights against us, we cannot be certain that we will not become subject to patent infringement claims
or litigation, interference proceedings in the U.S. Patent and Trademark Office to determine the priority of inventions, or oppositions to patent grants in foreign countries. An adverse determination in litigation, interference or opposition
proceedings could subject us to significant liabilities to third parties, require us to cease using such technology, or require us to license disputed rights from third parties. However, we cannot be certain that at such time any licenses will be
available to us, or if available, on commercially reasonable terms. Our inability to license any disputed technology could materially delay the commercialization of our products and 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.



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



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



We currently manufacture
our microcatheter systems in limited quantities for U.S. and international sales and for pre-clinical and clinical trials. However, we have limited experience manufacturing our products in the amounts necessary to achieve significant commercial
sales. We currently believe that our manufacturing capacity will be sufficient through December 2004. We expect that if U.S. sales for the PATHFINDERand REVELATION®microcatheter systems increase or if we receive
FDA clearance or approvals for other products, we will need to expend significant capital resources and develop additional manufacturing capacity to establish large-scale manufacturing capabilities. However, we could encounter problems related to:



| |  |  | capacity constraints;
| | - |  | ---------------------



| |  |  | production yields;
| | - |  | ------------------



| |  |  | quality control; and
| | - |  | --------------------



| |  |  | shortages of qualified personnel.
| | - |  | ---------------------------------



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



Our manufacturing
facilities are subject to periodic inspection by regulatory authorities. Our operations must either undergo Quality System Regulations compliance inspections conducted by the FDA or receive an FDA exemption from such compliance inspections in order
for the FDA to permit us to produce products for sale in the United States. Our facilities and manufacturing processes are subject to inspections from time to time by the FDA, the State of California and European Notified Bodies. We have
demonstrated compliance with EN 46001 (ISO 13485 or ISO 9001) quality standards, as well as compliance with 93/42/EEC, the Medical Device Directive. We comply with procedures to produce products for sale in Europe. Any failure by us to comply with
the Quality System Regulations requirements or to maintain our compliance with EN 46001 (ISO 13485 or ISO 9001) standards and 93/42/EEC, the Medical Device Directive, will require us to take corrective actions, such as modification of our policies
and procedures. In addition, we may be required to cease all or part of our operations for some period of time until we can demonstrate that appropriate steps have been taken to comply with Quality System Regulations or EN 46001 (ISO 13485 or ISO
9001) standards. There can be no assurance that we will be found in compliance with the Quality System Regulations by regulatory authorities, or that we will maintain compliance with EN 46001 (ISO 13485 or ISO 9001) standards in future audits. Our
failure to comply with state or FDA Quality System Regulations, maintain compliance with EN 46001 (ISO 13485 or ISO 9001) standards, or develop our manufacturing capability in



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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 re-certification inspection by the European Notified Body in November 2001 and a successful annual inspection in November 2002. In November 2000 and in January 2003, the FDA conducted a QSIT-Audit 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 are dependent upon our key personnel and will need to hire additional key personnel in the future.



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



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



We face an inherent business risk of product liability claims in the event that the use or misuse of our products results in personal
injury or death. We cannot be certain, in particular after commercial introduction of our products, that we will not experience losses due to product liability claims. We currently have general liability insurance with coverage in the amount of $1.0
million per occurrence, subject to a $2.0 million annual limitation. We have product liability insurance with coverage in the amount of $5.0 million per occurrence, subject to a $5.0 million annual limitation. We cannot be certain that 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 do not intend to pay cash dividends on our stock.



We have never paid cash dividends on our capital stock and do
not anticipate paying cash dividends in the foreseeable future. Instead, we intend to retain future earnings for reinvestment in our business.



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



Currently, our common stock trades on the Nasdaq SmallCap Market. During the past year, our stock, at times, traded below $1.00 per share. The NASD advised us that beginning on April 9, 2001, our common stock would no longer be
listed on the Nasdaq SmallCap Market. We appealed the NASDs decision, met the continued listing requirements and on June 7, 2001, the NASD notified us that our common stock would continue to trade on the Nasdaq SmallCap Market. Nasdaq listing
rules provide 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 from Nasdaq.



On October 28, 2002, we received notification from the NASD that our common stock had closed below the
minimum $1.00 per share required for continued inclusion on the Nasdaq for a period of more than thirty consecutive trading days. In its notification, the NASD informed us that we have 180 calendar days, or until April 28, 2003, to comply with NASD
Marketplace Rule 4310(c)(4). In order to comply with this rule, the bid price of our common stock must close at $1.00 per share or more for a minimum of ten consecutive trading days at any time before April 28, 2003.



As of January 23, 2003, the closing bid price of our common
stock had remained equal to $1.00 per share or greater for more than ten consecutive trading days. On January 29, 2003, we received affirmative notification from Nasdaq that we had regained compliance with Rule 4310(c)(4), and that the matter was
therefore closed.



We cannot assure you that the
closing bid price of our common stock will remain equal to or greater than $1.00 per share in the future. If the closing bid price of our common stock again falls below $1.00 for more than thirty consecutive trading days, we will be subject to
delisting by Nasdaq, and required to regain compliance with Rule 4310(c)(4) in order to maintain our listing on the Nasdaq SmallCap Market.



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



In addition, the purchase agreements signed in connection with the December 31, 2002 and the January 22, 2003 closings of our recent private placement provide that if at any time during the two year period beginning on the respective
closing dates of that placement our common stock is delisted from the Nasdaq National SmallCap Market for any reason, the investors shall receive an amount in cash equal to 1.5% of the aggregate purchase price of all shares and warrants purchased
under those agreements for each month or portion thereof from the date of such delisting until our common stock is again listed on the Nasdaq National SmallCap Market.



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Item 3.Quantitative and Qualitative Disclosure About Market Risk



Since we did not have a short-term investments or a line of credit obligation as of March 31, 2003, we do not have any material
quantitative disclosures about market risk.



Item 4.Controls and Procedures



| | (a) |  | Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us required to be included in our periodic SEC filings.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | There were no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the date of our
most recent evaluation.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PART
II.    OTHER INFORMATION



Item 2.Changes in Securities and Use of Proceeds



On January 22, 2003, we sold by means of the second closing of a private placement an aggregate of 973,339 shares of our common stock a
price per share of $0.74955 for net proceeds of approximately $650,000. In addition, we issued to the investors warrants to purchase 438,000 shares of our common stock at an exercise price of $0.8245 per share. The warrants became exercisable on
March 23, 2003 and will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the sixty (60) day period between January 22, 2003 and March 23, 2003. The warrants allow for a
cashless exercise whereby the exercising party may use shares issuable upon exercise of the warrant in payment of the exercise price. We may not redeem the warrants and the warrants are subject to a mandatory exchange or termination in
the case of certain reorganizations, mergers, or divestitures. Upon the January 22, 2003 closing of the transaction, we paid to the finder a total of $54,750 in cash and issued to the finder warrants to purchase 97,333 shares of our common stock at
an exercise price of $0.8245. The warrants issued to the finder are not redeemable and allow for cashless exercise whereby the finder may use shares issuable upon exercise of the warrant in payment of the exercise price.



On March 28, 2003, we sold by means of a private placement an
aggregate of 2,941,175 shares of our common stock at a price of $0.85 per share for net proceeds of approximately $2.3 million. In addition, we issued to the investors warrants to purchase 1,176,470 shares of our common stock at an exercise price of
$1.25 per share. The warrants will be exercisable beginning on September 28, 2003 and will be reduced on a share-for-share basis to the extent that an investor sells our common stock or other securities during the six (6) month period between the
closing and September 28, 2003. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our common stock has been at least $1.70 (as adjusted for subsequent stock splits and the like) for
fifteen consecutive trading days. We paid to the party that acted as agent in connection with this private placement upon the closing transaction, a total of $175,000 in cash and issued to the agent warrants to purchase 294,117 shares of our common
stock at an exercise price of $0.935.



Following
the end of the first quarter of 2003, on April 11, 2003, we sold by means of a private placement an additional 4,395,587 shares of our common stock at a price of $0.85 per share for net proceeds of approximately $3.5 million. In addition, we issued
to the investors warrants to purchase 1,758,234 shares of our common stock at an exercise price of $1.25 per share. The warrants will be exercisable beginning on October 11, 2003 and will be reduced on a share-for-share basis to the extent that an
investor sells our common stock or other securities during the six (6) month period between the closing and October 11, 2003. We may redeem the warrants for a price of $0.001 per share of common stock if the average closing price per share of our
common stock has been at least $1.70 (as adjusted for subsequent stock splits and the like) for fifteen consecutive trading days. We paid to the parties that acted as agents in connection with this private placement upon the closing transaction, a
total of $270,000 in cash and issued to the agents warrants to purchase 448,557 shares of our common stock at an exercise price of $0.935.



We intend to use the proceeds received from the sale of our securities on January 22, 2003, March 28, 2003 and April 11, 2003 for working
capital, including, without limitation, costs and expenses relating to our Phase III trial for the treatment of atrial fibrillation, efforts to obtain FDA approval for our microcatheter currently in Phase III trial, planned marketing efforts,
expansion of sales efforts and for such other general corporate purposes as our Board of Directors may determine.



We relied on the exemption provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act of 1933, as amended in
connection with the January 22, 2003 closing of our private placement. We filed with the SEC a registration statement on Form S-3 in connection with that placement.



We relied on the exemption provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act of
1933, as amended in connection with the March 28, 2003 and April 11, 2003 closings of our most recent private placement. We filed with the SEC a registration statement on Form S-3 in connection with that private placement.



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Item
5.Other Information



None.



Item 6.Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| | 10.45(1) |  | Form of Stock and Warrant Purchase Agreements between Cardima and certain purchasers dated March 28, 2003 and April 11, 2003.
| | -------- |  | -----------------------------------------------------------------------------------------------------------------------------



| | 10.46(2) |  | Form of warrants to purchase common stock of Cardima, Inc. issued to the Placement Agent.
| | -------- |  | -----------------------------------------------------------------------------------------



| | 10.47(3) |  | Form of warrant to purchase common stock of Cardima, Inc. issued to the Finder.
| | -------- |  | -------------------------------------------------------------------------------



| | 10.48(4) |  | Form of warrants to purchase common stock of Cardima, Inc. issued to the Placement Agents.
| | -------- |  | ------------------------------------------------------------------------------------------



| | 99.1 |  | Section 1350 Certification of the Chief Executive Officer of Cardima, Inc.
| | ---- |  | --------------------------------------------------------------------------



| | 99.2 |  | Section 1350 Certification of the Chief Financial Officer of Cardima, Inc.
| | ---- |  | --------------------------------------------------------------------------

|
|

| | (1) |  | Incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on Form S-3 (File No. 333-104791) filed on April 28, 2003.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | Incorporated by reference to Exhibit 10.2 to the Companys Registration Statement on Form S-3 (File No. 333-104791) filed on April 28, 2003.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | Incorporated by reference to Exhibit 10.3 to the Companys Registration Statement on Form S-3 (File No. 333-104791) filed April 28, 2003.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| | (4) |  | Incorporated by reference to Exhibit 10.4 to the Companys Registration Statement on Form S-3 (File No. 333-104791) filed April 28, 2003.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Reports on From 8-K
| | --- |  | -------------------



On January 6, 2003, we filed a report on Form 8-K to disclose the terms of the December 31, 2002 and March 28, 2003 private placements.



On January 29, 2003, we filed a report on Form
8-K/A amending the report on Form 8-K that we filed on January 6, 2003.



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CARDIMA, INC.



SIGNATURES



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



|DATE:  May 15, 2003 |  |  |  |  |  | CARDIMA, INC.
|------------------- |  |  |  |  |  | -------------
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CERTIFICATIONS



I, Gabriel B.
Vegh, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Cardima, Inc.;
|-- |  | --------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  
|------------------
|Date: May 15, 2003
|                  



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I, Ronald E. Bourquin, certify
that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Cardima, Inc.;
|-- |  | --------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  
|------------------
|Date: May 15, 2003
|                  



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