##### Table of Contents

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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 June 30, 2002
|- |  | --------------------------------------------------------------------------------------------------------------------------------------




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 Jurisdictionof Incorporation or Organization)

(I.R.S. EmployerIdentification No.)47266 Benicia Street, Fremont, CA

94538-7330(Address of Principal Executive Offices)

(Zip Code)





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





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





As of August 9, 2002, there were 49,641,458 shares of Registrants Common Stock outstanding.





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CARDIMA, INC.





INDEX





Part IItem 1.

Financial StatementsCondensed Balance Sheets

3Condensed Statements of Operations

4Condensed Statements of Cash Flows

5Notes to Condensed Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

9Results of OperationsThree and Six-Month Periods Ended June 30, 2002 and 2001

12Liquidity and Capital Resources

14Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30Part IIOTHER INFORMATIONItem 4.

Submission of Matters to a Vote of Security Holders

31Item 6.

Exhibits and Reports on Form 8-K

32Signatures

33




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PART I.





Item 1.Financial Statements





CARDIMA, INC.





CONDENSED BALANCE SHEETS


(In thousands, except share and per share amounts)





June 30, 2002


December 31, 2001(Unaudited)


(See Note 1)ASSETSCurrent assets:Cash and cash equivalents

$
1,473


$
7,542Accounts receivable, net of allowances for doubtful accounts of $73 at June 30, 2002 and $75 at December 31,
2001


361



301Inventories


1,692



1,564Other current assets


385



327Total current assets


3,911



9,734Property and equipment, net


1,248



1,323Notes receivable from officers


580



565Other assets


77



196$
5,816


$
11,818LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
1,618


$
1,563Accrued compensation


1,030



1,094Capital lease obligationcurrent portion


101



279Other current liabilities


175



42Total current liabilities


2,924



2,978Deferred rent


7



19Capital lease obligationnoncurrent portion


46



64CommitmentsStockholders equity:Common stock, $0.001 par value; 75,000,000 shares authorized, 42,712,366 shares issued and outstanding at June 30, 2002;
42,528,143 as of December 31, 2001; at amount paid in


86,403



86,583Accumulated deficit


(83,564
)


(77,826
)Total stockholders equity


2,839



8,757$
5,816


$
11,818





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 June 30,


Six months ended June 30,2002


2001


2002


2001(Unaudited)


(Unaudited)Net sales

$
423


$
473


$
1,189


$
1,012Cost of goods sold


703



945



1,593



1,919Gross profit (loss)


(280
)


(472
)


(404
)


(907
)Operating expenses:Research and development


1,213



1,290



2,046



2,647Selling, general and administrative


1,688



1,592



3,321



3,101Total operating expenses


2,901



2,882



5,367



5,748Operating loss


(3,181
)


(3,354
)


(5,771
)


(6,655
)Interest and other income


19



44



47



56Interest expense


(6
)


(16
)


(14
)


(35
)Gain on sale of intellectual property(1)














4,000Net income (loss)

$
(3,168
)

$
(3,326
)

$
(5,738
)

$
(2,634
)Basic and diluted net loss per share

$
(0.07
)

$
(0.11
)

$
(0.13
)

$
(0.10
)Shares used in computing basic and diluted net loss per share


42,705



29,148



42,712



25,384


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|(1) |  | In January 2001, we received $4,000,000 from Medtronic, Inc., representing the final payment on the transaction initiated in December 2000, whereby we sold a
portion of our patent portfolio and related intellectual property pertaining to intravascular sensing and signal detection and certain guiding catheters. See our Annual Report on Form 10-K filed with the SEC on April 1, 2002 for more information.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







See accompanying notes to financial statements




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CARDIMA, INC.





STATEMENTS OF CASH FLOWS


(In thousands)





Six months ended June 30,2002


2001(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(5,738
)

$
(2,634
)Adjustments to reconcile net loss to net cash provided by operations:Depreciation and amortization


505



438Stock-based compensation


(287
)


26Loss on disposal of assets


5



0Changes in operating assets and liabilities:Accounts receivable


(60
)


54Inventories


(128
)


464Other current assets


(58
)


(103
)Other assets


119



(77
)Accounts payable


55



220Accrued employee compensation


(64
)


(304
)Other current liabilities


133



33Deferred rent


(12
)


0Net cash used in operating activities


(5,530
)


(1,883
)CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures


(435
)


(152
)Net cash used in investing activities


(435
)


(152
)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments under capital leases


(196
)


(152
)Notes receivable from officers


(15
)


(36
)Net proceeds from sale of common stock


107



6,302Net cash provided by (used in) financing activities


(104
)


6,114NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

$
(6,069
)

$
4,079CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

$
7,542


$
1,324CASH AND CASH EQUIVALENTS END OF PERIOD

$
1,473


$
5,403




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CARDIMA, INC.





NOTES TO CONDENSED FINANCIAL STATEMENTS


June 30, 2002


(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- and six-month periods ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending December 31, 2002 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, 2001. The accompanying balance sheet at December 31, 2001 has been derived from these audited financial statements.





2.     Managements Plans





As of June 30, 2002 the Company had approximately $1,473,000 in cash and cash equivalents, working capital of $987,000 and an accumulated deficit of $83,564,000. Assuming the Company has adequate
funding to continue the course of its development activities, the Company expects such losses to continue for at least the next two years. Management is seeking to continue to finance operations with a combination of funds from equity or debt
offerings, revenue from product sales, funds from potential corporate alliances and technology licenses. Following a private placement resulting in $4.5 million in net proceeds completed on August 5, 2002 and subsequent to this quarter end, the
Company expects its existing capital resources will permit it to meet its capital and operational requirements through at least November 2002. The Company is currently in discussions with investment bankers to raise additional equity capital during
the later part of 2002. Failure to raise additional capital will cause the Companys business to suffer and could cause it to cease operations.





The Company continues to initiate relationships with new distributors worldwide. As of the quarter ended June 30, 2002, the Company had distributors in place in eleven countries that service sales in
sixteen countries, consultants and sales agents in place in two countries which service sales in four countries and a European distribution center in place which services an additional nine European countries. The Company is currently seeking
registration approval of all its therapeutic products in China, but cannot predict if its products will ultimately be approved for sale or whether or not the Company will be successful in marketing and selling its products in China and other Asian
countries. Recent registration additions have been the acceptance by




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Turkey of the CE Mark already in place in Europe for our diagnostic and therapeutic products and the ratification of an agreement between the EU and Switzerland which grants us the approval to
market and sell CE Mark products in that country.





3.     Subsequent EventsPrivate Placement





In August 2002, we sold a total of 6,788,325 shares of common stock at $0.72 per share in a private placement
transaction to accredited investors. The transaction included warrants to investors exercisable for 2,036,491 shares of common stock at an exercise price of $0.90 per share. These warrants are redeemable by the Company if the Companys common
stock closes at $1.44 for fifteen consecutive trading days. As a commission for the transaction, the Company will pay approximately $342,000 in cash and will issue warrants, exercisable for 678,832 shares of common stock at an exercise price of
$1.1875 per share. The Companys net proceeds, after expenses of the placement, were approximately $4,500,000. The Company is using these proceeds for development activities, clinical trial expenses and commercialization of product offerings,
operating costs and other general corporate purposes.





We relied on the exemption provided by Rule 506 under
Regulation D and Section 4(2) of the Securities Act of 1933, as amended. A registration statement on Form S-3 will be filed with the SEC in connection with this placement.





4.    Inventory





Inventories consists
of the following (in thousands):





June 30, 2002

December 31, 2001(Unaudited)

(Unaudited)Inventories:Raw materials

$
502

$
653Work-in-process


130


50Finished goods


1,060


861$
1,692

$
1,564





Inventory amounts shown above are net of reserves for excess and
obsolete inventory of $223,000 and $141,000 at June 30, 2002 and December 31, 2001, respectively. The Company reserves for inventory amounts by considering the potential excess inventory in relation to sales forecasts and the obsolescence of
inventory as a result of technological advancements and shelf life expirations. Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis.





5.    Revenue Recognition




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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 June 30, 2002. The cumulative non-cash compensation expense from the date of re-pricing in 2000, for the re-valuation of
these re-priced options is $143,000 as of quarter ended June 30, 2002. For the quarter ended June 30, 2002, a credit of $165,000 was recorded as a result of the decreased closing price of the Companys common stock from $1.85 per share at March
31, 2002, to $1.45 per share on June 30, 2002.





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 Loss





Comprehensive loss equaled net loss for all periods presented.





9.    Recent Accounting
Pronouncements





On June 29, 2001, the Financial Accounting Standards Board (FASB), approved the final
standards resulting from its deliberations on the business combinations project. The FASB issued statement of financial accounting SFAS No.141, Business Combinations and SFAS No.142 Goodwill and Other Intangible Assets. SFAS
141 was effective for any business combinations initiated after June 30, 2001 and also includes the criteria for recognition of intangible assets separately from goodwill. SFAS 142 was effective for fiscal years beginning after December 15, 2001 and
requires that goodwill not be amortized, but rather be subject to an impairment test at least annually. The Company adopted SFAS No. 141 and SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 141 and No. 142 did not have an impact on the
Companys financial position or result of operations.




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The Company adopted SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets on January 1,
2002. SFAS 144 supersedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of SFAS 144 are to develop one accounting model based on the framework established
in SFAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The adoption of SFAS 144 did not have a material impact on the Companys financial position or results of operations.





The Company adopted statement of SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections on April 1, 2002. One of the primary objectives of SFAS 145 was the rescission of FAS 4 and the required classification of extraordinary items. The adoption of SFAS 145 did not have a material impact on
the Companys financial position or results of operations.





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,
conduct successful clinical trials, obtain timely regulatory approvals and gain acceptance from the marketplace for our products, as well as the risk factors discussed below in Factors Affecting Future Results and those listed from time
to time in our SEC reports. The Company assumes no obligation to update the forward-looking statements included in this Form 10-Q. This discussion and analysis should be read in conjunction with the Financial Statements and related Notes thereto
included elsewhere in this Form 10-Q and in the Companys Annual Report on Form 10-K.





Overview





Since 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 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




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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
products, intended for single-use that can be adapted to and used with all existing signal display systems and radiofrequency generators, eliminating the need for significant new investment in capital equipment by hospitals.





We have generated revenues of approximately $14 million from inception to June 30, 2002. 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 regulatory clearance by the FDA 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. We are marketing and distributing our products in the United States with a small direct sales force and internationally through distributors and a small direct sales force in Europe in selected
countries who sell our products to physicians and hospitals. European sales consist primarily of the PATHFINDER microcatheter lines for diagnosis of ventricular tachycardia and REVELATION lines of microcatheters for diagnosis and treating of atrial
fibrillation.





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 Europe Union. We have received United States Food and Drug Administration, FDA, 510(k) clearances for the (1) REVELATION microcatheter for mapping atrial fibrillation; (2)
PATHFINDER, PATHFINDER mini and TRACER microcatheters for mapping ventricular tachycardia; (3) VUEPORT balloon guiding catheter and (4) Naviport deflectable tip guiding catheter. On July 25, 2002, we announced that we have 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 (RF) generators, a Cardima surgical probe 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 Pre-Market Approval, PMA, from the 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.




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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 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. Since the refocus on the Phase III clinical trial, we have completed four of the five necessary modules required for completing the PMA application process necessary to sell the
REVELATION Tx in the United States. As of May 31, 2002, three of the four completed modules were accepted and closed by the FDA. The remaining module, of the four completed modules, has been reviewed but will remain open for reference during the
review of the clinical data submitted with the fifth and final module. Additionally, we believe we have completed the necessary number of patients required by the PMA and completed the six-month follow-up on those patients. We expect to submit the
requisite clinical data from this study to support our PMA application in the third quarter of 2002.





We received
CE Mark approval for the REVELATION Helix in the European Union in December 2001. To support this approval, in July 2002 Cardima completed a left-sided clinical trial in Germany with the REVELATION Helix microcatheter system for the treatment of
atrial fibrillation originating in the pulmonary veins. This multi-center, 40-patient study was conducted under a common protocol at five clinical sites. The purpose of this study is to gain 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 ST, a line extension of the REVELATION Helix, in May
2002.





We have a limited history of operations and have experienced significant operating losses since inception.
We expect that our operating losses will continue for the foreseeable future as we continue to invest substantial resources in product development, 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 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




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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 inventory at the lower of cost or market. 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.





Results Of OperationsThree and Six Months Ended June 30, 2002 And 2001





Net
Sales





Net sales for the quarter ended June 30, 2002 decreased 11% to $423,000 from $473,000 for the same
period in 2001. This decrease was primarily due to slower than anticipated sales growth of distribution efforts in France and Italy, and changes in the Companys European Operation made to enhance its long-term revenue focus on therapeutic
products. For the six-month period ending June 30, 2002, net sales increased 17% to $1,189,000 from $1,012,000 for the same six-month period in 2001. The increase is attributable to the initial therapeutic product sales of the REVELATION Helix in
Europe and strong diagnostic product sales in Japan. U.S. sales for the six-month period ended June 30, 2002 decreased 19% to $363,000, from $449,000 in the same period in 2001, while international sales increased by approximately 71%, to $961,000
from $563,000 for the respective six-month periods. Accounts receivable increased 116% to $361,000 at June 30, 2002 from $167,000 at June 30, 2001 due to increased international sales while the related allowance for doubtful accounts decreased 3%,
or $2,000, over the same periods.





We continue to focus our resources and efforts on the completion of our Phase
III clinical trials to treat atrial fibrillation with the REVELATION Tx microcatheter system, while building a sales foundation on which to grow future revenue opportunities. The introduction of the REVELATION Helix to the international market and
the new surgical ablation system using the INTELLITEMP, a novel power-channeling device, may open additional channels to market our products worldwide.





Cost of Goods Sold





Cost of goods sold primarily includes
raw materials costs, catheter fabrication costs, system assembly, test costs and manufacturing overhead. Cost of goods sold for the quarter ended June 30, 2002 decreased 26% to $703,000 from $945,000 for the same period in 2001. Cost of goods sold
for the six-month period ending June 30, 2002 decreased 17% to $1,593,000 from $1,919,000 for the comparable six-month period in 2001. This decrease was primarily due to the allocation of fixed costs over a higher manufacturing volume, as well as
the continued efforts of management to reduce standard costs by manufacturing products and purchasing raw material in a more efficient manner. Inventory reserves for excess and obsolete inventory




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increased $82,000 from December 31, 2001 to June 30, 2002. This increase was primarily due to more units in finished goods with a short remaining shelf life as of June 30, 2002 when compared to
December 31, 2001. 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.





Research and Development Expenses





Research and development expenses include product
development, clinical testing and regulatory expenses. Research and development expenses, including regulatory and clinical functions, for the quarter ended June 30, 2002 decreased 6% to $1,213,000 from $1,290,000 for the same period in 2001. The 6%
decrease in research and development expenses is made up of a 28% increase in research and development costs to $755,000 from $590,000 for the six-month periods in 2001 to 2002, respectively, costs incurred due to the additional expenditures for the
INTELLITEMP product; and is offset by a 35% decrease in regulatory and clinical expenses for the quarter ended June 30, 2002 to $458,000 from $700,000 for the same period in 2001. The decrease in regulatory and clinical expenses for the quarter was
primarily due to lower patient enrollment costs associated with the Phase III clinical trials, the postponement of the TheraStream regulatory approval process and our focus on the REVELATION family of microcatheters. For the six-month period ended
June 30, 2002, overall research and development expenses decreased 23% to $2,046,000 from $2,647,000 for the comparable six-month period in 2001.





Selling, General and Administrative Expenses





Selling,
general and administrative expenses for the quarter ended June 30, 2002 increased 6% to $1,688,000 from $1,592,000 for the same period in 2001. Selling and marketing expenses for the quarter ended June 30, 2002 increased 26% to $880,000 from
$698,000 for the same period in 2001. Selling and marketing expenses increased during this period due to the ramp up of sales efforts to support the REVELATION Helix launch in Europe, the addition of sales personnel to our European sales base and an
increase in marketing projects to further our sales initiative. General and administrative expenses for the quarter ended June 30, 2002 decreased 10% to $808,000 from $894,000 for the same period in 2001. The decrease in general and administrative
expenses in this period is due to the required variable accounting adjustment for certain options that were re-priced in 2000. For the six-month period ended June 30, 2002, selling, general and administrative costs increased 7% to $3,321,000 from
$3,101,000 for the comparable six-month period in 2001.





Interest and Other Income





Interest and other income for the quarter ended June 30, 2002 decreased to $19,000 from $44,000 for the same period in 2001. The decrease
was primarily due to lower cash balances and declining interest rates during the second quarter of 2002 compared to the same period in 2001. Interest and other income for the six-month period ended June 30, 2002 decreased to $55,000 from $56,000.
The decrease for the six-month period ended June 30, 2002 was primarily due to lower average cash balances and declining interest rates.




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Interest Expense





Interest expense for the quarter ended June 30, 2002 decreased to $6,000 from $16,000 for the same period in 2001. Interest expense for the six-month period ended June
30, 2002 decreased to $13,000 from $35,000 for the same period in 2001. This decrease was primarily due to the expiration and payoff of certain capital equipment leases.





Gain on the Sale of Intellectual Property





The gain on the sale of certain intellectual property in the six-month period ended June 30, 2001 is due to the final $4,000,000 payment received from Medtronic in January 2001. The total purchase price of the intellectual property
was $8,000,000, of which $4,000,000 was received in December 2000. The intellectual property was carried at virtually no value on our balance sheets.





Liquidity And Capital Resources





We have financed our operations to date, principally
through (1) private placements of equity securities, which have yielded net proceeds of $73,000,000 through June 30, 2002, (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 June 30, 2002, we had approximately $1,473,000 in cash and cash equivalents. In August 2002, we sold a total of 6,788,325 shares of common stock in a private placement to accredited investors. Our
net proceeds, after expenses of the placement, were approximately $4.5 million.





Net cash used in operating
activities was approximately $5,530,000 compared to the net cash used of $1,919,000 for the six-month period ended June 30, 2002 and 2001, respectively. The change in cash usage is due primarily to the $4,000,000 gain on the sale of certain
intellectual property recognized in January 2001. Net cash used by financing and investing activities was approximately $539,000 compared to net cash provided of $5,998,000 for the six-month period ended June 30, 2002 and 2001, respectively. This
change was primarily due to the private placement transaction in May 2001 resulting in net proceeds of $6,200,000.





Our future liquidity and capital requirements will depend upon numerous factors, including receipt of adequate funding, sales and marketing activities, the progress of our product development efforts, the progress of our clinical
trials, actions relating to regulatory matters, the costs and timing of expansion of product development, manufacturing, the extent to which our products gain market acceptance and competitive developments. Since inception, we have an accumulated
deficit of approximately $83.6 million. Management expects to continue to incur additional losses in the foreseeable future as we engage in clinical trials seeking product approvals, and complete new product development and product
commercialization. We believe that available cash, following the August 5, 2002 closing of a private placement of our equity that resulted in net proceeds of approximately $4,500,000, will be




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sufficient to meet our cash requirements through at least November, 2002. We must seek to raise additional funds through public or private financing, collaborative relationships or other
arrangements. Furthermore, any additional equity financing is expected to be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may
require us to relinquish our rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed will have a material adverse effect on our business, financial condition and would cause us to cease
operations.





Factors Affecting Future Results





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





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





Our net
losses were approximately $9.3 million, $7.8 million and $14.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. As of June 30, 2002, our accumulated deficit was approximately $83.6 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 needs to raise additional capital in the future could have a dilutive effect on your investment.





In order to commercialize our products, we will need to raise additional capital. One possibility for raising additional capital would be
the public or private sale of our 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 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.





Subsequent to the end of the second quarter, in August 2002, we received net proceeds of approximately $4.5 million from a private
placement of 6,788,325 shares 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 shares of our common stock at




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an exercise price per share of $0.90. If we sell additional shares of our common stock, such sales will further dilute the percentage of our equity that you own.





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 June 30, 2002, our cash and cash equivalents totaled approximately $1,473,000. We believe that our existing cash and
cash equivalents and short-term investments, as well as sales of our products, including proceeds received in a recently-completed private placement, will be sufficient to fund our operations through November 2002. There can be no assurance that we
can obtain additional funding after such date.





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 qualification may make it more difficult for us to obtain additional funding to meet our obligations. 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 operate profitably in the future.





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.




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We often rely on multiple third-parties, such as hospital 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 third-parties meet the standards of the FDA or other regulatory agencies. If we are unable to
rely on the clinical data collected by third-parties, or if these third-parties do not perform their contractual obligations, the FDA or other regulatory agencies may require us to gather additional clinical data. This could significantly delay
commercialization of our products, require us to spend additional capital on our clinical trials and harm our business.





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





To date, we have received 510(k) pre-market clearances from the FDA 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 feasibility study in August 1997 and the atrial fibrillation ablation feasibility study in December 1998. We received approval of an IDE supplement in December 1998 allowing
us to expand the atrial fibrillation study. In October 2000, we received permission to expand the clinical trial to Phase III. The Phase III clinical trial requires 80 patients to be treated in up to 20 centers. 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. This study was completed in June 2002 and its results will be released in November 2002 at
the American Heart Association Meeting.





We also received approval for an IDE to begin clinical testing of our
TheraStream microcatheter system for ablation of ventricular tachycardia in December 1999 and approval to expand that trial in 2000; however, we have postponed the clinical feasibility trial for the TheraStream microcatheter system for ablation of
ventricular tachycardia to focus on completing our atrial fibrillation Phase III clinical trial. 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.





We must
complete the atrial fibrillation Phase III clinical trial in order to gather data for the completion of our pre-market approval, or PMA, application to the FDA for our atrial fibrillation ablation product. Currently, we are targeting approval for
our REVELATION Tx before the end of 2002. We must receive PMA approval before marketing our products for ablation in the




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United States. Clinical trials of our microcatheter systems will require substantial financial and management resources.





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





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 could be
harmed and our revenues would decline.





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





The market for catheters to diagnose or treat 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 our market. Other competitive factors include the length of time required for products to be developed and to receive
regulatory approval and, in some cases, reimbursement approval are important competitive factors. Existing treatments with which we must compete include:





| | · |  | conventional catheters using the drag and burn technique,
| | - |  | -----------------------------------------------------------




| | · |  | 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 our revenues will decline.




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





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 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. Since 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 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 Risk Factor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,
| | - |  | ----------------




| | · |  | 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 510(k) pre-market notification clearance or a PMA from the FDA 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 12 months.
However, the timing of such process can be uncertain and may be significantly longer. We cannot guarantee either the timing or receipt of 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.




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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. We filed an additional feasibility IDE application for the TheraStream microcatheter system in December 1998 and received permission to expand that trial in July 2000. We have postponed the TheraStream
clinical trial, while we focus 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.





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 will file five separate segments of the PMA with the FDA, all of which together will comprise our PMA application. At this time, we have filed the first four modules, three of which 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 submitted with the final module. The modular PMA submission process generally reduces the time for FDA approval by allowing an applicant to submit data required
for completion of the trial to the FDA on an ongoing basis. Instead of waiting until the last patient is treated and then submitting all the necessary modules in one complete submission, we can submit sections or modules required for the PMA filing
as we go. In addition, dialogue with the FDA during the modular submission process allows us to modify and improve our 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 complete clinical testing or to obtain timely
a PMA would have a material adverse effect on our business, financial condition and results of operations.





Regulatory agencies may limit the indications for which they approve or clear any of our products. Further, the FDA may restrict or withdraw approval or clearance of a product if additional information becomes available to support
such action. Delays in the approval or clearance process, limitation of our labeling claims or denial of our applications or notifications would cause our business to be materially and adversely affected.





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





Through pre-clinical studies and clinical trials, we must
demonstrate that our products are safe and effective for their indicated uses. Results from pre-clinical studies and early clinical trials




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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 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 and 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 the 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 of the FDA to grant clearances or approvals, and
| | - |  | --------------------------------------------------------




| | · |  | civil and criminal penalties.
| | - |  | -----------------------------




We also are required to demonstrate and maintain compliance with the Quality System Regulations 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 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 may be a long and difficult process. We also are required to provide
information to the FDA on deaths or serious injuries alleged to have been associated with the use of our medical devices, as




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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.





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 and TRACER for mapping in the European Union.





We have received CE Mark certification to sell our VENAPORT, VUEPORT and NAVIPORT guiding catheters in the European Union.





We also received approval to sell our PATHFINDER, PATHFINDER mini, Revelation, and TRACER in Japan and Australia, and to sell our PATHFINDER, TRACER, VENAPORT, VUEPORT and NAVIPORT in Canada. We
also received CE Mark certification to sell our REVELATION, REVELATION Tx, REVELATION T-Flex, REVELATION Helix and REVELATION Helix ST microcatheters for ablation of atrial fibrillation in the European Union. In July 2002, 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 a Cardima surgical probe using multi-electrode linear array microcatheter technology, a
novel power-channeling device, the INTELLITEMP, which allows the surgeon to apply RF energy to any or all of the individual electrodes on the probe and commercially available electro-surgical radio frequency (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,
| | - |  | ------------------------------------------------



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| | · |  | 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.





We derive a portion of our revenues
from the sale of our products in the European Union. The adoption of the Euro 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 may result in greater price transparency, making the EMU a more
competitive environment for our products. In addition, the EMU has not yet defined and/or finalized some of the rules and regulations relating to the governance of the currency. As a result, companies operating in or conducting business in Europe
will need to ensure that their financial and other software systems are capable of processing transactions and properly handling the Euro.





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





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





The market for catheters to map and/or ablate 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




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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 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 currently has research efforts in the field of electrophysiology that may compete
with our products. Under the Target Therapeutics license agreement, we have an exclusive license under specific issued United States patents. The exclusive license from Target Therapeutics covers the diagnosis and treatment of electrophysiological
disorders in areas other than the central nervous system. In addition, we have obtained a non-exclusive license to use Target Therapeutics technology, provided we have made a substantial improvement of such technology, for the diagnosis or
treatment of diseases of the heart, other than by balloon angioplasty. The license will terminate upon the expiration or invalidation of all claims under the underlying patents. In addition, Target Therapeutics has the right to terminate the license
earlier if we fail to comply with various commercialization, sublicensing, insurance, royalty, product liability, indemnification, non-competition and other obligations. Furthermore, either party can terminate the license if a material breach
remains uncured for thirty days or if either party ceases to be actively engaged in its present business for a period of twelve months. The loss of our exclusive rights to the Target Therapeutics-based microcatheter technology would harm our
business.





In December 2000, we sold certain patents and related intellectual property pertaining to intravascular
sensing and signal detection to Medtronic, Inc., for $8,000,000 in cash, 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




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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, since 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, or if available, on commercially reasonable terms. Our
inability to license any disputed technology could delay the commercialization of our products and harm our business. Under our license with Target Therapeutics, Target Therapeutics does not indemnify us against claims brought by third parties
alleging infringement of patent rights. Consequently, we could bear the liability resulting from such claims. We cannot be certain that we will have the financial resources to protect and defend our intellectual property, as such defense is often
costly and time-consuming. Our failure to protect our patent rights, trade secrets, know-how or other intellectual property would harm our business.





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





U. S. healthcare providers, including hospitals and physicians, that purchase microcatheter products generally rely on third-party payors,
principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using our products. The success of our products will depend upon the




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ability of health care providers to obtain satisfactory reimbursement for medical procedures in which our microcatheter systems are used. If these health care providers are unable to obtain
reimbursement from third-party payors, the market may not accept our products and our revenues may decline.





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





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 2002. 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 expertise to establish large-scale manufacturing capabilities. However, we could encounter problems related to:





| | · |  | capacity constraints,
| | - |  | ---------------------




| | · |  | production yields,
| | - |  | ------------------




| | · |  | quality control, and
| | - |  | --------------------




| | · |  | shortages of qualified personnel.
| | - |  | ---------------------------------




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




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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, State of California and European Notified Bodies. We have demonstrated compliance with ISO 9001 (EN 46001) 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 or to maintain our compliance with ISO 9001 (EN 46001)
standards and 93/42/EEC, the Medical Device Directive, will require us to take corrective actions, such as modification of our policies and procedures. In addition, we may be required to cease all or part of our operations for some period of time
until we can demonstrate that appropriate steps have been taken to comply with Quality System Regulations or ISO 9001 (EN 46001) standards. There can be no assurance that we will be found in compliance with the Quality System Regulations by
regulatory authorities, or that we will maintain compliance with ISO 9001 (EN 46001) standards in future audits. Our failure to comply with state or FDA Quality System Regulations, maintain compliance with ISO 9001 (EN 46001) standards, or develop
our manufacturing capability in compliance with such standards, would have a material adverse effect on our business, financial condition and results of operations.





Our facilities and manufacturing processes have recently undergone a successful annual re-certification inspection by the European Notified Body in November 2001. In
November 2000, 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 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 was to distribute our diagnostic products in the United States. St.




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Jude did not meet its minimum annual sales quota for the first year 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 plan to expand our own small sales force in the United States. Therefore, we will be solely responsible for marketing and distributing our
products in the United States. Expanding our marketing and sales capability to support sales in commercial quantities adequately will require substantial effort and require significant management and financial resources. Our failure to establish an
effective sales and marketing force will cause our revenues to decline.





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 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 also have approval to sell the REVELATION, REVELATION Tx, REVELATION T-Flex, REVELATION Helix and REVELATION
Helix ST in the European Union. Because we do not have written agreements with certain of our exclusive distributors, the terms of such arrangements, such as length of arrangements and minimum purchase obligations, are uncertain. In addition, the
laws in certain international jurisdictions may make it difficult and costly for us to terminate such distribution arrangements without specific written termination terms. We cannot be certain that we will be able to enter into written distribution
agreements with these distributors or that these distributors will be able to effectively market and sell our products in these markets. In addition, we 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 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,




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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 reusing 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 you to sell your shares.





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. In the event that our common stock trades below $1.00 per share for more than 30 consecutive days, we may receive a notification from Nasdaq that we may be delisted from the Nasdaq SmallCap Market if we cannot
demonstrate compliance with the NASD rule by a certain time. In order to regain compliance in the event of delisting, the closing bid price per




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share for our common stock must be $1.00 or more for a minimum of ten consecutive trading days.





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.





Item 3.    Quantitative and Qualitative Disclosures About Market Risk.





Since we do not have a short-term investments or a line of credit obligation as of June 30, 2002, we do not have any material quantitative disclosures about market risk.




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PART II.    OTHER INFORMATION





|Item 1. |  | Legal Proceedings
|------- |  | -----------------




| |  | None.
| |  | -----




|Item 2. |  | Changes in Securities and Use of Proceeds
|------- |  | -----------------------------------------




| |  | None.
| |  | -----




|Item 3. |  | Default Upon Senior Securities
|------- |  | ------------------------------




| |  | None.
| |  | -----




|Item 4. |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------




| | (a) |  | On June 20, 2002, the Company held its Annual Meeting of Stockholders.
| | --- |  | ----------------------------------------------------------------------




| | (b) |  | As listed below, all of managements nominees for directors were elected at the meeting:
| | --- |  | ----------------------------------------------------------------------------------------




Gabriel B. Vegh32,880,285 shares voted in favor, 299,459 withheld.





Jesse D. Erickson32,880,285 shares voted in favor, 299,459 withheld.





Rodolfo C. Quijano, Ph.D.32,880,285 shares voted in favor, 299,459 withheld.





Phillip C. Radlick, Ph.D.32,880,285 shares voted in favor, 299,459 withheld.





Lawrence J. Siskind32,880,285 shares voted in favor, 299,459 withheld.





(c)  The
proposal to amend and restate the Companys 1993 Stock Option Plan to increase the number of shares reserved for issuance thereunder by 1,200,000 shares was approved with 32,226,327 shares voting in favor, 796,854 shares voting against and
156,563 shares abstaining.





The appointment of Ernst & Young LLP as independent auditors of the Company for
the fiscal year ending December 31, 2002 was ratified with 32,954,987 shares voting in favor, 110,340 shares voting against and 114,417 shares abstaining.





|Item 5. |  | Other Information
|------- |  | -----------------




| |  | None.
| |  | -----



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Item 6.Exhibits and Reports on Form 8-K





(a) Exhibits





| | 3(i)** |  | Certificate of Designation, Rights and Preferences of Series A Participating Preferred Stock
| | ------ |  | --------------------------------------------------------------------------------------------




| | 10.1* |  | Rights Agreement, dated as of May 20, 2002, between Cardima, Inc. and American Stock Transfer & Trust Company, as Rights Agent.
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------




(b)  Report on Form 8-K





On May 22, 2002, we filed a report of Form 8-K to disclose the Rights Agreement dated as of May 20, 2002.


---

|* |  | Incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form 8-A (File No. 000-22419) filed on May 22, 2002.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|** |  | Incorporated by reference to Exhibit A to Exhibit 4.1 to the Company Registration Statement on Form 8-A (File No. 000-22419) filed on May 22, 2002.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



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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:    August 14, 2002





CARDIMA, INC./s/    GABRIEL B.
VEGHGabriel B. Vegh Chairman, Chief Executive Officer andDirector





/s/    RONALD E. BOURQUINRonald E. Bourquin Senior Vice President, Chief Financial Officer and Secretary




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