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

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

                                       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

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


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


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

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


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

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

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act). [_]Yes [X]No -

     As of October 5, 2005 there were 101,459,889 shares of Registrant's  Common
Stock outstanding.

<PAGE>

                                  CARDIMA, INC.

                                TABLE OF CONTENTS

                          PART I. Financial Information

<TABLE>
<CAPTION>



                                                Description                                                     Page

<S>  <C>                                                                                                         <C>
Item 1.      Financial Statements (unaudited)                                                                    3
             Condensed Balance Sheets as of September 30, 2005 and December 31, 2004                             3
             Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2005 and       4
             2004
             Condensed Statement of Cash Flows for the Nine Months Ended  September 30, 2005 and 2004            5
             Notes to Condensed Financial Statements                                                             6
Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations               15
             Factors Affecting Future Results                                                                    23
Item 3.      Quantitative and Qualitative Disclosure About Market Risk                                           40
Item 4.      Controls and Procedures                                                                             40

                           PART II. Other Information
                                Description Page

Item 1.      Legal Proceedings                                                                                   41
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds                                         42
Item 3.      Defaults Upon Senior Securities                                                                     42
Item 4.      Submission of Matters to a Vote of Security Holders                                                 42
Item 5.      Other Information                                                                                   42
Item 6.      Exhibits                                                                                            43

Signatures                                                                                                       43
</TABLE>

                                       2
<PAGE>
PART I.

Item 1.  Financial Statements
                                  CARDIMA, INC.
                            CONDENSED BALANCE SHEETS
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>


                                                                                     September 30,        December 31,
                                                                                        2005                  2004
                                                                                    (Unaudited)                (1)
                                                                                   --------------        --------------
<S>                                                                                      <C>                     <C>
ASSETS
Current assets:
     Cash and cash equivalents...................................................  $         271         $
                                                                                                                 3,854
     Accounts receivable, net of allowances for doubtful accounts
         of $26 for September 30, 2005 and $35 for December 31, 2004.............            163                   303
     Inventories.................................................................            428                   878
       Prepaid expenses..........................................................            595                   456
       Notes receivable from related parties, net................................            286                   575
     Other current assets........................................................            827                    38
                                                                                   --------------        --------------
         Total current assets....................................................          2,570                 6,104
Property and equipment, net......................................................             52                   395
Other assets.....................................................................             35                    38
                                                                                   --------------        --------------
                Total assets                                                       $       2,657         $       6,537
                                                                                   ==============        ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
     Accounts payable............................................................  $       1,302         $         870
     Accrued compensation........................................................            363                   604
     Other current liabilities...................................................          2,471                   321
     Credit obligation ..........................................................            200                    79
       Deferred rent.............................................................             20                    41
       Capital lease obligation - current portion................................             23                    31
                                                                                   --------------        --------------
             Total current liabilities ..........................................          4,379                 1,946
                                                                                   --------------        --------------

Capital lease obligation - noncurrent portion....................................             34                    52
                                                                                   --------------        --------------

Commitments and contingencies

Stockholders' equity (deficit):
     Common stock, $0.001 par value; 300,000,000 shares authorized, 101,459,889
     and 101,305,613 shares issued and outstanding at September 30, 2005 and
     December 31, 2004, respectively.............................................        117,986               117,973
             Accumulated deficit.................................................       (119,742)             (113,434)
                                                                                   --------------        --------------
           Total stockholders' equity (deficit)..................................         (1,756)                4,539
                                                                                   --------------        --------------
             Total liabilities & equity (deficit)                                  $       2,657         $       6,537
                                                                                   ==============        ==============

-----------
</TABLE>

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

            See accompanying notes to condensed financial statements


                                       3
<PAGE>



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

                                                        Three months ended                    Nine months ended
                                                           September 30,                        September 30,
                                                 ---------------------------------    ----------------------------------
                                                     2005               2004              2005               2004
                                                 --------------     --------------    --------------    ----------------
<S>                                                    <C>                <C>                <C>              <C>
Net sales                                        $         346      $         569      $      1,411     $         1,783
Cost of goods sold                                         483                893             1,671               2,121
                                                 --------------     --------------    --------------    ----------------

Gross loss                                                (137)              (324)             (260)               (338)

                                                 --------------     --------------    --------------    ----------------
Operating expenses:
             Research and development                      198              1,016             1,598               3,208
             Selling, general and
             administrative                                613              1,370             3,629               4,145
             Impairment of long-lived assets                 -                  -               404                   -
             Excess & obsolete inventory                     -                  -                 -                   -
                                                 --------------     --------------    --------------    ----------------

Total operating expenses                                   811              2,386             5,631               7,353
                                                 --------------     --------------    --------------    ----------------

Operating loss                                            (948)            (2,710)           (5,891)             (7,691)

Interest and other income                                  604                  9               867                   -
Interest expense                                          (785)                (3)           (1,284)                (11)
Warrant expense                                              -                  -                 -                 (33)
                                                 --------------     --------------    --------------    ----------------

Net loss                                               $(1,129)           $(2,704)    $      (6,308)    $        (7,735)
                                                 ==============     ==============    ==============    ================

Basic and diluted net loss per share             $       (0.01)             (0.03)    $       (0.06)    $         (0.09)
                                                 ==============     ==============    ==============    ================
Shares used in computing basic and diluted net         101,440             84,684           101,440              83,785
loss per share
                                                 ==============     ==============    ==============    ================
</TABLE>


            See accompanying notes to condensed financial statements

                                       4
<PAGE>

                                  CARDIMA, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                           Nine months ended
                                                                                              September 30,
                                                                                    ------------------------------
                                                                                        2005             2004
                                                                                    -------------    -------------
<S>                                                                                     <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                            $     (6,308)    $     (7,735)
Adjustments to reconcile net loss to net cash used in operations:
     Depreciation and amortization                                                            63              191
     Non-cash stock-based compensation                                                         3               63
     Non-cash deferred charges                                                               306               --
     Derivative revaluation                                                                   --               33
     Impairment of long-lived assets                                                         404               --
     Excess and obsolete inventory                                                           186               --
     Write-off of payroll tax refund liability                                              (245)              --
     Loss on disposal of assets                                                               --                5
     Accrued interest (income) on notes receivable from related parties                                        54
                                                                                             (11)
       Reserve on notes receivable from related parties                                      300               --
       Changes in operating assets and liabilities:
         Accounts receivable, net                                                            140               52
         Inventories                                                                         264              234
         Prepaid expenses                                                                   (139)              80
         Other current assets                                                             (3,276)               8
         Accounts payable                                                                    430               95
         Accrued employee compensation                                                      (239)            (201)
         Other current liabilities                                                         3,445                8
         Deferred rent                                                                       (21)               1
                                                                                    -------------    -------------
         Net cash used in operating activities                                            (4,698)          (7,112)
                                                                                    -------------    -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                                                          (124)             (56)
                                                                                    -------------    -------------
         Net cash used in investing activities                                              (124)             (56)
                                                                                    -------------    -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases and credit facility                                 (269)            (324)
Proceeds from Apix Loan                                                                    1,500               --
Proceeds from Agility Line of Credit & accrual of exit fees                                  771
Payment of Agility Line of Credit & exit fee                                                (773)              --
Net proceeds from common stock sale                                                           10            3,127
                                                                                    -------------    -------------
         Net cash provided by financing activities                                         1,239            2,803
                                                                                    -------------    -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 (3,583)          (4,365)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                             3,854            6,446
                                                                                    -------------    -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                            $        271     $      2,081
                                                                                    =============    =============
</TABLE>



            See accompanying notes to condensed financial statements.


                                       5
<PAGE>
                                  CARDIMA, INC.

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

1. BASIS OF PRESENTATION

     The  accompanying   unaudited  condensed  financial  statements  have  been
prepared by the Company according to the rules and regulations of the Securities
and  Exchange  Commission  (SEC)  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 nine month period ended  September 30, 2005
are not  necessarily  indicative  of the results  that may be  expected  for the
fiscal  year  ending  December  31, 2005 or for future  operating  results.  The
accompanying financial statements should be read in conjunction with the audited
financial  statements and notes thereto  included in the Company's Annual Report
on Form 10-K for the fiscal  year ended  December  31,  2004.  The  accompanying
balance sheet at December 31, 2004 has been derived from those audited financial
statements.

     Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.  After cost analysis studies were performed,
to properly  reflect costs of goods sold of the company,  certain staff salaries
were  transferred  out of the  manufacturing  to the  research  and  development
department.  These  reclassifications had the following effect on prior reported
results of operations:

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


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

2. RECENT FINANCINGS

     As of September 30, 2005 Cardima,  Inc. had approximately  $271,000 in cash
and cash equivalents, negative working capital of $1,809,000, and an accumulated
deficit of $119,742,000.

                                       6
<PAGE>

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

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

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

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

     On August 15, 2005, the Company re-hired certain furloughed employees and
resumed operations. As of September 30, 2005, the Company's staffing was 26,
including 21 regular full-time employees

     On  August  28,  2005,  the  Company  signed  a loan  agreement  with  Apix
International,  which  increased the total amount to be financed from $2 million
to $3 million. The principal amount of the promissory note dated August 12, 2005
for $500,000 was rolled over into the new loan agreement.  The Company  received
an  additional  $500,000 on this closing  date.  Per the funding  schedule,  the
Company received $500,000 on September 8, 2005 and $500,000 on October 11, 2005.
The  remainder  of the loan will be received  as  follows:  $350,000 on or after
November  18,  2005,  $350,000 on or after  December 18, 2005 and $300,000 on or
after January 18, 2006.  The loan  agreement  will be secured by a first lien on
all the Company's assets and intellectual property. All funds will bear interest
at a rate of 10% per annum.

     Per the loan  agreement,  the Company is required to pay a facility  fee of
$60,000,  a due diligence fee of $25,000,  a document review and preparation fee
of $50,000  and an exit fee of $900,000  at the end of the loan  agreement.  All
these fees are being amortized as non-cash interest expense over the life of the
loan.

     Also the loan agreement has an optional  conversion clause that at its sole
option, the lender, Apix International,  may elect to receive payment for all or
any portion of the facility fee, the exit fee and the accrued interest due under
the loan,  in full or partial  satisfaction  of such  amounts,  that  respective

                                       7
<PAGE>
number of the Company's common stock at a rate of $0.10 per share. At the end of
the loan agreement, if the lender ultimately exercises this option, any gains or
losses on the difference  between the conversion price and the fair value of the
stock at the time of  conversion  will be  included  in the  Company's  earnings
during that period.

Additionally, the Company will provide the lender, Apix International,  Warrants
with registration  rights to purchase  30,000,000 shares of capital stock with a
strike price of $0.10 per share. Any beneficial conversion effect resulting from
the  excess of the  average  market  price of the stock over the $0.10 per share
conversion  price will also be charged to non-cash  interest  during the periods
the loan is  outstanding.  As of September  30, 2005,  the Company has failed to
file a registration  statement with the SEC, as required by the loan  agreement,
to register all of the shares of Common Stock issued or issuable with respect to
these warrants.  On November 10, 2005, the Company and Apix  International  have
entered into an amendment to the Loan  Agreement to extend the date by which the
Company is required to file a registration  statement in accordance with Section
10(b)(i) of the Loan  Agreement.  The  amendment  agreement  extends the date by
which the Company is required to file a  registration  statement  from September
30, 2005 to January 1, 2006.

3. MANAGEMENT'S PLANS

     Based on Management's current expectations, Apix International's $3 million
loan agreement gives the Company  sufficient  cash to operate  through  February
2006.  Only if the Company is able to raise  sufficient  funds,  will Cardima be
able to continue to work towards regulatory  approval and  commercialization  of
the  REVELATION(R)  Tx in the United  States,  commercialization  of the Cardima
Surgical Ablation System and the commercialization of the REVELATION(R) Helix in
Europe.

     On  May  6,  2005,  the  Company  received  a  Nasdaq  Staff  Determination
indicating  that  we had not  regained  compliance  with  the  requirements  for
continued listing set forth in Marketplace Rule 4310(c)(4), which we refer to as
the  "Rule" for  purposes  of this  discussion,  and that our  securities  were,
therefore,  subject to delisting from The Nasdaq  SmallCap Market at the opening
of business on May 17, 2005.  The Rule provides that if the closing bid price of
a company's stock is below $1.00 for more than thirty consecutive  trading days,
the company  faces  possible  delisting.  On May 17, 2005 our stock was delisted
from the Nasdaq SmallCap Market and was quoted on the "Pink Sheets".  Commencing
on October 26, 2005,  the  Company's  shares were quoted on the Nasdaq  Bulletin
Board.

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

                                       8
<PAGE>

     Although our management recognizes the need to raise funds in the immediate
future, there can be no assurance that we will be successful in consummating any
fundraising  transaction,  or, if we do consummate such a transaction,  that its
terms and conditions  will not be  unfavorable to us. We are also  contractually
prohibited  from issuing  certain kinds of  convertible  securities  without the
consent of some of our investors.  We are evaluating  various  courses of action
including selling or licensing some of our proprietary technologies.  If we fail
to obtain  additional  funding  later this year,  our business will fail and our
stockholders  will  likely  lose  the  entire  value of  their  investment.  Our
independent  registered  public  accountants have stated in their opinion on our
December 31, 2004 financial statements that there is substantial doubt as to our
ability to continue as a going concern.

4. CRITICAL ACCOUNTING POLICIES

     Use of Estimates

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

     Revenue Recognition

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

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

     Revenue is presented net of  discounts,  allowances,  and returns.  Payment
terms are either open trade or cash. Customers are not entitled to any rights of
product return.  Although our customers are not legally entitled to returns,  on
occasion  returns  have  occurred  in such  circumstances  as  shipping or order
errors,  product complaints or for customer relations  purposes.  Returns are at
the sole  discretion  of the Company and can be  reasonably  estimated  based on
prior  history.  Net  revenue  for the  quarter  ended  September  30,  2005 was
$346,000,  net of $3,000 in product returns in the quarter. We have distributors
in Asia and Europe and we record as revenue  the  wholesale  price we charge our
distributors. Title and risk of loss are assumed by the distributors and the end
users at shipping point.

                                       9
<PAGE>

     Allowance for Doubtful Accounts

     We establish estimates of the un-collectability of accounts receivable. Our
management  analyzes accounts  receivable,  historical  write-offs as bad debts,
customer concentrations, current economic trends and changes in customer payment
terms when  evaluating the adequacy of the allowance for doubtful  accounts.  We
maintain an allowance for doubtful  accounts at an amount that we estimate to be
sufficient  to  provide  adequate   protection  against  losses  resulting  from
collecting  less than  full  payment  on  receivables.  We have not  experienced
significant bad debt expense and we believe our reserve for doubtful accounts of
$26,000 is adequate for any exposure to loss in our  September 30, 2005 accounts
receivable balance.

     Inventory Revaluation

     Inventories, which are composed of purchased parts and subassemblies,  work
in process and  finished  goods,  are valued at the lower of cost or market with
cost being determined by the first-in,  first-out  method.  We have analyzed the
level of inventory on hand,  its cost in relation to market value and  estimated
customer requirements to determine whether write-downs for excess or slow-moving
inventory are required.  Actual customer  requirements in any future periods are
inherently  uncertain and thus may differ from estimates.  If actual or expected
requirements were significantly  greater or lower than the established reserves,
a reduction or increase to the  obsolescence  allowance would be recorded in the
period  in  which  such  a  determination   was  made.  Excess  and  slow-moving
inventories have been  written-down by the amount of $682,000 from prior periods
to state inventory at the lower of net realizable value or cost.

     Stock-Based Compensation

The  Company  has  elected to follow  Accounting  Principles  Board  Opinion No.
("APB")  25,   "Accounting   for  Stock   Issued  to   Employees"   and  related
interpretations  in  accounting  for  its  employee  stock  options,   including
Financial Accounting Standard Board  Interpretation  ("FIN") 44, "Accounting for
Certain  Transactions  Involving Stock  Compensation."  Compensation  expense is
based on the difference,  if any, between the fair value of our common stock and
the exercise price of the option or share right on the measurement  date,  which
is  typically  the grant date.  This amount is  recordable  as  "deferred  stock
compensation" in the Balance Sheets and amortized as a charge to operations over
the vesting period of the applicable options or share rights. In accordance with
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based  Compensation,"  we have provided below the pro forma disclosures of
the  effect  on net loss and loss per share as if SFAS 123 had been  applied  in
measuring compensation expense for all periods presented.

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

                                       10
<PAGE>

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

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

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

                                                                                Three Months         Nine Months
                                                                              Ended September 30,  Ended September 30,
                                                                         ---------------------------------------------
                                                                              2005       2004      2005       2004
                                                                         ------------- --------- ---------- ----------
<S>                                                                           <C>          <C>        <C>       <C>
   Net loss applicable to common shareholders - as reported              $     (1,129)   (2,704)    (6,308)   (7,735)
   Add:
         Stock-based employee compensation expense
         included in reported net income, net of applicable tax effects           ---       ---        ---       ---
   Deduct:
        Total stock-based employee compensation expense
        determined under fair value based method for all
        awards, net of applicable tax effects                                    (189)     (222)      (587)     (808)


   Pro forma net loss                                                    $     (1,318)   (2,926)    (6,895)   (8,543)
                                                                         ------------- --------- ---------- ----------
   Basic and diluted net loss per share:
                                                                         ============= ========= ========== ==========
          As reported                                                    $      (0.01)    (0.03)     (0.06)    (0.09)
                                                                         ============= ========= ========== ==========

           Pro forma                                                     $      (0.01)    (0.03)     (0.07)    (0.10)
   Shares used in computing basic and diluted net loss per share              101,440    84,684    101,440    83,785
                                                                         ---------------------------------------------

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

                                                                      Nine Months
                                                                      Ended September 30,

                                                                      2005             2004
                                                                      ----             ----

Expected life (years)..........................................        3.2              4.0
Interest Rate..................................................       3.96%            3.14%
Volatility.....................................................     123.58%          129.07%
Dividend Yield.................................................          0%               0%
</TABLE>

   Research and Development

                                       11
<PAGE>

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

5.    WARRANTS

     During the third  quarter  of 2005,  per the Apix loan  agreement,  Cardima
provided the lender,  Apix  International,  Warrants with registration rights to
purchase  30,000,000  shares of capital  stock with a strike  price of $0.10 per
share. The beneficial conversion effect resulting from the excess of the average
market  price of the stock  over the $0.10 per share  conversion  price is being
charged to non-cash  interest  during the periods  the loan is  outstanding.  At
September 30, 2005 the company revalued the beneficial  interest.  The resulting
decrease  was credited to other  income.  Also as of  September  30,  2005,  the
Company has failed to file a registration statement with the SEC, as required by
the loan  agreement,  to register  all of the shares of Common  Stock  issued or
issuable with respect to these  warrants.  On November 10, 2005, the Company and
Apix  International  have entered  into an  amendment  to the Loan  Agreement to
extend  the  date by  which  the  Company  is  required  to file a  registration
statement  in  accordance  with  Section  10(b)(i)  of the Loan  Agreement.  The
amendment  agreement extends the date by which the Company is required to file a
registration statement from September 30, 2005 to January 1, 2006.

6.   CONCENTRATIONS OF RISK

     During the  quarter  ended  September  30,  2005,  our net sales to foreign
customers  increased to 66% of total net sales, with 42% to Asia (Japan) and 24%
to Europe.  During the quarter ended  September  30, 2004,  net sales to foreign
customers  were 50% of total net  sales,  with 39% to Asia  (Japan),  and 11% to
Europe. The countries which produced the largest net sales in the quarter ending
September  30, 2005 were the US at 34% and Japan at 42%. For the same quarter in
2004, the countries  which produced the largest net sales were the US at 50% and
Japan at 39%.

     During the first nine  months of 2005,  our net sales to foreign  customers
increased to 58% of total net sales, with 43% to Asia (Japan) and 15% to Europe.
During the nine months ended September 30, 2004, net sales to foreign  customers
were 52% of total net sales, with 35% to Asia (Japan),  16% to Europe, and 1% to
other.  The  countries  which  produced the largest net sales in the nine months
ending  September  30, 2005 were the US at 42% and Japan at 43% and for the same
nine months in 2004, the countries which produced the largest net sales were the
US at 48% and Japan at 35%.

     During the  quarter  ended  September  30, 2005  revenues  to one  customer
comprised 42% of the company's  total product  sales.  During the quarter ending
September  30,  2004,  one customer  comprised  39% of the  company's  total net
product sales.

     For the first nine months of 2005 revenues to one customer comprised 43% of
the company's  total net product sales.  This is an increase from the first nine
months of 2004  where one  customer  comprised  35% of the  company's  total net
sales.

7. NOTES RECEIVABLE FROM RELATED PARTIES

     There are two  outstanding  notes  receivable  from  related  parties as of
September 30, 2005. The notes receivable are as follow:

                                       12
<PAGE>
<TABLE>
<CAPTION>

-------------- --------------- --------------- ------------------ ---------------------
<S>                   <C>            <C>               <C>                <C>
Related        Principle       Accrued         Interest            Maturity
Parties        Amount          Interest        Rate                Date
-------------- --------------- --------------- ------------------ ---------------------

-------------- --------------- --------------- ------------------ ---------------------
Current                                           3 month         First day not serving
Director       $    278,500.00 $     85,577.00    Treasury Bill   as a  director
-------------- --------------- --------------- ------------------ ---------------------
Former Officer                                    3 month         48 months from
               $    192,500.00 $     29,910.00    Treasury Bill   note date
-------------- --------------- --------------- ------------------ ---------------------
</TABLE>

     The Company  recorded a $300,000  reserve  charge  against  these two notes
receivable in June 2005.

8. CREDIT OBLIGATIONS

     As of September  30,  2005,  there are  primarily  two  outstanding  credit
obligations.  They are:  (1) Apix loan  agreement  in the amount of  $2,550,000,
including  $1,500,000  cash proceed,  $1,035,000  loan fees and $15,000  accrued
interest; and (2) various insurance policies financed in the amount of $140,000,
including $47,000 for director and officer insurance package.  For the Apix loan
fees and the  various  insurance  policies'  financing,  the  Company has set up
respective  deferred  charges  accounts  and is  amortized  over the life of the
agreements.

9.    INVENTORIES

     Inventories consist of the following (in thousands):

                                September 30,                 December 31,
                                    2005                          2004
                              -------------------          --------------------
     Raw materials            $               90           $               152
     Work-in-process                         113                            99
     Finished goods                          225                           627
                              -------------------          --------------------
                              $              428                           878
                              ===================          ====================

     Inventory  amounts  shown above is recorded at standard cost which is lower
than  total  cost and  represented  the lower of cost or  market on a  first-in,
first-out  basis.  Additionally  they  are net of  write-downs  for  excess  and
obsolete  inventory of $682,000 at September 30, 2005 and $655,000  December 31,
2004. The Company  provides  reserves for inventory  amounts by considering  the
potential  excess  inventory in relation to sales forecasts and the obsolescence
of  inventory  as a result of  technological  advancements.  Included in the net
inventory  value is a charge for excess and  obsolete  inventory of $186,000 for
the nine-month  ended on September 30, 2005,  which was charged to cost of goods
sold, to bring the net inventory to their fair value less disposal costs.

10. IMPAIRMENT OF LONG-LIVED ASSETS

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

                                       13
<PAGE>

11. NET LOSS PER SHARE

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

                                         September 30,            December 31,
                                              2005                    2004
                                       -------------------   -------------------

   Warrants............................        52,726,106            24,717,722
   Stock Options.......................         6,282,690             6,684,112
                                       -------------------   -------------------

   Total Warrants and Options..........        59,008,796            31,401,834
                                       -------------------   -------------------


12. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

     In November 2004,  Statement of Financial Accounting Standards ("SFAS") No.
151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4", was issued which
amends the guidance in Accounting  Research  Bulletin ("ARB") No. 43, Chapter 4,
"Inventory  Pricing," to clarify the  accounting  for  abnormal  amounts of idle
facility  expense,  freight,  handling costs, and wasted  material.  Among other
provisions,  the new rule  requires  that items such as idle  facility  expense,
excessive  spoilage,  double  freight,  and  re-handling  costs be recognized as
current-period  charges  regardless  of whether  they meet the  criterion of "so
abnormal"  as stated in ARB No. 43.  Additionally,  SFAS 151  requires  that the



                                       14
<PAGE>

allocation of fixed production  overheads to the costs of conversion be based on
the normal  capacity of the  production  facilities.  SFAS 151 is effective  for
fiscal years  beginning  after June 15, 2005.  We are currently  evaluating  the
effect that the adoption of SFAS 151 will have on our results of operations  and
financial condition upon adoption.

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

13. COMMITMENTS AND CONTINGENCIES

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

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

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

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

                                       15
<PAGE>
o    the risk  that if we do not meet our  payment  obligations  under  our Loan
     Agreement with Apix International  Limited, our secured lender, by the loan
     due date of February 28, 2006,

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

o    the  uncertainties  associated  with our  ability  to  secure  distribution
     partners,

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

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

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

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

     We assume no obligation to update the  forward-looking  statements included
in this Form 10-Q.  This  discussion and analysis  should be read in conjunction
with the Financial  Statements and related Notes thereto  included  elsewhere in
this Form 10-Q and in the Company's most recent Annual Report on Form 10-K.

Overview

     Since our  incorporation in November 1992, we have developed,  produced and
sold  a  variety  of  microcatheters,  including  those  for  the  diagnosis  of
ventricular tachycardia. Since 2001, however, our efforts have primarily focused
on   developing   differentiated   products   that  diagnose  and  treat  atrial
fibrillation,  including  our  REVELATION(R)  Tx  microcatheter  for  use in the
Electrophysiology  (EP) market,  and our Surgical Ablation System for use in the
surgical market. Our EP products allow for the mapping  (diagnosis) and ablation
(treatment)  of the  two  most  common  forms  of  cardiac  arrhythmias:  atrial
fibrillation and ventricular  tachycardia.  Arrhythmias are abnormal  electrical
heart rhythms that adversely  affect the mechanical  activities of the heart and
can  significantly  affect a  person's  quality of life and  potentially  can be
fatal. We have developed  microcatheter-based systems designed (1) to locate and
provide more extensive and less traumatic  access to  arrhythmia-causing  tissue
for diagnosing the arrhythmia, referred to as mapping, and (2) to restore normal
heart rhythms by isolating and/or blocking the  arrhythmia-causing  tissue using
radio frequency energy, referred to as ablation. Our microcatheters  incorporate
multiple  electrodes at the distal end to record electrical  signals for mapping
and, with certain microcatheters,  to transfer radio frequency energy for tissue
ablation,  allowing physicians to both map and ablate arrhythmias using the same
microcatheter. Our microcatheters are designed with variable stiffness guidewire


                                       16
<PAGE>
technology  and a highly  flexible  distal tip to allow more  extensive and less
traumatic access to the chambers and vasculature of the heart. In addition,  all
of our microcatheters are disposable, single-use products that we believe can be
adapted to and used with  conventional  ECG-recording  systems and with existing
compatible radio frequency generators,  eliminating the need for significant new
investment in capital equipment by hospitals.

     More recently, we have leveraged our proprietary  technologies for treating
atrial  fibrillation,  or AF, into the  development of products for the surgical
market.  On  January  29,  2003,  we  received  notice  from the FDA that it had
approved for  commercialization  the Cardima Surgical Ablation System for use in
ablating  cardiac tissue during cardiac  surgery.  This new system  connects the
Cardima  Surgical  Ablation  Probe, a deflectable  multi-electrode  linear array
microcatheter  technology,  to a commercially  available  electrosurgical  radio
frequency generator through the INTELLITEMP(R), a multi-channel radio frequency,
or RF, energy management device. This system allows surgeons to direct RF energy
through any  combination  of up to eight probe  electrodes  simultaneously  into
cardiac tissue,  a feature which can  significantly  reduce the time required to
perform an ablation-based  "maze" procedure.  Since September 2003, the Surgical
Ablation  System has been  utilized on a limited basis to treat AF as an adjunct
procedure  to valve  replacement.  In the first  quarter of 2004,  the  Surgical
Ablation  System (SAS) was utilized in two less invasive cases for the treatment
of AF, opening the door to the prospect of the SAS technology being broadly used
in a stand-alone  procedure to treat AF. We do not currently  plan to market our
Surgical  Ablation  System  ourselves,  and  are  currently  seeking  to sell or
otherwise consummate a strategic transaction for this system.

     We have generated  revenues of approximately  $20.9 million from inception,
September 1, 1994 to September 30, 2005.  Prior to January 1997,  these revenues
were generated primarily in Europe and Japan from sales of our PATHFINDER(R) and
TRACER(R)  microcatheter systems for diagnosing ventricular  tachycardia and our
REVELATION(R)  microcatheter system for diagnosing atrial fibrillation,  as well
as ancillary products such as the VENAPORT(R) guiding catheters.  Since 1997 and
the U.S.  Food and Drug  Administration's  clearance of certain of our products,
sales  in  the  United  States  consist   primarily  of  our  PATHFINDER(R)  and
REVELATION(R) lines of microcatheters for diagnosing ventricular tachycardia and
atrial  fibrillation,  respectively.  To date, our international sales have been
made  through our small  direct sales  force,  which  currently  consists of one
salesperson, and distributors who sell our products to physicians and hospitals.
European sales consist primarily of the REVELATION(R) Tx,  REVELATION(R)  T-Flex
and  REVELATION(R)  Helix  microcatheters  for treatment of atrial  fibrillation
following the receipt of CE Mark for those products in December  1998,  December
2001 and November 2002, respectively.

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

                                       17
<PAGE>

     Obtaining and maintaining regulatory approvals is critical to our business.
We are required to conduct clinical trials, demonstrate safety and effectiveness
and obtain  either  510(k) or PMA approval from the FDA in order to legally sell
any of our products for treating atrial fibrillation or ventricular  tachycardia
in the United States.  While the Surgical  Ablation  System has received  510(k)
approval from the FDA for the ablation of cardiac tissue during cardiac  surgery
using  radio  frequency  energy,  PMA  approval  will be  required  prior to the
introduction in the United States of the REVELATION(R) Tx,  REVELATION(R) T-Flex
and REVELATION(R) Helix microcatheter  systems for treating atrial fibrillation.
Obtaining PMA for any of these products will require additional clinical trials,
which will require substantial time and expense.

     Our current  focus is on obtaining FDA approval in the United States of the
REVELATION(R) Tx microcatheter  system for the treatment of atrial fibrillation.
On September  30, 2002,  we submitted a PMA  application  for this system to the
FDA. On May 29, 2003, we met with the  Circulatory  System Devices Panel,  which
recommended that the FDA not approve our PMA application. The Circulatory System
Devices  Panel  commented  favorably  on the  safety  and need for this  type of
device.  However,  the Panel felt that efficacy data was not sufficiently  clear
and supportive for the approval.  The Panel provided several  suggestions on how
to possibly  reexamine the existing data or how to collect more data on existing
patients.  On June 26, 2003 we received a letter from the FDA, which stated that
the FDA concurred with the Panel's non-approval recommendation.

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

Results of Operations - Three and Nine Months Ended September 30, 2005 and 2004

Net Sales



                                       18
<PAGE>

     Net sales  for the  quarter  ended  September  30,  2005  decreased  39% to
$346,000  from  $569,000 for the same period in 2004.  Regionally,  net sales in
Europe increased by 32% to $83,000 in the third quarter of 2005, from $63,000 in
the same  period of 2004.  Net sales in the United  States  decreased  by 59% to
$116,000 in the third quarter of 2005 from $282,000 for the same period in 2004.
Also net sales in Asia (Japan) decreased by 34% to $147,000 in the third quarter
of 2005 from $224,000 for the same period in 2004.  The decrease in net sales in
the  United  States and Asia in this  quarter  was  caused by the  company  wide
furlough starting June 17, 2005, which was ended on August 15, 2005.

     For the nine-month period ended September 30, 2005, net sales decreased 21%
to  $1,411,000 in 2005 from  $1,783,000  for the same period in 2004. By region,
net sales in the United States  decreased by 31% to $592,000 for the  nine-month
period ended  September 30, 2005 from $864,000 for the same period in 2004.  The
decrease of net sales in the United States was due to the Company-wide  furlough
on June 17,  2005 which was ended on August 15,  2005 with no  headcount  in the
sales area.  European net sales  decreased by 24% to $214,000 for the nine month
period ended  September 30, 2005 from $282,000 for the same period in 2004.  The
decline  in  European  sales  was due to the  competition  that  our  single-use
catheters  were facing from  multi-use  catheters.  Also Asian net sales for the
nine-month  period ended  September  30, 2005  decreased by 3% to $605,000  from
$621,000 for the same period in 2004.

     By product group,  therapeutic  product net sales  decreased by 77% for the
nine-month  period ended  September  30, 2005 to $62,000 from $268,000 net sales
for the same period in 2004.  Diagnostic product net sales decreased slightly to
$988,000 for the  nine-month  period ended  September 30, 2005 from $991,000 for
the same period in 2004.  Guiding  catheters  product net sales decreased 39% to
$302,000 for the  nine-month  period ended  September 30, 2005 from $493,000 for
the same period in 2004.

     Accounts receivable decreased 46% to $163,000 as of September 30, 2005 from
$303,000 as of December  31, 2004.  This  decrease is due to lower sales in this
quarter  compared to the quarter  ending  December 31, 2004.  The  allowance for
doubtful  accounts  was $26,000 as of  September  30, 2005 and was $35,000 as of
December 31, 2004.

Cost of Goods Sold

     Cost of  goods  sold  primarily  includes  raw  materials  costs,  catheter
fabrication  costs,  system assembly and testing costs, and manufacturing  labor
and  overhead.  Cost of goods sold for the  quarter  ended  September  30,  2005
decreased by 46%, or $410,000 to $483,000,  from $893,000 for the same period in
2004.  Cost of goods sold for the nine- month  period ended  September  30, 2005
decreased by 21% to $1,671,000 from $2,121,000 for the same period in 2004. Cost
of goods sold as a percentage of net sales decreased by 11% for the three months
ended  September 30, 2005 from the same period of the prior year,  to 140%.  The
decrease in cost of goods sold as a percentage  of net sales in the three months
ended  September  30,  2005 was due to the  selling  of  inventories  that  were
previously impaired.


Research and Development Expenses

                                       19
<PAGE>

     Research and development  expenses  include product  development,  clinical
testing and regulatory expenses. Total research and development expenses for the
quarter ended  September 30, 2005 decreased 81% to $198,000 from  $1,016,000 for
the same period in 2004, due to the furlough in June 2005 and reduction in force
in August 2005.

     Total research and development expenses for the nine-months ended September
30, 2005  decreased 50% to  $1,598,000  from  $3,208,000  for the same period in
2004.  This decrease was due to a reduction in regulatory and clinical  expenses
for the first  nine-months of 2005, or 50%, to $611,000 from  $1,224,000 for the
same period in 2004,  which was  attributable  to a reduction in force following
the submission of the  REVELATION(R) Tx PMA to the FDA in 2004. Also, our direct
product development costs for the first nine months of 2005, decreased $997,000,
or 50%, to $987,000 from  $1,984,000 for the same period in 2004.  This decrease
was due to the completion of the Intellitemp project costs as this project moved
from research and development to production.

     Clinical  trials of our  products  and  regulatory  approval  efforts  have
required substantial financial and management resources.  We will be required to
fund additional  clinical trials to obtain U.S. FDA approval of REVELATION(R) Tx
and other  products for which we plan to seek U.S.  regulatory  approval.  These
trials will be expensive and  time-consuming.  In addition,  clinical trials may
identify significant  technical or other obstacles that we will have to overcome
before obtaining the necessary regulatory approvals or market acceptance. Due to
the  uncertainties  associated with our ability to (1) complete clinical trials,
(2)  demonstrate  product  safety and  effectiveness  and (3) obtain  regulatory
approval for our products, it is difficult for us to accurately predict the time
or cost until completion of product development efforts.
<TABLE>
<CAPTION>



                                       Three Months Ended                         Nine Months Ended
                                         September 30,                              September 30,
                              ---------------------------------------------------------------------------------
                                 2005         2004        % Change         2005         2004       % Change
                             ---------------------------------------------------------------------------------
<S>                                   <C>          <C>          <C>             <C>        <C>             <C>
Direct Product Development            153          494         -69%             987        1,984          -50%
Regulatory and Clinical                45          522         -91%             611        1,224          -50%
                             ------------  -----------         ----       ---------    ---------          ----
Total                                 198        1,016         -81%           1,598        3,208          -50%
                             =======================================   =======================================
Headcount                               4           11                            4           11
                             ==========================                ==========================
</TABLE>



     Selling, General and Administrative Expenses

     Selling,   general  and  administrative  expenses  for  the  quarter  ended
September 30, 2005 decreased  $757,000,  or 55%, to $613,000 from $1,370,000 for
the same period in 2004.  The  decrease in selling,  general and  administrative
expenses was mainly due to the company-wide  furlough,  which took place on June
17,  2005 and the  ultimate  staffing  reduction  in late  August  2005 when the
Company resumed its operation.

     Selling,  general and  administrative  expenses  for the nine months  ended
September 30, 2005 decreased $516,000, or 12%, to $3,629,000 from $4,145,000 for
the same period in 2004. More specifically, selling expenses for the nine-months
ended September 30, 2005 decreased  $366,000,  or 45%, to $448,000 from $814,000
for the same period in 2004. General and  administrative  expenses for the first
nine-months of 2005 decreased by $22,000,  or 1%, to $2,944,000  from $2,966,000
for the first nine months of 2004.  Marketing expenses for the first nine months
of 2005 also decreased $128,000,  or 35%, to $237,000 from $365,000 for the same
period in 2004.  The overall  decrease was due to (1) the costs  relating to the



                                       20
<PAGE>

reduced staffing during the period,  (2) the reversal of the previously  accrued
$217,000  executive  bonuses  which was  deemed to be  non-payable,  and (3) the
implementation of a Sarbanes-Oxley  Act compliance  program of $279,000 in 2004.
Offsetting  these  decreases  was a bad debt  reserve of  $300,000 in June 2005,
which was established against the notes receivable from the related parties.
<TABLE>
<CAPTION>


                                  Three Months Ended                            Nine Months Ended
                                  September 30,                                 September 30,
                                  ----------------------------------------      -------------------------------------
                                        2005          2004    % Change            2005         2004      % Change
                                  ----------------------------------------      -------------------------------------
<S>                                       <C>           <C>           <C>            <C>          <C>             <C>
General and Administrative                569           987          -42%            2,944        2,966          -1%

Marketing                                  17            97          -82%              237          365         -35%

Selling                                    27           286          -91%              448          814         -45%
                                  ------------ ------------- -------------      ------------ ------------ ----------

Total                                     613         1,370          -55%            3,629        4,145         -12%
                                  ============ ============= =============      ============ ============ ===========

Headcount                                   6            17                               6           17
                                  ============ =============                    ============ ============
</TABLE>


Interest and Other Income

     The Company  recognized  a gain of  $863,000  in other  income in the first
nine-months  ended  September  30, 2005.  These other  incomes were from;  (1) a
payroll tax refund  received in 2002 but was not recognized in income until this
year when we received final  confirmation of the overpayment of our payroll in a
prior year, and (2) the valuation difference for the 30,000,000 warrants,  which
were  issued to Apix  International  in  connection  with the  $3,000,000  loan,
between the grant date and this period ending date, September 30, 2005.

Interest expense

     There was interest  expense of $785,000 in the quarter ended  September 30,
2005 compared to $3,000 in the same period in 2004.  This increase was primarily
related to; (1) the  amortization  of the Apix loan fees of $257,000 and (2) the
interest  expense related to warrants  issued of $510,000,  which was related to
the  warrants  issued in  connection  with our  August  2005 Apix loan that were
carried as liabilities,  and represented the amortization of the discount of the
note during the three months ended September 30, 2005.

     Also there was interest  expense of  $1,284,000 in the first nine months of
2005  compared to $11,000 in the same period in 2004.  This increase in interest



                                       21
<PAGE>

expense for the nine months ended  September 30, 2005 was  primarily  attributed
to: (1) the $450,000 exit fee of the Agility  Capital's  loan,  (2) the $257,000
amortization of the fees associated with the loan from Apix  International,  and
(3) the $510,000 warrant-related amortization.

Warrant Expense

     There was no warrant  expense for the first nine months ended September 30,
2005 compared to $33,000 for the same period in 2004.

Impairment Charges

     There was no  impairment  charge on  long-lived  assets  during the quarter
ended  September 30, 2005.  However because there were indicators of impairment,
including  continued losses,  the Company conducted an analysis during the third
quarter of 2005 to determine if there was impairment of any  long-lived  assets.
Previously,  the Company  increased its impairment of fixed assets by $46,000 in
the second  quarter  of 2005 from  $358,000  in the first  quarter of 2005 for a
total of $404,000 in the first six months of 2005.  There was no  impairment  of
long-lived assets charge in 2004.

Liquidity and Capital Resources

Cardima had cash and cash equivalents of approximately  $271,000 as of September
30, 2005. Based on Management's  current  expectations,  Apix International's $3
million loan  agreement  gives the Company  sufficient  cash to operate  through
February  2006. We have  financed our  operations  to date  principally  through
private placements of equity securities,  which have resulted in net proceeds of
approximately  $117,177,000  through  December  31,  2004,  the  initial  public
offering of our common  stock in June 1997,  which  resulted in net  proceeds of
approximately  $13,600,000,  together  with  interest  income on such  proceeds,
borrowings  under a $3,000,000  line of credit,  sale of certain of our non-core
patents to  Medtronic,  Inc. for  $8,000,000 in 2001,  and  equipment  leases to
finance certain capital  equipment which have provided proceeds in the amount of
$4,700,000.

Net cash used in  operating  activities  for the first  nine  months of 2005 was
approximately  $4,698,000  compared to the net cash used of  $7,112,000  for the
first nine months of 2004. The decrease of $2,414,000,  or 34%, in net cash used
in  operating  activities  was mainly due to an  increase  in our other  current
liabilities and accounts payable, and lower operating expenses. Net cash used in
investing  activities  was  $124,000 in the first nine months of 2005 related to
the capital  expenditures of property and equipment,  as compared to $56,000 for
the same  period  in  2004.  Net  cash  provided  by  financing  activities  was
approximately $1,239,000 for the first nine months of 2005, compared to net cash
provided of $2,803,000 for the same period in 2004.

Although our  management  recognizes the need to raise  additional  funds in the
fourth  quarter of this year or the first quarter of next year,  there can be no
assurance  that  we  will  be  successful  in   consummating   any   fundraising
transaction,  or, if we do  consummate  such a  transaction,  that its terms and
conditions  will not be unfavorable to us. We are evaluating  various courses of
action including selling or licensing some of our proprietary  technologies.  If
we fail to obtain additional  funding in the immediate future, our business will
fail and our stockholders will likely lose the entire value of their investment.
Our  previous  independent  registered  public  accountants  has stated in their
opinion on our December 31, 2004 financial  statements that there is substantial
doubt as to our ability to continue as a going concern.

                                       22
<PAGE>

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

FACTORS AFFECTING FUTURE RESULTS

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

     We currently  have  $271,000 in cash as of September 30, 2005. We will need
to  raise  additional  capital  by the end of the year  through  a sale or other
strategic  transaction involving our Surgical Ablation System, public or private
financings or other arrangements. We are evaluating various potential courses of
action including selling or licensing some of our proprietary  technologies,  or
selling debt or equity securities, to raise additional funds.

     Although our management recognizes the need to raise funds in the immediate
future, there can be no assurance that we will be successful in consummating any
fundraising  transaction,  or if we do consummate  such a transaction,  that its
terms and conditions will not require us to give investors  valuable rights with
respect to our  products or  technology,  warrants or other  valuable  rights to
purchase additional interests in our company, or be otherwise unfavorable to us.
Among other things,  the  agreements  under which we issued some of our existing
securities  include,  and any  securities  that we may issue in the future  will
likely include, terms that could impede our ability to raise additional funding,
such as terms requiring the consent of certain  security holders before we issue
or register  additional  securities and  anti-dilution  protection  giving those
holders the right to receive  additional shares of our common stock depending on
the terms of our later financings.  We may be required to issue preferred stock,
debt or other  securities  with rights and  preferences  senior to the rights of
holders  of our  common  stock.  These  rights  and  preferences  may  reduce or
eliminate the value of our common stock upon liquidation of our company or other
events.  In addition,  the issuance of additional  securities will likely dilute
the  interests of existing  common  stockholders,  and could  impose  additional
restrictions on how we operate and finance our business.

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

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



                                       23
<PAGE>

expenses as we seek to obtain necessary  approvals and bring our  microcatheters
and  surgical  products  to market.  Since our  inception,  we have  experienced
losses, and we expect to experience  substantial net losses into the foreseeable
future.

     Our net losses were  approximately  $6.3  million for the nine months ended
September 30, 2005 and  approximately  $9.7 million,  $13.2  million,  and $12.6
million for the years ended December 31, 2004, 2003 and 2002,  respectively.  As
of September 30, 2005, our accumulated deficit was approximately $119.8 million.
Our  limited  sales  history,  and  the  fact  that we have  very  limited  cash
resources, makes it difficult to assess or predict our future results. We cannot
be  certain  that  we  will  ever  generate   substantial   revenue  or  achieve
profitability.  Our  failure to  generate  substantial  revenues  would harm our
business.

Our stock was delisted from Nasdaq  SmallCap  Market on May 17, 2005. This could
make it more  difficult  for  investors  to sell their  shares and might lead to
costly claims by investors.

     On May 6, 2005, we received a Nasdaq Staff Determination indicating that we
had not regained  compliance  with the  requirements  for continued  listing set
forth in  Marketplace  Rule  4310(c)(4),  which we  refer to as the  "Rule"  for
purposes of this discussion, and that our securities are, therefore,  subject to
delisting from The Nasdaq  SmallCap Market at the opening of business on May 17,
2005. Consequently our stock was delisted from Nasdaq SmallCap Market on May 17,
2005 and thus was  traded  on the  Nasdaq  "Pink  Sheets".  This  delisting  may
adversely affect the liquidity and the value of your  investment.  It also could
impair our  ability to raise  additional  equity  capital,  which we may need in
order to continue to operate our business.  Currently  the Company's  shares are
quoted on the Nasdaq Bulletin Board.

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

     Furthermore,  we may face contractual claims under purchase agreements from
our past private placement financings,  and possibly non-contractual claims from
other stockholders, with the fact that our common stock was delisted from Nasdaq
SmallCap Market . Any such claim would likely be costly and disruptive,  even if
resolved favorably to us.

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

     In order to continue  operations beyond the fourth quarter of 2005, we will
need to  raise  additional  capital.  Subject  to the  contractual  restrictions
described  above,  we may attempt to raise capital through the public or private
sale of our common stock or securities  convertible  into or exercisable for our
common stock.  Any such sales will further  dilute the  percentage of our equity
that you own. In addition,  some of our previous  private  placement  financings
have involved the issuance of securities at a price per share that represented a
discount  to the  closing  price of our  common  stock  and any  future  private
placements  will likely  involve the  issuance  of  securities  at a discount to
prevailing market prices.

     Depending  upon  the  price  per  share of  securities  that we sell in the
future,  if any, your interest in us could be further diluted by any adjustments
to the number of shares and the applicable  exercise price required  pursuant to
the terms of the  agreements  under which we previously  issued  securities.  No


                                       24
<PAGE>
assurance can be given that previous or future  investors,  finders or placement
agents  will not  claim  that  they are  entitled  to  additional  anti-dilution
adjustments or dispute the Company's  calculation of any such  adjustments.  Any
such claim or dispute  could  require us to incur  material  costs and  expenses
regardless  of the  resolution  and,  if resolved  unfavorably  to us, to affect
dilutive securities issuances or adjustments to previously issued securities. In
addition,  certain of our prior securities  issuances have included,  and future
financings may also include, provisions requiring us to make additional payments
to the  investors  if we fail to obtain or  maintain  the  effectiveness  of SEC
registration  statements by specified dates or take other specified action.  Our
ability to meet these requirements may depend on actions by regulators and other
third parties, over which we will have no control.  These provisions may require
us to make payments or issue additional  dilutive  securities,  or could lead to
costly and disruptive disputes.  In addition,  these provisions could require us
to record additional  non-cash expenses,  as we were required to do in the third
quarter of 2003 with respect to certain warrants issued in that quarter.

The audit report accompanying our 2004 financial  statements  indicates there is
substantial doubt as to our ability to continue as a going concern.

     As a result of our losses to date and accumulated deficit, the audit report
on our 2004 financial  statements contains an explanatory  paragraph  indicating
that  there  is  substantial  doubt as to our  ability  to  continue  as a going
concern.  The audit reports on our 2003 and 2002 financial  statements contained
similar explanatory paragraphs.  Our continuation as a going concern will depend
upon our ability to generate or obtain  sufficient  cash to meet our obligations
on a timely basis and ultimately to attain profitable operations.  Concern about
our ability to continue as a going concern may make it more  difficult for us to
obtain additional  funding to meet our obligations or adversely affect the terms
of any  additional  funding we are able to obtain.  We  anticipate  that we will
continue to incur significant losses until successful  commercialization  of one
or more of our products.  There can be no assurance  that we can or will operate
profitably in the future, or that we will continue as a going concern.

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

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

     o  product testing;

     o  product labeling;

     o  product storage;

     o  pre-market clearance and approval;

     o  advertising and promotion; and

     o  product sales and distribution.

                                       25
<PAGE>

     Before we can market  any of our  products  in the  United  States or other
countries,  we must  demonstrate  that our products are safe and  effective  and
obtain approval or clearance from the applicable  governmental  authorities.  In
the United States,  we must obtain from the FDA 510(k)  pre-market  notification
clearance  for devices that are  classified  as Class II or lower,  or a PMA for
devices  classified as Class III, such as REVELATION(R) Tx, in order to market a
product.  Currently, the process for 510(k) clearance requires approximately 120
days and PMA review process requires approximately six to twelve months. The PMA
review  process is in addition to the time required to conduct  clinical  trials
demonstrating  safety and effectiveness.  However,  the timing of such processes
can be uncertain and may involve  significantly  more time. We cannot  guarantee
either the timing or receipt of regulatory  approval or clearance for any of our
products in development.  The FDA may request extensive clinical data to support
either 510(k) clearance or a PMA. The approval process,  including any necessary
clinical trials, can involve substantial expense. No assurance can be given that
we will ever be able to obtain the necessary  approvals for any of our products.
Our failure to do so on a timely basis would have a material  adverse  effect on
our business, financial condition and results of operations.

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

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

     To date,  although we received 510(k) clearance for the use of the Surgical
Ablation System to ablate cardiac tissue, none of our electrophysiology products
in  development   for  the  ablation  of  atrial   fibrillation  or  ventricular
tachycardia has received  regulatory approval in the United States. Our Surgical
Ablation System has received 510(k)  clearance only for ablating  cardiac tissue
and not for any other purpose or any specified treatment. If we cannot gain U.S.
regulatory  approvals,  our  business  will be  materially  harmed and we may be
unable to secure the funding needed to continue operations. Even if we raise the
funding  necessary  to continue  operations,  successfully  develop our ablation
products and obtain the required regulatory approvals, we cannot be certain that
our ablation  products and their  associated  procedures  will  ultimately  gain
market  acceptance.  Because  our sole  product  focus is to design  and  market
microcatheter  systems to map and ablate  atrial  fibrillation  and  ventricular
tachycardia,  our failure to obtain  regulatory  approval  for and  successfully
commercialize these systems would materially harm our business.

     In the  United  States,  we are  required  to seek a PMA  for our  ablation
products,  including the  REVELATION(R) Tx  microcatheter,  since they have been
classified  as Class III devices.  The process of obtaining a PMA is  expensive,
lengthy and uncertain and requires clinical trials to demonstrate the safety and
effectiveness  of the product.  In December  1997, the FDA approved a 10-patient
atrial  fibrillation  feasibility  study  for  mapping  and  ablation  with  the
REVELATION(R) Tx. We received FDA approval to conduct a Phase III clinical trial



                                       26
<PAGE>

for this system in 2000, and filed portions of the PMA in 2001. On September 20,
2002, we submitted our PMA to the FDA with data on more than 80 patients treated
with our  REVELATION(R)  Tx  microcatheter  system.  We met with the Circulatory
Systems Device Panel on May 29, 2003,  and on that date,  the Panel  recommended
that  the FDA not  approve  our PMA for the  REVELATION(R)  Tx  linear  ablation
microcatheter  system.  The  Circulatory  System  Devices  Panel  felt  that the
efficacy data was not  sufficiently  clear and supportive for the approval.  The
Panel  provided  the FDA and the  Company  with  several  suggestions  on how to
possibly  reexamine  the  existing  data or how to collect more data on existing
patients.  On June 26, 2003, we received a letter from the FDA, which reiterated
the  recommendation  of  the  Panel  and  stated  the  FDA  concurred  with  the
recommendation  of the Panel.  On January 20, 2004,  we submitted an amended PMA
that provided new analysis, including data from an expanded patient base, to the
FDA.

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

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

     Through  pre-clinical studies and clinical trials, we must demonstrate that
our products  are safe and  effective  for their  indicated  uses.  Results from
pre-clinical  studies  and early  clinical  trials  may not allow us to  predict
results in later-stage  testing.  No assurance can be given that, even if we are
able to afford to conduct future clinical trials,  those trials will demonstrate
the safety and effectiveness of any of our products or will result in regulatory
approval to market our products.  We may never meet our development schedule for
any of our products in development.  Even if a product is successfully developed
and clinically  tested, we cannot be certain that it will be approved by the FDA
or other  regulatory  agency  on a timely  basis or at all.  If the FDA does not
approve our products for  commercial  sales,  our  business  will be harmed.  As
described above, we have devoted considerable  resources to developing,  testing
and seeking regulatory  approval for our REVELATION(R) Tx microcatheter  systems
designed  for  ablation  of atrial  fibrillation.  On May 28, 2004 we received a
letter,  dated  May  21,  2004,  from  the  FDA,  stating  that  our PMA for the
REVELATION(R) Tx linear ablation  microcatheter  system was not approvable based
on the  requirements of applicable  regulations.  Among other things,  the FDA's
letter  stated  that the FDA  believes  that the least  burdensome  approach  to
demonstrate the safety and  effectiveness  of  REVELATION(R) Tx for the intended
indication is to collect  additional  clinical data using a randomized  clinical


                                       27
<PAGE>
trial  design.  At a meeting with the FDA's Center for Devices and  Radiological
Health on June 18, 2004, the FDA  representatives  reiterated the view that data
from an additional study would be necessary to demonstrate the  effectiveness of
REVELATION(R)  Tx for atrial  fibrillation,  and that the nature of the  trial's
primary goal would require a randomized  clinical trial design.  The development
and   implementation   of  a  new  clinical  trial  would  require   substantial
expenditures  and management  attention,  and the timing and success of any such
trial  cannot be assured.  We must  receive PMA approval  before  marketing  our
products for ablation in the United States.

     In December  2001,  the  REVELATION(R)  Helix received the CE mark allowing
sales in the European  Economic Area. We also received in December 1999 approval
for an IDE to begin clinical testing of our THERASTREAM(R)  microcatheter system
for ablation of ventricular  tachycardia  and during calendar year 2000 approval
to expand that trial;  however, we have postponed the clinical feasibility trial
for  the  THERASTREAM(R)   microcatheter  system  for  ablation  of  ventricular
tachycardia to focus on obtaining  regulatory  approval of our  REVELATION(R) Tx
for atrial  fibrillation.  We have no estimate as to when, or if, we will resume
the clinical trial for our  THERASTREAM(R)  microcatheter  system.  If we resume
that trial, completing it could take several years.

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

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

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

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

     We  have  entered  into  several  agreements  with  parties  to  act as our
financial  advisors,  finders or agents in  connection  with actual and proposed
equity financings,  including  agreements entered into in April 2001 and on July
15, 2002,  November 13, 2002,  December 9, 2002, December 28, 2002 (with another
agreement signed with the same party in January 2003),  March 11, 2003, July 15,
2003, July 18, 2003, August 2003 (oral agreement), November 2003, September 2004
and October  2004.  These  agreements  have provided that we will pay cash fees,



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<PAGE>
generally  expressed  as 6% to 8% of the funds  raised,  and issue  warrants  to
purchase  specified  numbers  of  shares  of our  common  stock,  generally  not
exceeding 10% of the number of shares sold, to these parties in connection  with
our  financings.  Additional  details  concerning  the  terms of  these  various
agreements,  and the fees and warrants previously paid to these parties,  can be
reviewed  in our  Annual  Report on Form 10-K as filed with the  Securities  and
Exchange Commission on March 31, 2005.

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

     Due  to  the  existence  of  these  various  letter  agreements,  we may be
obligated to pay cash fees and issue warrants to one or more financial  advisors
in connection with the closing of any of our private placements. In addition, we
may in the future enter into further agreements with financial advisors, finders
or placement  agents,  similar to those  discussed  above,  in  connection  with
private or public  offerings of our  securities.  We might agree to pay to these
parties a commission on any sales of securities to investors introduced to us by
such  parties or a commission  based upon the exercise  price of any warrants or
other securities  exercised by investors  introduced to us by such parties,  and
that such  commissions  will be in  addition  to  commissions  payable  to other
financial  advisors,  finders and  placement  agents  working on our behalf.  In
addition, we may agree to issue to these additional financial advisors,  finders
and  placement  agents  securities  such as warrants  to purchase  shares of our
common stock, which could dilute your investment in our company.  We also may be
obligated to pay termination or break-up fees to our current or future financial
advisors, finders and placement agents in connection with our financings.  These
commissions  paid or warrants or other  securities  issued may be in addition to
the  commissions  payable or securities  issuable to other  financial  advisors,
finders or  placement  agents in respect of the same  transaction,  and could be
substantial.  Disputes  have arisen from time to time  concerning  our financial
advisors'  entitlement to cash and equity compensation  associated with our past
financings,  and additional  disputes may arise in the future.  Any issuances of
equity  compensation  to advisor  could also be  restricted  by, or give rise to
disputes  under,  the terms or our  previously  issued  securities.  Any dispute
relating to these advisors will tend to divert  management's  time and attention
from running our business and may cause us to incur material costs and expenses.

We have  limited  sales  and  limited  experience  in the  sale,  marketing  and
distribution  of our products.  Our failure to establish an effective  direct or
indirect sales and marketing force will cause our revenues to decline.

     We have only  limited  experience  marketing  and selling  our  products in
commercial  quantities.  Currently,  we are solely responsible for marketing and
distributing  our products in the United  States.  We had  previously  signed an
exclusive three-year distribution agreement with St. Jude Medical Corporation in
2000,  but St. Jude did not meet the first year minimum annual sales quota under
the  distribution  agreement and, in June 2001, we mutually agreed with St. Jude
to  terminate  the  agreement.  If we  receive  FDA  approval  of  our  PMA  for
REVELATION(R)  Tx, we may not have an  adequate  marketing  and  sales  force to



                                       29
<PAGE>

adequately  sell that product.  Expanding our marketing and sales  capability to
support  sales in  commercial  quantities  adequately  will require  substantial
effort and require significant  management and financial resources.  Our failure
to establish an effective  sales and marketing  force will prevent us from being
able to generate significant revenues from the sale of our products.

     Currently we only have a single contracted salesperson in Europe.  Building
and managing a larger  remote sales force  effectively,  in Europe or elsewhere,
would  require  additional  resources,  time and  expense,  which  could  have a
material  adverse  effect on our  business,  financial  condition and results of
operations.  We cannot  be  certain  that we will be able to build a  successful
European business. Failure to do so would harm our business.

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

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

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

We cannot assure the safety or effectiveness of our products.

     To obtain  and  maintain  required  regulatory  approvals  and  secure  the
confidence of physicians and others whose acceptance is needed for our products,
we will need to demonstrate that our products are safe and effective.  We cannot
assure you that our  products  will be deemed  safe and  effective.  Many of our
products,  such as our surgical  ablation system,  which has begun to be used by
cardiac  surgeons only  recently,  have not been used to a sufficient  extent to
permit us to predict their safety and effectiveness.  In addition,  our products



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<PAGE>

include  components and materials  supplied by third  parties,  whose safety and
reliability we cannot guarantee. We have occasionally experienced quality issues
with some elements of our  products,  and we may face  additional  issues in the
future.  The perceived safety and  effectiveness of our products can also depend
on their manner of use by physicians  and other third  parties,  which we cannot
control.  If safety and  effectiveness  issues arise with any of our products in
the future,  we may incur  liabilities  to third  parties,  lose any  regulatory
approvals for the  applicable  product,  or be required to redesign the product.
These  issues  will  reduce  our  sales  and  increase  our  expenses,  possibly
substantially.

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

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

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

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

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

     o    anti-arrhythmic and anti-coagulant drugs;

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

     o    implantable defibrillators;

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

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

     Physicians  will  not  recommend  the use of our  systems  unless  they can
conclude  that  our  systems  provide  a  safe,   effective  and  cost-efficient
alternative  to current  technologies  for the  mapping  and  ablation of atrial



                                       31
<PAGE>

fibrillation or ventricular tachycardia.  If our clinical data and other studies
do not  show  that  our  products  are safe  and  effective,  the FDA and  other
regulators  will not approve our  products  for sale.  If our  products  are not
approved,  we will not be able to enter  the  market  and we will not be able to
generate revenues from their sale.

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

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

     o  fines;

     o  injunctions;

     o  recall or seizure of products;

     o  withdrawal of marketing approvals or clearances;

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

     o  civil and criminal penalties.

     We also are required to demonstrate and maintain  compliance with the FDA's
Quality System Regulations for all of our products. The FDA enforces the Quality
System  Regulations  through  periodic  inspections,  including  a  pre-approval
inspection for PMA products.  The Quality System Regulations  relates to product
testing  and  quality  assurance,  as well as the  maintenance  of  records  and
documentation.  If we do not, or any  third-party  manufacturer  of our products
does not, comply with the Quality System  Regulations and cannot be brought into
compliance, we will be required to find alternative  manufacturers.  Identifying
and qualifying  alternative  manufacturers  would likely be a long and difficult
process.  We also are  required to provide  information  to the FDA on deaths or
serious  injuries  alleged to have been  associated  with the use of our medical
devices,  as well as  product  malfunctions  that could  contribute  to death or
serious injury. If we fail to comply with these applicable  regulations,  we may
incur substantial  business  disruption,  expenses,  penalties,  fines and other
liabilities and our business results and financial condition could suffer.

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

     Sales  of  medical  devices  outside  the  United  States  are  subject  to
international  regulatory  requirements  that vary from country to country.  The
time  required for approval  varies from country to country and may be longer or
shorter than the time required in the United  States.  In order to market any of
our products in the member  countries of the European  Union, we are required to
obtain CE Mark certification.  CE Mark certification is an international  symbol
of adherence to quality  assurance  standards and  compliance  with the European



                                       32
<PAGE>

Medical Device  Directives.  We have received CE Mark  certification to sell our
PATHFINDER,  PATHFINDER mini,  REVELATION(R),  REVELATION(R)  Tx,  REVELATION(R)
Helix,  and TRACER  microcatheters  and VENAPORT,  VUEPORT and NAVIPORT  guiding
catheters  for mapping in the European  Union,  and approval to sell some of our
products in Canada.  We received CE Mark  Clearance  for the  INTELLITEMP  radio
frequency energy management devices during the first quarter of 2004.

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

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

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

     Although we label all of our microcatheter  systems for single-use only, we
are aware that some physicians  potentially  may reuse these products.  Reuse of
our  microcatheter  systems  could reduce  revenues from product sales and could
cause our revenues to decline.  In addition,  such misuse of our products  could
result in personal injury and death. See "Factors  Affecting Future  Results--We
may face product liability claims related to the use or misuse of our products."
Difficulties  presented by  international  factors could  negatively  affect our
business.  A  component  of our  strategy is to expand our  international  sales
revenues. We believe that we will face risks in doing business abroad that we do
not face domestically.  Among the international risks we believe are most likely
to affect us are: o export license requirements for our products;

     o    exchange rate fluctuations or currency controls;

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

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

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

     o    domestic or international trade restrictions; and

     o    changes in tariffs.

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<PAGE>

Any of these factors could damage our business results.

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

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

     Many of our  competitors  have an  established  presence  in the  field  of
interventional cardiology and electrophysiology,  or the study of the electrical
system of the heart. These competitors include C.R. Bard, Inc., Medtronic, Inc.,
Boston Scientific,  through its EP Technologies and Cardiac Pathways  divisions,
Johnson & Johnson,  through its Biosense-Webster  division and St. Jude Medical,
Inc., through its Daig division.  These competitors have  substantially  greater
financial  and  other  resources  than  we do,  including  larger  research  and
development  staffs  and  greater  experience  and  capabilities  in  conducting
clinical trials,  obtaining regulatory approvals,  and manufacturing,  marketing
and  distributing   products.  In  addition,   other  companies  are  developing
proprietary  systems for the  diagnosis  and  treatment of cardiac  arrhythmias,
including  Biosense-Webster,  a division of Johnson & Johnson,  and  Endocardial
Solutions,  Inc.  Other  companies  are also  developing,  marketing and selling
alternative  approaches for the treatment of atrial fibrillation and ventricular
tachycardia,  including  manufacturers  of  implantable  defibrillators  such as
Guidant  Corporation,  Medtronic,  Inc. and St. Jude Medical,  Inc. We cannot be
certain  that we will  succeed in  developing  and  marketing  technologies  and
products that are safer, more clinically  effective and cost-effective  than the
more  established  treatments or the new approaches and products being developed
and marketed by our competitors.  Furthermore, there can be no assurance that we
will succeed in developing new  technologies and products that will be available
before those of our competitors, particularly because of our financial position.
Our  failure to  demonstrate  the  competitive  advantages  and  achieve  market
acceptance of our products would significantly harm our business.

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

                                       34
<PAGE>

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

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

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

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

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

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<PAGE>

     We have received in the past and expect to continue to receive letters from
others threatening to enforce patent or other intellectual rights against us. We
cannot be  certain  that we will not become  subject  to patent or  intellectual
property infringement claims or litigation, interference proceedings in the U.S.
Patent  and  Trademark  Office to  determine  the  priority  of  inventions,  or
oppositions to patent grants in foreign countries. Any such claim, litigation or
proceeding,  regardless  of the  outcome,  would  likely  require  us to  expend
substantial   defense  costs  and  would   disrupt  our  business.   An  adverse
determination  in  litigation,  interference  or  opposition  proceedings  could
subject us to  significant  liabilities  to third  parties,  require us to cease
using important  technology  invalidate our  intellectual  property  rights,  or
require us to license disputed rights from third parties.  However, we cannot be
certain that any licenses  will be  available to us on  commercially  reasonable
terms or at all. Our inability to obtain such a license could  materially  delay
the  commercialization  of  our  products,  require  us  to  expend  substantial
resources  to design and develop  alternative  to the disputed  technology,  and
otherwise  harm our  business.  Our license  with Target  Therapeutics  does not
provide us with indemnification against claims brought by third parties alleging
infringement  of  patent  rights.  Consequently,  we would  bear  the  liability
resulting from such claims. We cannot be certain that we will have the financial
resources to protect and defend our  intellectual  property,  as such defense is
often costly and time-consuming. Our failure to protect our patent rights, trade
secrets, know-how or other intellectual property would harm our business.

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

     U.S.  healthcare  providers,   including  hospitals  and  physicians,  that
purchase   microcatheter   products   generally  rely  on  third-party   payors,
principally federal Medicare, state Medicaid and private health insurance plans,
to reimburse all or a part of the costs and fees  associated with the procedures
performed  using our products.  The success of our products will depend upon the
ability of healthcare providers to obtain satisfactory reimbursement for medical
procedures  in which our  microcatheter  systems are used.  If these  healthcare
providers are unable to obtain reimbursement from third-party payors, the market
may not accept our products and our revenues may decline.

Third-party  payors may deny  reimbursement  if they determine that a prescribed
device:

     o    has not received appropriate regulatory clearances or approvals;

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

     o    is experimental, unnecessary or inappropriate.

     If we receive FDA  clearance or approval,  third-party  reimbursement  also
would  depend  upon  decisions  by  the  United  States  Health  Care  Financing
Administration  for  Medicare,  as  well  as by  individual  health  maintenance
organizations,  private  insurers  and other  payors.  Reimbursement  systems in
international  markets vary  significantly  by country and by region within some
countries,  and reimbursement  approvals may be obtained on a country-by-country
basis. Many international  markets have  government-managed  health care systems
that control  reimbursement  for new devices and  procedures.  In most  markets,
there are private insurance systems as well as government-managed systems. There
can be no assurance that:

                                       36
<PAGE>

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

     o    if available,  that such reimbursement will be available in sufficient
          amounts in the United States or in international  markets under either
          government or private reimbursement systems; or

     o    that physicians will support and advocate reimbursement for procedures
          using our products.

     Failure  by   hospitals   and  other  users  of  our   products  to  obtain
reimbursement  from  third-party  payors or changes in  government  and  private
third-party  payor policies toward  reimbursement  for procedures  employing our
products  would harm our  business.  Moreover,  we are  unable to  predict  what
additional  legislation  or  regulation,  if any,  relating  to the health  care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on our business.

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

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

     o  capacity constraints;

     o  production yields;

     o  quality control; and

     o  shortages of qualified personnel.

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

     Our  manufacturing   facilities  are  subject  to  periodic  inspection  by
regulatory  authorities.  Our  operations  must either  undergo  Quality  System
Regulations  compliance  inspections  conducted  by the  FDA or  receive  an FDA
exemption from such compliance  inspections in order for the FDA to permit us to
produce products for sale in the United States. Our facilities and manufacturing
processes are subject to inspections  from time to time by the FDA, the State of
California and European Notified Bodies.  We have  demonstrated  compliance with



                                       37
<PAGE>

ISO 13485 or ISO 9001 quality  standards,  as well as compliance with 93/42/EEC,
the Medical Device Directive.  We comply with procedures to produce products for
sale in Europe.  Any failure by us to comply with the Quality System Regulations
requirements  or to maintain our compliance with ISO 13485 or ISO 9001 standards
and 93/42/EEC, the Medical Device Directive,  will require us to take corrective
actions,  such as modification of our policies and procedures.  In addition,  we
may be required to cease all or part of our  operations  for some period of time
until we can demonstrate that  appropriate  steps have been taken to comply with
Quality System  Regulations or ISO 13485 or ISO 9001 standards.  There can be no
assurance  that  we  will  be  found  in  compliance  with  the  Quality  System
Regulations by regulatory authorities,  or that we will maintain compliance with
ISO 13485 or ISO 9001  standards  in future  audits.  Our failure to comply with
state or FDA Quality System  Regulations,  maintain compliance with ISO 13485 or
ISO 9001 standards,  or develop our manufacturing  capability in compliance with
such standards, would have a material adverse effect on our business,  financial
condition and results of operations.

     Our  facilities  and  manufacturing  processes  have undergone a successful
annual  surveillance  audit by the European Notified Body in December 2004 and a
pre-PMA  inspection in December  2003. In November 2000 and in January 2003, the
FDA conducted an inspection of our quality system, which we successfully passed.
There is no assurance that our  manufacturing  facilities  will continue to meet
such compliance audits and will maintain such compliance standards.

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

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

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

     We face an inherent  business risk of product liability claims in the event
that the use or misuse of our products  results in personal  injury or death. We
have received claims of this type in the past and may receive  additional claims
in the future. We cannot be certain, in particular after commercial introduction
of our products,  that we will not  experience  losses due to product  liability
claims.  Although we currently  have  general  liability  and product  liability
insurance  coverage,  this  coverage  is  subject to  per-occurrence  and annual
limitations,  as well as substantial deductibles. We cannot be certain that such
coverage will be adequate or continue to be available to us on reasonable terms,
if at all. In  addition,  there can be no assurance  that all of the  activities
encompassed  within  our  business  are or will be covered  under our  policies.
Although we label our  microcatheter  products for single-use only, we are aware
that some physicians are re-using such products.  Moreover, despite labeling our
microcatheters  for  diagnostic  use only, we believe that  physicians are using
such mapping microcatheters for ablation. Multiple use or "off-label" use of our
microcatheters  could  subject us to  increased  exposure  to product  liability
claims,  which could have a material  adverse effect on our business,  financial
condition and results of operations. We may require additional product liability
coverage if we  significantly  expand  commercialization  of our products.  Such
additional  coverage is expensive,  difficult to obtain and may not be available
in the future on  acceptable  terms,  if at all.  Any claims or series of claims
against us, regardless of their merit or eventual outcome, could have a material
adverse effect on our business, financial condition and results of operations.

                                       38
<PAGE>

We are dependent upon our key personnel.

     Our ability to operate  successfully  depends in significant  part upon the
continued service of certain key scientific, technical, clinical, regulatory and
managerial  personnel,   and  our  continuing  ability  to  attract  and  retain
additional  highly  qualified  personnel  in these areas.  Competition  for such
personnel is intense,  especially  in the San  Francisco  Bay Area. We cannot be
certain  that we can  retain  such  personnel  or that,  if we are able to raise
additional  capital in amounts sufficient to maintain and expand our operations,
we  will be able  to  attract  or  retain  other  highly  qualified  scientific,
technical, clinical, regulatory and managerial personnel in the future.

We do not intend to pay cash dividends on our stock.

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

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

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

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

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

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

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

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

Each of these provisions could discourage potential takeover attempts.

                                       39
<PAGE>

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

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 4. CONTROLS AND PROCEDURES

(a)  Evaluation of disclosure controls and procedures

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

     Subject to the limitations noted above, as of the end of the period covered
by this report,  we conducted an evaluation,  under the supervision and with the


                                       40
<PAGE>

participation of our chief executive  officer and chief financial officer of our
disclosure  controls  and  procedures  (as  defined in Rule  13a-15(e)  and Rule
15d-15(e) of the Exchange Act). Based upon this evaluation,  our chief executive
officer and chief financial officer  concluded that our disclosure  controls and
procedures  were  not  effective  to  ensure  that  information  required  to be
disclosed  by us in the reports that we file or submit under the Exchange Act is
recorded, processed,  summarized and reported, within the time periods specified
in the Commission's  rules and forms. This determination was based upon the lack
of segregation of duties caused by the Company wide Furlough on June 17, 2005.

(b)  Changes in internal control over financial reporting

Except as set forth below,  there was no change in our  internal  controls or in
other factors that could affect these  controls  during our last fiscal  quarter
that has materially affected,  or is reasonably likely to materially affect, our
internal control over financial reporting.

The  following  events  adversely  affected  the  Company's  ability to maintain
adequate  internal  controls  over  financial  reporting  during the last fiscal
quarter:

     o    The Company  furloughed  all of its employees on June 17, and re-hired
          approximately  one-half  of the  pre-furlough  employees  on August 15
          ,2005. The loss of so many employees resulted in a lack of segregation
          of duties,  as evidenced by Mr. Gabriel Vegh serving as both our Chief
          Executive Officer and Chief Financial Officer.

     o    On August 26,  2005,  Mr.  Spero  Matthews  resigned as the  Company's
          Controller.

     o    On October 17,  2005,  BDO  Seidman,  LLP  resigned  as the  Company's
          independent registered public accounting firm.

Notwithstanding  the  foregoing,  the Company has taken the  following  steps to
improve its disclosure controls and procedures:

     o    On October 3, 2005,  the Company  hired Mr.  Chris Mak to serve as its
          new Company's Controller;

     o    In  October,  2005,  the  Company  hired Mr.  Jim Pardee to serve as a
          finance and accounting consultant;

     o    Also on October 18, 2005, the Company  engaged Marc Lumer & Company to
          serve as its new independent registered public accounting firm.

We  believe  these  additions  in  personnel  enhance  our  ability  to meet our
financial and other  reporting  obligations as well as strengthen our disclosure
controls  and  procedures  so that they are  currently  effective to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded,  processed,  summarized and reported, within
the time periods specified in the Commission's rules and forms.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

                                       41
<PAGE>

     We  are  currently  not  a  party  to  any  material   legal   proceedings.
Notwithstanding  the foregoing,  the Company has entered into several agreements
with parties to act as its financial  advisors,  finders or agents in connection
with actual and proposed equity financings, which have provided that the Company
will pay cash fees and issue warrants to purchase shares of the Company's common
stock to these parties in  connection  with the  Company's  financings.  Some of
these  advisors,  finders and agents have alleged that they are owed  additional
cash and warrant compensation in connection with our prior financings,  to which
we have felt they were not entitled,  and which would be in addition to fees and
warrants  paid to  other  advisors  with  respect  to the  same  investors.  Our
financial advisors,  finders and agents may assert similar claims in the future.
Additional  details  concerning the terms of these various  agreements,  and the
fees and  warrants  previously  paid to these  parties,  can be  reviewed in our
Annual Report on Form 10-K as filed with the Securities and Exchange  Commission
on March 31, 2005. An unfavorable  outcome of some or all of these matters could
have a material adverse effect on the Company's cash flows, business, results of
operations  or financial  position.  An estimate of potential  loss from pending
claims cannot be made at this time.

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

        None.

Item 3. Defaults Upon Senior Securities

     On November 10, 2005, the Company and Apix  International have entered into
an  amendment  to the Loan  Agreement to extend the date by which the Company is
required to file a registration statement in accordance with Section 10(b)(i) of
the Loan  Agreement.  The  amendment  agreement  extends  the date by which  the
Company is required to file a registration  statement from September 30, 2005 to
January  1,  2006.  Item 4.  Submission  of  Matters  to a Vote of the  Security
Holders.

         None.

Item 5.  Other Information

     On  October  17,  2005,  BDO  Seidman,  LLP  resigned  as  the  independent
registered  public  accounting  firm for Cardima,  Inc. The Company engaged Marc
Lumer & Company as its new independent  registered  public  accounting firm. The
Company's  decision to engage the new  accountant  was  approved by its Board of
Directors  on  October  18,  2005.  The  reports  from BDO  Seidman,  LLP on the
financial  statements  of the  Company  for each of the two most  recent  fiscal
years,  did not contain an adverse  opinion or disclaimer of opinion and was not
qualified or modified as to  uncertainty,  audit scope or accounting  principles
for the two most recent fiscal years, except that BDO Seidman,  LLP's opinion in
its report on the Company's financial statements for each of the last two fiscal
years  expressed  substantial  doubt with  respect to the  Company's  ability to
continue as a going concern.

                                       42
<PAGE>

     On October 28, 2005,  Cardima  announced  that its shares are now quoted on
the  Over-the-Counter  Bulletin Board (OTC BB) under the ticker symbol  CRDM.BB.
The Company's shares were previously quoted on the Pink Sheets.

Item 6. Exhibits


Exhibit
Number                              Description
--------- ----------------------------------------------------------------------
10.1      Loan Agreement dated August 28, 2005 by and between Apix International
          Limited  and  Cardima,  Inc.  (as  incorporated  by  reference  to the
          Registrant's   Form  8-K  filed  with  the   Securities  and  Exchange
          Commission filed on September 1, 2005)

10.2      Amendment No. 1 to Loan Agreement dated November 10, 2005

10.3      10%  Promissory  Note of Cardima,  Inc.  dated  August 26,  2005.  (as
          incorporated by reference to the Registrant's  Form 8-K filed with the
          Securities and Exchange Commission filed on September 1, 2005)

10.4      Warrant  Agreement to purchase  shares of the common stock of Cardima,
          Inc. dated as of August 28, 2005. (as incorporated by reference to the
          Registrant's   Form  8-K  filed  with  the   Securities  and  Exchange
          Commission filed on September 1, 2005)

10.5      Security Agreement dated August 12, 2005, by and between Cardima, Inc.
          and Apix  International  Limited (as  incorporated by reference to the
          Company's Form 8-K filed with the  Securities and Exchange  Commission
          on August 16, 2005).

10.6      Trademark  Security  Agreement  dated August 12, 2005,  by and between
          Cardima,  Inc.  and Apix  International  Limited (as  incorporated  by
          reference  to the  Company's  Form 8-K filed with the  Securities  and
          Exchange Commission on August 16, 2005).

10.7      Patent  Security  Agreement  dated  August 12,  2005,  by and  between
          Cardima,  Inc.  and Apix  International  Limited (as  incorporated  by
          reference  to the  Company's  Form 8-K filed with the  Securities  and
          Exchange Commission on August 16, 2005).

10.8      Patent,  Trademark and Copyright  Security  Agreement dated August 12,
          2005, by and between Cardima,  Inc. and Apix International Limited (as
          incorporated  by  reference to the  Company's  Form 8-K filed with the
          Securities and Exchange Commission on August 16, 2005).


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

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

                                       43
<PAGE>







                                  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:     November 21, 2005


                               CARDIMA, INC.



                                /s/ Gabriel B. Vegh
                                ------------------------------------------------
                                GABRIEL B. VEGH
                                Chairman   of  the   Board,   Chief   Executive
                                Officer, and Chief Financial Officer
                                (Principal Executive, Financial and Accounting
                                Officer)


                                       44