UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




(Mark
One)





            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2008




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: 000-22419




CARDIMA, INC.




(Exact
name of registrant as specified in its charter)




Delaware
            
            94-3177883(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      Number)






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
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.  Yes x No  .




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.




Large
      accelerated filer 
            Accelerated
      filer 
            Non-accelerated
      filer 
            Smaller
      reporting company x







Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2) of the Act. Yes   No   x




There
were 116,389,966 shares of the registrant's common stock outstanding as of May
14, 2008.






1












CARDIMA, INC.




TABLE
OF CONTENTS




PART
I.  Financial Information







Description
            PageItem
      1.
            Financial
      Statements (unaudited)
            3Condensed
      Balance Sheets as of March 31, 2008 and December 31, 2007
            3Condensed
      Statements of Operations for the Three Months ended March 31, 2008 and
      March  31, 2007
            4Condensed
      Statements of Cash Flows for the Three Months ended March 31, 2008 and
      2007
            5Notes
      to Condensed Financial Statements
            6Item
      2.
            Management’s
      Discussion and Analysis and Results of Operations
            17Item
      3.
            Controls
      and Procedures
            20




PART
II.  Other Information




Description
            PageItem
      1.
            Legal
      Proceedings
            21Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            22Item
      3.
            Defaults
      Upon Senior Securities
            22Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            22Item
      5.
            Other
      Information
            22Item
      6.
            Exhibits
            22Signatures
            23











2






PART
I.


ITEM
1.  Financial Statements


CARDIMA,
INC.


CONDENSED
BALANCE SHEETS


(In
thousands, except per share amounts)






ASSETS
              
              March
      31, 2008
              
              December 31, 2007Current
      assets:
              
              (Unaudited)
              
              
              (a)Cash
              
              $
              1,682
              
              
              $
              4,811Accounts
      receivable, net of allowances for doubtful accounts of $77
              
              
              298
              
              
              
              183Short
      term investment
              
              
              2,084
              
              
              
              2,008Inventories
              
              
              744
              
              
              
              402Prepaid
      expenses
              
              
              675
              
              
              
              46Other
      current assets
              
              
              97
              
              
              
              131Total
      current assets
              
              
              5,580
              
              
              
              7,581Property
      and equipment, net
              
              
              644
              
              
              
              362Other
      assets
              
              
              61
              
              
              
              61TOTAL
      ASSETS
              
              $
              6,285
              
              
              $
              8,004LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              776
              
              
              $
              443Accrued
      liabilities
              
              
              964
              
              
              
              911Notes
      payable to related parties - current portion
              
              
              11
              
              
              
              10Capital
      leases - current portion
              
              
              18
              
              
              
              24Payable
      related party
              
              
              100
              
              
              
              175Total
      current liabilities
              
              
              1,869
              
              
              
              1,563Capital
      leases - net of current portion
              
              
              21
              
              
              
              7Notes
      payable to related-party - net of current portion
              
              
              51
              
              
              
              53TOTAL
      LIABILITIES
              
              
              1,941
              
              
              
              1,623Stockholders'
      Equity:Preferred
      stock, $0.001 par value, liquidation preference of $0.10, 5,000,000 shares
      authorized, 5,000,000 issued and outstanding.
              
              
              500
              
              
              
              500Common
      stock, $0.001 par value, 300,000,000 shares authorized, 116,389,966 and
      116,316,311 shares issued and outstanding at March 31, 2008 and December
      31, 2007, respectively
              
              
              116
              
              
              
              116Additional
      paid-in-capital
              
              
              182,603
              
              
              
              182,324Accumulated
      deficit
              
              
              (178,875
              )
              
              
              (176,559
              )Total
      Stockholders' Equity
              
              
              4,344
              
              
              
              6,381TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              6,285
              
              
              $
              8,004




See
accompanying notes to these condensed financial statements






(a)
derived from the December 31, 2007 Audited Financial
Statement








3




CARDIMA,
INC.


CONDENSED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)


(Unaudited)


Three
      Months Ended March 31, 2008 (Unaudited)
              
              
              Three
      Months Ended March 31, 2007Net
      sales
              
              $
              417
              
              
              $
              319Cost
      of goods sold
              
              
              437
              
              
              
              424Gross
      deficiency
              
              
              (20
              )
              
              
              (105
              )Operating
      expenses:Research
      and development
              
              
              983
              
              
              
              903Selling,
      general and administrative
              
              
              1,373
              
              
              
              884Total
      operating expenses
              
              
              2,356
              
              
              
              1,787Operating
      loss
              
              
              (2,376
              )
              
              
              (1,892
              )Interest
      income
              
              
              63
              
              
              
              -Other
      income / income expense
              
              
              (3
              )
              
              
              (220
              )Loss
      on excess share over authorized
              
              
              
              
              
              
              (7,737
              )Total
      other income (expense)
              
              $
              (2,316
              )
              
              $
              (9,849
              )Basic
      and diluted net loss per share
              
              $
              (0.02
              )
              
              $
              (0.96
              )Shares
      used in computing basic and diluted net loss per share
              
              
              116,365
              
              
              
              10,267




See
accompanying notes to these condensed financial
statements








4










CARDIMA,
INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Three
      Months Ended March 31,2008
                
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIES:
                
                (Unaudited)
                
                
                (Restated)Net
      loss
                
                $
                (2,316
                )
                
                $
                (9,849
                )Adjustments
      to reconcile net loss to net cash used in operating activities provided by
      operations:Depreciation
      and amortization
                
                
                27
                
                
                
                20Non-cash
      stock-based compensation
                
                
                247
                
                
                
                66Disposal
      of assets
                
                
                2Loss
      on excess shares over authorized
                
                
                -
                
                
                
                7,737Excess
      and obsolete inventory
                
                
                (186
                )
                
                
                51Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (114
                )
                
                
                273Inventories
                
                
                (155
                )
                
                
                (240
                )Prepaid
      and other assets
                
                
                (595
                )
                
                
                74Accounts
      payable, accrued compensation and other liabilities
                
                
                385
                
                
                
                40Accrued
      fees
                
                
                -
                
                
                
                217Net
      cash used in operating activities
                
                
                (2,705
                )
                
                
                (1,611
                )CASH
      FLOWS FROM INVESTING ACTIVITIESShort-term
      investment
                
                
                (77
                )
                
                
                -Purchase
      of property and equipment
                
                
                (290
                )
                
                
                (24
                )Net
      cash used in investing activities
                
                
                (367
                )
                
                
                (24
                )CASH
      FLOWS FROM FINANCING ACTIVITIESPrincipal
      payments under capital leases and credit facility
                
                
                (12
                )
                
                
                (5
                )Payment
      on payable-related party
                
                
                (75
                )
                
                
                -Payment
      from notes payable
                
                
                (2
                )
                
                
                -Net
      proceeds from loan financing
                
                
                -
                
                
                
                1,350Net
      proceeds from sale of common stock
                
                
                32
                
                
                
                19Net
      cash provided by (used in)  financing activities
                
                
                (57
                )
                
                
                1,364Change
      in cash and cash equivalents
                
                
                (3,129
                )
                
                
                (271
                )Beginning
      cash and cash equivalents
                
                
                4,811
                
                
                
                942Ending
      cash and equivalents
                
                $
                1,682
                
                
                $
                671SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS INFORMATIONCash
      paid for income taxes
                
                $
                -
                
                
                $
                -Cash
      paid for interest
                
                $
                7
                
                
                $
                5SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESCapital
      Lease Equipment
                
                $
                22
                
                
                $
                -


See
accompanying notes to these condensed financial statements




5








CARDIMA,
INC.


NOTES
TO CONDENSED FINANCIAL STATEMENTS


MARCH
31, 2008


(Unaudited)





1. NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Cardima,
Inc., (“The Company”) was incorporated in the State of Delaware on November 12,
1992. The Company designs, develops, manufactures and markets minimally
invasive, single-use, micro-catheter systems for the mapping and ablation of the
two most common forms of cardiac arrhythmias: atrial fibrillation and
ventricular tachycardia. The Company has licensed its micro-catheter technology
for use in the treatment of electrophysiological diseases affecting areas other
than the central nervous system from Target Therapeutics. The Company sells its
products worldwide through both direct sales and distribution channels, with a
substantial portion of its sales to international customers.




2.  BASIS
OF PRESENTATION - INTERIM FINANCIAL INFORMATION




The
accompanying condensed unaudited interim financial statements included herein
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC").  The condensed financial
statements and notes are presented as permitted on Form 10-QSB and do not
contain information included in the Company's annual statements and notes.
 Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
 It is suggested that these condensed financial statements be read in
conjunction with the December 31, 2007 audited financial statements and the
accompanying notes thereto filed on Form 10KSB with SEC.  While management
believes the procedures followed in preparing these condensed financial
statements are reasonable, the accuracy of the amounts are in some respects
dependent upon the facts that will exist, and procedures that will be
accomplished by the Company later in the year.  These results are not
necessarily indicative of the results to be expected for the full
year.




These
condensed unaudited financial statements reflect all adjustments, including
normal recurring adjustments, which, in the opinion of management, are necessary
to present fairly the operations and cash flows for the periods
presented.





The
accompanying unaudited consolidated financial statements in this report have
been presented on the going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
While the Company has obtained additional equity financing in December 2007 and
May 2008, the Company’s viability as a going concern is dependent upon its
ability to maintain and increase profitable operations through increased sales
and the higher profit margins received from product sales. During the fiscal
years starting from 1992 the Company has experienced significant operating
losses with corresponding reductions in working capital and stockholders'
equity. The Company does not currently have any external financing in place to
support operating cash flow requirements. However, historically, management has
been able to raise capital through the issuance of debt or equity to meet
working capital needs.  The Company obtained approximately $5 million
in additional capital through an equity offering in May 2008.





To
address the going concern issue, management implemented financial and
operational plans to improve operating efficiencies, reduce overhead and reduce
and eliminate cash losses, and position the Company for future profitable
operations. The Company is reducing its general and administrative expenses by
streamlining its executive and administrative support team.





The
Company’s Independent Registered Accounting Firm has also mentioned the
liquidity caution in Note1 in its financial statements for the period ended
December 31, 2007.





3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Significant
accounting policies followed in the preparation of the consolidated financial
statements are as follows:





There
have been no significant changes in the Company's significant accounting
policies during the three months ended March 31, 2008 compared to what was
previously disclosed in the Company's Annual Report on 10-KSB for the year ended
December 31, 2007.






6






USE OF
ESTIMATES




The
preparation of financial statements in conformity with GAAP requires the
Company’s management to make estimates and judgments that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include
the fair value of stock-based compensation, the allowance for doubtful accounts
inventory reserves, and valuation allowance for deferred tax
assets.  The Company bases its estimates on historical experience and
on various other assumptions that it believes to be reasonable under the
circumstances. Actual results may differ significantly from the Company’s
estimates. In addition, any significant unanticipated changes in any of the
Company’s assumptions could have a material adverse effect on its business,
financial condition, and results of operations.




Comprehensive
Loss:





Comprehensive
loss consists of net loss and other gains and losses affecting stockholders’
equity that, under generally accepted accounting principles are excluded from
net loss in accordance with Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive
Income.  The Company, however, does not have any components of
other comprehensive loss as defined by SFAS No. 130 and therefore, for the three
months ended March 31, 2008 and 2007, comprehensive loss is equivalent to the
Company’s reported net loss.  Accordingly, a statement of
comprehensive loss is not presented.




STOCK-BASED
COMPENSATION




Since
January 1, 2006, Cardima follows Statement of Financial Accounting Standard
123 (revised 2004), “Share - Based Payment” (“SFAS 123(R)”) which requires the
measurement and recognition of compensation expense for all share-based awards
made to employees and directors, including employee stock options and employee
stock purchases, based on estimated fair values. Also, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)
relating to SFAS 123(R). Cardima has applied the provisions of SAB 107 in its
adoption of SFAS 123(R). Cardima adopted SFAS 123(R) using the modified
prospective transition method.




Stock
compensation expense recognized during the period is based on the value of
share-based awards that are expected to vest during the period. Stock
compensation expense recognized in Cardima's statements of operations for
2008 and 2007 includes compensation expense related to share-based awards
granted prior to January 1, 2006 that vested during the current period
based on grant date fair value estimated in accordance with the pro forma
provisions of SFAS 123. Stock compensation expense for the share-based awards
granted subsequent to January 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). As stock
compensation expense recognized in the statement of operations is based on
awards ultimately expected to vest, it has been adjusted for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.For the three months ended March 31, 2008 and 2007, no excess tax
benefits were generated.




Cardima’s
determination of estimated fair value of share-based awards utilizes the
Black-Scholes option-pricing model. The Black-Scholes model is affected by
Cardima’s stock price as well as assumptions regarding certain highly complex
and subjective variables. These variables include, but are not limited to;
Cardima’s expected stock price volatility over the term of the awards and actual
and projected employee stock option exercise behaviors.







Stock
Warrants Issued to Third Parties


The
Company accounts for stock warrants issued to third parties, including
customers, in accordance with the provisions of the EITF Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services, and EITF 01-9, Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor’s
Products). Under the provisions of EITF 96-18, because none of the
Company’s agreements have a disincentive for nonperformance, the Company records
a charge for the fair value of the portion of the warrants earned from the point
in time when vesting of the warrants becomes probable. Final determination of
fair value of the warrants occurs upon actual vesting. EITF 01-9 requires that
the fair value of certain types of warrants issued to customers be recorded as a
reduction of revenue to the extent of cumulative revenue recorded from that
customer.  The Company has not issued any warrants to customers in
2008 or 2007.








7





Net
Income (Loss) Per Common Share




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





March
      31,
            
            
            March
      31,2008
            
            
            2007Warrants
            
            
            6,745,759
            
            
            
            7,381,761Stock
      Options
            
            
            6,926,683
            
            
            
            446,764Preferred
      Shares
            
            
            1,000,000
            
            
            
            -Total
      Warrants, Options and Preferred Shares
            
            
            14,672,442
            
            
            
            7,828,525


Reclassifications





Certain
prior year financial statement amounts have been reclassified to conform to the
current year presentation.  The reclassifications did not impact net
loss or stockholder’s equity.







4.
ADOPTION OF NEW ACCOUNTING STANDARDS




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.”  The Statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure related to the use of fair value measures in financial
statements.  The provisions of SFAS No. 157 were to be effective for
fiscal years beginning after November 15, 2007.  On February 6, 2008,
the FASB agreed to defer the effective date of SFAS No. 157 for one year for
certain nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  Effective January 1, 2008, the Company
adopted SFAS No. 157 except as it applies to those nonfinancial assets and
nonfinancial liabilities.  The adoption of SFAS No. 157 did not have
any material impact on the Company’s results of operations or financial
position.




Effective
January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – including an amendment of FASB
Statement No. 115.”  SFAS No. 159 allows an entity the irrevocable
option to elect fair value for the initial and subsequent measurement of certain
financial assets and liabilities under an instrument-by-instrument
election.  Subsequent measurements for the financial assets and
liabilities an entity elects to fair value will be recognized in the results of
operations.  SFAS No. 159 also establishes additional disclosure
requirements.  The Company did not elect the fair value option under
SFAS No. 159 for any of its financial assets or liabilities upon
adoption.  The adoption of SFAS No. 159 did not have a material impact
on the Company’s results of operations or financial position.




In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
which amends FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, requires companies with derivative instruments to
disclose information about how and why a company uses derivative instruments,
how derivative instruments and related hedged items are accounted for under
Statement 133, and how derivative instruments and related hedged items
affect a company’s financial position, financial performance, and cash flows.
The required disclosures include the fair value of derivative instruments and
their gains or losses in tabular format, information about credit-risk-related
contingent features in derivative agreements, counterparty credit risk, and the
company’s strategies and objectives for using derivative instruments. The
Statement expands the current disclosure framework in Statement 133.
Statement 161 is effective prospectively for periods beginning on or after
November 15, 2008. The Company is currently evaluating this
pronouncement.





In June
2007, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-11,
"Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards."
EITF Issue No 06-11 requires that tax benefits generated by dividends paid
during the vesting period on certain equity-classified share-based compensation
awards be treated as additional paid-in capital and included in a pool of excess
tax benefits available to absorb tax deficiencies from share-based payment
awards. EITF Issue No. 06-11 is effective beginning with the 2008 fiscal
year. The Company does not expect it to have a significant impact on its
financial position, results of operations or cash flows.




8




Also in
June 2007, the FASB ratified EITF Issue No. 07-3, "Accounting for Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities." EITF 07-3 provides that nonrefundable advance payments made for
goods or services to be used in future research and development activities
should be deferred and capitalized until such time as the related goods or
services are delivered or are performed, at which point the amounts would be
recognized as an expense. This issue is effective for fiscal years beginning
after December 15, 2007.  The Company has evaluated the potential
impact of these issues and anticipates that they will have no material impact on
its financial position and results of operations.





In
April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets,” (“FSP No. 142-3”). The
intent of this FSP is to improve consistency between the useful life of a
recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”), and the period of expected cash flows used to measure
the fair value of the intangible asset under SFAS No. 141R. FSP No. 142-3 will
require that the determination of the useful life of intangible assets acquired
after the effective date of this FSP shall include assumptions regarding renewal
or extension, regardless of whether such arrangements have explicit renewal or
extension provisions, based on an entity’s historical experience in renewing or
extending such arrangements. In addition, FSP No. 142-3 requires expanded
disclosures regarding intangible assets existing as of each reporting period.
FSP 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those years. Early
adoption is prohibited. The Company is currently evaluating the impact that FSP
No. 142-3 will have on its financial statements.





In August
2007, the FASB released proposed Financial Statement of Position APB 14-a,
Accounting For Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Including Partial Cash Settlement) (FSP APB 14-a) that would alter
the accounting treatment for convertible debt instruments that allow for either
mandatory or optional cash settlements. FSP APB 14-a, if adopted as proposed,
could significantly impact the accounting associated with the Company’s
convertible  notes. This FSP would require the Company to recognize
additional (non-cash) interest expense based on the market rate for similar debt
instruments without the conversion feature. Furthermore, it would require
recognizing interest expense in prior periods pursuant to the proposed
retrospective accounting treatment. The proposed FSP was issued for a 45-day
comment period. It is anticipated that the final FSP will be issued in the
second calendar quarter of 2008 and is expected to be effective for fiscal years
beginning after December 15, 2008. The Company would not be required to adopt
this FSP until the first quarter of fiscal 2010.





5. GOING
CONCERN





As
reported in the consolidated financial statements accompanying the Company’s
annual report on Form 10-KSB for the year ended December 31, 2007. The Company
incurred net losses for the years ended December 31, 2007 and 2006. The Company
has also suffered recurring losses, has a negative working capital position and
a stockholders' deficit. As noted in the independent auditor's report on the
Company’s December 31, 2007, financial statements, these factors raise
substantial doubt about the Company's ability to continue as a going
concern.





For the
three months ended March 31, 2008, the Company is reporting net loss of
$2,316,000 and cash used in operations amounted to $2,780,000. The Company did
decrease its net loss from the same period of the prior year but it used more
cash for operating activities. The Company has had a history of net losses over
the years. These consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and


classification
of liabilities that might be necessary in the event the Company cannot continue
in existence.





Management
has taken  action to reduce operating costs  and has
established plans  to increase the sales of the Company's products and
services. Management intends to seek financing to provide funds needed to
increase liquidity, fund growth in revenues and to implement its business plan.
The Company intends to secure working capital through additional debt or equity
financings. Any additional equity financing could dilute the equity interests of
existing security holders. If adequate funds are not available or are not
available on acceptable terms, the Company’s ability to operate its business and
fund its operations could be materially and adversely affected. No assurance can
be given that the Company will be able to raise any additional
capital.





6.
RESTATEMENTS





As
disclosed in Item 4.02(a) of the Company's Form 8-K dated October 1, 2007, as
filed with the Securities and Exchange Commission ("SEC") on March 26, 2008, the
Company detected errors in the calculation and disclosure of:





·
            effect
      of debt modification
extinguishment.


·
            excess
      share liability





In  the
footnotes of the Company's 2007 audited financial statements, which were filed
on Form 10KSB with SEC,  the Company presented the restated interim
financial statements for the three months ending March 31, 2007, the three and
six months ending June 30, 2007 and the three and nine months ending September
30, 2007. The Company determined that it misapplied accounting principles
generally accepted in the United States of America in relation to accounting for
a modification or exchange of debt instruments and the derivative liability for
shares required for potential dilutive securities exceeding the authorized
shares. The following outlines the changes relative to this
misapplication.




9






·
            Specifically,
      the Company did not properly record debt modification and related
      additional financing received in February 2006. The Company analyzed this
      transaction and determined that debt extinguishment accounting should be
      applied under guidance provided by EITF Issue Nos. 96-19 and
      06-06.




·
            The
      Company recorded a liability for the derivative instrument that resulted
      due to the number of potential common stock shares plus outstanding shares
      that exceeded the number of authorized common stock shares. At June 30,
      2006, September 30, 2006, December 31, 2006, and March 31, 2007, the
      Company’s authorized shares were less than the outstanding shares plus
      potential shares from the exercise of options, warrants, and convertible
      debt that were issued. The excess potential shares were attributed to the
      additional funding received starting in April 2006 from the issuance of
      convertible debt. The Company calculated the fair value of these potential
      shares and recorded a corresponding
liability.




In June
2007, the shareholders of the Company voted for a reverse stock-split without a
corresponding decrease in the number of shares authorized. As a result of this
action, the Company cured this liability as the authorized common shares now
exceed all outstanding common shares and potential common shares. The Company
originally booked a derivative liability based on the fair value of the
Company's common stock on each balance sheet date and any change was processed
through a charge or gain in the statement of operations.





Both of
these errors resulted in an understatement of the net loss for the affected
periods. These errors did not affect the Company's reported cash flows for the
reporting periods, as they were non-cash items.





The
Condensed Statement of Operations for the three ended March 31, 2007 in this
report reflects the restatements as reported in the Company's amended disclosure
for the quarterly period ended March 31, 2007 as filed in 10KSB December 31,
2007 on April 15, 2008.





7.
 INVENTORIES





Inventories
are stated at the lower of cost or market.  Cost is based on actual
costs computed on a first-in, first-out basis.  Inventories consist of
the following (in thousands):





March
      31, 2008
            
            
            December
      31, 2007Raw
      Materials
            
            $
            508
            
            
            $
            202Work-In-Process
            
            
            12
            
            
            
            23Finished
      Goods
            
            
            224
            
            
            
            177$
            744
            
            
            $
            402





Inventories
shown above are computed using the FIFO cost method and are adjusted to the
lower of cost or market.  The Company had allowances for excess and
obsolete inventory of $429,000 and $615,000 at March 31, 2008 and December 31,
2007, respectively.  As of March 31, 2008, the Company has
approximately $44,000 of inventories located in foreign countries, which were
held by the local distributor.





8.  PROPERTY
AND EQUIPMENT





Property
and equipment, including equipment under capital leases, are carried at cost
less accumulated depreciation and amortization.  Property and
equipment are depreciated using the straight-line method over the estimated
useful lives, generally three to five years.  Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the remaining term of the
lease.  Depreciation expense includes amortization of capital leases
and leasehold improvements. Depreciation expense was $27,000 and $20,000 for the
three months ended March 31, 2008 and 2007, respectively.






10





Property
and equipment consist of the following (in thousands):





March
      31, 2008
            
            
            December
      31, 2007Equipment
            
            $
            2,462
            
            
            $
            2,230Leasehold
      improvements
            
            
            309
            
            
            
            270$
            2,771
            
            
            $
            2,500Less:
      accumulated depreciation and amortization
            
            
            (2,127
            )
            
            
            (2,138
            )$
            644
            
            
            $
            362Idle
      Equipment
            
            $
            1,290
            
            
            $
            1,290Less:
      accumulated depreciation and amortization
            
            
            (1,290
            )
            
            
            (1,290
            )$
            -
            
            
            $
            -





9. NOTE
PAYABLE TO RELATED PARTIES





As
previously disclosed, the Company’s former President and Chief Operating
Officer, Mr. William K. Wheeler, has threatened to sue the Company for the
recovery of $375,000 plus interest, which he has claimed that he was owed under
the terms of his amended executive agreement. He made a settlement proposal,
which would extinguish his repayment obligation on the loan that he had received
from the Company in June 2000 and May 2001, in the total principal amount of
$192,500.





In
December 2006, a settlement agreement was reached in principle, which the
Company would pay $295,000 to Mr. Wheeler ($5,000 per month for 59 months). The
liability is accounted for in accordance with APB 21 as discussed in the
footnote to the filing. The liability was recorded at the final date of the
settlement. Until that date the exact terms had not been agreed to by both
parties. The Company had netted the notes receivable and payable in accordance
with the underlying agreement that gave both parties the right of offset in
accordance with FASB Technical Bulletin 88-2 which provides the specific
requirements for liabilities and receivables to be offset. The technical
bulletin has been superseded, but paragraph 4 of FIN 39 says that the guidance
in the Technical Bulletin has been incorporated largely without change. In
accordance with the Accounting Principle Board (“APB”) No. 21, “Interest on
Receivables and Payables”, the $295,000 note payable is discounted at 10% (same
as the interest rate on the current loan financing) and the $192,500 note
receivable is discounted at 6% (the original note’s interest rate). The
discounted value of the note payable and note receivable is $232,287 and
$162,022, respectively. The net note payable balance amounted to $61,262 and $
63,667 as of March 31, 2008 and December 31, 2007 respectively.





In
December 1997, the Company entered into a $300,000 note receivable agreement
with Phillip Radlick, Ph.D., a Director of the Company and then President and
Chief Executive Officer, to facilitate the purchase of a principal residence in
the San Francisco Bay Area. The note bears interest at the minimum Applicable
Federal Rate, and was due and payable in a single lump sum forty-eight months
from the note date. In August, 2001, the Board of Directors amended Dr.
Radlick’s agreement to extend this loan until the first of (i) the date that Dr.
Radlick no longer serves as a member of the Board of Directors, (ii) the date
when Dr. Radlick sells his house and (iii) December 16, 2005. As a security for
the note, Dr. Radlick granted the Company a security interest in his vested
stock options. At December 16, 2005, Dr. Radlick informed the Company that he
was unable to repay the loan. At December 31, 2005, the balance of the loan is
approximately $357,085, including approximately $78,585 of accrued interest. No
interest accrual was made after December 31, 2004. The loan balance is fully
reserved as of the end of December 31, 2007. In the recently concluded round of
financing on December 17, 2007,  Apix accepted for its services
rendered all rights, title and interest in a loan totaling $360,000, including
accrued interest, owed to the Company by Phil Radlick, with a guarantee by the
Company that the minimum recoverable value of the loan is not less than
$100,000.  In the event the actual amount recovered is less than
$100,000, the Company agrees to pay to Apix the amount of shortfall on or before
December 18, 2008.




10.
COMMITMENTS AND CONTINGENCIES





Commitments





The
Company leases facilities under an operating lease, which has been extended
through May 2010.  The Company also leases certain equipment under
non-cancelable capital leases, which bear interest at the rate of 10% per annum.
Following is a schedule of future minimum lease payments under both operating
and capital leases at March 31, 2008 (in thousands):








11






Fiscal
      Year
            
            Operating
      Leases
            
            
            Capital
      Leases$
            
            
            
            $2008
            
            
            265
            
            
            
            192009
            
            
            272
            
            
            
            162010
            
            
            115
            
            
            
            9Total
      minimum lease payments
            
            $
            652
            
            
            $
            44Less
      amounts representing interest
            
            
            N/A
            
            
            
            5Present
      value of net minimum lease payments
            
            $
            652
            
            
            $
            39








Contingencies





On August
31, 2007, our Board of Directors terminated the employment of our Chief
Executive Officer and Acting Chief Financial Officer, Mr. Gabriel
Vegh.  Mr. Vegh remains as a Director and his severance package has
not been finalized. If the Company and Mr. Vegh do not agree on the terms of the
severance package, the Company may face potential lawsuit arising from Mr.
Vegh’s termination. On March 3, 2008, the Company received a letter from the law
firm representing its former Chief Executive Officer and Acting Chief Financial
Officer Mr. Gabriel Vegh. Mr. Vegh claimed for damages for wrongful termination
in violation of statutes, breach of contract and related claims.  The
Company determined that Mr. Vegh’s termination was “with cause” thus the
severance provision of his employment agreement did not apply. The Company will
defend itself vigorously against Mr. Vegh’s claims.





On
October 31, 2007, the Company received a letter from the law firm representing
its former Director of Operations, Mr. Larry Stevens. Mr. Stevens claimed for
damages for wrongful termination in violation of public policy, breach of
contract and related claims.  The Company determined that Mr. Stevens’
termination was “with cause” thus the severance provision of his employment
agreement did not apply. The Company will defend itself vigorously against Mr.
Stevens’ claims.





In
addition, the Company is subject to numerous risks and uncertainties because of
the nature and status of its operations and could be subject to claims and legal
actions arising in the ordinary course of business. The Company maintains
insurance coverage for events in amounts that it deems appropriate. Management
believes that uninsured losses, if any, will not be materially adverse to the
Company’s financial position or results of operations.





11.
INTEREST EXPENSE





The
Company reported interest expense of $7,000 and $220,000 for the quarter ended
March 31, 2008 and 2007 respectively.





12.
INCOME TAXES





Historically,
Cardima has incurred net operating losses, or NOLs. Because of this history of
net operating losses Cardima does not currently believe that the future
realization of the tax benefit associated with these NOL carryforwards is more
likely than not; therefore, Cardima has recorded a valuation allowance for the
full amount of its net deferred tax assets.  Cardima will continue to
evaluate the likelihood that these tax benefits may be realized, and may reverse
all or a portion of its valuation allowance in the future if it is determined
that realization of these benefits is more likely than not.





Utilization
of the NOL carry forwards to offset future taxable income and tax, respectively,
may be subject to a substantial annual limitation due to ownership change
limitations that may have occurred previously or that could occur in the future
provided by Section 382 of the Internal Revenue Code of 1986, as amended (the
“Code”). In general, an ownership change, as defined by Section 382 of the Code,
results from transactions increasing the ownership of certain stockholders or
public groups in the stock of a corporation by more than 50 percentage points
over a three-year period.





13.
CONCENTRATIONS OF RISK





To date,
product sales have been direct to customers in the United States and to
distributors primarily in Europe and Japan. The geographic distribution of net
sales was as follows (in thousands):






12






Concentration
      of RiskYear
      Ended March 31,2008
              
              
              
              
              2007United
      States
              $
              258
              62
              %
              
              $
              250
              
              79
              %Europe
              
              155
              37
              %
              
              
              68
              
              21
              %Asia/Pacific
              
              1
              0
              %
              
              
              0
              
              0
              %Others
              
              3
              1
              %
              
              
              1
              
              0
              %Total
      Net Sales
              $
              417
              100
              %
              
              $
              319
              
              100
              %





During
the first quarter of 2007, the Company’s Japanese distributor notified the
Company of its failure to maintain the legal documentation standard required to
sell its PATHFINDER® in Japan.  As a result, the Company had no sales
in Japan in 2007.   The Company understands that the
reapplication process takes approximately twelve to eighteen
months.





The
Company’s diagnostic product group, namely the Pathfinder® family of
micro-catheter systems, accounted for 70% and 81% of net sales for the
three months ended March 31, 2008 and 2007, respectively.





The
Company purchases certain key components of its products for which there are
relatively few alternative sources of supply including the hydrophilic coating
for certain of its micro-catheters, from sole or limited source supplies.
Establishing additional or replacement suppliers for any of the numerous
components used in the Company’s products, if required, may not be accomplished
quickly and could involve significant additional costs.  Any supply
interruption from vendors or failure of the Company’s products would limit the
Company’s ability to manufacture its products and would have a material adverse
effect on the Company’s business, financial condition and results of
operations.





14. CASH
AND CASH EQUIVALENTS





The
Company receives payments from its customers and deposits them in federally
insured financial institutions during its normal course of
business.  From time to time, the balances with these deposit accounts
may exceed the federally insured maximum limit, $100,000.  As of March
31, 2008, the Company had cash and cash equivalents of approximately of $1.5
million in excess of federally insured limits.











15.  STOCK-BASED
COMPENSATION





2007
Stock Option Plan





On
September 14, 2007, Cardima Board of Directors adopted the 2007 Stock Option
Plan (the “2007 Stock Plan”). The 2007 Stock Plan authorizes the Board of
Directors or one or more of its members to grant options to purchase shares of
the Company to eligible individuals.  Eligible individuals may be
employees, non-employee members of the Board or the board of directors of any
Parent or Subsidiary, and consultants who provide valuable service to the
Company or its Parent or Subsidiary. Options to purchase Common Stock of the
Company granted under the plan may be incentive stock options or non-statutory
stock options as determined by the Board of Directors or its delegate.
30,000,000 shares of Common Stock were reserved for issuance over the term of
the 2007 Stock Plan.




Under the
plan in no event shall the option price per share be less than 85% of the fair
market value of a share of Common Stock on the date of the grant. In case of
incentive stock option, except options to 10% stockholders, the exercise price
of the option will not be less than 100% of the fair value of the Common Stock
at the grant date. Each option agreement specifies the term as to when the
option is to become exercisable. Standard options vest at a rate of at least 33%
of the underlying shares per year over 3 years and have a maximum term of 10
years. However, in no event shall an incentive stock option granted to a 10%
stockholder under the plan shall have a maximum term in excess of more than 5
years from the date of the grant, Any optionee (as determined under Section
424 (d) of the Internal Revenue Code) who owns more than 10% of the combined
voting power of all classes of outstanding stock of the Company, its Parent or
Subsidiary is not eligible for the grant unless the exercise price of the option
is at least 110% of the fair market value of the Common Stock on the date of the
grant.









13






2003
Stock Option Plan




On April
17, 2003 Cardima Board of Directors adopted the 2003 Stock Option Plan (the
“Stock Plan”). The Stock Plan authorizes the Board of Directors or one or more
of its members to grant to employees, consultants and non-employee directors
options to purchase Common Stock of the Company. Options granted under the Stock
Plan may be incentive stock options or non-statutory stock options as determined
by the Board of Directors or its delegate.




Under the
Stock Plan, 820,000 shares of Common Stock were reserved for issuance. Under the
plan, any optionee who owns more than 10% of the combined voting power of all
classes of outstanding stock is not eligible for the grant of an incentive stock
option unless the exercise price of the option is at least 110% of the fair
market value of the Common Stock on the date of the grant.




Under the
Stock Plan, except 10% stockholders, the exercise price of incentive stock
option will not be less than 100% of the fair value of the Common Stock at the
grant date. Each option agreement specifies the term as to when the option is to
become exercisable. Standard option issuances are for grants with vesting
periods of four years with six months 12.5% cliff vesting and ratable monthly
vesting thereafter. However, in no event shall an incentive stock option granted
under the Stock Plan be exercisable more than 10 years from the date of the
grant, and in the case of 10% stockholders, no more than 5 years from the date
of the grant.





1993
Stock Option Plan




During
1993, the Board of Directors adopted the 1993 Stock Option Plan, as amended, and
reserved 765,069 shares of common stock for issuance under the plan. The plan
provides for both incentive and non-statutory stock options to be granted to
employees, directors and consultants. Exercisability, option price, fair value
and other terms are determined by the Board of Directors; however, the exercise
price of each incentive stock option shall be not less than 100% of the fair
market value of the stock issuable upon exercise of the option on the date the
option is granted. The exercise price of each non-statutory stock option shall
not be less than 85% of the fair market value of the stock subject to the option
on the date the option is granted. All options granted prior to the initial
public offering of shares were generally exercisable upon grant, but shares
received upon exercise prior to vesting are subject to repurchase upon the
stockholder’s termination of service to the Company. Subsequent to the Company’s
initial public offering, only fully vested shares are exercisable. Shares
purchased upon exercise of options generally vest at the rate of 12.5% after six
months from the date of grant, and monthly thereafter over the following 42
months. No option shall have a maximum term in excess of ten years from the
grant date and no option granted to a 10% stockholder shall have a maximum term
in excess of five years from the grant date. The 1993 plan expired on June 10,
2003, and no additional grants would be made under this plan.




Forfeiture
rate is the estimated percentage of options granted that are expected to be
forfeited or cancelled on an annual basis before becoming fully vested. We
estimate the forfeiture rate based on past turnover data.




The
weighted average fair value of options at the grant date during 2008 and 2007
was $0.60 and $0.55, respectively. The fair value of each option is estimated on
the grant of date using the Black-Scholes option-pricing model with the
following weighted average assumptions for stock options granted during the
three months ended March 31, 2008:




Expected
      dividend yield
            
            0.0
            %Expected
      stock volatility
            
            167
            %Risk-free
      interest rate
            
            3.45
            %Expected
      term (in
      years)
            
            5Forfeiture
      rate
            
            0.0
            %





The
compensation cost that has been recognized in the statements of operations for
Cardima’s stock option plans for the three months ended March 31, 2008 and 2007
was $241,300 and $66,000. For stock subject to graded vesting, the Company
has utilized the “straight-line” method for allocating compensation cost by
period.  The non-cash expense was recorded in Selling, General and
Administrative for the three months ended March 31, 2008 and 2007.




Since
Cardima has a full valuation allowance for its deferred tax assets, there was no
impact to its cash flows related to excess tax benefits associated with the
provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R,
Share-Based
Payment.





The
following is a summary of stock option activity under all plans:




Shares
      under Options
              
              
              Average
      Exercise Price
              
              
              Intrinsic
      ValueOption
      Plan
              Status2007
              Outstanding
      December 31, 2007
              
              
              5,815,000
              
              
              $
              0.44
              
              
              $
              384,000Granted
              
              
              1,090,000
              
              
              $
              0.50
              
              
              $
              130,800Exercised
              
              
              -Cancelled/expired
              
              
              150,000
              
              
              $
              0.47
              
              
              $
              23,100Outstanding
      March 31, 2008
              
              
              6,755,000
              
              
              $
              0.45
              
              
              $
              1,154,4002003
              Outstanding
      December 31, 2007
              
              
              81,425
              
              
              $
              4.50
              
              
              $
              -Granted
              
              
              -
              
              
              
              
              
              
              $
              -Exercised
              
              
              -
              
              
              
              
              
              
              $
              -Cancelled/expired
              
              
              1,813
              
              
              $
              0.95
              
              
              $
              -Outstanding
      March 31, 2008
              
              
              79,612
              
              
              $
              4.58
              
              
              $
              -1993
              Outstanding
      December 31, 2007
              
              
              60,271
              
              
              $
              11.24
              
              
              $
              -Granted
              
              
              -
              
              
              
              
              
              
              $
              -Exercised
              
              
              -
              
              
              
              
              
              
              $
              -Cancelled/expired
              
              
              -
              
              
              
              
              
              
              $
              -Outstanding
      March 31, 2008
              
              
              60,271
              
              
              $
              11.24
              
              
              $
              -1997
      Director's Plan
              Outstanding
      December 31, 2007
              
              
              31,800
              
              
              $
              0.90
              
              
              $
              160Granted
              
              
              -
              
              
              
              
              
              
              $
              -Exercised
              
              
              -
              
              
              
              
              
              
              $
              -Cancelled/expired
              
              
              -
              
              
              $
              -
              
              
              $
              -Outstanding
      March 31, 2008
              
              
              31,800
              
              
              $
              0.90
              
              
              $
              460






14








During
the three months ended March 31, 2008, there were no exercises of options
by employees.




The
following is a summary of information relating to stock options outstanding and
exercisable by price range as of March 31, 2008:




Options
      Outstanding
              
              
              
              
              
              Options
      ExercisableOption
      Plan
              
              Range
      of exercise prices
              
              
              Outstanding
      as of March 31, 2008
              
              
              Weighted
      average remaining contractual life
              
              
              Weighted
      average exercise price
              
              
              Exercisable
      as of March 31, 2008
              
              
              Weighted
      average remaining contractual life
              
              
              Weighted
      average exercise price2007
              
              $
              0.39-$0.45
              
              
              
              5,780,000
              
              
              
              9.49
              
              
              $
              0.44
              
              
              
              325,000
              
              
              
              2.2
              
              
              $
              0.44$
              0.48-$0.55
              
              
              
              780,000
              
              
              
              9.88
              
              
              $
              0.51
              
              
              
              -$
              0.60-$0.66
              
              
              
              195,000
              
              
              
              10.00
              
              
              $
              0.65
              
              
              
              -Total
              
              
              
              6,755,000
              
              
              
              8.23
              
              
              $
              0.38
              
              
              
              325,000
              
              
              
              2.2
              
              
              $
              0.442003
              
              $
              0.55-$2.50
              
              
              
              55,637
              
              
              
              7.66
              
              
              $
              0.61
              
              
              
              31,658
              
              
              
              7.63
              
              
              $
              0.62$
              3.50-$12.40
              
              
              
              23,975
              
              
              
              5.96
              
              
              $
              9.29
              
              
              
              23,447
              
              
              
              5.94
              
              
              $
              9.42Total
              
              
              
              79,612
              
              
              
              7.15
              
              
              $
              3.22
              
              
              
              55,105
              
              
              
              6.91
              
              
              $
              4.361993
              
              $
              3.40-$15.00
              
              
              
              57,393
              
              
              
              3.45
              
              
              $
              10.36
              
              
              
              57,393
              
              
              
              3.45
              
              
              $
              10.36$
              19.10-$46.30
              
              
              
              2,878
              
              
              
              0.65
              
              
              $
              28.74
              
              
              
              2,878
              
              
              
              0.65
              
              
              $
              28.74Total
              
              
              
              60,271
              
              
              
              1.37
              
              
              $
              4.12
              
              
              
              60,271
              
              
              
              1.37
              
              
              $
              11.241997
      Director's Plan
              
              $
              .30-$.70
              
              
              
              31,000
              
              
              
              8.20
              
              
              $
              0.66
              
              
              
              29,000
              
              
              
              8.20
              
              
              $
              0.66$
              8.40-$14.50
              
              
              
              800
              
              
              
              4.70
              
              
              $
              10.10
              
              
              
              800
              
              
              
              4.70
              
              
              $
              10.10Total
              
              
              
              31,800
              
              
              
              8.15
              
              
              $
              0.90
              
              
              
              29,800
              
              
              
              8.15
              
              
              $
              0.90






Non-employee
Compensation




There was
no non-employee compensation expense recorded for the first quarter of 2008 and
2007 respectively.





1997
Directors' Stock Option Plan




In March
1997, the Board of Directors adopted the 1997 Directors’ Stock Option Plan and
reserved 90,000 shares of common stock for issuance. The plan provides for the
grant of non-statutory stock options to non-employee directors of the
Company.




1997
Employee Stock Purchase Plan




In March
1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan, as
amended, and reserved 250,000 shares of common stock for issuance. The purchase
plan is intended to provide an opportunity for eligible employees of the Company
and its designated subsidiaries to acquire common stock on a favorable basis.
The purchase plan is implemented by a series of offering periods of twelve
months duration, with two consecutive purchase periods of six months in
duration. New offering periods commence on or about February 1 and August 1 of
each year (or at such other time or times as may be determined by the Board of
Directors). Through periodic payroll deductions, which may not exceed $25,000
per offering period or 10% of any employee’s compensation, eligible employees
may purchase common stock at a price equal to the lower of: (i) 85% of the fair
market value of the common stock on the offering date; or (ii) 85% of the fair
market value of the common stock on the purchase date. As of March 31, 2008,
73,655 shares of common stock have been issued under the purchase plan. In March 2008 and 2007,
a total of 73,655 and 48,628shares were issued respectivelyunder
this plan.





The
Company believes that under SFAS 123R (Paragraph 12) a plan is not compensatory
if among other things “any purchase discount from the market price does not
exceed the per-share amount of share issuance costs that would have been
incurred to raise a significant amount of capital by a public offering. A
purchase discount of 5% or less from the market price shall be considered to
comply with this condition without further justification. A purchase discount
greater than 5% that cannot be justified under this condition results in
compensation cost for the entire amount of the discount.” Additionally, the
Company does not believe that in 2007 it is in a position to raise significant
amount of capital through a public offering. Based on its recent cost of raising
equity capital, the Company incurred costs of 37% and 16%. In both cases
the cost exceeded the 15% discount given under this plan. The plan was therefore
considered non-compensatory.   The Company understands that in
accordance with footnote 115 to SFAS 123R, if an entity justifies a purchase
discount in excess of 5 percent, it would be required to reassess that discount
at least annually and no later than the first share purchase offer during the
fiscal year.   If upon reassessment that discount is not deemed
justifiable, subsequent grants using that discount would be
compensatory.







15






16.
WARRANTS






At
March 31, 2008, the Company had issued and outstanding warrants as
follows:




No.
      Of Warrant Shares
              
              
              Exercise
              
              Expiration
              In
      ConnectionMarch
      31, 2008
              
              
              Price
              
              Date
              With2,700,000
              
              
              $
              0.55
              
              December
      2008
              Private
      Placement3,000,000
              
              
              $
              0.55
              
              December
      2008
              Placement
      Agent Fee757,409
              
              
              $
              4.30
              
              November
      2008
              Private
      Placement229,291
              
              
              $
              8.30
      - $14.00
              
              November
      2008 through December 2012
              Private
      Placement59,059
              
              
              $
              0.24
      - $ 0.28
              
              April
      2008
              Placement
      Agent Fee6,745,759





No
warrants were exercised during the three months end March 31, 2008 and
2007





17.
PREFERRED SHARES





On March
23, 2008, the Board approved a resolution to amend the provisions of the
Preferred Shares to reflect the following:  Apix, at its sole
discretion, may convert the five million Preferred Shares of the
Company that it owns into 10 million shares of common stock. 
Apix will be able to vote the Preferred Shares together with the common
stock on a two votes for each share of preferred stock basis.  The Company
is in the process of drafting and filing an amended certificate of designation
for the preferred stock to refelect these revised terms.




18.
SUBSEQUENT EVENTS





On May 8,
2008, the Company entered into a series of identical agreements with a
number of accredited investors for the private sale of 8,474,992 shares of
common stock at US$0.60 per share.  The total gross proceeds from the
sale are expected to be $5,085,000. In addition, the Company will issue to
these investors warrants to purchase 1,271,247 shares of common stock at an
exercise price of US$0.65 per share.





16





ITEM
2. Management’s Discussion and Analysis and Results of Operations




Cautionary
Statement Regarding Forward-Looking Statements




The
information in this discussion may contain 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. These forward-looking statements involve risks and uncertainties,
including statements regarding our capital needs, business strategy and
expectations. Any statements that are not of historical fact may be deemed
to be forward-looking statements. These forward-looking statements involve
substantial risks and uncertainties. In some cases you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” or “continue”, the negative of the terms or other comparable
terminology. Forward-looking statements in this Report may also include
references to anticipated sales volume and product margins, efforts aimed at
establishing new or improving existing relationships with customers, other
business development activities, anticipated financial performance, business
prospects and similar matters. Actual events or results may differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements. In evaluating these statements, you should consider
various factors, including the risks included from time to time in other reports
or registration statements filed with the United States Securities and Exchange
Commission. These factors may cause our actual results to differ materially
from any forward-looking statements. We disclaim any obligation to publicly
update these statements, or disclose any difference between actual results and
those reflected in these statements.





Overview





Cardima’s
corporate strategy involves attaining certain key goals in three significant
areas: product commercialization, regulatory strategy, and manufacturing
capabilities. These areas are discussed in detail in the following
sections.




Product
Commercialization




Cardima
is committed to the commercialization of its surgical and electrophysiological
products worldwide.  In order to attain this goal the company has and
will continue to add key marketing resources and personnel in the US and will
align itself with independent sales organizations capable of representing its
products in other markets.  The company has filed and/or is planning
to file for additional regulatory marketing product approvals in promising
international markets such as the European Union, China, Japan, Thailand, India
and Korea.




In the
immediate term the company, is focusing its US efforts on the commercialization
of its FDA 510K approved Surgical Ablation System.  In Europe, Cardima
is focusing in the near term on expanding the number of commercial EP centers
using our EP ablation products in select markets including the United Kingdom
and Germany.  In late 2008 or early 2009 (dependent on CE mark
approval) the company will start to market its Surgical Ablation System in the
European Union.  Also in late 2008 the company expects to start
obtaining some product market approvals in China.  The Chinese market
is promising for Cardima as it has a large population of un-treated patients, a
significant body of trained electrophysiologists and cardiac surgeons and
several cardiac centers that routinely perform both EP and surgical
ablations.  In the second half of 2009 (dependent on regulatory
approval) the company intends to re-enter the Japanese diagnostic market and is
reviewing Japanese regulatory requirements for its surgical and EP ablation
products.




As
Cardima commercializes its products it will identify key opinion leaders to
become “product champions” and will certify certain leading cardiology programs
as “Cardima Centers of Excellence”.  The company will also continue to
add leading Electrophysiologists and cardiac surgeons as consultants and
advisors to improve our products and the procedure designs.  Cardima
is also identifying appropriate independent distributors that will be engaged to
train, support and distribute our products in key markets.




Regulatory
Strategy




Cardima
is focused on attaining necessary regulatory approvals for the commercial sale
of its surgical and EP products worldwide.  In the near term the
company is focused on finalizing its discussions with the FDA for a study design
leading to FDA approval for an indication to treat atrial fibrillation for our
EP ablation system.  In this regard Cardima has engaged the services
of Sanjeev Saksena MD, a cardiologist and trained electrophysiologist with a
worldwide reputation, to advise the company.  In addition to Dr.
Saksena the company has also engaged a Chief Medical Officer, Dr. Sung Chun and
other specialist consultants such as Dr. Abraham Kocheril (University of
Illinois, Chicago) to provide the Board with appropriate
advice.  Cardima remains the only company to date to have completed a
multi-center trial and submitted its data for review to an FDA panel for the
indication of treating AF.  The company continues to interact with the
FDA to resolve the final issues and data required to attain market approval for
the EP ablation product.




In
addition to the efforts with the FDA the company has filed, or is planning to
file, applications for product approvals in several countries, notably the
European Union, China, Thailand and Japan.




Manufacturing
Capabilities




Cardima’s
management has focused on improving the company’s ability to manufacture, in
commercial quantities, high quality reliable products.  The entire
organization is committed to providing the best surgical and EP products
possible.  This has entailed adding key individuals, improving design
processes, adding test and quality control measures and implementing training
and support systems to ensure high levels of staff performance and product
quality.  Cardima’s team of professionals and its dedicated staff have
made great strides in achieving new manufacturing goals and standards in
2008.




The
research and development goals and achievements for the company for 2008
include:




Product
Goals and objectives/achievements in Q1 2008




The key
product goals are:




New
EP Handle




A key
product goal for Cardima’s engineers and managers in Q1 of 2008 is to
finalize and initialize implementation of a new handle design for the EP
products, including the REVELATION T-Flex and the Naviport.  Significant
progress has been achieved in this regard and management has plans to introduce
the new handle design into clinical usage in Q3 of 2008.  In a parallel
process, all necessary regulatory updates for these devices with the new handle
will be submitted to the appropriate notified bodies in Q2 2008.  The new
handle will afford significant improvements in product performance and is
expected to offer patients and physicians key procedure improvements in ease of
use and shorter procedure times.








17






Intellitemp




Cardima
has over the past several months worked with a new strategic supplier and its
own engineering staff to successfully complete manufacturing transfer of the
Intellitemp to this new supplier.  This has been an intensive effort and in
Q1 the first new Intellitemp units were produced and will be available for
commercial centers to Cardima’s marketing staff and sales representatives. 
The availability of a sufficient number of new Intellitemps is critical to the
commercial roll out of Cardima’s products.




The
company’s engineering group continues to evaluate the Intellitemp design and is
planning the next version of this product to initiate development in
2008.




Surgical
Ablation System




Cardima
has implemented a number of product improvements and design changes to improve
the performance and safety of the surgical ablation system.  In addition,
in early Q1, Product Development and Process Engineers made key contributions to
the development of manufacturing processes that substantially reduce the time
needed to build surgical ablation probes.  Many of these product and
process improvements have been achieved in Q1 and are already implemented in the
commercial product.




Going
forward, the product development team continues to review marketing feedback
from surgeons, and will develop product enhancements to fulfill user needs based
on this feedback.




Sales and
Marketing Priorities/achievements in Q1 2008.




The sales
and marketing goals and achievements for the company for Q108 and the remainder
of 2008 include:




Resource
Management




The
company previously had limited sales and marketing efforts and was primarily
focused on research and development and regulatory approval
activities.  Accordingly, the company devoted limited resources and
personnel to sales and marketing.  This has changed over the past
six-months with new resources being added by management. The company has hired
an international head of sales, has engaged a strategic surgical sales
consultant and has hired marketing personnel.  Cardima plans to
continue to bolster its resources and personnel in sales and marketing as well
as customer support throughout 2008.




Distribution
Partners




The
company is reviewing several potential distribution partners worldwide and is
planning to further bolster its sales and marketing resources as it continues to
expand its commercial sales efforts.  Progress in this area is
expected throughout the balance of 2008.




Surgical
Ablation System




In the
surgical ablation field in the USA the company is working with sales
representatives through its relationship with ON-X Life Technologies Inc. as
well as through its own independent sales efforts.  The company is
identifying higher volume surgical ablation centers with surgeons experienced in
surgical ablations to establish these centers as training centers and Cardima
Centers of Excellence.




In Europe
Cardima’s sales executives are evaluating appropriate marketing partners in the
surgical field and are awaiting CE mark approval for the surgical probe to
implement the European surgical sales strategy.








18




EP
Ablation System




In the
field of electrophysiology, Cardima is focusing on key initial European markets
including the United Kingdom and Germany.  The company is in the
process of selecting marketing partners, training the field representatives
and/or supporting key customer centers in each of these key
markets.




China




Cardima
is in discussions with potential marketing partners for the China market to
cover both electrophysiology and surgical products.  Cardima
executives have also met with key Chinese physicians and opinion leaders to
prepare for an appropriate market launch in China.




Risk
factors





For the
period between January 1, 2008 and March 31, 2008, the Company does not have any
material change to report from risk factors as previously disclosed in the
Company’s Form 10-KSB for the period ended December 31, 2007.





Results
of Operations – Three Months Ended March 31, 2008 and 2007





NetSales




For the
quarter ended March 31, 2008, revenues increased 31% to $417,000 from $319,000
from the same period in 2007. The increase in net sales was primarily due to
increase sales and marketing efforts in Europe and in the United States as
management hired an international head of sales, and additional marketing
resources over the period.  The company’s revenue increased in 2008 in
spite of no revenue from the company’s former Japanese distributor. The
company continues to explore ways to market products in Japan and other
countries.




Net sales
in the United States and Canada increased by 3% to $258,000 in the first quarter
of 2008 from $250,000 for the same period in 2007. The revenue received
from the Japanese distributor in the first quarter of 2007, was offset by
the company authorized return, resulting in minimal sales activity in
Asia.  Net sales in our European region increased 129% to $155,000 in
the first quarter of 2008, from $68,000 in the comparable period of
2007.  The increase in the region was due to new customer acquisitions
over the period and a revised distributorship arrangement in
Germany.  Net sales in other regions increased to $3,000 in the first
quarter of 2008, from $1,000 in the comparable period of 2007.




The
Company is currently exploring its options with regard to selling the
PATHFINDER® in Japan.  During the reapplication process, the Company
may have limited or no sales in Japan.  The Company anticipates
resuming commercial sales in the second half of 2009.  However, there
can be no assurance that it will be able to resume sales by that
time.  Furthermore, the Company entered into a distribution agreement
with Japan Life Line Inc. in Japan to be its exclusive distributor in the
country effective August 1, 2007 with an initial term of five (5) years. Japan
Life Line Inc. will not be able to start importing and selling our products
until the reapplication process is complete.




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 costs
for the units sold in the period. Cost of goods sold for the quarter ended March
31, 2008 increased to $437,000 from $424,000 for the same period in 2007. Cost
of goods sold as a percentage of net sales decreased to 105% from 133% for the
three months ended March 31, 2008 as compared to the same period of the prior
year.  This change was caused by (i) additional sales in the quarter
which increast COGS while, (ii) inventory sold in the quarter that was
previously fully  reserved, and (iii)increased production which
reduced the average overhead charge per unit reduced over all
COGS.  In January 2008, the Company also changed its estimate for the
rate of reserve for slow moving and obsolete inventory.





Research
and Development Expenses




Research
and development expenses include product development, clinical testing and
regulatory expenses. Total research and development expenses for the quarter
ended March 31, 2008 increased to $983,000 from $903,000, for the same period in
2007. The increase was primarily related to increased headcount required to
support the new product commercialization initiative in 2008 versus
2007.




Selling, Marketing, General and
Administrative Expenses




Total
selling, marketing, general and administrative expenses for the quarter ended
March 31, 2008 increased to $1,373,000 from $884,000 for the same period in
2007. The overall increase of $489,000 in expenses is related to the cost of
hiring employees and related non-cash stock compensation expense of $247,000 to
its employees and consultants in 2008. The selling expenses for the three months
ended March 31, 2008 increased to $319,000 from $90,000 for the same period in
2007. Marketing expenses for the three months ended March 31, 2008 also
increased to $200,000 from $126,000 for the same period in 2007. These increases
were primarily related to the hiring of an international head of sales, and
additional marketing resources along with increased marketing and promotional
activities in the first quarter of 2008 to stimulate sales in the U.S and
Europe. General and administrative expenses for the quarter ended March 31, 2008
increased to $854,000 from $668,000 for the same period in 2007. The company,
having s recognized the need to bring in additional resources in the accounting
and finance, hired two senior management personnel in the first quarter of
2008.








19






Interest
Expense




Interest
expense decreased to $7,000 in the first quarter of 2008 from $220,000 in the
first quarter of 2007. The decrease was related to the conversion of debt equity
in October 2007.




Net
Loss




Net loss
for the quarter ended March 31, 2008 was $2,316,000 as compared to a net loss of
$9,849,000 for the same period in 2007.  The Company recorded a
liability for the derivative instrument that resulted due to the number of
potential common stock shares plus outstanding shares that exceeded the number
of authorized common stock shares. At March 31, 2007, the Company’s authorized
shares were less than the outstanding shares plus potential shares from the
exercise of options, warrants, and convertible debt that were issued. The excess
potential shares were attributed to the additional funding received starting in
April 2006 from the issuance of convertible debt. The Company calculated the
fair value of these potential shares and recorded a corresponding liability of
$7,737,000 based on the fair value of the Company's common stock on March 31,
2007 and any change was processed through a charge or gain in the statement of
operations.





In June
2007, the shareholders of the Company voted for a reverse stock-split without a
corresponding decrease in the authorized number of shares authorized. As a
result of this action, the Company cured this liability as the authorized common
shares now exceed all outstanding common shares and potential common
shares.




Liquidity
and Capital Resources




We had
cash and cash equivalents of approximately $1,682,000 as of March 31, 2008 and
$4,811,000 as of December 31, 2007.  In addition we have $2,084,000 in
certificates of deposit in Bank of America and Silicon Valley Bank maturing
between 2008 and 2009. As of March 31, 2008, we had positive working capital of
$3,711,000 and an accumulated deficit of approximately
$178,875,000.





Net cash
used in operating activities was approximately $2,705,000 and $1,611,000 for the
years ended March 31, 2008 and 2007, respectively, resulting primarily from
increased working capital needs and current period operating expenses. Net cash
used in investing activities was $367,000 in March 31, 2008 and related to the
capital expenditures of property and equipment, as compared to $24,000 used in
2007 for purchases of short term investments and fixed assets. Net cash used by
financing activities was approximately $57,000 for the period ended March
31, 2008 and net cash provided by financing activities in March 31, 2007 was
$1,364,000, resulting primarily from the Apix loan financing in
2007.





On March
31, 2008 the Company had total assets of $6,285,000 compared to $8,004,000 on
December 31, 2007, a decrease of $1,719,000.  The Company had a
total stockholder's equity of $4,344,000 on March 31, 2008 compared to of
$6,381,000 on December 31, 2007.





ITEM 3. Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





The
Company's management, with the participation of the Company's Chief Executive
Officer and the Principal Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered
by this Quarterly Report on Form 10-QSB.  The Company had detected
certain errors in the calculation and disclosure of non-cash debt extinguishment
and non-cash excess share liability as presented in the Company's previously
issued Quarterly Reports on Form 10-QSB for the periods ended March 31, June 30,
and September 30, 2006, March 31, June 30, and September 30, 2007 and on form
10-KSB for the year ended December 31, 2006.





As disclosed in Part I. ITEM 8A.
CONTROLS AND PROCEDURES of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2007 and its restatements to its Quarterly Financial
statements for the quarterly periods ended March 31, June 30, and September 30,
2006, March 31, June 30, and September 30, 2007 and on form 10-KSB for the year
ended December 31, 2006, the Company's management determined that there were
material weaknesses in its internal controls over financial reporting in the
areas of accounting for debt extinguishments and excess share liability.






20






To
address these significant deficiencies and material weaknesses, the Company has
taken the following steps to improve its internal controls and procedures over
financial reporting:





·
            We
      have hired a new Corporate Controller/Secretary in March 2008, added
      additional staff to our financial department and have assigned to our CEO
      some of the duties of our previous interim CFO as of March
      2008.




·
            We
      have added two additional accounting staff in 2008 to allow for sufficient
      segregation of duties.




·
            Management
      and the Finance group performed additional analyses, including but not
      limited to a detailed balance sheet and statement of operations analytical
      review that compared changes from the prior period's financial statements
      and analyzed all significant
differences.




·
            We
      implemented new procedures during the first quarter of 2008 that require
      an additional individual within our finance department to perform a
      detailed review of any and all non-recurring manual journal entries above
      a certain dollar threshold and also to review all journal
      entries.




·
            We
      have retained a consultant to analyze and update our written internal
      controls over financial reporting as
necessary




Based
upon such evaluation and the steps taken by the Company to address the
previously reported significant deficiencies and material weaknesses, the
Company's management has concluded that, as of the end of the period covered by
this report, the Company's disclosure controls and procedures are effective in
ensuring that information required to be disclosed in this filing is accumulated
and communicated to management and is recorded, processed, summarized and
reported in a timely manner and in accordance with Securities and Exchange
Commission rules and regulations. The company is in the process of testing all
of its controls. The testing of all controls has not been completed as of the
balance sheet date.




Internal Control
Over Financial Reporting.





Except
for the affirmative changes discussed above, there have been no changes in the
Company's internal controls over financial reporting during the last quarterly
period covered by this Quarterly Report on Form 10-QSB that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.





Management
will continue to monitor internal control over financial reporting and will
modify or implement if necessary, any additional controls or procedures that may
be required to ensure the continued integrity of our financial
statements





Limitations
on the Effectiveness of Controls





A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.  Our disclosure
controls and procedures are designed to provide reasonable assurance of
achieving its objectives.





PART
II.                      OTHER
INFORMATION




ITEM
1.                      Legal
Proceedings





A
complaint was filed against the Company in the Superior Court in Alameda County,
California (File No. HG 08374416), on March 3, 2008 by Gabriel Vegh, one of our
directors and the former Chairman and Chief Executive Officer, for violation of
statues , breach of contract, bad faith, wrongful termination and damages. The
action was commenced in connection with our termination of Mr. Vegh in August
2008. The Company is in the process of responding to the complaint and intends
to defend itself vigorously.





On
October 31, 2007, the Company received a letter from the law firm representing
its former Director of Operations, Mr. Larry Stevens. Mr. Stevens claimed for
damages for wrongful termination in violation of public policy, breach of
contract and related claims.  The Company determined that Mr. Stevens’
termination was “with cause” thus the severance provision of his employment
agreement did not apply. The Company will defend itself vigorously against Mr.
Stevens’ claims.






21






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





On May 8,
2008, the Company entered into a series of identical agreements with a
number of accredited investors for the private sale of 8,474,992 shares of
common stock at US$0.60 per share.  The total gross proceeds from the
sale are expected to be $5,085,000. In addition, the Company will issue to
these investors warrants to purchase 1,271,247 shares of common stock at an
exercise price of US$0.65 per share.





ITEM
3.                      Defaults
Upon Senior Securities





None.




ITEM
4.                      Submission
of Matters to a Vote of the Security Holders





None.




ITEM
5.                      
Other Information





On May
19, 2008, the company received  SEC staff comments to the Company’s
response filed on  May 6, 2008. The Company is currently in
the process of evaluating the staff comments. The Company had initially
received a SEC staff  letteron April 21,
2008 in response to its Form 10KSB filing for the fiscal year ended December 31,
2007.




ITEM
6.                      
Exhibits


31.1
              
              Certification of the
      Chief Executive Officer and Chief Financial Officer of Cardima, Inc.,
      pursuant to Rule 13a-14(a) under the Securities Exchange Act of
      1934.32.1
              
              Certification of the
      Chief Executive Officer and Chief Financial Officer of
      Cardima furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.








22





..


CARDIMA,
INC.





SIGNATURE





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.








CARDIMA, INC.May
      20, 2008
            By:
            /s/ John.
      R. CheneyChief
      Executive Officer and Chief Financial Officer (Principal Executive and
      Financial and Accounting Officer)








23