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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



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|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|- | ----------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2004



or



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



For the transition period from  to
.



Commission File Number: 0-22419



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CARDIMA, INC.

(Exact name of registrant as specified in its charter)



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



47266 Benicia
Street, Fremont, CA 94538-7330

(Address of Principal Executive Offices) (Zip Code)



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



---



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



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



As of April 30,
2004, there were 84,618,244 shares of Registrants Common Stock outstanding.



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##### Table of Contents

CARDIMA, INC.



TABLE OF CONTENTS



PART I. Financial Information



|            |  |                                                                                       |  |   
|----------- |  | ------------------------------------------------------------------------------------- |  | --
|Description |  | Page                                                                                 
|Item 1.     |  | Financial Statements (unaudited)                                                      |  | 3 
|            |  |                                                                                      
|            |  | Condensed Balance Sheets as of March 31, 2004 and December 31, 2003                   |  | 3 
|            |  |                                                                                      
|            |  | Condensed Statements of Operations for the Three Months Ended March 31, 2004 and 2003 |  | 4 
|            |  |                                                                                      
|            |  | Condensed Statement of Cash Flows for the Three Months Ended March 31, 2004 and 2003  |  | 5 
|            |  |                                                                                      
|            |  | Notes to Condensed Financial Statements                                               |  | 6 
|            |  |                                                                                      
|Item 2.     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12
|            |  |                                                                                      
|            |  | Factors Affecting Future Results                                                      |  | 18
|            |  |                                                                                      
|Item 3.     |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 38
|            |  |                                                                                      
|Item 4      |  | Controls and Procedures                                                               |  | 38



PART II. Other
Information



|            |  |                                                     |  |   
|----------- |  | --------------------------------------------------- |  | --
|Description |  | Page                                               
|Item 1.     |  | Legal Proceedings                                   |  | 39
|            |  |                                                    
|Item 2.     |  | Changes in Securities and Use of Proceeds           |  | 39
|            |  |                                                    
|Item 3.     |  | Default Upon Senior Securities                      |  | 39
|            |  |                                                    
|Item 4.     |  | Submission of Matters to a Vote of Security Holders |  | 39
|            |  |                                                    
|Item 5.     |  | Other Information                                   |  | 39
|            |  |                                                    
|Item 6.     |  | Exhibits and Reports on Form 8-K                    |  | 39
|            | 
|Signatures  |  | 41                                                 



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##### Table of Contents

PART I.



Item 1.Financial Statements



CARDIMA, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share amounts)



|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | --------------------- | - | -------- | -
|                                                                                                                                                                                                        |  | March 31, 2004(Unaudited) |          |   | December 31, 2003 (1) |  
|ASSETS                                                                                                                                                                                                  |  |                           |          |   |                       |   |          |  
|Current assets:                                                                                                                                                                                         |  |                           |          |   |                       |   |          |  
|Cash and cash equivalents                                                                                                                                                                               |  | $                         | 6,935    |   |                       | $ | 6,446    |  
|Accounts receivable, net of $87 allowances for doubtful accounts at March 31, 2004 and December 31, 2003                                                                                                |  |                           | 340      |   |                       |   | 299      |  
|Inventories                                                                                                                                                                                             |  |                           | 968      |   |                       |   | 991      |  
|Prepaid expenses                                                                                                                                                                                        |  |                           | 347      |   |                       |   | 325      |  
|Other current assets                                                                                                                                                                                    |  |                           | 121      |   |                       |   | 31       |  
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|Total current assets                                                                                                                                                                                    |  |                           | 8,711    |   |                       |   | 8,092    |  
|Property and equipment, net                                                                                                                                                                             |  |                           | 496      |   |                       |   | 554      |  
|Notes receivable from officers                                                                                                                                                                          |  |                           | 567      |   |                       |   | 626      |  
|Other assets                                                                                                                                                                                            |  |                           | 38       |   |                       |   | 38       |  
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|                                                                                                                                                                                                        |  | $                         | 9,812    |   |                       | $ | 9,310    |  
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                    |  |                           |          |   |                       |   |          |  
|Current liabilities:                                                                                                                                                                                    |  |                           |          |   |                       |   |          |  
|Accounts payable                                                                                                                                                                                        |  | $                         | 809      |   |                       | $ | 910      |  
|Accrued compensation                                                                                                                                                                                    |  |                           | 713      |   |                       |   | 869      |  
|Warrant liability                                                                                                                                                                                       |  |                           |         |   |                       |   | 658      |  
|Other current liabilities                                                                                                                                                                               |  |                           | 275      |   |                       |   | 279      |  
|Credit obligation                                                                                                                                                                                       |  |                           | 20       |   |                       |   | 125      |  
|Capital lease obligation - current portion                                                                                                                                                              |  |                           | 43       |   |                       |   | 42       |  
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|Total current liabilities                                                                                                                                                                               |  |                           | 1,860    |   |                       |   | 2,883    |  
|                                                                                                                                                                                                        |  |                          
|Deferred rent                                                                                                                                                                                           |  |                           | 45       |   |                       |   | 45       |  
|Capital lease obligation - noncurrent portion                                                                                                                                                           |  |                           | 71       |   |                       |   | 82       |  
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|Total Liabilities                                                                                                                                                                                       |  |                           | 1,976    |   |                       |   | 3,010    |  
|                                                                                                                                                                                                        |  |                          
|Commitments                                                                                                                                                                                             |  |                           |          |   |                       |   |          |  
|                                                                                                                                                                                                        |  |                          
|Stockholders equity:                                                                                                                                                                                   |  |                           |          |   |                       |   |          |  
|Common stock, $0.001 par value; 125,000,000 shares authorized, 84,618,244 shares issued and outstanding at March 31, 2004; 80,333,798 issued
and outstanding as of December 31, 2003; at amount paid in |  |                           | 113,882  |   |                       |   | 109,988  |  
|Accumulated deficit                                                                                                                                                                                     |  |                           | (106,046 | ) |                       |   | (103,688 | )
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|Total stockholders equity                                                                                                                                                                              |  |                           | 7,836    |   |                       |   | 6,300    |  
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  
|                                                                                                                                                                                                        |  | $                         | 9,812    |   |                       | $ | 9,310    |  
|                                                                                                                                                                                                        |  |                           |          |   |                       |   |          |  

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|(1) | The balance sheet as of December 31, 2003 was derived from the audited financial statements included in the Companys 2003 Annual Report on Form 10-K filed with the Securities
and Exchange Commission but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to condensed financial statements



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CARDIMA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                              |  |                              |        |   |      |   |        |  
|------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                              |  | Three months ended March 31, |       
|                                                              |  | 2004                         |        |   | 2003 |  
|Net Sales                                                     |  | $                            | 636    |   |      | $ | 638    |  
|Cost of Goods Sold                                            |  |                              | 835    |   |      |   | 1,085  |  
|                                                              |  |                              |        |   |      |   |        |  
|Gross Margin                                                  |  |                              | (199   | ) |      |   | (447   | )
|                                                              |  |                             
|Operating expenses:                                           |  |                              |        |   |      |   |        |  
|Research and development                                      |  |                              | 871    |   |      |   | 950    |  
|Selling, general and administrative                           |  |                              | 1,227  |   |      |   | 1,834  |  
|                                                              |  |                              |        |   |      |   |        |  
|Total operating expenses                                      |  |                              | 2,098  |   |      |   | 2,784  |  
|                                                              |  |                              |        |   |      |   |        |  
|Operating loss                                                |  |                              | (2,297 | ) |      |   | (3,231 | )
|                                                              |  |                             
|Interest and other income                                     |  |                              | (24    | ) |      |   | 12     |  
|Other non-cash expense                                        |  |                              | (33    | ) |      |   |       |  
|Interest expense                                              |  |                              | (4     | ) |      |   | (2     | )
|                                                              |  |                              |        |   |      |   |        |  
|Net loss                                                      |  | $                            | (2,358 | ) |      | $ | (3,221 | )
|                                                              |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per share                          |  | $                            | (0.03  | ) |      | $ | (0.06  | )
|                                                              |  |                              |        |   |      |   |        |  
|Shares used in computing basic and diluted net loss per share |  |                              | 82,051 |   |      |   | 55,344 |  
|                                                              |  |                              |        |   |      |   |        |  



See accompanying notes
to condensed financial statements



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CARDIMA, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                      |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                      |  | Three months ended March 31, |       
|                                                                      |  | 2004                         |        |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                  |  |                              |        |   |      |   |        |  
|Net loss                                                              |  | $                            | (2,358 | ) |      | $ | (3,221 | )
|Adjustments to reconcile net loss to net cash provided by operations: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                         |  |                              | 70     |   |      |   | 220    |  
|Other non-cash expense related to warrants                            |  |                              | 33     |   |      |   |       |  
|Non-cash stock-based compensation                                     |  |                              | 59     |   |      |   |       |  
|Loss on disposal of assets                                            |  |                              | 3      |   |      |   | 7      |  
|Non-cash interest income (charge) on notes receivable from officers   |  |                              | 59     |   |      |   | (8     | )
|Changes in operating assets and liabilities:                          |  |                              |        |   |      |   |        |  
|Accounts receivable, net                                              |  |                              | (41    | ) |      |   | (102   | )
|Inventories, net                                                      |  |                              | 23     |   |      |   | 165    |  
|Prepaid expenses                                                      |  |                              | (90    | ) |      |   | 153    |  
|Other assets                                                          |  |                              | (22    | ) |      |   | 42     |  
|Accounts payable                                                      |  |                              | (101   | ) |      |   | (838   | )
|Accrued compensation                                                  |  |                              | (156   | ) |      |   | (139   | )
|Other current liabilities                                             |  |                              | (4     | ) |      |   | 341    |  
|Deferred rent                                                         |  |                              |       |   |      |   | 12     |  
|                                                                      |  |                              |        |   |      |   |        |  
|Net cash used in operating activities                                 |  |                              | (2,525 | ) |      |   | (3,368 | )
|                                                                      |  |                             
|CASH FLOWS FROM INVESTING ACTIVITIES                                  |  |                              |        |   |      |   |        |  
|Capital expenditures                                                  |  |                              | (15    | ) |      |   | (88    | )
|                                                                      |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                 |  |                              | (15    | ) |      |   | (88    | )
|                                                                      |  |                             
|CASH FLOWS FROM FINANCING ACTIVITIES                                  |  |                              |        |   |      |   |        |  
|Principal payments under leases                                       |  |                              | (115   | ) |      |   | (27    | )
|Net proceeds from sale of common stock                                |  |                              | 3,144  |   |      |   | 2,925  |  
|                                                                      |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities                             |  |                              | 3,029  |   |      |   | 2,898  |  
|                                                                      |  |                              |        |   |      |   |        |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  |  |                              | 489    |   |      |   | (558   | )
|                                                                      |  |                             
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                        |  |                              | 6,446  |   |      |   | 3,385  |  
|                                                                      |  |                              |        |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                              |  | $                            | 6,935  |   |      | $ | 2,827  |  
|                                                                      |  |                              |        |   |      |   |        |  



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CARDIMA, INC.



NOTES TO
CONDENSED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)



1. BASIS OF PRESENTATION



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



The operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2004 or for future operating results. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2003. The accompanying balance sheet at December 31, 2003 has been derived from these audited financial statements.



2. MANAGEMENTS PLANS



As of March 31, 2004 Cardima, Inc. had approximately $6,935,000 in cash and cash equivalents, working capital of $6,851,000 and an accumulated deficit of
$106,046,000. Management expects to continue to incur additional losses in the foreseeable future as the Company works towards regulatory approval and commercialization of the REVELATION® Tx in the United States, commercialization of the Cardima
Surgical Ablation System, and the commercialization of the REVELATION® Helix in Europe. Our management currently estimates that our cash balances as of March 31, 2004 will be sufficient to fund planned expenditures into the fourth quarter of
2004, but this cannot be predicted with certainty. Although our management recognizes the need to raise funds in the near future, there can be no assurance that we will be successful in consummating any fundraising transaction, or, if we do
consummate such a transaction, that its terms and conditions will not be unfavorable to us. Any failure by us to obtain additional funding will have a material adverse effect upon us and there is substantial doubt as to our ability to continue as a
going concern.



Cardima, Inc., continues to pursue regulatory
approvals and distribution relationships in significant market opportunities worldwide. We currently have distribution agreements for various products covering eight countries with an emphasis on Europe and the Pacific Rim, and we are currently
seeking a distributor or distributors for our Surgical Ablation System, which received United States Food and Drug Administration 510(k) clearance in 2003. We have arranged for warehousing capacity in Europe to support both distribution and direct
customer sales. Securing



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FDA approval of the REVELATION® Tx remains one of our primary goals. We will continue to pursue regulatory approvals
in other markets which we believe have both the clinical potential and adequate medical support structure to accept a developing technology application. We cannot assure you that we will be able to obtain or maintain any necessary regulatory
approvals or that, if such regulatory approvals are obtained, that we will be able to successfully market our products, or that we will be able to establish a successful distribution channel for our Surgical Ablation System.



3. STOCK-BASED COMPENSATION



We have elected to follow Accounting Principles Board Opinion No.
(APB) 25, Accounting for Stock Issued to Employees and related interpretations in accounting for our employee stock options, including Financial Accounting Standard Board Interpretation (FIN) 44, Accounting
for Certain Transactions Involving Stock Compensation.



Compensation expense is based on the difference, if any, between the fair value of our common stock and the exercise price of the option or share right on the measurement date, which is typically the grant date. This amount is recordable as
Deferred stock compensation in the Balance Sheets and amortized as a charge to operations over the vesting period of the applicable options or share rights. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure, we have provided below the pro forma disclosures of the
effect on net loss and loss per share as if SFAS 123 had been applied in measuring compensation expense for all periods presented.



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



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



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



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



|                                                                                                               |  |                              |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                               |  | Three Months Ended March 31, |       
|                                                                                                               |  | 2004                         |        |   | 2003 |  
|Net loss applicable to common shareholders - as reported                                                       |  | $                            | (2,358 | ) |      | $ | (3,221 | )
|Add:Stock-based employee compensation expense included in reported net income                                  |  |                              | 92     |   |      |   |       |  
|Deduct:Total stock-based employee compensation expense determined under fair value based method for all awards |  |                              | (198   | ) |      |   | (186   | )
|                                                                                                               |  |                              |        |   |      |   |        |  
|Pro forma net loss                                                                                             |  | $                            | (2,464 | ) |      | $ | (3,407 | )
|                                                                                                               |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per share:                                                                          |  |                              |        |   |      |   |        |  
|As reported                                                                                                    |  | $                            | (0.03  | ) |      | $ | (0.06  | )
|                                                                                                               |  |                              |        |   |      |   |        |  
|Pro forma                                                                                                      |  | $                            | (0.03  | ) |      | $ | (0.06  | )
|                                                                                                               |  |                              |        |   |      |   |        |  



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



|                      |  |                              |   |  |      |  
|--------------------- |  | ---------------------------- | - |  | ---- | -
|                      |  | Three Months Ended March 31, |  
|                      |  | 2004                         |   |  | 2003 |  
|Expected life (years) |  | 4.0                          |   |  | 4.0  |  
|Interest Rate         |  | 2.58                         | % |  | 2.80 | %
|Volatility            |  | 88.9                         | % |  | 89.0 | %
|Dividend Yield        |  | 0                            | % |  | 0    | %



4.
CRITICAL ACCOUNTING POLICIES



Use of Estimates



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



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Revenue Recognition



We recognize revenue from two types of customersend users and distributors. Revenue is recognized in accordance with
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements when all of the following criteria are met: persuasive evidence of an agreement exists, shipment of the product has occurred and title of products transferred at
the point of shipment, the payment for the product is reasonably assured and no substantive obligations to the customer remain. Customers are not entitled to rights of product return.



Inventories



Our inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis. Inventories are shown
net of reserves for excess and obsolete inventory at the lower cost or market. We provide reserves for potential excess quantities and obsolescence as a result of technological advancements which impact inventories on hand.



Allowance for Doubtful Accounts



We establish estimates of the uncollectability of accounts receivable. Our
management analyzes accounts receivable, historical write-offs as bad debts, customer concentrations, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We maintain an
allowance for doubtful accounts at an amount that we estimate to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on receivables. We have not experienced significant bad debt expense and
our reserve for doubtful accounts of $87,000 should be adequate for any exposure to loss in our March 31, 2004 accounts receivable.



Allowance for Excess and Slow-Moving Inventory



Inventories, which are composed of purchased parts and subassemblies, work in process and finished goods, are valued at the lower of cost or market with
cost being determined by the first-in, first-out method. We have analyzed the level of inventory on hand, its cost in relation to market value and estimated customer requirements to determine whether write-downs for excess or slow-moving inventory
are required. Actual customer requirements in any future periods are inherently uncertain and thus may differ from estimates. If actual and or expected requirements were significantly greater or lower than the established reserves, a reduction or
increase to the obsolescence allowance would be recorded in the period in which such a determination was made. We have established reserves for excess and slow-moving inventories and believe the reserve of $533,000 at March 31, 2004 is adequate.



Research and Development



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



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Stock Based Compensation



We have elected to follow Accounting Principles Board Opinion No. (APB) 25, Accounting for Stock Issued to
Employees and related interpretations in accounting for our employee stock options, including Financial Accounting Standard Board Interpretation (FIN) 44 Accounting for Certain Transactions Involving Stock Compensation.
Compensation expense is based on the difference, if any, between the fair value of the Companys common stock and the exercise price of the option or share right on the measurement date, which is basically the date of the grant. This amount is
recorded as Deferred stock compensation in the Balance Sheet and amortized as a charge to operations over the vesting period of the applicable options or share rights.



5. WARRANT EXERCISE



On March 17, 2004, we announced that all of the warrants that we issued on August 13, 2003, as well as a portion of the
warrants issued on August 14 and August 18, 2003, had been exercised for a total of 4,144,839 shares of common stock. Warrant exercise prices ranged from $0.7282 to $0.8375 per share. We had issued a notice of redemption on October 10, 2003 in
connection with our election to redeem all outstanding warrants issued on August 13, 2003. Total net proceeds from the exercise of these warrants was $3.1 million.



6. INVENTORIES



Inventories consist of the following (in thousands):



|                |  |                |     |                   |   |    
|--------------- |  | -------------- | --- | ----------------- | - | ---
|                |  | March 31, 2004 |     | December 31, 2003
|Raw materials   |  | $              | 278 |                   | $ | 336
|Work-in-process |  |                | 147 |                   |   | 164
|Finished goods  |  |                | 543 |                   |   | 491
|                |  |                |     |                   |   |    
|                |  | $              | 968 |                   | $ | 991
|                |  |                |     |                   |   |    



Inventory amounts
shown above are net of reserves for excess and obsolete inventory of $533,000 and $412,000 at March 31, 2004 and December 31, 2003, respectively. The Company provides reserves for inventory amounts by considering the potential excess inventory in
relation to sales forecasts and the obsolescence of inventory as a result of technological advancements.



7. STOCK OPTION RE-PRICING



On March 20, 2000, the Companys Board of Directors approved a reduction, effective June 2, 2000, in the exercise price of 462,576 outstanding stock
options held by executive



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##### Table of Contents

officers and employees of the Company to the fair market value of the Companys common stock on June 2, 2000, which
was $1.16 per share. These options were granted between July 29, 1997 and July 6, 1999 at exercise prices ranging from $1.91 to $5.88 per share.



Of the initial 462,576 shares that were repriced, 34,786 shares have been cancelled, 29,700 shares have been exercised and 398,090 shares remain
outstanding as of March 31, 2004. The cumulative non-cash compensation expense from the re-valuation of these re-priced options is $25,000 from the date of re-pricing in 2000 until March 31, 2004. No expenses related to the re-pricing were recorded
for the quarter ended March 31, 2004 because the closing price of $0.91 per share on March 31, 2004 is below the repriced exercise price of $1.16 per share and therefore, no adjustment was required. For the options that remain outstanding,
additional compensation expenses will be recognized to the extent the fair value of our common stock exceeds $1.16 per share.



8. NET LOSS PER SHARE



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



|                           |  |                |  |                  
|-------------------------- |  | -------------- |  | -----------------
|                           |  | March 31, 2004 |  | December 31, 2003
|Warrants                   |  | 18,221,606     |  | 22,336,445       
|Stock Options              |  | 7,928,243      |  | 6,693,513        
|                           |  |                |  |                  
|Total Warrants and Options |  | 26,149,849     |  | 29,029,958       
|                           |  |                |  |                  



9.
RECENT ACCOUNTING PRONOUNCEMENTS



In January 2003, the
Financial Accounting Standards Boards (FASB) issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of
loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. A variable interest entity is a corporation, partnership, trust, or any other legal structures used for
business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds
financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The adoption of FIN 46 in January 2003 did not have a material impact on the Companys financial position or results of operations.



10. COMMITMENTS AND CONTINGENCIES



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



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In November 2003, the Emerging Issues Task Force (EITF) issued EITF No. 03-06, Participating
Securities and the Two-Class Method under SFAS No. 128 which provides for a two-class method of calculating earnings per share computations that relate to certain securities that would be considered to be participating in conjunction with
certain common stock rights. EITF No. 03-06 will be effective for the quarter ending September 30, 2004. EITF No. 03-06 is not expected to have a material impact on our financial statements.



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



This quarterly report on Form 10-Q, including managements discussion and analysis of financial condition and results of operations, contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding the
Companys goals, plans and efforts to secure regulatory approvals and to raise necessary capital, marketing plans, operating results and capital requirements. Except for historical information, the matters discussed in this Form 10-Q are
forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected, estimated or contemplated by the forward-looking statements. Such factors include uncertainties
associated with the Companys ability to obtain adequate funding, whether we will be successful in obtaining U.S. Food and Drug Administration, or FDA, approval of our premarket approval application, or PMA, for the REVELATION Tx linear
ablation microcatheter system, after the FDAs initial indication that it concurred in the nonapproval recommendation of the Circulatory System Devices Panel, whether we will be able to conduct successful clinical trials, whether we will be
able to obtain and maintain timely regulatory approvals and gain acceptance from the marketplace for our products, whether we will be able to successfully market, sell and derive sufficient revenue from our products, as well as the risk factors
discussed below in Factors Affecting Future Results and those listed from time to time in the Companys SEC reports. We assume no obligation to update the forward-looking statements included in this Form 10-Q. This discussion and
analysis should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Form 10-Q and in the Companys most recent Annual Report on Form 10-K.



Overview



Since our incorporation in November 1992, we have developed, produced and sold a variety of microcatheters, including those
for the diagnosis of ventricular tachycardia. Since 2001 however, our efforts have primarily focused on developing differentiated products that diagnose and treat atrial fibrillation, including our REVELATION® Tx microcatheter for use in the
Electrophysiology (EP) market and our Surgical Ablation System for use in the surgical market.



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Our EP products provide for the mapping (diagnosis) and ablation (treatment) of the two most common forms
of cardiac arrhythmias: atrial fibrillation and ventricular tachycardia. Arrhythmias are abnormal electrical heart rhythms that adversely affect the mechanical activities of the heart and can significantly affect a persons quality of life and
be potentially fatal. We have developed microcatheter-based systems designed (1) to locate and provide more extensive and less traumatic access to arrhythmia-causing tissue for diagnosing the arrhythmia, referred to as mapping, and (2) to restore
normal heart rhythms by isolating and destroying the arrhythmia-causing tissue using radio frequency energy, referred to as ablation. Our microcatheters incorporate multiple electrodes at the distal end to record electrical signals for mapping and,
with certain microcatheters, to transfer radio frequency energy for tissue ablation, allowing physicians to both map and ablate arrhythmias using the same microcatheter. Our microcatheters are designed with variable stiffness guidewire technology
and a highly flexible distal tip to allow more extensive and less traumatic access to the chambers and vasculature of the heart. In addition, all of our microcatheters are disposable, single-use products that we believe can be adapted to and used
with all conventional ECG-recording systems and with existing compatible radio frequency generators, eliminating the need for significant new investment in capital equipment by hospitals.



More recently, we have leveraged our proprietary technologies for treating atrial fibrillation, or AF, into the development
of products for the surgical market. On January 29, 2003, we received notice from the FDA that they had approved for commercialization the Cardima Surgical Ablation System for use in cardiac surgery. This new system connects the Cardima Surgical
Ablation Probe with deflectable multi-electrode linear array microcatheter technology to a commercially available electro-surgical radio frequency generator and the INTELLITEMP®, a radio frequency, or RF, energy management device, which allows
surgeons to direct RF energy through any combination of up to eight probe electrodes simultaneously, a feature which can significantly reduce the time required to perform the ablation procedure. Since September 2003, the Surgical Ablation System has
been utilized on a limited basis to treat AF as an adjunct procedure to valve replacement. In the first quarter of 2004, the Surgical Ablation System was utilized in two less invasive cases for the treatment of AF, opening the door to the prospect
of the SAS technology being broadly used in a stand alone procedure to treat AF. While early results are promising, additional patient follow-up data will be required over a period of six months or more, to judge the long-term effectiveness and
safety of our system.



We have generated revenues of
approximately $17.5 million from inception to March 31, 2004. Prior to January 1997, these revenues were generated primarily in Europe and Japan from sales of our PATHFINDER and TRACER microcatheter systems for diagnosing ventricular tachycardia and
our REVELATION microcatheter system for diagnosing atrial fibrillation, as well as ancillary products such as the VENAPORT guiding catheters. Since 1997 and the U.S. Food and Drug Administrations clearance of certain of our products, sales in
the United States consist primarily of our PATHFINDER and REVELATION lines of microcatheters for diagnosing ventricular tachycardia and atrial fibrillation, respectively. To date, our international sales have been made through our small direct sales
force, which currently consists of one salesperson and one administrator, and distributors who sell our products to physicians and hospitals. European sales consist primarily of the REVELATION Tx, REVELATION T-Flex and REVELATION Helix
microcatheters for treatment of atrial fibrillation following receipt of CE Mark for those products in December 1998, December 2001 and November 2002, respectively.



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



Obtaining and maintaining regulatory approvals
is critical to our business. We are required to conduct clinical trials, demonstrate safety and effectiveness and obtain either 510(k) or PMA approval from the U.S. Food and Drug Administration in order to sell any of our products for treating
atrial fibrillation or ventricular tachycardia in the United States. While the Surgical Ablation System has received 510(k) approval from the FDA, PMA approval will be required prior to the introduction in the United States of the REVELATION Tx,
REVELATION T-Flex and REVELATION Helix microcatheter systems for treating atrial fibrillation. Outside of the United States, our strategy has been to obtain regulatory approvals in those geographies that offer existing infrastructure to support
medical technology as well as offer the potential for adequate product demand with the goal of positioning us to expand into these geographies once we have sufficient capital and other resources. To date, we have emphasized obtaining regulatory
approvals in Western Europe and select portions of Asia. We cannot assure you that we will be able to obtain or maintain regulatory approval.



Our primary focus is to obtain FDA approval in the United States of the REVELATION® Tx microcatheter system for the treatment of atrial fibrillation.
On September 30, 2002, we submitted a PMA application for this system to the FDA. On November 5, 2002, the PMA was accepted by the FDA and was granted expedited review status. On May 29, 2003, we met with the Circulatory System Devices Panel which
recommended that the FDA not approve our PMA for the REVELATION Tx linear ablation microcatheter system. The Circulatory System Devices Panel commented favorably on the safety and need for this type of device. However, the Panel felt that efficacy
data was not sufficiently clear and supportive for the approval. The Panel provided several suggestions on how to possibly reexamine the existing data or how to collect more data on existing patients. On June 26, 2003 we received a letter from the
FDA, which stated that the FDA concurred with the Panels non-approval recommendation. On January 20, 2004 we submitted a supplement to our PMA filing, in which we provided new analysis and an expanded patient base. The timing and the outcome
of the FDAs response are uncertain.



We had cash and cash
equivalents of approximately $6.9 million as of March 31, 2004. Our management believes that our cash balances as of that date will be sufficient to fund planned future expenditures into the fourth quarter of 2004, although the actual amount of
expenditures is inherently uncertain. Although our management recognizes the need to raise funds in the near future, we cannot assure you that we will be successful in consummating any fundraising transaction, or, if we do consummate such a
transaction, that its terms and conditions will not be unfavorable to us. Any failure by us to obtain additional funding will have a material and adverse effect upon us and will likely result in our inability to continue as a going concern. Our



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independent auditors have concluded that there is substantial doubt as to our ability to continue as a going concern for
a reasonable period of time, and have, therefore, modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty.



Results Of Operations  Three Months Ended March 31, 2004 and 2003



Net Sales



Net sales for the quarter ended March 31, 2004 decreased less than 1% to $636,000 from $638,000 for the same period in 2003.
Regionally, sales in the United States increased 26% to $317,000 in the first quarter of 2004, from $251,000 in the same period of 2003. This increase was offset by decreases in sales in the European region of 19%, from $159,000 in the first quarter
of 2003 to $129,000 in the first quarter of 2004, and in the Asian region of 12%, from $209,000 to $185,000 for the same periods. The increase in domestic revenue resulted primarily from the sale of therapeutic and surgical products used in clinical
studies while the decreases in the international markets can be attributed to the corporate strategic decision to focus all resources on the FDA approval of our REVELATION family of microcatheters and marketing of the Surgical Ablation System in the
United States.



Accounts receivable increased 14% to $340,000
as of March 31, 2004 from $299,000 as of December 31, 2003. Allowance for doubtful accounts remained at $87,000 as of March 31, 2004 and December 31, 2003.



Cost of Goods Sold



Cost of goods sold primarily includes raw materials costs, catheter fabrication costs, system assembly and testing costs and manufacturing labor and
overhead. Cost of goods sold for the quarter ended March 31, 2004 decreased 23% to $835,000 from $1,085,000 for the same period in 2003. This decrease in the cost of goods sold was partially due to the overall decrease in sales in the first quarter
of 2004 along with the decrease in expenses realized following the reduction in force in June 2003, which decreased indirect and overhead expenses for periods following the reduction.



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, 2004 decreased 8% to $871,000 from $950,000 for the same period in 2003. More specifically, our direct product development costs for the first three months of 2004 increased $95,000, or 23%, to $517,000 from $422,000 for the
first three months of 2003, due to expenses incurred in the development of the INTELLITEMP and products related to the Surgical Ablation System. This increase was offset by a decrease in regulatory and clinical expenses for the first three months of
2004 of $175,000, or 33%, when compared to the same period in 2003. The decrease was attributable to the reduction of expenses following the finalization of Phase III clinical trials in 2003 and a decrease of expenses following the submission of the
REVELATION® Tx PMA to the FDA.



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Clinical trials of our products and regulatory approval efforts have required substantial financial and
management resources. In addition, clinical trials may identify significant technical or other obstacles that we will have to overcome before obtaining the necessary regulatory approvals or market acceptance. Due to the uncertainties associated with
our ability to complete clinical trials, demonstrate product safety and effectiveness and obtain regulatory approval for our products, it is difficult for us to accurately predict the time or cost until completion of product development efforts.



Selling, General and Administrative Expenses



Selling, general and administrative expenses for the quarter ended March 31,
2004 decreased $607,000, or 33%, to $1,227,000 from $1,834,000 for the same period in 2003. More specifically, selling expenses for the first three months of 2004 decreased $321,000, or 56%, to $248,000 from $569,000 for the first three months of
2003. This decrease is attributable to the decreased international sales presence as we continue to focus our resources on securing regulatory approval for the REVELATION® Tx in the United States. General and administrative expenses for the
first three months of 2004 also decreased by $223,000, or 21%, to $854,000 from $1,077,000 for the first three months of 2003. The decrease in general and administrative expenses in this period is primarily a result of the direct and indirect
expenses resulting from the reduction in force in June 2003, as well as an overall decrease in executive compensation expense as bonus accruals were realigned and reduced. Marketing expenses for the first three months of 2004 also decreased $64,000,
or 34%, to $124,000 from $188,000 for the same period in 2003 as a result of the direct and indirect savings realized following the reduction in force of June 2003. If we obtain FDA approval for the REVELATION Tx in 2004, we would expect 2004 sales
expenses to increase, and in general, we expect total selling, general and administrative expenses to increase during 2004 compared to 2003 levels, as we prepare for the launch of our therapeutic family of products in the United States.



Interest and Other Income



Interest and other income for the quarter ended March 31, 2004 decreased by
$36,000, primarily due to an adjustment of the amounts recorded for two notes receivable to correct accrued interest income based on an adjustable interest rate as opposed to a fixed interest rate, as per the respective contracts.



Interest Expense



Interest expense for the quarter ended March 31, 2004 increased to $4,000 from $2,000 for the same period in 2003 due to a
slight increase of lease and credit obligation balances.



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Other Non-Cash Expense



Other non-cash expense for the quarter ended March 31, 2004 was $33,000. No such expense was recorded for the same period in 2003. This non-cash
expense relates to the warrants issued in connection with our December 2003 private placement, and represents the difference of the warrants valuation between their date of issuance and the date of registration of the shares underlying the
warrants.



Liquidity and Capital Resources



We had cash and cash equivalents of approximately $6.9 million as of March
31, 2004. Our management currently estimates this cash balance will be sufficient to fund planned expenditures into the fourth quarter of 2004, although the actual level of expenditures cannot be predicted with certainty. Although our management
recognizes the need to raise funds in the near future, there can be no assurances that we will be successful in consummating any such financing, or, if we do consummate such a transaction, that the terms and conditions of such financing will not be
unfavorable to us. Any failure by us to obtain additional funding will have a material effect upon us and will likely result in our inability to continue as a going concern.



We have financed our operations, to date, principally through (1) private placements of equity securities, (2) our initial
public offering of Common Stock in June 1997, together with interest income on such proceeds, (3) borrowings under a $3,000,000 former line of credit, (4) sale of certain of our non-core patents to Medtronic, Inc. for $8,000,000 in 2002 and 2003 and
(5) equipment leases to finance certain capital equipment.



Net
cash used in operating activities for the first three months of 2004 was approximately $2,525,000, compared to the net cash used of $3,368,000 for the first three months of 2003. The decrease of $843,000, or 25%, in net cash used in operating
activities is due to the overall decrease in operating expenses primarily resulting from the reduction in force enacted June 30, 2003. Net cash provided by financing and investing activities for the first three months of 2004 was approximately
$3,029,000, compared to net cash provided by financing and investing activities of approximately $2,898,000 for the first three months of 2003. This change was primarily due to the exercise of warrants during the first quarter of 2004, following our
redemption call for warrants issued as part of the August 2003 private placements.



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



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Factors Affecting Future Results



If we fail to raise additional capital in the near future, our business will fail.



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



We have
financed our operations since inception primarily through the private placement of equity securities, proceeds from our initial public offering in June 1997, loan facilities and the sale of certain of our patents and other intellectual property.
Although our management recognizes the need to raise funds in the near future, there can be no assurance that we will be successful in consummating any fundraising transaction, or if we do consummate such a transaction, that its the terms and
conditions will not be unfavorable to us. Among other things, the agreements under which we issued some of our existing securities include, and any securities that we may issue in the future may also include, terms that could impede our ability to
raise additional funding, such as terms requiring the consent of certain security holders before we issue additional securities. The issuance of additional securities will likely dilute the interests of existing common stockholders, and could impose
additional restrictions on how we operate and finance our business.



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



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



Our net losses were approximately $2.4 million for the three months ended March 31, 2004 and approximately $13.2 million, $12.6 million and $9.4 million
for the years ended December 31, 2003, 2002 and 2001, respectively. As of March 31, 2004, our accumulated deficit was approximately $106.0 million. Our limited sales history makes it difficult to assess our future results. We cannot be certain that
we will ever generate substantial revenue or achieve profitability. Our failure to generate substantial revenues would harm our business.



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



Currently, our common stock trades on the Nasdaq SmallCap Market. We cannot assure you that we will be able to maintain our listing on Nasdaq or any other
established trading market. Among other things, Nasdaq has considerable discretion with respect to listing standards, which include qualitative criteria as well as quantitative criteria, such as minimum stock price requirements, some of which are
out of our control.



Among other things, Nasdaq listing rules
provide that if the closing bid price of a companys stock is below $1.00 for more than thirty consecutive trading days, the company faces possible delisting. On May 10, 2004, we received a letter from Nasdaq stating that for the last thirty
consecutive business days the closing bid price of our common stock had remained below the minimum $1.00 per share required for continued inclusion under Marketplace Rule 4310 (c)(4) (the Rule). In accordance with Marketplace Rule
4310(c)(8)(D), we will be provided 180 calendar days, or until November 8, 2004, to regain compliance. If, at anytime before November 8, 2004, the bid price of our common stock closes at $1.00 per share or more for a minimum 10 consecutive
business days, Nasdaq Staff will provide notification that we have complied with the Rule. If, after 180 calendar days, we have not regained compliance, the Staff will determine whether we meet The Nasdaq SmallCap Market initial listing criteria as
set forth in Marketplace Rule 4310(c), except for the bid price requirement. If we meet the initial requirements, the Staff will grant us an additional 180 calendar day compliance period. Thereafter, if we have not regained compliance but satisfy
the initial inclusion criteria, we may be afforded an additional period, up to our next shareholder meeting, provided we commit to: (1) seek shareholder approval for a reverse stock split at or before our next shareholder meeting and (2) promptly
thereafter effect the reverse stock split. The shareholder meeting to seek such approval must occur no later than two years from May 10, 2004. If we do not regain compliance with the Rule and are not eligible for an additional compliance period,
Staff will provide written notification that our securities will be delisted. At that time, we may appeal the Staffs determination to delist our securities to a Listing Qualifications Panel.



We have faced possible delisting from Nasdaq in the past and even if we
comply with the requirements in Nasdaqs most recent notice to us, we may receive additional notices of potential delisting in the future. For example, the NASD advised us that beginning on April 9, 2001, our common stock would no longer be
listed on the Nasdaq SmallCap Market. We appealed the NASDs decision and met the continued listing requirements in June 2001. In addition, due to our stock trading below $1.00 per share over various prior periods, we have received other
notices from the NASD that our stock could be delisted if its closing bid price did not close at $1.00 per share or more over specified periods. For example, we received notices of this kind on October 28, 2002 and July 22, 2003.



We cannot assure you that we will be able to maintain our listing on the
Nasdaq SmallCap Market. Delisting would have material and adverse effects on our business and the value of your



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investment. If our common stock were to be delisted from Nasdaq SmallCap Market, our common stock would be considered a
penny stock under regulation of the Securities and Exchange Commission and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon
broker-dealers by these requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and your ability to sell our securities in the secondary
market. Delisting could also make it difficult or impossible for us to raise additional capital, which could cause us to cease operations.



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



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



In order to complete the required regulatory approval process and commercialize our products, we will need to raise additional capital. One possibility
for raising additional capital is the public or private sale of our common stock or securities convertible into or exercisable for our common stock.



If we sell additional shares of our common stock, such sales will further dilute the percentage of our equity that you own. In addition, our recent
private placement financings have involved the issuance of securities at a price per share that represented a discount to the closing price of our common stock and it is possible that we will close future private placements involving the issuance of
securities at a discount to prevailing market prices. Depending upon the price per share of securities that we sell in the future, your interest in us could be further diluted by any adjustments to the number of shares and the applicable exercise
price required pursuant to the terms of the agreements under which we previously issued securities. No assurance can be given that previous or future investors, finders or placement agents will not claim that they are entitled to additional
antidilution adjustments or dispute the Companys calculation of any such adjustments. Any such claim or dispute could require us to incur material costs and expenses regardless of the resolution and, if resolved unfavorably to us, to effect
dilutive securities issuances or adjustments to previously issued securities. In addition, certain of our prior securities issuances have included, and future financings may also include, provisions requiring us to make additional payments to the
investors if we fail to obtain or maintain the effectiveness of SEC registration statements by specified dates or take other specified action. Our ability to meet these requirements may depend on actions by regulators and other third parties, over
which we will have no control. These provisions may require us to make payments or issue additional dilutive securities, or could lead to costly and disruptive disputes. In addition, these provisions could require us to record additional non-cash
expenses, as we were required to do in the third quarter of 2003 with respect to certain warrants issued in that quarter





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The audit report accompanying our 2003 financial statements indicates there is substantial doubt as to
our ability to continue as a going concern.



As a result
of our losses to date and accumulated deficit, the audit report on our 2003 financial statements contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern. The audit reports on our
2002 and 2001 financial statements contained similar explanatory paragraphs. Our continuation as a going concern will depend upon our ability to generate or obtain sufficient cash to meet our obligations on a timely basis and ultimately to attain
profitable operations. Concern about our ability to continue as a going concern may make it more difficult for us to obtain additional funding to meet our obligations or adversely affect the terms of any additional funding we are able to obtain. We
anticipate that we will continue to incur significant losses until successful commercialization of one or more of our products. There can be no assurance that we can or will operate profitably in the future, or that we will continue as a going
concern.



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



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



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



For example, shortly before the closing of our August 2002 private placement, the advisor that assisted us with a 2001 private placement, which we refer to as the 2001 Advisor, communicated to us that it believes that
it is entitled to cash fees and warrants in connection with the August 2002 private placement. We strongly disagree with the 2001 Advisors interpretation of its letter agreement with us.



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Even if the 2001 Advisors interpretation is determined to be correct, we believe that the 2001 Advisor waived any
rights to compensation it might have in connection with the August 2002 private placement. In August 2002, we sent the 2001 Advisor a termination letter relating to its 2001 agreement, which provides that our obligations to pay the 2001 Advisor a
commission or to issue to it warrants terminated 30 days from the date of the termination letter, or September 20, 2002. On August 29, 2002, the 2001 Advisor sent to us an invoice for cash commissions and warrants that the 2001 Advisor claims are
owed to it as a result of our August 2002 private placement. On September 26, 2002 we received a letter from legal counsel to the 2001 Advisor reasserting the advisors claim. In the event the 2001 Advisor prevails on its claims in connection
with the August 2002 private placement, we would be required to pay to the 2001 Advisor $381,570, or 7.5% of the gross proceeds that we received from the sale of shares of common stock, and issue to the 2001 Advisor warrants to purchase up to
698,287 shares of common stock, or 10% of the number of shares of common stock sold in the August 2002 private placement (and if all of the warrants issued to the investors in the August 2002 private placement are exercised, an additional cash
amount equal to $133,549). These payments would be in addition to fees and warrants paid to another advisor that arranged the August 2002 placement.



In addition, in a letter dated September 19, 2003, an advisor that we had retained in November 2002 (under an agreement that we terminated effective May
18, 2003) has claimed that under its November 13, 2002 agreement with us, we are obligated to pay such advisor cash fees of $157,500 and warrants to purchase Units of our securities comprising 396,514 shares of common stock and warrants
to purchase 118,954 shares of common stock at an exercise price per share of $0.7282) at an exercise price per Unit of $0.58256, in connection with four enumerated purchasers investments in our August 2003 private placement. The letter also
stated that this advisor believed that the Company would have additional obligations to the advisor in the event that it was determined that other investors in the August 2003 private placement were investors as to which the advisor is entitled to
compensation under its November 13, 2002 agreement. In a letter dated January 29, 2004, this advisor advised us that it was no longer claiming compensation with respect to one of the four purchasers, reduced its claim to cash fees of $82,500 and
warrants to purchase Units comprising 207,698 shares of common stock and warrants to purchase 62,309 shares of common stock, submitted information alleged to support a portion of its claim, and stated its belief that we are obligated to
register the claimed securities for resale. In our opinion, this advisor has not established the merit of its claim. We cannot predict whether additional claims will be made, or the resolution of any current or future claims, by this former advisor.



Despite the termination letter that we delivered to the 2001
Advisor on August 21, 2002, we received on January 7, 2003, a letter from the 2001 Advisor asserting that it also is owed approximately $245,000 plus five year warrants to purchase approximately 436,000 shares of the our common stock at an exercise
price of $0.8245 per share, in each case arising in connection with a private placement we consummated in December 2002. On February 2, 2003 we received another letter from the 2001 Advisor asserting that it is also owed (i) approximately $54,717
plus (ii) five year warrants to purchase approximately 97,332 shares of our common stock at an exercise price of $0.8245 per share, in connection with the January 22, 2003 closing of our private placement. Any payments or warrants issued to the 2001
Advisor would be in addition to fees and warrants we paid to the finder we retained in December 2002. We have not yet received



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a letter from the 2001 Advisor claiming additional fees or warrants in connection with the March 28, 2003, April 11,
2003, August 2003 and December 2003 closings of our recent financings, but there can be no guarantee that such a claim will not be made in connection with any prior or future financing.



In August 2003, one of the advisors that we retained in connection with our August 2003 private placement notified us of its
belief that it was entitled to an additional fee of approximately $35,000 and additional warrants to purchase approximately 47,000 shares of common stock, in connection with the August 2003 private placement. We responded that, based on the
information in our possession, we believed that such advisor is not entitled to such fees and warrants. To date, we have received no further information from such advisor in support of its claim.



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



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



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



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



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



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



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



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



We cannot assure the safety or effectiveness of our products.



To obtain and maintain required regulatory approvals and
secure the confidence of physicians and others whose acceptance is needed for our products, we will need to demonstrate that our products are safe and effective. We cannot assure you that our products will be deemed



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safe and effective. Many of our products, such as our surgical ablation system, which has begun to be used by cardiac
surgeons only recently, have not been used to a sufficient extent to permit us to predict their safety and effectiveness. In addition, our products include components and materials supplied by third parties, whose safety and reliability we cannot
guarantee. We have occasionally experienced quality issues with some elements of our products, and we may face additional issues in the future. The perceived safety and effectiveness of our products can also depend on their manner of use by
physicians and other third parties, which we cannot control. If safety and effectiveness issues arise with any of our products in the future, we may incur liabilities to third parties, lose any regulatory approvals for the applicable product, or be
required to redesign the product. These issues will reduce our sales and increase our expenses, possibly substantially.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Before we can market any of our products in the United States or Europe, we must demonstrate that our products are safe and effective and obtain approval
or clearance from the applicable governmental authorities. In the United States, we must obtain from the FDA 510(k) pre-market notification clearance or a PMA in order to market a product. We have received 510(k) pre-market notification clearances
for our PATHFINDER, PATHFINDER mini and



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TRACER microcatheter systems for mapping ventricular tachycardia, for the REVELATION microcatheter system for mapping
atrial fibrillation and for the Cardima Surgical Ablation System to ablate cardiac tissue during cardiac surgery using radio-frequency energy. Currently, the process for 510(k) clearance requires approximately 120 days and PMA approval is six to
twelve months. However, the timing of such processes can be uncertain and may involve significantly more time. We cannot guarantee either the timing or receipt of regulatory approval or clearance for any of our products in development. These
products may require a PMA, and the FDA may request extensive clinical data to support either 510(k) clearance or a PMA.



We are required to seek a PMA for our ablation products, including the REVELATION Tx microcatheter. The process of obtaining a PMA is much more expensive,
lengthy and uncertain than the 510(k) pre-market notification clearance process. In order to complete our PMA application, we will be required to complete clinical trials to demonstrate the safety and effectiveness of these products. In December
1997, the FDA approved a 10-patient atrial fibrillation feasibility study for mapping and ablation with the REVELATION Tx. In June 2000, we received conditional approval from the FDA and full approval in August 2000 for our Phase III clinical trial.
In March 2001, the FDA allowed us to file a modular PMA for our REVELATION Tx in Phase III clinical trial. Under the modular PMA submission, we filed four of five modules in 2001. The fifth module is the clinical data and formal PMA application.
Three of the first four modules have been accepted and closed by the FDA and the remaining module has been left open for reference during the review of the clinical data in the fifth and final module. On September 20, 2002, we submitted our PMA
application to the FDA with the fifth module containing data on more than 80 patients treated with our REVELATION Tx microcatheter system. Subsequently, on November 5, 2002, we announced that the FDA had accepted our filing and granted our request
for expedited review. We met with the Circulatory Systems Device Panel on May 29, 2003, and on that date, the Panel recommended that the FDA not approve our PMA for the REVELATION Tx linear ablation microcatheter system. The Circulatory System
Devices Panel commented favorably on the safety and need for this type of device. However, the Panel felt that efficacy data was not sufficiently clear and supportive for the approval. The Panel provided the FDA and the Company with several
suggestions on how to possibly reexamine the existing data or how to collect more data on existing patients. On June 26, 2003, we received a letter from the FDA, which reiterated the recommendation of the Panel and stated the FDA concurred with the
recommendation of the Panel. On January 20, 2004, we submitted an amended PMA that provides new analysis, including data from an expanded patient base, to the FDA. The timing and outcome of the FDAs consideration of any submission are
currently uncertain.



We are restricted from selling the
product until the entire PMA process is complete and approved by the FDA. No assurance can be given that we will ever be able to obtain a PMA for any of our ablation products. Our failure to obtain a PMA on a timely basis would have a material
adverse effect on our business, financial condition and results of operations.



We filed an investigational device exemption (IDE) application for a feasibility trial with the THERASTREAM microcatheter system in December 1998 and received permission to expand that trial in July 2000. We have
postponed the THERASTREAM clinical trial while we



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focus our resources on obtaining regulatory approval of our REVELATION Tx. There can be no assurance that any additional
clinical studies that we may propose will be permitted by the FDA, will be completed or, if completed, will provide data and information that supports a PMA. Furthermore, we cannot assure you that our Phase III clinical trial for ablation of atrial
fibrillation will provide us with data and information that supports a PMA.



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



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



Through pre-clinical studies and clinical trials, we must demonstrate that our products are safe and effective for their indicated uses. Results from
pre-clinical studies and early clinical trials may not allow us to predict results in later-stage testing. No assurance can be given that our future clinical trials will demonstrate the safety and effectiveness of any of our products or will result
in regulatory approval to market our products. As a result, if we are unable to commence and complete our clinical trials as planned, or demonstrate the safety and effectiveness of our products, our business will be harmed. In addition, no assurance
can be given that we can begin any future clinical trials or successfully complete these trials once started. We may never meet our development schedule for any of our products in development. Even if a product is successfully developed and
clinically tested, we cannot be certain that it will be approved by the FDA or other regulatory agency on a timely basis or at all. If the FDA does not approve our products for commercial sales, our business will be harmed. As described above, we
have devoted considerable resources to developing, testing and seeking regulatory approval for our REVELATION Tx microcatheter systems designed for ablation of atrial fibrillation. On May 29, 2003, the FDAs Circulatory System Devices Panel
recommended that the FDA not approve our premarket approval application, or PMA, for the REVELATION Tx linear ablation microcatheter system. In June 2003, the FDA indicated that it concurred in the Panels recommendation. On January 20, 2004,
we submitted an amended PMA to the FDA, but the timing and outcome of any response from the FDA are currently uncertain. We must receive PMA approval before marketing our products for ablation in the United States.



Additionally, in August 2001, we began a clinical trial in Germany involving
our REVELATION Helix microcatheter in the treatment of atrial fibrillation originating from the pulmonary veins. Enrollment in this study was completed in June 2002. By December 2002, all enrolled study subjects had completed the six-month
follow-up. Data from the six-month follow-up on these subjects will be analyzed and prepared for publication targeted for the fourth quarter of 2004. In December, 2001, the REVELATION Helix received the CE mark allowing sales in the European
Economic Area. We also received in December 1999 approval for an IDE to begin clinical testing of our THERASTREAM microcatheter system for ablation of ventricular



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tachycardia and during calendar year 2000 approval to expand that trial; however, we have postponed the clinical
feasibility trial for the THERASTREAM microcatheter system for ablation of ventricular tachycardia to focus on obtaining regulatory approval of our REVELATION Tx for atrial fibrillation. We have no estimate as to when, or if, we will resume the
clinical trial for our THERASTREAM microcatheter system. If we resume the clinical trial for our THERASTREAM microcatheter system, the completion of that clinical trial could take several years.



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



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



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



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



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



| |  | fines;
| | - | ------



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



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



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



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



| |  | civil and criminal penalties.
| | - | -----------------------------



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



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



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



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



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



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



Although we label all of our microcatheter systems for single-use only, we
are aware that some physicians potentially may reuse these products. Reuse of our microcatheter systems could reduce revenues from product sales and could cause our revenues to decline. In addition, such misuse of our products could result in
personal injury and death. See Factors Affecting Future ResultsWe may face product liability claims related to the use or misuse of our products.



Difficulties presented by international factors could negatively affect our business.



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



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



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



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



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



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



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



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



Any of these factors could damage our business results.



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



The market for catheters to map and/or ablate atrial fibrillation and
ventricular tachycardia is highly competitive, as is the market for surgical ablation products. Several of our competitors are developing different approaches and products for these procedures. These approaches include mapping systems using contact
mapping, single-point spatial mapping and non-contact, multi-site electrical mapping technologies, and ablation systems using radio frequency, ultrasound, microwave, laser and cryoblation technologies. Other companies are also developing surgical
procedures that could allow physicians to perform the open-heart surgical maze procedure for the treatment of atrial



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fibrillation in a minimally invasive manner. If any of these new approaches or products proves to be safe, effective and
cost effective, our products could be rendered non-competitive or obsolete, which would harm our business.



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



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



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



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



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



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



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



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



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bear the liability resulting from such claims. We cannot be certain that we will have the financial resources to protect
and defend our intellectual property, as such defense is often costly and time-consuming. Our failure to protect our patent rights, trade secrets, know-how or other intellectual property would harm our business.



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



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



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



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



We currently manufacture our microcatheter systems in limited quantities for
U.S. and international sales and for pre-clinical and clinical trials. However, we have limited experience manufacturing our products in the amounts necessary to achieve significant commercial sales.



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



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



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



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



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



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



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



Our facilities and manufacturing
processes have undergone a successful annual surveillance audit by the European Notified Body in November 2002 and a pre-PMA inspection in December 2003. In November 2000 and in January 2003, the FDA conducted an inspection of our quality system,
which we successfully passed. There is no assurance that our manufacturing facilities will continue to meet such compliance audits and will maintain such compliance standards.



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



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



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



We face an inherent business risk of product liability claims in the event that the use or misuse of our products results in
personal injury or death. We have received claims of this type in the past and may receive additional claims in the future. We cannot be certain, in particular after commercial introduction of our products, that we will not experience losses due to
product liability claims. We currently have general liability insurance with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million annual limitation. We have product liability insurance with coverage in the amount of $5.0
million per occurrence, subject to a $5.0 million annual limitation. We cannot be certain that such coverage will be adequate or continue to be available to us on reasonable terms, if at all. In addition, there can be no assurance that all of the
activities encompassed within our business are or will be covered under our policies. Although we label our microcatheter products for single-use only, we are aware that some physicians are re-using such products. Moreover, despite labeling our
microcatheters for diagnostic use only, we believe that physicians are using such mapping microcatheters for ablation. Multiple use or off-label use of our microcatheters could subject us to increased exposure to product liability
claims, which could have a material adverse effect on our business, financial condition and results of operations. We may require additional product liability coverage if we significantly expand commercialization of our products. Such additional
coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims or series of claims against us, regardless of their merit or eventual outcome, could have a material adverse effect on our
business, financial condition and results of operations.



We
are dependent upon our key personnel and may need to hire additional key personnel in the future.



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



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



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



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



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



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



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



| |  | the ability of the board of directors to alter our bylaws without stockholder approval;
| | - | ---------------------------------------------------------------------------------------



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



| |  | the elimination of the rights of stockholders to act by written consent.
| | - | ------------------------------------------------------------------------



Each of these provisions could discourage potential takeover attempts.



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



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



Item 3. Quantitative and Qualitative Disclosure about Market Risk



Since we did not have a short-term investment or a line of credit obligation as of March 31, 2004, we do not have any material quantitative disclosures
about market risk.



Item 4: Controls and Procedures



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



Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure
controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report
on Form 10-Q was being prepared.



Changes in internal
control over financial reporting. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2004, that have materially affected, or are reasonably like to materially affect, our internal controls
over financial reporting.



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PART II. OTHER INFORMATION



Item 1.Legal Proceedings



From time to time, we are subject to certain legal proceedings that arise in the ordinary course of business. In the opinion of management, no pending legal proceedings are reasonably likely to have a material adverse
effect on our financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any legal proceedings, our operating results for a particular reporting
period could be materially adversely affected.



Item 2.Changes in Securities and Use of Proceeds



During the first quarter of 2004, all of the warrants that we issued on August 13, 2003, as well as a portion of the warrants issued on August 14 and
August 18, 2003, were exercised for a total of 4,144,839 shares of common stock. Warrant exercise prices ranged from $0.7282 to $0.8375 per share. We had issued a notice of redemption on October 10, 2003 in connection with our election to redeem all
outstanding warrants issued on August 13, 2003. Total net proceeds from the exercise of these warrants was $3.1 million. We relied on the exemption provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act of 1933, as amended,
in connection with the warrant exercises.



We intend to use the
proceeds received from the exercise of these warrants for working capital, including, without limitation, costs and expenses relating to our Phase III trial for the treatment of atrial fibrillation, efforts to obtain FDA approval for our REVELATION
Tx microcatheter, planned marketing efforts, expansion of sales efforts and for such other general corporate purposes as our Board of Directors may determine.



Item 3.Default Upon Senior Securities



None.



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



None



Item 5.Other Information



None



Item 6.Exhibits and Reports on Form 8-K



(a) Exhibits



|     |  |                                                                                                                                                  
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer of Cardima, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.             
|     | 
|31.2 |  | Certification of the Interim Chief Financial Officer of Cardima, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.     
|     | 
|32.1 |  | Certification 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.
|     | 
|32.2 |  | Certification 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.



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| | (b) | Reports on Form 8-K filed during the first quarter of 2004:
| | --- | -----------------------------------------------------------



On January 21, 2004, we filed a report on Form 8-K to announce the submission of an amendment of our pre-market approval (PMA) application to the FDA for
the REVELATION Tx linear ablation catheter.



On March 17,
2004, we filed a report on Form 8-K to announce the exercise of warrants to purchase 4,144,839 shares of common stock, generating net proceeds of approximately $3.1 million.



On March 31, 2004, we furnished a report on Form 8-K, with an exhibit attached thereto, to announce financial results for
the fourth quarter and year ended December 31, 2003. This Form 8-K shall not be deemed filed for any purpose under the Securities Exchange Act of 1934, as amended.



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CARDIMA, INC.



SIGNATURES



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



|                   |  |                                               
|------------------ |  | ----------------------------------------------
|DATE: May 12, 2004 |  | CARDIMA, INC.                                 
|                   | 
|                   |  | /s/ GABRIEL B. VEGH                           
|                   |  | GABRIEL B. VEGH                               
|                   |  | Chairman, Chief Executive Officer and Director
|                   | 
|                   |  | /s/ BARRY D. MICHAELS                         
|                   |  | BARRY D. MICHAELS                             
|                   |  | Interim Chief Financial Officer and Secretary 



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