UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549








FORM
10-Q




(Mark
One)




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


FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2008




OR




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


FOR THE
TRANSITION PERIOD FROM ____________ TO ____________




COMMISSION
FILE NUMBER: 000-22419




CARDIMA,
INC.




(Exact
name of registrant as specified in its charter)




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






47266
      Benicia Street,
              Fremont,
      CA  94538-7330(Address
      of principal executive offices) (Zip
Code)







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





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




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




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







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




There
were 124,864,958 shares of the registrant's common stock, par value $0.001,
issued and outstanding as of July 31, 2008.









CARDIMA, INC.




TABLE
OF CONTENTS




PART
I.  Financial Information




Description


PageItem
      1.
            Financial
      Statements (unaudited)
            3Balance
      Sheets as of June 30, 2008 and December 31, 2007
            3Statements
      of Operations for the Three and Six Months ended June 30, 2008 and
      June 30, 2007
            4Statements
      of Cash Flows for the Six Months ended June 30, 2008 and
      2007
            5Notes
      to Condensed Financial Statements
            6Item
      2.
            Management’s
      Discussion and Analysis and Results of Operations
            18Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            22Item
      4.
            Controls
      and Procedures
            22





PART
II.  Other Information




Description


PageItem
      1.
            Legal
      Proceedings
            24Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            24Item
      3.
            Defaults
      Upon Senior Securities
            24Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            24Item
      5.
            Other
      Information
            24Item
      6.
            Exhibits
            24Signatures
            25


2




PART
I – FINANCIAL INFORMATION





ITEM
1.  Financial Statements




CARDIMA,
INC.


BALANCE
SHEETS


(In
thousands, except shares and per share amounts)
  ASSETS
              
              June
      30, 2008
              
              
              December
      31, 2007Current
      assets:
              
              (Unaudited)
              
              
              (Note
      2)Cash
              
              $
              5,667
              
              
              $
              4,811Accounts
      receivable, net of allowances for doubtful accounts of $132 and $77,
      respectively
              
              
              199
              
              
              
              183Short
      term investment
              
              
              50
              
              
              
              2,008Inventories
              
              
              852
              
              
              
              402Prepaid
      expenses
              
              
              563
              
              
              
              46Other
      current assets
              
              
              47
              
              
              
              131Total
      current assets
              
              
              7,378
              
              
              
              7,581Property
      and equipment, net
              
              
              692
              
              
              
              362Other
      assets
              
              
              61
              
              
              
              61TOTAL
      ASSETS
              
              $
              8,131
              
              
              $
              8,004LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              515
              
              
              $
              443Accrued
      liabilities
              
              
              970
              
              
              
              911Loans
      payable
              
              
              11
              
              
              
              10Capital
      leases - current portion
              
              
              28
              
              
              
              24Notes
      payable to related-party - current portion
              
              
              100
              
              
              
              175Total
      current liabilities
              
              
              1,624
              
              
              
              1,563Capital
      leases - net of current portion
              
              
              31
              
              
              
              7Notes
      payable to related-party - net of current portion
              
              
              48
              
              
              
              53TOTAL
      LIABILITIES
              
              
              1,703
              
              
              
              1,623Shareholders'
      Equity:Preferred
      stock, $0.001 par value, liquidation preference of $0.10, 5,000,000 shares
      authorized, 5,000,000 issued and outstanding
              
              
              500
              
              
              
              500Common
      stock, $0.001 par value, 300,000,000 shares authorized, 124,864,958 and
      116,316,311 shares issued and outstanding at June 30, 2008 and December
      31, 2007, respectively
              
              
              125
              
              
              
              116Additional
      paid-in-capital
              
              
              188,867
              
              
              
              182,324Accumulated
      deficit
              
              
              (183,064
              )
              
              
              (176,559
              )Total
      Shareholders' Equity
              
              
              6,428
              
              
              
              6,381TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
              
              $
              8,131
              
              
              $
              8,004


See
accompanying notes to these condensed financial statements





3




CARDIMA,
INC.
 STATEMENTS
OF OPERATIONS
 (In
thousands, except per share amounts)


(unaudited)Three
      Months Ended June 30,2008
              
              
              2007Net
      sales
              
              $
              280
              
              
              $
              260Cost
      of goods sold
              
              
              860
              
              
              
              531Gross
      deficiency
              
              
              (580
              )
              
              
              (271
              )Operating
      expenses:Research
      and development
              
              
              1,128
              
              
              
              792Selling,
      general and administrative
              
              
              2,498
              
              
              
              864Total
      operating expenses
              
              
              3,626
              
              
              
              1,656Operating
      loss
              
              
              (4,206
              )
              
              
              (1,927
              )Interest
      income
              
              
              21
              
              
              
              292Other
      income / (expense)
              
              
              (3
              )
              
              
              505Loss
      on debt extinguishment
              
              
              -
              
              
              
              (15,182
              )Total
      pre-tax profit/(loss)
              
              
              18
              
              
              
              (14,385
              )Income
      tax
              
              
              1
              
              
              
              -Net
      loss
              
              $
              (4,189
              )
              
              $
              (16,312
              )Basic
      and diluted net loss per share
              
              $
              (0.03
              )
              
              $
              (1.59
              )Shares
      used in computing basic and diluted net loss per share
              
              
              121,419
              
              
              
              10,286
  Six
      Months Ended June 30,2008
              
              
              2007(Unaudited)Net
      sales
              
              $
              697
              
              
              $
              579Cost
      of goods sold
              
              
              1,297
              
              
              
              955Gross
      deficiency
              
              
              (600
              )
              
              
              (376
              )Operating
      expenses:Research
      and development
              
              
              2,111
              
              
              
              1,695Selling,
      general and administrative
              
              
              3,871
              
              
              
              1,748Total
      operating expenses
              
              
              5,982
              
              
              
              3,443Operating
      loss
              
              
              (6,582
              )
              
              
              (3,819
              )Interest
      income
              
              
              84
              
              
              
              72Other
      income / (expense)
              
              
              (6
              )
              
              
              504Excess
      shares liability
              
              
              -
              
              
              
              (7,737
              )Loss
      on debt extinguishment
              
              
              -
              
              
              
              (15,182
              )Total
      pre-tax profit/(loss)
              
              
              78
              
              
              
              (22,343
              )Income
      tax
              
              
              1
              
              
              
              -Net
      loss
              
              $
              (6,505
              )
              
              $
              (26,162
              )Basic
      and diluted net loss per share
              
              $
              (0.05
              )
              
              $
              (2.55
              )Shares
      used in computing basic and diluted net loss per share
              
              
              118,892
              
              
              
              10,277


See
accompanying notes to these condensed financial statements




4




CARDIMA,
INC.
 STATEMENTS
OF CASH FLOWS
 (In
thousands)


(Unaudited)Six
      Months Ended June 30,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (6,505
              )
              
              $
              (26,162
              )Adjustments
      to reconcile net loss to net cash used in operating activities provided by
      operations:Depreciation
      and amortization
              
              
              67
              
              
              
              49Non-cash
      stock-based compensation
              
              
              567
              
              
              
              107Non-cash
      compensation
              
              
              868
              
              
              
              -Non-cash
      interest expense (income)
              
              
              -
              
              
              
              (743
              )Disposal
      of assets
              
              
              2
              
              
              
              -Loss
      on excess shares over authorized
              
              
              -
              
              
              
              7,737Loss
      on debt extinguishment
              
              
              -
              
              
              
              15,182Preferred
      shares issued for fees
              
              
              -
              
              
              
              500Excess
      and obsolete inventory
              
              
              -
              
              
              
              142Allowance
      for doubtful accounts
              
              
              54
              
              
              
              19Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (70
              )
              
              
              214Inventories
              
              
              (450
              )
              
              
              (298
              )Prepaid
      and other assets
              
              
              (433
              )
              
              
              58Accounts
      payable, accrued compensation and other liabilities
              
              
              128
              
              
              
              (273
              )Accrued
      interest and fees
              
              
              -
              
              
              
              2,604Excess
      share liability
              
              
              -
              
              
              
              (2,886
              )Net
      cash used in operating activities
              
              
              (5,772
              )
              
              
              (3,750
              )CASH
      FLOWS FROM INVESTING ACTIVITIESShort-term
      investment
              
              
              1,958
              
              
              
              -Purchase
      of property and equipment
              
              
              (376
              )
              
              
              (27
              )Net
      cash provided by/(used in) investing activities
              
              
              1,582
              
              
              
              (27
              )CASH
      FLOWS FROM FINANCING ACTIVITIESPrincipal
      payments under capital leases and credit facility
              
              
              8
              
              
              
              (10
              )Expense
      reimbursement
              
              
              (75
              )
              
              
              -Payment
      to related party
              
              
              (4
              )
              
              
              (2
              )Net
      proceeds from loan financing
              
              
              -
              
              
              
              3,045Net
      proceeds from sale of common stock
              
              
              5,117
              
              
              
              19Net
      cash provided by financing activities
              
              
              5,046
              
              
              
              3,052Change
      in cash and cash equivalents
              
              
              856
              
              
              
              (725
              )Beginning
      cash and cash equivalents
              
              
              4,811
              
              
              
              942Ending
      cash and equivalents
              
              $
              5,667
              
              
              $
              217SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS INFORMATIONCash
      paid for income taxes
              
              $
              1
              
              
              $
              -Cash
      paid for interest
              
              $
              14
              
              
              $
              11SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESEquipment
      aquired under capital lease arrangements
              
              $
              45
              
              
              
              -Issuance
      of preferred stock to pay for accrued fees
              
              $
              -
              
              
              $
              500Warrants
      issued for loan financing
              
              $
              1,603
              
              
              $
              -


See
accompanying notes to these condensed financial statements


5


CARDIMA,
INC.


NOTES
TO FINANCIAL STATEMENTS


JUNE
30, 2008


(Unaudited)





1.
            NATURE
      OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES




Cardima,
Inc., (“we”, “us”, “our”) was incorporated in the State of Delaware on November
12, 1992. We design, develop, manufacture and market minimally invasive,
single-use, micro-catheter systems for the mapping and ablation of the two most
common forms of cardiac arrhythmias: atrial fibrillation and ventricular
tachycardia. We have developed the PATHFINDER®,
TRACER® and
VUEPORT® Series
of diagnostic catheters, the NAVIPORT® Series
of guiding catheters, the REVELATION® Series
of ablation catheters, the Surgical Ablation System with its series of ablation
probes, and the INTELLITEMP® Energy
Management Device Series for RF (radiofrequency) energy management. These
devices are CE marked and/or received United States FDA 510(k)
clearance.  The REVELATION Series of ablation catheters with the
INTELLITEMP EP Energy Management Device was developed and marketed for the
treatment of atrial fibrillation (AF) with CE mark approval in Europe; it is not
yet commercially approved in the United States. We have licensed our
micro-catheter technology for use in the treatment of electrophysiological
diseases affecting areas other than the central nervous system from Target
Therapeutics. We sell our products worldwide through both direct sales and
distribution channels, with a substantial portion of its sales to international
customers.




2.
            BASIS
      OF PRESENTATION - INTERIM FINANCIAL
INFORMATION




The
accompanying unaudited interim financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The financial statements and notes are
presented as permitted on Form 10-Q and do not contain information included in
our annual statements and notes. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although we believe
that the disclosures are adequate to make the information presented not
misleading.





The
consolidated balance sheet at December 31, 2007 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. It is suggested that these
condensed financial statements be read in conjunction with the December 31, 2007
audited financial statements and the accompanying notes thereto filed on our
annual report on Form-10KSB/A with the SEC. While we believe the procedures
followed in preparing these financial statements are reasonable, the accuracy of
the amounts are in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by us later in the year. These results are
not necessarily indicative of the results to be expected for the full
year.




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





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





To
address the going concern issue, we implemented financial and operational plans
to improve operating efficiencies, reduce overhead and reduce and eliminate cash
losses, and position ourselves for future profitable operations. We are reducing
our general and administrative expenses by streamlining our executive and
administrative support team.





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




Adoption of New Accounting
Standards




Effective
January 1, 2008, we implemented FAS No. 157, Fair Value Measurements(“FAS
157”) for our financial assets and liabilities that are remeasured and reported
at fair value at each reporting period and non-financial assets and liabilities
that are remeasured and reported at fair value at least annually. In accordance
with the provisions of FSP No. FAS 157-2, Effective Date of FASB Statement
No. 157, we elected to defer implementation of FAS 157 as it relates
to our non-financial assets and non-financial liabilities that are recognized
and disclosed at fair value in the financial statements on a nonrecurring basis
until January 1, 2009. The adoption of FAS 157 with respect to financial
assets and liabilities that are remeasured and reported at fair value at least
annually did not have an impact on our financial statements. We are evaluating
the impact, if any, that adopting FAS 157 will have on its non-financial assets
and liabilities.




6




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




Except as
noted above, there have been no significant changes in our significant
accounting policies during the six months ended June 30, 2008, compared to what
was previously disclosed in our Annual Report on 10-KSB/A for the year ended
December 31, 2007.





USE OF
ESTIMATES




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




COMPREHENSIVE
LOSS





Comprehensive
loss consists of net loss and other gains and losses affecting stockholders’
equity that, under generally accepted accounting principles are excluded from
net loss in accordance with Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive
Income.  We, however, do not have any components of other
comprehensive loss as defined by SFAS No. 130 and therefore, for the three and
six months ended June 30, 2008 and 2007, comprehensive loss is equivalent to our
reported net loss.  Accordingly, a statement of comprehensive loss is
not presented.




STOCK-BASED
COMPENSATION




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




Stock
compensation expense recognized during the period is based on the value of
share-based awards that are expected to vest during the period. Stock
compensation expense recognized in our statements of operations for 2008
and 2007 includes compensation expense related to share-based awards granted
prior to January 1, 2006 that vested during the current period based on
grant date fair value estimated in accordance with the pro forma provisions of
SFAS 123. Stock compensation expense for the share-based awards granted
subsequent to January 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). As stock
compensation expense recognized in the statement of operations is based on
awards ultimately expected to vest, it has been adjusted for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.For the three and six months ended June 30, 2008 and 2007, no excess tax
benefits were generated.




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




STOCK
WARRANTS ISSUED TO THIRD PARTIES





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




7




NET LOSS
PER COMMON SHARE




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





June 30,2008
            
            2007Warrants
            9,333,241
            
            
            20,945,493Stock
      Options
            7,059,005
            
            
            446,063Preferred
      Shares
            1,000,000
            
            
            -Total
      Warrants, Options and Preferred Shares
            17,392,246
            
            
            21,391,556





RECLASSIFICATIONS





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





4.
            RECENTLY
      ISSUED ACCOUNTING STANDARDS




In
December 2007, the FASB issued FAS No. 141(R), “Applying the Acquisition
Method.” FAS No. 141(R) provides guidance for the recognition of the fair values
of the assets acquired upon initially obtaining control, including the
elimination of the step acquisition model. The standard is effective for
acquisitions made in fiscal years beginning after December 15, 2008, and is not
expected to have a significant impact on our results of operations, financial
condition or liquidity.





In
December 2007, the FASB issued FAS No. 160, “Accounting for Noncontrolling
Interests.” FAS No. 160 clarifies the classification of noncontrolling interests
in consolidated statements of financial position and the accounting for and
reporting of transactions between the reporting entity and holders of such
noncontrolling interests. Under the standard, noncontrolling interests are
considered equity and should be reported as an element of consolidated equity,
and net income will encompass the total income of all consolidated subsidiaries
and there will be separate disclosure on the face of the income statement of the
attribution of that income between the controlling and noncontrolling interests.
FAS No. 160 is effective prospectively for fiscal years beginning after December
15, 2008, and is not expected to have a significant impact on our results of
operations, financial condition or liquidity.





In March
2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” an amendment of FASB Statement No. 133 “Accounting for
Derivative Instruments and Hedging Activities”. FAS No. 161 requires entities to
provide greater transparency about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FAS No. 133, and how derivative instruments and related hedged items
affect an entity’s financial position, results of operations, and cash flows.
The statement is effective for financial statements issues for fiscal years and
interim periods beginning after November 15, 2008, and is not expected to have a
significant impact on our results of operations, financial condition or
liquidity.





In April
2008, the FASB issued FSP FAS No. 142-3 “Determination of the Useful Life of
Intangible Assets,” (“FSP No. 142-3”), which amends the factors that must be
considered in developing renewal or extension assumptions used to determine the
useful life over which to amortize the cost of a recognized intangible asset
under FAS No. 142, “Goodwill and Other Intangible Assets.” The FSP requires an
entity to consider its own assumptions about renewal or extension of the term of
the arrangement, consistent with its expected use of the asset, and is an
attempt to improve consistency between the useful life of a recognized
intangible asset under FAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under FAS No. 141, “Business Combinations.”
The FSP is effective for fiscal years beginning after December 15, 2008, and the
guidance for determining the useful life of a recognized intangible asset must
be applied prospectively to intangible assets acquired after the effective date.
The FSP is not expected to have a significant impact on our results of
operations, financial condition or liquidity.




In May
2008, the FASB issued Financial Accounting Standard (“FAS”) No. 162, “The
Hierarchy of Generally Accepted Accounting Principles.” The statement is
intended to improve financial reporting by identifying a consistent hierarchy
for selecting accounting principles to be used in preparing financial statements
that are prepared in conformance with generally accepted accounting principles.
Unlike Statement on Auditing Standards (“SAS”) No. 69, “The Meaning of Present
in Conformity With GAAP,” FAS No. 162 is directed to the entity rather than the
auditor. The statement is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section
411, “The Meaning of Present Fairly in Conformity with GAAP,” and is not
expected to have any impact on our results of operations, financial condition or
liquidity.




8




In June
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” Under the FSP, unvested share-based payment awards
that contain rights to receive nonforfeitable dividends (whether paid or unpaid)
are participating securities, and should be included in the two-class method of
computing earnings per share. The FSP is effective for fiscal years beginning
after December 15, 2008, and interim periods within those years, and is not
expected to have a significant impact on our results of operations, financial
condition or liquidity.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force ("EITF"), the American Institute of Certified Public
Accountants ("AICPA"), and the SEC did not or are not believed by us to have a
material impact on our present or future financial statements.




5.
            LIQUIDITY





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has accumulated significant losses
as it has been developing its current and next generation  products.
The Company has had recurring losses and expects to report operating losses for
fiscal 2008. For the three and six months ended June 30, 2008, we reported net
loss of $4.2 million and  $6.5 million, respectively, and cash used in
operations amounted to $5.8 million for the six months ended June 30, 2008. The
Company believes that cash flow from operations, together with debt and equity
financings  from its existing shareholders and other third parties, if
necessary, will be sufficient to fund the anticipated operations through
December 2008. These financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern for a reasonable period of
time.




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





6.
            INVENTORIES





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





June
      30, 2008
              
              
              December
      31, 2007Raw
      Materials
              
              $
              506
              
              
              $
              356Work-In-Process
              
              
              24
              
              
              
              23Finished
      Goods
              
              
              322
              
              
              
              23$
              852
              
              
              $
              402


Inventories
are reduced for excess and obsolete inventories. These write-downs are based on
our review of inventories on hand on a quarterly basis, compared to our
assumptions about future demand, market conditions and anticipated timing of the
release of next generation products. If actual conditions for future demand are
less favorable than those projected by us or if next generation products are
released earlier than anticipated, additional inventory write-downs may be
required. Obsolete products removed from gross inventory are physically
scrapped.





7.
            PROPERTY
      AND EQUIPMENT





Property
and equipment, including equipment under capital leases, are carried at cost
less accumulated depreciation and amortization.  Property and
equipment are depreciated using the straight-line method over the estimated
useful lives, generally three to five years.  Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the remaining term of the
lease.  Depreciation expense includes amortization of capital leases
and leasehold improvements. Depreciation expense was $39,000 and $67,000 for the
three and six months ended June 30, 2008, respectively, as compared to $21,000
and $49,000 for the same periods in 2007, respectively.




9




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




June
      30, 2008
              
              
              December
      31, 2007Equipment
              
              $
              2,542
              
              
              $
              2,230Leasehold
      improvements
              
              
              316
              
              
              
              2702,858
              
              
              
              2,500Less
      accumulated depreciation and amortization
              
              
              (2,166
              )
              
              
              (2,138
              )Property
      and equipment, net
              
              $
              692
              
              
              $
              362Idle
      equipment
              
              $
              1,290
              
              
              $
              1,290Less
      accumulated depreciation and amortization
              
              
              (1,290
              )
              
              
              (1,290
              )Idle
      equipment, net
              
              $
              -
              
              
              $
              -


8.
            RECENT
      FINANCING





In May
2008, the Company entered into a Subscription Agreement for the purchase of
Securities (the “ Subscription Agreement”) with various accredited investors
pursuant to which the Company sold in a private placement to these accredited
investors (a) 8,474,992 shares of the Company’s Common Stock, par value $0.001
per share, and (b) warrants to purchase, in aggregate, up to 1,272,247 shares of
the Company’s common stock, par value $0.001 at an exercise price of $0.65 per
share, for an aggregate purchase price of approximately $5.1
million.





9.
            RELATED
      PARTY TRANSACTIONS – APIX International
Ltd.





In
relation to the financing referred to May 2008 private placement transaction
described in Note 8, APIX International Ltd. (“APIX”) acted as placement agent
for the transaction. APIX is owned by Robert Cheney, who is also our Chief
Executive Office and a Director. In consideration for the services provided, we
have entered into an agreement with APIX whereby we agreed to: (i) grant
1,500,000 warrants to purchase shares of our Common Stock for a period of five
years at an exercise price of $0.60, having a fair value of $868,000 calculated
based on the Black-Scholes Option pricing model; and (ii) pay APIX an aggregate
of $80,000.





10.
            NOTE
      PAYABLE TO RELATED PARTIES





In
December 2006, a settlement agreement was reached in principle, which we would
pay $295,000 to Mr. Wheeler ($5,000 per month for 59 months). The liability is
accounted for in accordance with APB 21 as discussed in the footnote to the
filing. The liability was recorded at the final date of the settlement. Until
that date the exact terms had not been agreed to by both parties. We had netted
the notes receivable and payable in accordance with the underlying agreement
that gave both parties the right of offset in accordance with FASB Technical
Bulletin 88-2 which provides the specific requirements for liabilities and
receivables to be offset. The technical bulletin has been superseded, but
paragraph 4 of FIN 39 says that the guidance in the Technical Bulletin has been
incorporated largely without change. In accordance with the Accounting Principle
Board (“APB”) No. 21, “Interest on Receivables and Payables”, the $295,000 note
payable is discounted at 10% (same as the interest rate on the current loan
financing) and the $193,000 note receivable is discounted at 6% (the original
note’s interest rate). The discounted value of the note payable and note
receivable is $232,000 and $162,000, respectively. The net note payable balance
amounted to $59,000 as of June 30, 2008.





In
December 1997, we entered into a $300,000 note receivable agreement with Phillip
Radlick, a Director, and then President and Chief Executive Officer, to
facilitate the purchase of a principal residence in the San Francisco Bay Area.
The note bears interest at the minimum Applicable Federal Rate, and was due and
payable in a single lump sum forty-eight months from the note date. In August,
2001, our Board of Directors amended Mr. Radlick’s agreement to extend this loan
until the first of (i) the date that Mr. Radlick no longer serves as a member of
the Board of Directors, (ii) the date when Mr. Radlick sells his house and (iii)
December 16, 2005. As a security for the note, Mr. Radlick granted us a security
interest in his vested stock options. At December 16, 2005, Mr. Radlick informed
us that he was unable to repay the loan. At December 31, 2005, the balance of
the loan is approximately $357,000, including approximately $79,000 of accrued
interest. No interest accrual was made after December 31, 2004. The loan balance
is fully reserved as of the end of December 31, 2007. In the recently concluded
round of financing on December 17, 2007,  APIX, accepted for its services
rendered all rights, title and interest in a loan totaling $360,000, including
accrued interest, owed to us by Mr. Radlick, with a guarantee by us that the
minimum recoverable value of the loan is not less than $100,000.  In
the event the actual amount recovered is less than $100,000, we agree to pay to
APIX the amount of shortfall on or before December 18, 2008. As a result, we had
$175,000 in loan payable at June 30, 2008.


10


11.
            COMMITMENTS
      AND CONTINGENCIES





Commitments





We lease
facilities under an operating lease, which has been extended through May
2010.  We also lease certain equipment under non-cancelable capital
leases, which bear interest at the rate of 10% per annum. Following is a
schedule of future minimum lease payments under both operating and capital
leases at June 30, 2008 (in thousands):




Fiscal
      Year
              
              Operating
      Leases
              
              
              Capital
      Leases2008
              
              $
              265
              
              
              $
              162009
              
              
              272
              
              
              
              252010
              
              
              115
              
              
              
              182011
              
              
              -
              
              
              
              8Total
      minimum lease payments
              
              
              652
              
              
              
              67Less
      amounts representing interest
              
              
              -
              
              
              
              8Present
      value of net minimum lease payments
              
              $
              652
              
              
              $
              59


Contingencies





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





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





In
addition, we are subject to numerous risks and uncertainties because of the
nature and status of our operations and could be subject to claims and legal
actions arising in the ordinary course of business. We maintains insurance
coverage for events in amounts that we deems appropriate. We believe that
uninsured losses, if any, will not be materially adverse to our financial
position or results of operations.





12.
            INCOME
      TAXES





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





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





We have
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes. Accordingly, no benefit has been
recognized on the net loss as the realization of the net operating loss
carryforward cannot be assured.




13.
            CONCENTRATIONS
      OF RISK




11




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




Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007United
      States
              
              $
              196
              
              
              
              70
              %
              
              $
              225
              
              
              
              87
              %
              
              $
              462
              
              
              
              66
              %
              
              $
              475
              
              
              
              82
              %Europe
              
              
              84
              
              
              
              30
              %
              
              
              120
              
              
              
              46
              %
              
              
              234
              
              
              
              34
              %
              
              
              188
              
              
              
              32
              %Asia/Pacific
              
              
              -
              
              
              
              0
              %
              
              
              (85
              )
              
              
              -33
              %
              
              
              1
              
              
              
              0
              %
              
              
              (85
              )
              
              
              -15
              %Others
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              0
              %
              
              
              -
              
              
              
              0
              %
              
              
              1
              
              
              
              0
              %Total
      Net Sales
              
              $
              280
              
              
              
              100
              %
              
              $
              260
              
              
              
              100
              %
              
              $
              697
              
              
              
              100
              %
              
              $
              579
              
              
              
              100
              %


During
the first quarter of 2007, our Japanese distributor notified us of their failure
to maintain the legal documentation standard required to sell our PATHFINDER in
Japan.  As a result, we had no sales in Japan in 2007 and in the
first six months of 2008.  We understand that the reapplication
process takes approximately twelve to eighteen months.





Our
diagnostic product group, namely the Pathfinder family of micro-catheter
systems, accounted for 67% and 65% of net sales for the six months ended
June 30, 2008 and 2007, respectively.





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





14.
            CASH
      AND CASH EQUIVALENTS





We
receive payments from our customers and deposit them in federally insured
financial institutions during our normal course of business.  From
time to time, the balances with these deposit accounts may exceed the federally
insured maximum limit, $100,000.  As of June 30, 2008, we had cash and
cash equivalents of approximately of $5.7 million in excess of federally insured
limits.





15.
            STOCK-BASED
      COMPENSATION





2007
Stock Option Plan





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




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




2003
Stock Option Plan




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




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




12




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





1993
Stock Option Plan




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




1997
Directors' Stock Option Plan




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





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




The
weighted average fair value of options at the grant date during the second
quarter of 2008 and 2007 was $1.28 and $0.59, respectively. The fair value of
each option is estimated on the grant of date using the Black-Scholes
option-pricing model with the following weighted average assumptions for stock
options granted during the six months ended June 30, 2008:




Six
      months ended June 30,2008
            
            
            2007Dividend
      yield
            
            
            0.0
            %
            
            
            0.0
            %Annual
      risk free rate of return
            
            
            4.05
            %
            
            
            4.49
            %Expected
      volatility
            
            
            163
            %
            
            
            160
            %Expected
      term (years)
            
            
            7
            
            
            
            7





In
estimating the expected term, we considered our historical stock option exercise
experience including forfeitures, our post vesting termination pattern and the
term of the options outstanding. The annual risk free rate of return was based
on the U.S. Treasury constant maturity rates with similar terms to the expected
term of the stock option awards. We based our determination of expected
volatility on our historical stock price volatility over the expected
term.




The
compensation cost related to stock based compensation that has been reported in
general and administrative expense  in the statements of operations
for the three and six months ended June 30, 2008 was $321,000, $567,000,
respectively, compared to $66,000 and $107,000 respectively, for the same period
in 2007. For stock subject to graded vesting, we have utilized the
“straight-line” method for allocating compensation cost by period. As of
June 30, 2008, there was $2.2 million of total unrecognized compensation cost
related to non-vested stock option awards which is expected to be recognized
over a weighted-average period of 2.6 years.  There were approximately
27,000 options that became vested during the six months ended June 30,
2008.





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





13


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


Options
                Available
      for
                Grant
              
              
              Outstanding
                Options
              
              
              Average
      Exercise Price
              
              
              Intrinsic
                ValueOption
      Plan
              Status2007
              Outstanding
      December 31, 2007
              
              
              24,185,000
              
              
              
              5,815,000
              
              
              $
              0.44
              
              
              $
              384,000Granted
              
              
              1,090,000
              
              
              
              1,090,000
              
              
              
              0.50
              
              
              
              130,800Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              150,000
              
              
              
              (150,000
              )
              
              
              0.47
              
              
              
              (23,100
              )Outstanding
      March 31, 2008
              
              
              23,245,000
              
              
              
              6,755,000
              
              
              
              0.45
              
              
              
              1,154,400Granted
              
              
              925,000
              
              
              
              925,000
              
              
              $
              0.86
              
              
              
              1,147,600Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              775,000
              
              
              
              (775,000
              )
              
              
              0.47
              
              
              
              (1,260,900
              )Outstanding
      June 30, 2008
              
              
              23,095,000
              
              
              
              6,905,000
              
              
              $
              0.50
              
              
              $
              11,014,2752003
              Outstanding
      December 31, 2007
              
              
              738,575
              
              
              
              81,425
              
              
              $
              3.17
              
              
              
              -Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              1,813
              
              
              
              (1,813
              )
              
              
              0.95
              
              
              
              -Outstanding
      March 31, 2008
              
              
              740,388
              
              
              
              79,612
              
              
              
              3.22
              
              
              
              -Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              6,250
              
              
              
              (6,250
              )
              
              
              0.57
              
              
              
              (9,547
              )Outstanding
      June 30, 2008
              
              
              746,638
              
              
              
              73,362
              
              
              $
              3.45
              
              
              $
              73,4811993
              Outstanding
      December 31, 2007
              
              
              -
              
              
              
              60,271
              
              
              $
              11.24
              
              
              $
              -Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      March 31, 2008
              
              
              -
              
              
              
              60,271
              
              
              
              11.24
              
              
              
              -Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              -
              
              
              
              (28
              )
              
              
              46.30
              
              
              
              -Outstanding
      June 30, 2008
              
              
              -
              
              
              
              60,243
              
              
              $
              11.23
              
              
              $
              -1997
      Director's Plan
              Outstanding
      December 31, 2007
              
              
              57,800
              
              
              
              31,800
              
              
              $
              0.90
              
              
              $
              160Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      March 31, 2008
              
              
              57,800
              
              
              
              31,800
              
              
              
              0.90
              
              
              
              460Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              11,400
              
              
              
              (11,400
              )
              
              
              0.67
              
              
              
              (16,260
              )Outstanding
      June 30, 2008
              
              
              69,200
              
              
              
              20,400
              
              
              $
              1.03
              
              
              $
              28,240


During
the three months ended June 30, 2008, there were no exercises of options by
employees.




14


The
following is a summary of information relating to stock options outstanding and
exercisable by price range as of June 30, 2008:






Options Outstanding
              
              
              Options
      ExercisableOption
      Plan
              
              Range
      of
                exercise
      prices
              
              
              As
      of June 30, 2008
              
              
              Weighted
                avg.
                remaining
                contractual
                life
              
              
              Weighted
                avg.
                exercise
                price
              
              
              As
      of June 30, 2008
              
              
              Weighted
                avg.
                remaining
                contractual
                life
              
              
              Weighted
                avg.
                exercise
                price2007
              
              $
              0.39-$0.45
              
              
              
              5,145,000
              
              
              
              9.02
              
              
              $
              0.44
              
              
              
              324,583
              
              
              
              9.25
              
              
              $
              0.44$
              0.48-$0.55
              
              
              
              740,000
              
              
              
              9.53
              
              
              
              0.51
              
              
              
              25,000
              
              
              
              9.26
              
              
              
              0.50$
              0.60-$1.85
              
              
              
              1,020,000
              
              
              
              9.88
              
              
              
              0.84
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              
              6,905,000
              
              
              
              9.20
              
              
              $
              0.50
              
              
              
              349,583
              
              
              
              9.25
              
              
              $
              0.442003
              
              $
              0.55-$2.50
              
              
              
              49,387
              
              
              
              7.40
              
              
              $
              0.62
              
              
              
              33,240
              
              
              
              7.38
              
              
              $
              0.62$
              3.50-$12.40
              
              
              
              23,975
              
              
              
              5.77
              
              
              
              9.29
              
              
              
              23,623
              
              
              
              5.75
              
              
              
              9.37Total
              
              
              
              73,362
              
              
              
              8.70
              
              
              $
              3.45
              
              
              
              56,863
              
              
              
              6.71
              
              
              $
              4.261993
              
              $
              3.40-$15.00
              
              
              
              57,393
              
              
              
              3.20
              
              
              $
              10.37
              
              
              
              57,393
              
              
              
              3.2
              
              
              $
              10.37$
              19.10-$32.50
              
              
              
              2,850
              
              
              
              0.46
              
              
              
              28.56
              
              
              
              2,850
              
              
              
              0.46
              
              
              
              28.56Total
              
              
              
              60,243
              
              
              
              3.07
              
              
              $
              11.23
              
              
              
              60,243
              
              
              
              3.07
              
              
              $
              11.231997
      Director's Plan
              
              $
              0.50-$.70
              
              
              
              19,600
              
              
              
              7.98
              
              
              $
              0.66
              
              
              
              17,600
              
              
              
              8.02
              
              
              $
              0.68$
              8.40-$14.50
              
              
              
              800
              
              
              
              4.42
              
              
              
              10.10
              
              
              
              800
              
              
              
              4.42
              
              
              
              10.1Total
              
              
              
              20,400
              
              
              
              7.84
              
              
              $
              1.03
              
              
              
              18,400
              
              
              
              7.87
              
              
              $
              1.09


Non-employee
Compensation




From time
to time we grant options to non-employees to purchase common stock at a specific
price with various vesting dates. The options are typically granted for services
rendered and/or specific milestone met. During the first six months of 2008, we
granted 895,000 options to purchase shares of our common stock to non-employees
and recorded an expense of $146,000.  During 2007, we approved a stock
issuance in the amount of 29,000 (post-split) shares of common stock to a third
party for its services. A non-cash stock compensation expense of $3,000 was
recorded in 2007.





1997
Employee Stock Purchase Plan




In March
1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan, as
amended, and reserved 250,000 shares of common stock for issuance. The purchase
plan is intended to provide an opportunity for eligible employees and our
designated subsidiaries to acquire common stock on a favorable basis. The
purchase plan is implemented by a series of offering periods of twelve months
duration, with two consecutive purchase periods of six months in duration. New
offering periods commence on or about February 1 and August 1 of each year (or
at such other time or times as may be determined by the Board of Directors).
Through periodic payroll deductions, which may not exceed $25,000 per offering
period or 10% of any employee’s compensation, eligible employees may purchase
common stock at a price equal to the lower of: (i) 85% of the fair market value
of the common stock on the offering date; or (ii) 85% of the fair market value
of the common stock on the purchase date. As of June 30, 2008, 73,655 shares of
common stock have been issued under the purchase plan.





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




15




16.
            WARRANTS




In May
2008, we consummated a transaction whereby we entered into a series of
Subscription Agreements with certain accredited investors (collectively, the
“Investors”) providing for the sale by us to the Investors of (i) a total of
8,474,992 shares of our Common Stock (the “Shares”) and (ii) warrants (the
“Warrants”) to purchase an aggregate of 1,271,247 shares of our Common Stock at
an exercise price of $0.65 for the aggregate principal amount of $5.1
million.





APIX
acted as placement agent for the transaction. In consideration for the services
provided, we have entered into a Funding Agreement with APIX whereby we agreed
to: (i) grant 1.5 million warrants to purchase shares of our Common Stock for a
period of five years at an exercise price of $0.60; and (ii) reimburse APIX’s
expenses totaling $80,000.





The
warrants issued were accounted for under Financial Accounting Standards Board
Statement No. 123R, using the Black-Scholes option-pricing model (with similar
assumptions as those used for the option), which resulted in the recording of
$868,000 in compensation cost in the three months ended June 30,
2008.





The
following table summarizes warrants for the years 2007 and 2008:




Outstanding WarrantsNumber
      of Warrant Shares
              
              
              Exercise
      Price/ Warrant Share
              
              
              Weighted
      Avg. Exercise PriceBalance
      as of 12/31/2006
              
              
              7,579,353
              
              
              $
              0.60
      - $14.00
              
              
              $
              3.20Granted
      in 2007
              
              
              19,860,000
              
              
              $
              0.30
      - $0.55
              
              
              $
              0.55Canceled
      in 2007
              
              
              (537,359
              )
              
              $
              0.78
      - $13.40
              
              
              $
              10.60Exercised
      in 2007
              
              
              (20,340,000
              )
              
              $
              0.40
              
              
              $
              0.40Balance
      as of 12/31/2007
              
              
              6,561,994
              
              
              $
              0.55
      - $12.38
              
              
              $
              1.30Granted
      in 2008
              
              
              2,771,247
              
              
              $
              0.65
              
              
              $
              0.65Canceled
      in 2008
              
              
              -
              
              
              
              -
              
              
              $
              -Exercised
      in 2008
              
              
              -
              
              
              
              -
              
              
              $
              -Balance
      as of 6/30/2008
              
              
              9,333,241
              
              
              $
              0.55
      - $12.38
              
              
              $
              0.98


The
following table summarizes information about warrants outstanding at June 30,
2008:




Range
      of Exercise Price
            
            
            Number
      of Warrants Outstanding and Exercisable
            
            
            Weighted
      Avg. Remaining Contractual Life (Yrs.)
            
            
            Weighted
      Avg. Exercise Price$
            4.30
      - $12.38
            
            
            
            861,994
            
            
            
            1.4
            
            
            $
            4.86$
            0.55
            
            
            
            5,700,000
            
            
            
            4.5
            
            
            $
            0.55$
            0.65
            
            
            
            2,771,247
            
            
            
            5.0
            
            
            $
            0.659,333,241






No
warrants were exercised during the three months end June 30, 2008 and
2007.





17.
            PREFERRED
      SHARES





On August
14, 2008, we signed a letter agreement with APIX that clarifies the terms of the
Series A Preferred Stock issued to APIX as originally understood by the parties,
as follows:




APIX, at
its sole discretion, may convert the five million Preferred Shares it owns
into 10,000,000 shares of our common stock, subject to adjustment in the
event of a stock split and other similar events affecting the number of issued
and outstanding common stock.  Therefore, as a result, of the ten for one
reverse stock that was effectuated on July 31, 2007, the Series A Preferred is
currently convertible into 1,000,000 shares of our common stock.  The
Series A Preferred votes together with the Common Stock and will continue to
carry 28 votes for each share of Preferred Stock.  We are in the process of
drafting and filing an amended certificate of designation for the preferred
stock to reflect these clarifications.





16


18.
            FAIR
      VALUE MEASUREMENTS




As
of January 1, 2008, we implemented FAS No. 157, Fair Value Measurements(“FAS
157”) for our financial assets and liabilities that are remeasured and reported
at fair value at each reporting period and non-financial assets and liabilities
that are remeasured and reported at fair value at least annually. In accordance
with the provisions of FSP No. FAS 157-2, Effective Date of FASB Statement
No. 157, we elected to defer implementation of FAS 157 as it relates
to our non-financial assets and non-financial liabilities that are recognized
and disclosed at fair value in the financial statements on a nonrecurring basis
until April 1, 2009.





In
general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities. Fair
values determined by Level 2 inputs utilize observable inputs other than Level 1
prices, such as quoted prices for similar assets or liabilities, quoted prices
in markets that are not active or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
related assets or liabilities. Fair values determined by Level 3 inputs are
unobservable data points for the asset or liability, and include situations
where there is little, if any, market activity for the asset or liability. The
following table presents information about our financial assets that have been
measured at fair value as of June 30, 2008, and indicates the fair value
hierarchy of the valuation inputs utilized to determine such fair value (in
thousands):




Description
            
            Fair
      Value at June 30, 2008
            
            
            Quoted
      Prices in Active Markets (Level 1)
            
            
            Significant
      Other Observable Inputs (Level 2)Assets:Cash
      and cash equivalents
            
            $
            5,667
            
            
            $
            5,667
            
            
            $
            -Certificate
      of deposit with an institution
            
            $
            50
            
            
            $
            50
            
            
            $
            -


17


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




Cautionary
Statement Regarding Forward-Looking Statements




The
information in this discussion may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and uncertainties,
including statements regarding our capital needs, business strategy and
expectations. Any statements that are not of historical fact may be deemed
to be forward-looking statements. These forward-looking statements involve
substantial risks and uncertainties. In some cases you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” or “continue”, the negative of the terms or other comparable
terminology. Unless the context otherwise requires, references in this Form 10-Q
to “we,” “us,” “our,” or the “Company” refer to Cardima, Inc. Forward-looking
statements in this Report may also include references to anticipated sales
volume and product margins, efforts aimed at establishing new or improving
existing relationships with customers, other business development activities,
anticipated financial performance, business prospects and similar matters.
Actual events or results may differ materially from the anticipated results
or other expectations expressed in the forward-looking statements. In evaluating
these statements, you should consider various factors, including the risks
included from time to time in other reports or registration statements filed
with the United States Securities and Exchange Commission. These factors
may cause our actual results to differ materially from any forward-looking
statements. We disclaim any obligation to publicly update these statements, or
disclose any difference between actual results and those reflected in these
statements.





Overview





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




Product
Commercialization




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




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




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




Regulatory
Strategy




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




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




18




Manufacturing
Capabilities




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




The
research and development goals and achievements for the second quarter of 2008
included:





New
EP Handle




One of
our design policies is to constantly receive feedbacks from our end users so
that we can continuously improve our products. In the second quarter of 2008, we
received feedback from end-user physicians and finalized the design of a new
handle design for the EP products, including the REVELATION T-Flex and the
NAVIPORT. Significant progress has been achieved in this regard, including
developing manufacturing processes for this new handle. We have plans to
introduce the new handle design into clinical usage by the end of the
year.  In a parallel process, all necessary regulatory updates for these
devices with the new handle will be submitted to the appropriate notified
bodies.  The new handle will afford significant improvements in product
performance and is expected to offer patients and physicians key procedure
improvements in ease of use and shorter procedure times.





Enhancement
of REVELATION T-Flex 8 electrodes





Our
product development engineers have been evaluating ways to improve the
deflection performance of the REVELATION T-Flex with 8 electrodes, to address
ablation at specific anatomic regions of the heart, such as the cavo-tricuspid
isthmus.  This has been a successful endeavor and clinical assessment
will begin in the third quarter of 2008.





INTELLITEMP




Over the
past several months, we have worked with a new strategic supplier and have been
successful in transferring the INTELLITEMP Energy Management Device (“EMD”) to
this new supplier. During the second quarter, manufacturing verification of the
Surgical version of the INTELLITEMP EMD was completed, with system validation
occurring in early third quarter of 2008. After product validation, the units
will be available to our marketing staff and sales representatives for
commercial centers.




We
continue to evaluate the INTELLITEMP design and have been developing the
specifications for the next version of this product.  The goal is to
initiate development in the later part of 2008.




Surgical
Ablation System




We have
implemented a number of product improvements and design changes to improve the
performance and safety of the Surgical Ablation System.  In addition,
earlier this year, our Product Development and Process Engineers made key
contributions to the development of manufacturing processes that substantially
reduce the time needed to build Surgical Ablation Probes.  Many of these
product and process improvements have been achieved in the first quarter and are
already implemented in the commercial product.




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




Sales and
Marketing Priorities/achievements in Q2 2008 included:




Resource
Management




We have
continued to follow our strategic sales and marketing plans as noted in our
previous report on Form-10Q.  Staffing for clinical site and case
support for US surgical procedures has been increased.  New hires have
been made in marketing to advance our Web site to a state-of-the-art portal
which will allow patients, doctors and investors to view a broad range of
clinical and product information including company milestones.  This
site should be up and running by later part of the year. We plan to continue to
bolster our resources and personnel in sales and marketing as well as customer
support throughout 2008.




Distribution
Partners




We
continue to review several potential distribution partners worldwide. Progress
in this area is expected throughout the balance of 2008 and we anticipate that
contracts with these partners will be in place in all key world markets as soon
as registration for our products is achieved through the remaining quarters of
2008 and 2009.




19




Surgical
Ablation System




We will
continue to identify higher volume surgical ablation centers whose surgeons are
experienced in surgical ablations.  Some of these sites will become
training centers and Cardima Centers of Excellence.  It is anticipated
that this strategy will aid our US commercial efforts for surgical ablation,
both open chest and minimally invasive, throughout 2008.




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





EP
Ablation System




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




Developments
in China and Thailand




We are in
discussions with potential marketing partners for the China market to cover both
electrophysiology and surgical products.  We have also met with key
Chinese physicians and opinion leaders in the industry to prepare for an
appropriate market launch in China.  Furthermore, in June 2008, we
received approval from China’s State Food and Drug Administration to market the
INTELLITEMP Energy Management Device in the People’s Republic of China. We are
also awaiting registration in Thailand.




Risk
factors





For the
period between January 1, 2008 and June 30, 2008, we do not have any material
change to report from risk factors as previously disclosed in our Form 10-KSB/A
for the period ended December 31, 2007.





Results
of Operations





NetSales




(unaudited,
      in thousands)Three
      months ended
            
            
            Six
      months endedNet
      sales
            
            June
      30, 2008
            
            
            June
      30, 2007
            
            
            June
      30, 2008
            
            
            June
      30, 2007United
      States
            
            $
            196
            
            
            $
            225
            
            
            $
            462
            
            
            $
            475Europe
            
            
            84
            
            
            
            120
            
            
            
            234
            
            
            
            188Asia/Pacific
            
            
            -
            
            
            
            (85
            )
            
            
            1
            
            
            
            (85
            )Other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1Total
      net sales
            
            $
            280
            
            
            $
            260
            
            
            $
            697
            
            
            $
            579





For three
months ended June 30, 2008, sales were $280,000 as compared to $260,000 for the
same period in 2007. Net sales for the six months ended June 30, 2008 were
$697,000 as compared to $579,000 for the same period in 2007, due mainly to
slight increase in sale to Europe of $46,000, offset by an authorized return of
$85,000 from our Japanese distributor in the second quarter of 2007 due to their
failure to maintain the legal documentation standard required to sell our
PATHFINDER products in Japan. As the distributor no longer had the right to sell
our product, the goods were taken back and returned to our
inventory.





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


20


Cost
of Sales; gross deficiency




(unaudited,
      in thousands)Three
      months ended
            
            
            Six
      months endedJune
      30, 2008
            
            
            June
      30, 2007
            
            
            June
      30, 2008
            
            
            June
      30, 2007Sales
            
            $
            280
            
            
            $
            260
            
            
            $
            697
            
            
            $
            579Cost
      of sales
            
            
            860
            
            
            
            531
            
            
            
            1,297
            
            
            
            955Gross
      deficiency
            
            $
            (580
            )
            
            $
            (271
            )
            
            $
            (600
            )
            
            $
            (376
            )





Cost of
goods sold primarily includes raw materials costs, catheter fabrication costs,
system assembly and testing costs, and manufacturing labor and overhead costs
for the units sold in the period. Cost of goods sold as a percentage to sales
for the three months ended June 30, 2008 increased to 307%, as compared to 204%
for the same period in 2007. Cost of goods sold as a percentage to sales for the
six months ended June 30, 2008 increased to 186%, as compared to 165% for the
same period in 2007. The increase in cost of sales in the first six months of
2008 as compared to the same period in 2007 is mainly attributed to higher
headcount of $124,000 and other spending of $125,000 in the manufacturing area
in anticipation of the commercialization of the surgical line of products. We
expect the cost of sales percentage to improve as sales volume
increases.





Research
and Development Expenses




(unaudited,
      in thousands)Three
      months ended
            
            
            Six
      months endedJune
      30, 2008
            
            
            June
      30, 2007
            
            
            June
      30, 2008
            
            
            June
      30, 2007Research
      and development
            
            $
            1,128
            
            
            $
            792
            
            
            $
            2,111
            
            
            $
            1,695





Research
and development expenses include product development, clinical testing and
regulatory expenses. Research and development expenses for the three months
ended June 30, 2008 increased to $1.1 million from $792,000 for the same period
in 2007. The increase was primarily related to higher compensation expenses of
$129,000 due to head count increases to support the new product
commercialization initiative and scrapping of $143,000 of obsolete materials.
For the first six months of 2008, research and development expenses increased to
$2.1 million from $1.7 million in the same period in 2007. The increase was
mainly attributable to higher compensation expenses of $252,000 due to head
count increase and the scrapping of obsolete materials in the second quarter of
2008 of $143,000.





Selling,
Marketing, General and Administrative Expenses




(unaudited,
      in thousands)Three
      months ended
            
            
            Six
      months endedJune
      30, 2008
            
            
            June
      30, 2007
            
            
            June
      30, 2008
            
            
            June
      30, 2007Selling,
      general and administrative
            
            $
            2,498
            
            
            $
            864
            
            
            $
            3,871
            
            
            $
            1,748





Selling,
marketing, general and administrative expenses for the three months ended June
30, 2008 increased to $2.5 million from $864,000 for the same period in
2007.





For the
three months ended June 30, 2008, selling and marketing expenses increased by
$388,000 as compared to the same period in 2007 chiefly due to higher
compensation costs as headcount increased ($259,000) and higher travel and
exhibit related expenses ($98,000).  General and administrative
expenses increased by $1.3 million for the three months ended June 30, 2008 as
compared to the same period in 2007 mostly attributable to (i) a non-cash
compensation cost of $868,000, accounted for under the Black-Scholes
option-pricing model, for warrants granted to APIX in consideration of their
services provided in the arrangement of the funding during the second quarter of
2008 of $5.1 million from accredited investors, (ii) payment of $80,000 to APIX
to facilitate the funding arrangement, (iii) $45,000 non-recurring legal and
accounting expenses related to the restatement of our historical financial
statements included in our December 31, 2007 Annual Report on Form 10-KSB, and
our response to a series of comment letters issued by the Division of Corporate
Finance of the Securities and Exchange Commission which started in the later
part of 2007 and (iv) non-cash stock-based compensation expenses of
$280,000.





For the
six months ended June 30, 2008, selling and marketing expenses increased by
$690,000 as compared to the same period in 2007 largely due to higher
compensation costs as headcount increased ($538,000) and higher travel and
exhibit related expenses ($135,000). General and administrative expenses
increased by $1.4 million for the six months ended June 30, 2008 as compared to
the same period in 2007 mainly due to (i) a non-cash compensation cost of
$868,000 for warrants granted to APIX in consideration of their services
provided in the arrangement of the funding during the second quarter of 2008 of
$5.1 million from accredited investors, (ii) payment of $80,000 to APIX to
facilitate the funding arrangement, (iii) $77,000 non-recurring legal and
accounting expenses related to the restatement of our historical financial
statements included in our December 31, 2007 Annual Report on Form 10-KSB, and
our response to a series of comment letters issued by the Division of Corporate
Finance of the Securities and Exchange Commission which started in the later
part of 2007 and (iv) non-cash stock-based compensation expenses of
$461,000.




21




We expect
general and administrative expenses to increase slightly in the last six months
of 2008 in the area of consulting costs to help with the implementation of
Sarbanes Oxley internal controls.





Interest
Income and Expense, net




Interest
income was $21,000 for the three months ended June 30, 2008 as compared to
$292,000 for the same period in 2007 resulted from the adjustment of interest on
the debt in 2007. Interest income was $84,000 and $72,000 for the first six
months in 2008 and 2007, respectively.




Net
Loss




Net loss
for the three months ended June 30, 2008 was $4.2 million, as compared to a net
loss of $16.3 million reported in the same period of 2007, which included
charges from the recognition of the extinguishment of debt treatment of $15.2
million, offset in part by the adjustment of derivative liability related to the
fair value of warrant liability of $505,000and a correction to interest expense
of $292,000 associated with the loan.





Net loss
for the six months ended June 30, 2008 was $6.5 million, as compared to a net
loss of $26.2 million reported in the same period of 2007. The net loss in 2007
included the charges from the recognition of the extinguishment of debt
treatment of $15.2 million and a charge of $7.7 million, recorded in the first
three months of 2007, arising from shares to settle convertible debt in excess
of corporate authority, offset in part by the adjustment of derivative liability
related to the fair value of the warrant liability of $505,000.





We
recorded a liability for the derivative instrument that resulted due to the
number of potential common stock shares plus outstanding shares that exceeded
the number of authorized common stock shares. At March 31, 2007, our authorized
shares were less than the outstanding shares plus potential shares from the
exercise of options, warrants, and convertible debt that were issued. The excess
potential shares were attributed to the additional funding received starting in
April 2006 from the issuance of convertible debt. We calculated the fair value
of these potential shares and recorded a corresponding liability of $7.7 million
based on the fair value of our common stock on March 31, 2007 and any change was
processed through a charge or gain in the statement of operations. In June 2007,
our shareholders voted for a reverse stock-split without a corresponding
decrease in the authorized number of shares authorized. As a result of this
action, we cured this liability as the authorized common shares now exceed all
outstanding common shares and potential common shares.




Liquidity
and Capital Resources




We had
cash and cash equivalents of approximately $5.7 million as of June 30, 2008 and
$4.8 million as of December 31, 2007.  As of June 30, 2008, we had
positive working capital of $5.8 million and an accumulated deficit of
approximately $182.9 million.





Net cash
used in operating activities was approximately $5.8 million and $3.8 million for
the six months ended June 30, 2008 and 2007, respectively, resulting primarily
from increased working capital needs and current period operating expenses. Net
cash used in investing activities included $376,000 related to the capital
expenditures of property and equipment, as compared to $27,000 used in 2007. We
had $2.0 million cash in short term investments as of December 31, 2007, which
was liquidated into to our cash accounts during the second quarter of 2008 to
support our operating expenses. Net cash provided by financing activities in the
first six months of 2008 was $5.0 million primarily from a private placement
funding from qualified investors arranged by APIX, who also provided $3.0
million loan financing in the same period of 2007.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements





ITEM
3. Quantitative and Qualitative Disclosure About Market Risk





Not
applicable.





ITEM
4. Controls and Procedures




22




Evaluation
of Disclosure Controls and Procedures





Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC. Our Chief Executive
Officer and Corporate Controller have reviewed the effectiveness of our
“disclosure controls and procedures” (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c) and 15d-14(c)) during the period covered by this report
on Form 10-Q.  We had detected certain errors in the calculation and
disclosure of debt extinguishment and excess share liability as presented in our
previously issued Quarterly Reports on Form 10-Q for the periods ended March 31,
June 30, and September 30, 2006, March 31, June 30, and September 30, 2007
and  in the  2007 annual report on Form 10-KSB for the year
ended December 31, 2007.


.





As
disclosed in Part I. ITEM 8A. CONTROLS AND PROCEDURES of our Annual Report on
Form 10-KSB/A for the year ended December 31, 2006 and our restatements to the
Quarterly Financial statements for the quarterly periods ended March 31, June
30, and September 30, 2006, March 31, June 30, and September 30, 2007 and ITEM
3A on form 10-KSB/A for the year ended December 31, 2007, we determined that
there were material weaknesses in our internal controls over financial reporting
in the areas of accounting for debt extinguishments and excess share
liability.




To
address these significant deficiencies and material weaknesses, we have taken
the following steps to improve our internal controls and procedures over
financial reporting:





·
            We
      have added additional staff to our financial department and have assigned
      to our CEO some of the duties of our previous interim CFO as of March
      2008.




·
            We
      have added two additional accounting staff in 2008 to allow for sufficient
      segregation of duties. We have hired an interim corporate controller, who
      has public company reporting
experience.





·
            We
      initiated a plan to search and add personnel with technical accounting
      expertise in order to help us maintain effective disclosure controls and
      procedures as well as internal control over financial
      reporting.




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




·
            We
      implemented new procedures during the first quarter of 2008 that require
      additional reviews by qualified third parties to perform detailed review
      of all non-recurring journal entries above a certain dollar threshold and
      also to review all journal entries.




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




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




Internal Control
Over Financial Reporting.





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





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





Limitations
on the Effectiveness of Controls





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


23




PART
II - OTHER INFORMATION




ITEM
1.      Legal Proceedings





A
complaint was filed against us in the Superior Court in Alameda County,
California, on March 3, 2008 by Gabriel Vegh, one of our directors, and former
Chairman and Chief Executive Officer, for violation of statues, breach of
contract, bad faith, wrongful termination and damages. The action was commenced
in connection with our termination of Mr. Vegh in August 2007. We are in the
process of responding to the complaint and intend to defend ourselves
vigorously.





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




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





On May 8,
2008, we entered into a series of identical agreements with a number of
accredited investors for the private sale of an aggregate of 8,474,992
shares of common stock and warrants to purchase 1,271,247 shares of common stock
at an exercise price of US$0.65 per share.  The total gross
proceeds from the sale were approximately $5.1 million.  The
proceeds will be used for general working capital purposes.





ITEM
3.     Defaults Upon Senior Securities





None.




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





None.




ITEM
5.     Other Information





We had
received a comment letter from the Securities and Exchange Commission, the
Division of Corporation Finance, on April 21, 2008 in response to our Form 10KSB
filing for the fiscal year ended December 31, 2007.  On May 19, 2008,
we received the SEC staff’s comments to our response filed
on May 6, 2008. We have responded to the Staff’s comments on June 16,
2008.  On July 16, 2008, we have received the Staff’s notification
letter that they have completed their review of our annual report on Form 10-KSB
for the year ended December 31, 2007 and have no further comments at this
time.




ITEM
6.     Exhibits




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


24




CARDIMA,
INC.





SIGNATURE









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






CARDIMA,
      INC.August
      14, 2008
              By:
              /s/ Robert
      CheneyChief
      Executive Officer and Chief Financial Officer (Principal Executive and
      Financial and Accounting Officer)






















25