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 MARCH 31, 2009




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 143,768,240 shares of the registrant's common stock, par value $0.001,
issued and outstanding as of April 30, 2009.











CARDIMA, INC.




TABLE
OF CONTENTS




PART
I.  Financial Information







Description
              PageItem
      1.
              Financial
      Statements (unaudited)Condensed
      Balance Sheets as of March 31, 2009 and December 31,
      2008
              3Condensed
      Statements of Operations for the Three Months ended March 31, 2009 and
      2008
              4Condensed
      Statements of Cash Flows for the Three Months ended March 31, 2009 and
      2008
              5Notes
      to Condensed Financial Statements
              6Item
      2.
              Management’s
      Discussion and Analysis and Results of Operations
              19Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              22Item
      4.
              Controls
      and Procedures
              22





PART
II.  Other Information




Description
              PageItem
      1.
              Legal
      Proceedings
              24Item
      1A.
              Risk
      Factors
              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.CONDENSED
      BALANCE SHEETS(In
      thousands, except share amounts)(unaudited)ASSETS
                          
                          March
      31, 2009
                          
                          December
      31, 2008Current
      assets:Cash
      and cash equivalents
                          
                          $
                          467
                          
                          $
                          5,325Accounts
      receivable, net of allowances for doubtful accounts of $190 and $187, as
      of March 31, 2009 and December 31, 2008, respectively
                          
                          
                          233
                          
                          
                          169Short
      term investment
                          
                          
                          15,197
                          
                          
                          50Inventories
                          
                          
                          1,548
                          
                          
                          1,566Prepaid
      expenses
                          
                          
                          561
                          
                          
                          687Other
      current assets
                          
                          
                          13
                          
                          
                          9Total
      current assets
                          
                          
                          18,019
                          
                          
                          7,806Property
      and equipment, net of accumulated depreciation of $3,029 and $2,988 as of
      March 31, 2009 and December 31, 2008, respectively
                          
                          
                          1,211
                          
                          
                          924Other
      assets
                          
                          
                          61
                          
                          
                          61TOTAL
      ASSETS
                          
                          $
                          19,291
                          
                          $
                          8,791LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          438
                          
                          $
                          418Accrued
      liabilities
                          
                          
                          1,691
                          
                          
                          1,477Deferred
      revenue
                          
                          
                          112
                          
                          
                          112Loans
      payable
                          
                          
                          12
                          
                          
                          6,012Capital
      leases - current portion
                          
                          
                          25
                          
                          
                          25Notes
      payable to related-party - current portion
                          
                          
                          -
                          
                          
                          100Total
      current liabilities
                          
                          
                          2,278
                          
                          
                          8,144Loans
      payable - net of current portion
                          
                          
                          38
                          
                          
                          41Capital
      leases - net of current portion
                          
                          
                          39
                          
                          
                          45TOTAL
      LIABILITIES
                          
                          
                          2,355
                          
                          
                          8,230Shareholders'
      Equity:Preferred
      stock, series A, $0.001 par value, liquidation preference of $0.10,
      10,000,000 shares authorized, 5,000,000 issued
                            and outstanding at March 31, 2009 and December
      31, 2008
                          
                          
                          500
                          
                          
                          500Common
      stock, $0.001 par value, 300,000,000 shares authorized, 143,768,240 and
      125,134,721 shares issued and outstanding at March 31, 2009 and December
      31, 2008, respectively
                          
                          
                          144
                          
                          
                          125Additional
      paid-in-capital
                          
                          
                          210,881
                          
                          
                          190,220Accumulated
      deficit
                          
                          
                          (194,589)
                          
                          
                          (190,284)Total
      Shareholders' Equity
                          
                          
                          16,936
                          
                          
                          561TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                          
                          $
                          19,291
                          
                          $
                          8,791







See
accompanying notes to these condensed financial statements





3




CARDIMA,
      INC.CONDENSED
      STATEMENTS OF OPERATIONS(In
      thousands, except per share amounts)(Unaudited)For
      The Three Months Ended March 31,2009
                      
                      
                      2008Net
      sales
                      
                      $
                      361
                      
                      
                      $
                      417Cost
      of goods sold
                      
                      
                      866
                      
                      
                      
                      456Gross
      margin deficiency
                      
                      
                      (505
                      )
                      
                      
                      (39
                      )Operating
      expenses:Research
      and development
                      
                      
                      1,705
                      
                      
                      
                      1,071Selling,
      marketing, and general and administrative
                      
                      
                      2,037
                      
                      
                      
                      1,266Total
      operating expenses
                      
                      
                      3,742
                      
                      
                      
                      2,337Operating
      loss
                      
                      
                      (4,247
                      )
                      
                      
                      (2,376
                      )Other
      income/(expense):Interest
      income / (expense), net
                      
                      
                      (58
                      )
                      
                      
                      63Other
      income / (expense)
                      
                      
                      1
                      
                      
                      
                      (3
                      )Total
      other income / (expense)
                      
                      
                      (57
                      )
                      
                      
                      60Loss
      before income taxes
                      
                      
                      (4,304
                      )
                      
                      
                      (2,316
                      )Income
      taxes
                      
                      
                      1
                      
                      
                      
                      -Net
      loss
                      
                      $
                      (4,305
                      )
                      
                      $
                      (2,316
                      )Basic
      and diluted net loss per share
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.02
                      )Shares
      used in computing basic and diluted net loss per share
                      
                      
                      131,589
                      
                      
                      
                      116,365




See
accompanying notes to these condensed financial statements





4


CARDIMA, INC.CONDENSED
      STATEMENTS OF CASH FLOWS(In
      thousands)(Unaudited)For
      the Three Months Ended March 31,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                  
                  $
                  (4,305
                  )
                  
                  $
                  (2,316
                  )Adjustments
      to reconcile net loss to net cash used in operating activities provided by
      operations:Depreciation
      and amortization
                  
                  
                  79
                  
                  
                  
                  27Non-cash
      stock-based compensation
                  
                  
                  448
                  
                  
                  
                  247Disposal
      of assets
                  
                  
                  -
                  
                  
                  
                  2Excess
      and obsolete inventory
                  
                  
                  (232
                  )
                  
                  
                  (186
                  )Allowance
      for doubtful accounts
                  
                  
                  2
                  
                  
                  
                  -Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (66
                  )
                  
                  
                  (114
                  )Inventories
                  
                  
                  250
                  
                  
                  
                  (155
                  )Prepaid
      and other assets
                  
                  
                  122
                  
                  
                  
                  (595
                  )Accounts
      payable, accrued compensation and other liabilities
                  
                  
                  155
                  
                  
                  
                  385Accrued
      interest and fees
                  
                  
                  263
                  
                  
                  
                  -Net
      cash used in operating activities
                  
                  
                  (3,284
                  )
                  
                  
                  (2,705
                  )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of short-term investment
                  
                  
                  (15,147
                  )
                  
                  
                  (77
                  )Purchase
      of property and equipment
                  
                  
                  (366
                  )
                  
                  
                  (290
                  )Net
      cash used in investing activities
                  
                  
                  (15,513
                  )
                  
                  
                  (367
                  )CASH
      FLOWS FROM FINANCING ACTIVITIESPrincipal
      payments under capital leases and credit facility
                  
                  
                  (6
                  )
                  
                  
                  (12
                  )Payments on
      notes payable
                  
                  
                  (3
                  )
                  
                  
                  (2
                  )Payments
      on notes payable to related party
                  
                  
                  (100
                  )
                  
                  
                  (75
                  )Net
      proceeds from sale of common stock
                  
                  
                  14,048
                  
                  
                  
                  32Net
      cash provided by (used in) financing activities
                  
                  
                  13,939
                  
                  
                  
                  (57
                  )Change
      in cash and cash equivalents
                  
                  
                  (4,858
                  )
                  
                  
                  (3,129
                  )Beginning
      cash and cash equivalents
                  
                  
                  5,325
                  
                  
                  
                  4,811Ending
      cash and cash equivalents
                  
                  $
                  467
                  
                  
                  $
                  1,682SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS INFORMATIONCash
      paid for income taxes
                  
                  $
                  1
                  
                  
                  $
                  1Cash
      paid for interest
                  
                  $
                  7
                  
                  
                  $
                  7SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESEquipment
      acquired under capital lease arrangements
                  
                  $
                  -
                  
                  
                  $
                  22Conversion
      of accrued interest into common stock
                  
                  $
                  183
                  
                  
                  $
                  -Conversion
      of $6 million note into common stock
                  
                  $
                  6,000
                  
                  
                  $
                  -





See
accompanying notes to these condensed financial statements





5




CARDIMA,
INC.




NOTES
TO CONDENSED FINANCIAL STATEMENTS


MARCH
31, 2009


(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. We sell our
products worldwide through both direct sales and distribution channels, with a
substantial portion of our 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
balance sheet at December 31, 2008 has been derived from the audited 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, 2008 audited financial statements
and the accompanying notes thereto filed on our annual report on Form-10K with
the SEC on March 19, 2009. 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.





3.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





There
have been no significant changes in our significant accounting policies during
the three months ended March 31, 2009, compared to what was previously disclosed
in our Annual Report on 10-K for the year ended December 31,
2008.





REVENUE
RECOGNITION





We
recognize revenue from two types of customers, end users and distributors.
Revenue is recognized in accordance with Staff Accounting Bulletin 104, “Revenue
Recognition in Financial Statements” when all of the following criteria are met:
persuasive evidence of an arrangement exists, shipment of the product has
occurred and title of products transferred at the point of shipment, payment of
the product is reasonably assured and no substantive obligations to the customer
remain. Revenue is presented net of discounts, allowances, and returns.
Customers are not entitled to any rights of product return. Payment terms are
either open trade credit or cash. We have distributors in Asia and Europe and we
record as revenue the wholesale price we charge our distributors. The
distributors assume the title and risk of loss at the shipping
point.





INCOME
TAXES





Income
taxes are accounted for under the asset and liability method. Deferred income
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement bases and the
respective tax bases of the assets and liabilities and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized, and have been provided for all periods presented.





6


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
months ended March 31, 2009 and 2008, comprehensive loss is equivalent to our
reported net loss.  Accordingly, a statement of comprehensive loss is
not presented.




STOCK-BASED
COMPENSATION




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 2009
and 2008 includes compensation expense related to share-based awards granted
prior to January 1, 2006 that vested during the current period based on
grant date fair value estimated in accordance with the pro forma provisions of
SFAS 123. Stock compensation expense for the share-based awards granted
subsequent to January 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). As stock
compensation expense recognized in the statement of operations is based on
awards ultimately expected to vest, it has been adjusted for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.For the three months ended March 31, 2009 and 2008, 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.





Since
January 2009, we have recognized stock-based compensation expense in our
statement of operations in their respective cost centers as compared to
recognizing all the compensation costs in general and administrative expense
prior to 2009. The table below shows the compensation costs included in the
statement of operations for the three months ended March 31, 2009 and 2008 by
line item. The 2008 statement of operations have been reclassified to reflect
the below changes to conform to the current year presentation. (unaudited, in
thousands):





Three
      Months ended March 31,2009
                    
                    
                    2008Stock-based
      compensation expense by caption:Cost
      of goods sold
                    
                    $
                    54
                    
                    
                    $
                    19Research
      and development
                    
                    $
                    107
                    
                    
                    $
                    88Selling,
      general and administrative
                    
                    $
                    287
                    
                    
                    $
                    140Total
      stock-based compensation expense
                    
                    $
                    448
                    
                    
                    $
                    247







7


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 the three
months ended March 31, 2009 or 2008.





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:




March
31,2009
                    
                    2008Warrants
                    14,784,211
                    
                    
                    6,745,759Stock
      Options
                    9,436,635
                    
                    
                    6,926,683Preferred
      Shares, common stock equivalent
                    1,000,000
                    
                    
                    1,000,000Total
      Warrants, Options and Preferred Shares
                    25,220,846
                    
                    
                    14,672,442





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




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 our 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.




In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”
(SFAS No. 157). SFAS No. 157 establishes a framework for measuring
fair value, clarifies the definition of fair value and requires additional
disclosures about fair-value measurements. In general, SFAS No. 157 applies
to fair value measurements that are already required or permitted by other
accounting standards and is expected to increase the consistency of those
measurements. SFAS No. 157, as issued, is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB
Staff Position (FSP) SFAS No. 157-2, Effective Date of FASB Statement No.
157 (FSP SFAS No. 157-2) which deferred the effective date of SFAS No.
157 for one year for certain nonfinancial assets and nonfinancial liabilities.
Accordingly, we adopted the required provisions of SFAS No. 157 at the beginning
of fiscal year 2008 and the remaining provisions will be adopted by us at the
beginning of fiscal year 2009. The 2008 fiscal year adoption did not result in a
material impact to our financial statements. We are currently evaluating the
impact of adopting the remaining parts of SFAS No. 157 in fiscal year 2009 in
accordance with FSP SFAS No. 157-2.




In June
2007, the FASB ratified EITF Issue No. 07-3, "Accounting for Advance Payments for
Goods or Services to Be Used in Future Research and Development
Activities." EITF 07-3 provides that nonrefundable advance payments made
for goods or services to be used in future research and development activities
should be deferred and capitalized until such time as the related goods or
services are delivered or are performed, at which point the amounts would be
recognized as an expense. This issue is effective for fiscal years beginning
after December 15, 2007.  The adoption of EITF 07-3 did not have a
material impact on our financial position and results of
operations.





8




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS
No. 141(R)). SFAS No. 141(R) amends SFAS No. 141, “Business Combinations”,and
provides revised guidance for recognizing and measuring identifiable assets and
goodwill acquired, liabilities assumed and any noncontrolling interest in the
acquiree. Some of the revised guidance of SFAS No. 141(R) includes initial
capitalization of acquired in-process research and development (IPR&D),
expensing transaction costs, expensing acquired restructuring costs and
recording contingent consideration payments at fair value with subsequent
adjustments recorded to net earnings. It also provides disclosure requirements
to enable users of the financial statements to evaluate the nature and financial
statement effects of the business combination. SFAS No. 141(R) is effective for
fiscal years beginning on or after December 15, 2008 and will be applied
prospectively to business combinations that are consummated after adoption of
SFAS No. 141(R).





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. The adoption of FAS No. 160 did not 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 Staff Position No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets.” FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R) and other applicable accounting literature.
FSP FAS 142-3 is effective for fiscal years beginning after December 15,
2008. The adoption of FSP FAS 142-3 did not have a material impact on our
financial statements.





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” This FSP
provides additional guidance for estimating fair value in accordance with FASB
Statement No. 157, Fair Value Measurements, when the volume and level of
activity for the asset or liability have significantly decreased. This FSP also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. This FSP emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or liability and
regardless of the valuation technique(s) used, the objective of a fair value
measurement remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. FSP FAS 157-4 is effective
for interim and annual reporting periods ending after June 15, 2009, and is
applied prospectively. We do not believe that the implementation of this
standard will have a material impact on our financial statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments”. This FSP amends FASB Statement No. 107, “Disclosures about Fair Value of
Financial Instruments” to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1
are effective for interim and annual reporting periods ending after June 15,
2009. We do not believe that the implementation of this standard will have a
material impact on our financial statements.





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”. This FSP amends the
other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change the FSP brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. FSP FAS 115-2
and FAS 124-2 are effective for interim and annual reporting periods ending
after June 15, 2009. We do not believe that the implementation of this standard
will have a material impact on our financial statements.





9




In
November of 2008, the SEC released a proposed roadmap regarding the potential
use by U.S. issuers of financial statements prepared in accordance with
International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive
series of accounting standards published by the International Accounting
Standards Board (“IASB”). Under the proposed roadmap, the Company may be
required in fiscal 2015 to prepare financial statements in accordance with IFRS.
However, the SEC will make a determination in 2011 regarding the mandatory
adoption of IFRS. We are currently assessing the impact that this potential
change would have on our consolidated financial statements, and we will continue
to monitor the development of the potential implementation of IFRS.




In March
2009, FASB unanimously voted for the FASB “Accounting Standards
Codification” (the “Codification”) to be effective beginning on
July 1, 2009. Other than resolving certain minor inconsistencies in current
United States Generally Accepted Accounting Principles (“GAAP”), the
Codification is not supposed to change GAAP, but is intended to make it easier
to find and research GAAP applicable to particular transactions or specific
accounting issues. The Codification is a new structure which takes accounting
pronouncements and organizes them by approximately ninety accounting topics.
Once approved, the Codification will be the single source of authoritative U.S.
GAAP. All guidance included in the Codification will be considered authoritative
at that time, even guidance that comes from what is currently deemed to be a
non-authoritative section of a standard. Once the Codification becomes
effective, all non-grandfathered, non-SEC accounting literature not included in
the Codification will become non-authoritative.





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.
            CASH
      AND CASH EQUIVALENTS





We
receive payments from our customers and deposit them in federally insured
financial institutions during our normal course of business.  As of
March 31, 2009, we had cash and cash equivalents of approximately of $467,000.
In October 2008, the Federal Deposit Insurance Corporation announced the Term
Policy Liquidity Guarantee Program which provides deposit insurance for funds in
non-interest bearing transaction deposit accounts.





6.
            SHORT
      TERM INVESTMENTS





Short-term
investments consist of certificates of deposit with maturities of less than a
year.  As of March 31, 2009, we had short-term investments of
approximately $15.2 million.





7.
            INVENTORIES





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





March
      31, 2009
                    
                    
                    December
      31, 2008Raw
      Materials
                    
                    $
                    644
                    
                    
                    $
                    736Work-In-Process
                    
                    
                    414
                    
                    
                    
                    34Finished
      Goods
                    
                    
                    873
                    
                    
                    
                    1,024Reserve
      for obsolescence
                    
                    
                    (383
                    )
                    
                    
                    (228
                    )$
                    1,548
                    
                    
                    $
                    1,566







Prior to
2009, we have included our INTELLITEMP products in inventory. In the first
quarter of 2009, we have reclassified $245,000 worth of INTELLITEMP products
into capital assets as a result of a change in our sales strategy to facilitate
sales of our surgical line of products. Depreciation for these capitalized
assets will be included in cost of goods sold as the INTELLITEMPs are shipped to
our customers.





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.





Pursuant
to SAFA No. 151, “Inventory
Costs – an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”), which
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material, or spoilage. Under some circumstances, SFAS
No. 151 mandates that items such as idle facility expense, excessive spoilage,
double freight and re-handling costs be recognized as current-period charges. In
addition, SFAS No. 151 requires that allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production
facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. In the first quarter of 2009, we have
identified $4,000 of idle facility costs as certain plant operating costs as a
result of an extended period of production down-time due to facilities
maintenance. This was included in general and administrative expenses on our
statement of operations for the three months ended March 31, 2009.





10


8.
            PROPERTY
      AND EQUIPMENT





Property
and equipment, including equipment under capital leases, are carried at cost
less accumulated depreciation and amortization. Property and equipment are
depreciated using the straight-line method over the estimated useful lives,
generally three to five years. Leasehold improvements are amortized using
the straight-line method over the shorter of the estimated useful life of the
asset or the remaining term of the lease. Depreciation expense includes
amortization of capital leases and leasehold improvements. Depreciation expense
was $79,000 and $27,000 for the three months ended March 31, 2009 and 2008,
respectively.





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





March
      31, 2009
                    
                    
                    December
      31, 2008Equipment
                    
                    $
                    3,874
                    
                    
                    $
                    3,554Leasehold
      improvements
                    
                    
                    366
                    
                    
                    
                    3584,240
                    
                    
                    
                    3,912Less
      accumulated depreciation and amortization
                    
                    
                    (3,029
                    )
                    
                    
                    (2,988
                    )Property
      and equipment, net
                    
                    $
                    1,211
                    
                    
                    $
                    924





9.
            RECENT
      FINANCING





On
February 28, 2009, we issued and sold in a private placement (the "Financing")
(i) an aggregate of 18,518,518 shares (the "Shares") of our common stock at a
purchase price per share of $1.08, for an aggregate purchase price of
approximately $20 million ($14 million in cash and $6 million of a note
payable), (ii) warrants (the "Warrants") to purchase an aggregate of 5,555,555
shares of our common stock for an exercise price of $1.25 per share. The Shares
and Warrants were issued pursuant to a Common Stock and Warrant Purchase
Agreement (the "Purchase Agreement"), dated as of February 28, 2009, with a
shareholder, who is an accredited investors identified in the Purchase
Agreement.




The
Warrants expire five years from the date of the closing of the Financing and
contain customary provisions for adjustment to the exercise price in the event
of stock splits, combinations and dividends. In addition, at our option, we may
force the purchaser  to exercise the Warrant at a price per share
equal to $1.08, provided that (i) our Common Stock is trading at a price equal
to or greater than $1.58 per share for a period of fifteen (15) consecutive
trading days ending on the date preceding the date we send a notice to the
investor in which we announce our intention to force the exercise of the
Warrants and (ii) a registration statement is in effect with respect to the
Warrant Shares.





The
offer, sale and issuance to the Purchasers of the Shares, the Warrants and the
shares of common stock issuable upon the exercise of the Warrants have been made
in reliance on the statutory exemption from registration pursuant to Rule 506 of
Regulation D, Section 4(2) of the Securities Act of 1933, as amended. The Shares
and the Warrants have not been registered under the Securities Act of 1933, as
amended, and, unless so registered, may not be offered or sold in the United
States, except pursuant to an applicable exemption from the registration
requirements of the Securities Act of 1933, as amended, and applicable state
securities laws. We are not required to register for resale under the Securities
Act the Shares and the shares issuable upon the exercise of the Warrants. APIX
International, Ltd., acted as the placement agent. We provided for up to $80,000
in expense reimbursements.





10.
            RELATED
      PARTY TRANSACTIONS





APIX
International Ltd. (“APIX”) is an entity that is solely owned by Robert Cheney
who is also the CEO, CFO and a Director of our Company. Mr. Cheney was appointed
as the CEO in June 2007. APIX acted as agent for all of our recent financing
activities. During the three months ended March 31, 2009, we reimbursed APIX for
$80,000 of expenses related to the loan executed on November 11,
2008.




In
February 2008, we entered into a consulting agreement with Richard Gaston
Associates, LLC, an entity owned by Richard Gaston who is a member of our Board
of Directors. The agreement was extended in February 2009 through February 2010.
Per the agreement, Dr. Gaston is paid a monthly fee in exchange for advisory
services to our Sales and Marketing departments. During the first three months
ended March 31, 2009 and 2008, total payments made under the agreement were
$24,000 and $21,000, respectively.





11.
            NOTE
      PAYABLE TO RELATED PARTIES





In
December 2007, we had entered into a series of Subscription Agreements with
certain accredited investors providing for the sale of 18 million shares of our
Common Stock in the aggregate principal amount of $9 million. Per the Amended
Funding Agreement, APIX waived its five-percent common share placement fee and
accepted for its services rendered; (i) an additional one million warrants
(total three million warrants) to purchase shares of our common stock at an
exercise price of $0.55 per share; and (ii) all rights, title and interest in a
loan totaling $360,000, including accrued interest, owed to us by Phil Radlick,
a Director of our Company, with a guaranteed minimum recoverable value of not
less than $100,000. We have extinguished all of our obligations under this
Amended Funding Agreement in the first quarter of 2009.





11


12.
            LOANS
      PAYABLE





On
November 11, 2008, we executed a Loan Term Sheet and Loan Commitment letter (the
"Financing Documents") with an accredited investor and the largest individual
shareholder of our Company (the “Note Holder”) pursuant to which we issued
a secured promissory note (the "Note") in the principal amount of $6 million
(the “Advance”).  The Note provided for interest at a rate of 10% per
year and a maturity date of November 10, 2009.  We agreed to grant the
Holder a general charge on all of our assets.





On
February 28, 2009, we entered into a subscription agreement with the Note Holder
providing for the sale of 18,518,518 shares of our Common Stock in the aggregate
principal amount of $20 million. Under the terms of the agreement, the Note
Holder and us agreed to convert the $6 million in aggregate principal amount of
the Note into shares of common stock, in accordance with the same terms of the
subscription agreement.





As
previously disclosed, in December 2006, a settlement agreement was reached with
our former President and Chief Operating Officer, William K. Wheeler, in which
we agreed to pay Mr. Wheeler $295,000 and he agreed to reimburse the Company
$192,500 for a loan he received from Cardima in June 2000 and May
2001.  In accordance with the Accounting Principle Board (“APB”) No.
21, “Interest on Receivables and Payables”, we recorded the discounted value of
the note payable and note receivable of $232,287 and $162,022, respectively at
December 31, 2006.  The net of these two values, or $50,000, is
reported as $12,000 and $38,000 under current and non-current loans payable, as
of March 31, 2009, respectively.





13.
            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 March 31, 2009 (in thousands):




Fiscal
      Year
                    
                    Operating
      Leases
                    
                    
                    Capital
      Leases2009
                    
                    $
                    205
                    
                    
                    $
                    232010
                    
                    
                    115
                    
                    
                    
                    312011
                    
                    
                    -
                    
                    
                    
                    18Total
      minimum lease payments
                    
                    $
                    320
                    
                    
                    $
                    72Less
      amounts representing interest
                    
                    
                    -
                    
                    
                    
                    (8
                    )Present
      value of net minimum lease payments
                    
                    $
                    320
                    
                    
                    $
                    64Short-Term
                    
                    
                    -
                    
                    
                    $
                    (25
                    )Long-Term
                    
                    
                    -
                    
                    
                    $
                    39





Royalty
Agreement





We have
an exclusive royalty-free worldwide license to use Target Therapeutics’
technology and to make, use and sell or otherwise distribute products for the
diagnosis and treatment of electrophysiological diseases in the body, other than
in the central nervous system, including the brain. The exclusive license grant
applied to any Target Therapeutics’ technology developed through May 1996 and
will expire upon the expiration of the last of the patents relating to Target
Therapeutics’ technology. We also have a royalty agreement with SurModics, Inc.
for the non-exclusive use of licensed products and patents for products treated
with photoreactive polyvinylpyrrolidone copolymer and non-photoreactive
polyvinylpyrrolidone.





Consultant
Agreement





We have
entered into consulting agreements with several individuals.  The
agreements are typically for a term of one year and define the scope of services
to be provided by the individuals.  The method of compensation for the
consultants is either cash or stock options, or a combination of
both.





12




Contingencies





On August
31, 2007, our Board of Directors terminated the employment of our Chief
Executive Officer and Acting Chief Financial Officer, Mr. Gabriel
Vegh.  Mr. Vegh remained as a member of the Board of Directors until
September 8, 2008.  On March 3, 2008, we received a letter from the
law firm representing Mr. Vegh, who 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. In April 2009, we reached
an agreement with Mr. Vegh to settle all disputes and release all claims against
each other.





On
October 31, 2007, we received a letter from the law firm representing our former
Director of Operations, Larry Stevens in which claims were made against us for
damages due to wrongful termination in violation of public policy, breach of
contract and other related claims. We determined that Mr. Stevens’
termination was “with cause” thus the severance provision of his employment
agreement did not apply. In February 2009, we reached an agreement with Mr.
Stevens to settle all disputes and release all claims against each
other.





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 maintain 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.





14.
            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 our 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.




15.  CONCENTRATIONS
OF RISK




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 March 31,2009
                      
                      
                      2008United
      States
                      
                      $
                      301
                      
                      
                      
                      83
                      %
                      
                      $
                      258
                      
                      
                      
                      62
                      %Europe
                      
                      
                      58
                      
                      
                      
                      16
                      %
                      
                      
                      155
                      
                      
                      
                      37
                      %Asia/Pacific
                      
                      
                      2
                      
                      
                      
                      1
                      %
                      
                      
                      1
                      
                      
                      
                      -Others
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3
                      
                      
                      
                      1
                      %Total
      Net Sales
                      
                      $
                      361
                      
                      
                      
                      100
                      %
                      
                      $
                      417
                      
                      
                      
                      100
                      %





Our
diagnostic product group, namely the PATHFINDER family of micro-catheter
systems, accounted for 60% and 70% of net sales for the three months ended
March 31, 2009 and 2008, 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 our 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.





13


16.
            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.




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.
The 1997 plan expired in March 2007 and no additional grants would be made under
this plan.





14


Valuation
Assumptions





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 rate
used in the three months ended March 31, 2009 and 2008 was minimal.





The
assumptions used for the three months ended March 31, 2009 and 2008 and the
resulting estimates of weighted-average fair value per share of options granted
and shares purchased during these periods were as follows:





Three months ended
                      March 31,2009
                    
                    
                    2008Employee
      stock options:Dividend
      yield
                    
                    
                    0.0
                    %
                    
                    
                    0.0
                    %Volatility
      factor
                    
                    
                    154.9
                    %
                    
                    
                    164.0
                    %Risk-free
      interest rate
                    
                    
                    2.5
                    %
                    
                    
                    3.5
                    %Expected
      term (years)
                    
                    
                    7
                    
                    
                    
                    7Weighted-average
      fair valueof
      options granted during theperiods
                    
                    $
                    1.16
                    
                    
                    $
                    0.50





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 stock
based compensation expense under SFAS123R that has been reported in the
statements of operations is as follow:





Three
      Months ended
                        March
      31,2009
                      
                      
                      2008Stock-based
      compensation expense by caption:Cost
      of goods sold
                      
                      $
                      54
                      
                      
                      $
                      19Research
      and development
                      
                      $
                      107
                      
                      
                      $
                      88Selling,
      general and administrative
                      
                      $
                      287
                      
                      
                      $
                      140Total
      stock-based compensation expense
                      
                      $
                      448
                      
                      
                      $
                      247





For stock
subject to graded vesting, we have utilized the “straight-line” method for
allocating compensation cost by period. As of March 31, 2009, there was
$5.3 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 2.3 years.  There were approximately 95,000 and 53,000 options that
became vested during the three months ended March 31, 2009 and 2008,
respectively.





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





15


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





Options
      Outstanding
                  
                  
                  Average
      Exercise Price
                  
                  
                  Intrinsic
      ValueOption
      Plan
                  Status2007
                  Outstanding
      December 31, 2008
                  
                  
                  9,167,222
                  
                  
                  $
                  0.86
                  
                  
                  $
                  7,034,211Granted
                  
                  
                  250,000
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (115,001
                  )
                  
                  
                  -
                  
                  
                  
                  -Cancelled/expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      March 31, 2009
                  
                  
                  9,302,221
                  
                  
                  $
                  0.87
                  
                  
                  $
                  4,106,6602003
                  Outstanding
      December 31, 2008
                  
                  
                  67,571
                  
                  
                  $
                  3.69
                  
                  
                  $
                  43,191Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cancelled/expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      March 31, 2009
                  
                  
                  67,571
                  
                  
                  $
                  3.69
                  
                  
                  $
                  23,7531993
                  Outstanding
      December 31, 2008
                  
                  
                  41,243
                  
                  
                  $
                  12.03
                  
                  
                  
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cancelled/expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      March 31, 2009
                  
                  
                  41,243
                  
                  
                  $
                  12.03
                  
                  
                  
                  -1997
      Director's Plan
                  Outstanding
      December 31, 2008
                  
                  
                  25,600
                  
                  
                  $
                  1.02
                  
                  
                  $
                  21,560Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cancelled/expired
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      March 31, 2009
                  
                  
                  25,600
                  
                  
                  $
                  1.02
                  
                  
                  $
                  10,400





As of
March 31, 2009, there were 2,243,892 vested and exercisable shares and 7,192,743
unvested and expected to vest shares.





During
the three months ended March 31, 2009, 115,001 options to purchase shares
of common stock were exercised. No options were exercised in the three months
ended March 31, 2008.





16


The
following is a summary of information relating to stock options outstanding and
exercisable by price range as of March 31, 2009:





Options
      Outstanding
                  
                  
                  Options
      ExercisableOption
      Plan
                  
                  Range
      of exercise prices
                  
                  
                  As
      of March 31, 2009
                  
                  
                  Weighted
      avg. remaining contractual life
                  
                  
                  Weighted
      avg. exercise price
                  
                  
                  As
      of March 31, 2009
                  
                  
                  Weighted
      avg. remaining contractual life
                  
                  
                  Weighted
      avg. exercise price2007
                  
                  $
                  0.41-$0.62
                  
                  
                  
                  6,002,221
                  
                  
                  
                  8.58
                  
                  
                  $
                  0.47
                  
                  
                  
                  2,118,079
                  
                  
                  
                  8.68
                  
                  
                  $
                  0.49$
                  1.15-$1.62
                  
                  
                  
                  765,000
                  
                  
                  
                  9.66
                  
                  
                  $
                  1.36
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  1.65-$1.85
                  
                  
                  
                  2,535,000
                  
                  
                  
                  9.39
                  
                  
                  $
                  1.70
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  
                  9,302,221
                  
                  
                  
                  8.89
                  
                  
                  $
                  0.87
                  
                  
                  
                  2,118,079
                  
                  
                  
                  8.68
                  
                  
                  $
                  0.492003
                  
                  $
                  0.55-$2.50
                  
                  
                  
                  43,596
                  
                  
                  
                  6.65
                  
                  
                  $
                  0.62
                  
                  
                  
                  35,995
                  
                  
                  
                  6.64
                  
                  
                  $
                  0.62$
                  3.50-$12.40
                  
                  
                  
                  23,975
                  
                  
                  
                  5.02
                  
                  
                  $
                  9.29
                  
                  
                  
                  23,975
                  
                  
                  
                  5.02
                  
                  
                  $
                  9.29Total
                  
                  
                  
                  67,571
                  
                  
                  
                  6.07
                  
                  
                  $
                  3.69
                  
                  
                  
                  59,970
                  
                  
                  
                  5.99
                  
                  
                  $
                  4.091993
                  
                  $
                  3.40-$10.30
                  
                  
                  
                  19,651
                  
                  
                  
                  3.57
                  
                  
                  $
                  8.95
                  
                  
                  
                  19,651
                  
                  
                  
                  3.57
                  
                  
                  $
                  8.95$
                  11.60-$25.60
                  
                  
                  
                  21,592
                  
                  
                  
                  2.56
                  
                  
                  $
                  14.83
                  
                  
                  
                  21,592
                  
                  
                  
                  2.56
                  
                  
                  $
                  14.83Total
                  
                  
                  
                  41,243
                  
                  
                  
                  3.04
                  
                  
                  $
                  12.03
                  
                  
                  
                  41,243
                  
                  
                  
                  3.04
                  
                  
                  $
                  12.031997
      Director's Plan
                  
                  $
                  0.50-$0.70
                  
                  
                  
                  19,600
                  
                  
                  
                  7.23
                  
                  
                  $
                  0.66
                  
                  
                  
                  18,600
                  
                  
                  
                  7.25
                  
                  
                  $
                  0.67$
                  8.40-$14.50
                  
                  
                  
                  6,000
                  
                  
                  
                  5.87
                  
                  
                  $
                  2.21
                  
                  
                  
                  6,000
                  
                  
                  
                  5.87
                  
                  
                  $
                  2.21Total
                  
                  
                  
                  25,600
                  
                  
                  
                  6.91
                  
                  
                  $
                  1.02
                  
                  
                  
                  24,600
                  
                  
                  
                  6.91
                  
                  
                  $
                  1.04





Non-employee
Compensation




The
Company accounts for options and warrants issued to non-employees under
SFAS 123 and EITF 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, using the Black-Scholes option-pricing model. The value of
such non-employee options and warrants are periodically re-measured over their
vesting terms and the Company must recognize compensation as the option
vests.  During the first three months of 2009, we reversed $164,000 of
accrued stock compensation expense for an option granted in 2008 to a
consultant.  The option had a performance based vesting which was not
met.  During the first three months of 2009, we did not grant options
to purchase shares of our common stock to non-employees.





17


17.
            WARRANTS




The
following table summarizes warrants for the years 2009 and 2008:





Outstanding
      WarrantsNumber
      of Warrant Shares
                    
                    
                    Exercise
      Price Per Warrant Share
                    
                    
                    Weighted-Average
      Exercise PriceBalance
      as of 12/31/2007
                    
                    
                    6,561,994
                    
                    
                    $
                    0.55
      - $14.00
                    
                    
                    $
                    1.30Warrant
      Shares Granted in 2008
                    
                    
                    2,771,247
                    
                    
                    $
                    0.60
      - $0.65
                    
                    
                    $
                    0.62Warrant
      Shares Cancelled  in 2008
                    
                    
                    (104,585
                    )
                    
                    $
                    7.79
      - $12.38
                    
                    
                    $
                    0.88Warrant
      Shares Exercised in 2008
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      as of 12/31/2008
                    
                    
                    9,228,656
                    
                    
                    $
                    0.55
      - $4.30
                    
                    
                    $
                    0.88Warrant
      Shares Granted
                    
                    
                    5,555,555
                    
                    
                    $
                    1.25
                    
                    
                    $
                    1.25Warrant
      Shares Cancelled
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Warrant
      Shares Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      as of 3/31/2009
                    
                    
                    14,784,211
                    
                    
                    $
                    0.55
      - $4.30
                    
                    
                    $
                    1.02





The following table summarizes information about warrants outstanding and
exercisable at March 31, 2009:





Range
      of Exercise Price
                        
                        
                        Number
      of Warrants Outstanding and Exercisable
                        
                        
                        Weighted
      Avg. Remaining Contractual Life (Yrs.)
                        
                        
                        Weighted
      Avg. Exercise Price$
                        4.30
                        
                        
                        
                        757,409
                        
                        
                        
                        0.6
                        
                        
                        $
                        4.30$
                        0.55
      - $1.25
                        
                        
                        
                        14,026,802
                        
                        
                        
                        4.3
                        
                        
                        $
                        0.8414,784,211
                        
                        
                        
                        4.1
                        
                        
                        $
                        1.02





No
warrants were exercised during the three months ended March 31, 2009 and
2008.





18.
            PREFERRED
      SHARES





In 2007
we issued five million shares of convertible preferred stock to APIX
Corporation.  APIX, at its sole discretion, may convert the five
million Preferred Shares it owns into 1 million 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.




18




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 these significant
areas: product commercialization, manufacturing capabilities, research and
development and marketing strategies. 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 will
continue to add key marketing resources and personnel in the US and align
ourselves with sales organizations capable of representing our products in other
markets. In the second quarter of 2008, we received product registration
approval from the State Food and Drug Administration in China for the
INTELLITEMP product.  In the third quarter of 2008, we received product
registration approval in Thailand for all of our products. In the first quarter
of 2009, we received CE Mark approval for our Surgical Ablation System with
Stabilization Sheath. All components of our Surgical Ablation System are now
approved for marketing in European countries recognizing CE Mark
approval.




In the
immediate term, domestically, we are focusing our efforts on the
commercialization of our FDA 510K cleared Surgical Ablation
System.  In the European Union, we will start to develop Surgical
Centers of Excellence, which specialize in special procedures and programs, in
the second quarter of 2009.  The Chinese market is promising for us as it
has a large population of untreated 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 are 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.




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.  We have made great strides in achieving new manufacturing
goals and standards in 2009 and beyond.




Research
and Development





We
continued to evaluate the present INTELLITEMP design, and have also been
developing improvements for its use in cardiac electrophysiology applications,
based on in vitro and
in vivotesting
results.  We are also in the process of developing and formalizing
hardware and software specifications for this next generation Energy Management
Device, and focusing resources to engage in this project launch.




We are in
the process of implementing a number of product improvements to improve the
quality, robustness and user-friendliness of the Surgical Ablation Probe. 
Other probe improvements will be slated for the product pipeline, in answer to
user needs that we are learning from the field, as our customer base
increases.




19


Sales
and Marketing





We have
continued to follow our strategic sales and marketing plans as previously
reported.  Staffing for clinical site and case support for US surgical
procedures has been increased. Our marketing team has redesigned our Web site to
a state-of-the-art portal which allows patients, doctors and investors to view a
broad range of clinical and product information including company milestones
that have been met.  We are continuing to bolster our resources and
personnel in sales and marketing as well as customer training/support throughout
2009.




We will
continue to identify higher volume surgical ablation centers whose surgeons are
experienced in the techniques of ablation.  Some of these sites will
become Cardima Centers of Excellence and conduct peer-to peer physician
training. It is anticipated that this strategy will aid our U.S. commercial
efforts for surgical ablation, both open chest and minimally invasive,
throughout 2009 and beyond.





We
continue to appoint distribution partners worldwide. We have engaged
distributors covering major markets in the United Kingdom, Europe, Japan, and
Thailand. We anticipate strategic contracts will be in place prior to
registration approvals of products in all key world markets throughout
2009. In Europe, Dot Medical and other strategic regional sales agents have
been engaged to partner with us in developing centers of excellence. These
centers will also serve as training sites for other surgeons in the
EU.





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
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
received product registration in Thailand and selected a key distribution
partner to start Centers of Excellence in Thailand.  Dr. Li Poa has
completed surgeon training at the Ramathibodi Hospital in Bangkok. This
center will serve as a teaching institution for other surgeons. We are also
working with the Thai ministry of health to achieve implementation of the
Cardima surgical ablation procedure into their healthcare system.





In the
field of electrophysiology, we are focusing developing next generation
technologies of our probes and energy management device, with the goal of
attaining an effective EP ablation procedure completed in less than 2 hours. In
the meantime, we will be working with a few key European EP centers using our
current system to develop procedures and protocols. We hope to receive
CE Mark approval in late 2009 or early 2010. We are in the process of selecting
marketing partners, training the field representatives and supporting customer
centers that will develop into EP Centers of Excellence. These Centers of
Excellence will also conduct peer-to peer physician training; aiding Cardima in
EP sales and marketing efforts.






Results
of Operations





NetSales




(unaudited,
      in thousands)Three
      months ended March 31,Net
      sales
                    
                    2009
                    
                    
                    2008United
      States
                    
                    $
                    301
                    
                    
                    $
                    258Europe
                    
                    
                    58
                    
                    
                    
                    155Asia/Pacific
                    
                    
                    2
                    
                    
                    
                    1Other
                    
                    
                    -
                    
                    
                    
                    3Total
      net sales
                    
                    $
                    361
                    
                    
                    $
                    417





Sales for
the three months ended March 31, 2009 were $361,000 as compared to $417,000 for
the same period in 2008. Domestic sales of $301,000, which represents 83% of
total sales, increased slightly over sales to the same region in the first three
months of 2008 of $258,000, or 62% of total sales, due to higher shipments of
our surgical ablation products. The higher sales to domestic channels were
offset in part by lower shipments of our diagnostic products to our European
customers.





We had no
sales to Japan during 2008 and in the first three months of 2009, as our former
Japanese distributor failed to maintain the legal documentation standard
required to sell our PATHFINDER products in Japan. Together with our new
Japanese distributor, we have filed a “Shonin Application” to obtain the
necessary regulatory approval to re-start PATHFINDER sales in the Japanese
market. We anticipate resuming commercial sales in Japan sometime in early third
quarter of 2009.




20


Cost
of Goods Sold; gross margin deficiency




(unaudited,
      in thousands)Three
      months ended March 31,2009
                            
                            
                            2008Sales
                            
                            $
                            361
                            
                            
                            $
                            417Cost
      of goods sold
                            
                            
                            866
                            
                            
                            
                            456Gross
      margin deficiency
                            
                            $
                            (505
                            )
                            
                            $
                            (39
                            )





Cost of
goods sold primarily includes raw materials costs, catheter fabrication costs,
system assembly and testing costs, and manufacturing labor and overhead costs
for the units sold in the period. Cost of goods sold for the three months ended
March 31, 2009 were $866,000, or 240% of sales, as compared to $456,000, or 109%
of sales, for the same period in 2008. The higher cost of goods sold in 2009
included a provision for potential obsolete inventory of certain products
pending further clinical trials of $151,000, a one-time adjustment of cost
related to our INTELLITEMP products of $118,000 and higher share-based
compensation expense of $35,000. Compensation expenses were also higher in the
three months of 2009 by $254,000 as compared to the same period in 2008 as we
prepared for the commercialization of the surgical line of products as well as
the positioning of our PATHFINDER line of products in anticipation of shipments
to Japan as soon as the Shonin Application is approved. We expect cost of sales
as a percentage to sales to improve as sales volume increases.





Research
and Development Expenses




(unaudited,
      in thousands)Three
      months ended March 31,2009
                    
                    
                    2008Research
      and development
                    
                    $
                    1,705
                    
                    
                    $
                    1,071





Research
and development expenses include product development, clinical testing and
regulatory expenses. Research and development expenses for the three months
ended March 31, 2009 were $1.7 million, or 472% of sales, as compared to $1.1
million, or 257% of sales, for the same period in 2008. The increase was
primarily related to higher compensation expenses of $319,000 due to headcount
increase of 10 employees to support the new product commercialization
initiative, higher cost of supplies of $77,000, and outside services and patent
fees of $120,000.





Selling,
Marketing, General and Administrative Expenses




(unaudited,
      in thousands)Three
      months ended March 31,2009
                      
                      
                      2008Selling,
      general and administrative
                      
                      $
                      2,037
                      
                      
                      $
                      1,266





Selling,
marketing, general and administrative expenses for the three months ended March
31, 2009 were $2.0 million, or 564% of sales, as compared to $1.3 million, or
303% of sales, for the same period in 2008.





Selling
and marketing expenses for the three months ended March 31, 2009 increased
slightly over the same period in 2008. General and administrative expenses for
the three months ended March 31, 2009 increased by $682,000 over the same period
in 2008. The increase was primarily due to higher compensation, due to headcount
increase of 2 employees, and consulting expenses of $283,000, higher legal
expenses of $207,000 and share-based compensation expenses of
$147,000.





Total
Other Income/( Expense)




Total
other income/expense for the three months ended March 31, 2009 was $57,000 as
compared to an interest income of $60,000 for the same period in 2008 mainly due
to $100,000 of interest expense recorded in the first quarter of 2009 on the $6
million loan executed in November 2008. The loan was converted to equity in
February 2009.




Liquidity
and Capital Resources




We had
cash and cash equivalents of approximately $467,000 and $5.3 million as of March
31, 2009 and December 31, 2008, respectively. We also had $15.2 million in
short-term investments as of March 31, 2009. Our working capital was $15.7
million as of March 31, 2009 as compared to a negative working capital of
$338,000 as of December 31, 2008 due to a $6.0 million note payable, which was
executed in November 2008 and converted to equity in February 2009.
  21


The cash
used in operating activities in the three months ended March 31, 2009 was $3.3
million, which reflected primarily a net loss of $4.3 million and non-cash
charges of $527,000 consisting primarily of depreciation expense and stock-based
compensation, offset partially by an increase in accounts payable and accrued
liabilities of $418,000 due to the timing of payments. The cash used in
operating activities in the three months ended March 31, 2008 was $2.7 million,
which was essentially due to a net loss of $2.3 million, non-cash charges of
$274,000 consisting primarily of depreciation expense and stock-based
compensation, an increase in inventory of $341,000 and prepaid expenses of
$595,000, offset in part by an increase in accounts payable and accrued
liabilities of $385,000 due to timing of payments.




Net cash
used in investing activities of $15.5 million in the three months ended March
31, 2009 was primarily for the purchase of short-term investments of $15.1
million consisting of certificates of deposit and our investment in capital
expenditures of $366,000. This compares to capital expenditures of $290,000 in
the same period of 2008. We continue to invest in capital expenditures chiefly
to acquire lab equipment, computer hardware and software to support the growth
of our business.


Net cash
provided by financing activities was $13.9 million in the three months ended
March 31, 2009. We have funded our operations primarily with proceeds from
issuances of common stock, debt financing, and lease financing. In November
2008, we obtained approximately $6 million in debt financing. In February 2009,
we obtained an additional $14 million in equity capital financing. The note
holder of the $6 million we obtained in November 2008 converted the principal
into equity in February 2009.


We
believe our existing cash and cash equivalents and the additional capital raised
in 2009 will be sufficient to meet our anticipated cash needs for at least nine
to twelve months. Our future working capital requirements will depend on many
factors, including the rates of our revenue growth, our introduction of new
features and complementary services for our products and services, and our
expansion of research and development and sales and marketing activities. To the
extent our cash and cash equivalents and cash flow from operating activities are
insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financings. If additional funding
is required, there can be no assurance what we may be able to obtain bank credit
arrangements or to effect an equity or debt financing on terms acceptable to us
or at all.


Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements.





ITEM
3. Quantitative and Qualitative Disclosure About Market Risk





We are
exposed to various market risks, which include potential losses arising from
adverse changes in market rates and prices, such as foreign exchange
fluctuations and changes in interest rates. Since our distributors in the
Netherlands and England who distribute our products to the respective countries
and invoice in Euros and British Pounds, we have exposure to exchange rate
fluctuations between the Euro, British Pounds and the U.S. Dollar. Our
foreign-currency-based sales to these countries have been insignificant; as a
result, the effect of the foreign exchange fluctuations on our financial results
has not been significant.





ITEM
4. Controls and Procedures





Management's
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934.





All
internal control systems, no matter how well designed, have inherent limitations
including the possibility of human error and the circumvention or overriding of
controls. Further, because of changes in conditions, the effectiveness of
internal controls may vary over time. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Accordingly, even those systems
determined to be effective can provide us only with reasonable assurance with
respect to financial statement preparation and presentation.





Our
management, including the chief executive officer and chief financial officer,
has assessed the effectiveness of our internal control over financial reporting
as of March 31, 2009, following the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control
- Integrated Framework, and with further guidance for internal controls for
small business provided by the SEC’s new Interpretive Guidance in Release No.
34-55929.





Based on
our assessment under the COSO Internal Control framework, the Company's
management, including the chief executive officer and chief financial officer,
has concluded that our internal control over financial reporting was effective
as of March 31, 2009.




Management's
report was not subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this Quarterly Report on Form 10-Q.





22


Changes
in Internal Controls





There
were no changes to the internal controls that have materially affected or that
are reasonably likely to affect the internal controls.





Limitations
on the Effectiveness of Controls





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





23


PART
II - OTHER INFORMATION






ITEM 1.
                                                  Legal
    ProceedingsOn
      August 31, 2007, our Board of Directors terminated the employment of our
      Chief Executive Officer and Acting Chief Financial Officer, Mr. Gabriel
      Vegh.  Mr. Vegh remained as a member of the Board of Directors
      until September 8, 2008.  On March 3, 2008, we received a letter
      from the law firm representing Mr. Vegh, who 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. In April 2009, we reached an agreement with Mr. Vegh to settle all
      disputes and release all claims against each other.
                                                    
                                                    On
      October 31, 2007, we received a letter from the law firm representing our
      former Director of Operations, Larry Stevens in which claims were made
      against us for damages due to wrongful termination in violation of public
      policy, breach of contract and other related claims. We determined
      that Mr. Stevens’ termination was “with cause” thus the severance
      provision of his employment agreement did not apply. In February 2009, we
      reached an agreement with Mr. Stevens to settle all disputes and release
      all claims against each other.ITEM 1A.
                                                  Risk
factorsFor
      the period between January 1, 2009 and March 31, 2009, we do not have any
      material change to report from risk factors as previously disclosed in our
      annual report on Form 10-K for the period ended December 31,
      2008.ITEM
      2.
                                                  Unregistered Sales of Equity
      Securities and Use of ProceedsOn
      February 28, 2009, we entered into a subscription agreement with an
      accredited investor providing for the sale of (i) a total of 18,518,518
      shares of our Common Stock at a price equal to $1.08 per share, in the
      aggregate principal amount of $20 million and (ii) warrants to purchase an
      aggregate of 5,555,555 shares of our Common Stock at an exercise price of
      $1.25 per share. At our option, we may force the Holder to exercise the
      Warrant at a price per share equal to $1.08, provided that (i) our Common
      Stock is trading at a price equal to or greater than $1.58 per share for a
      period of fifteen (15) consecutive trading days ending on the date
      preceding the date we send a notice to the Holder in which we announce our
      intention to force the exercise of the Warrants and (ii) a registration
      statement is in effect with respect to the Warrant Shares. The
      Warrants have an expiration date of 5 years from the date of issuance.
      APIX acted as placement agent.  We provided for up to $80,000 in
      expense reimbursements.
                                                    
                                                    The
      above offering and sale was deemed to be exempt under Rule 506 of
      Regulation D and Section 4(2) and/or Regulation S of the Securities Act of
      1933, as amended.ITEM 3.
                                                  Defaults Upon Senior
      SecuritiesNone.ITEM 4
                                                  Submission of Matters to a Vote
      of the Security HoldersNone.ITEM 5.
                                                  Other
    InformationWe
      lease a 29,000 square feet facility in Fremont, California, which expires
      on May 31, 2010. On May 12, 2009, we extended the lease for sixty two
      months from June 2009 through July 2014. Under the terms of the extension,
      we have one option to renew the lease for a term of five more years at the
      then current fair market rental for comparable space.ITEM 6.
                                                  Exhibits


10.21
            Amendment
      to building lease *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.




*  Filed
herewith




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.May
      14, 2009
              By:
              /s/ Robert
      CheneyChief
      Executive Officer and Chief Financial Officer (Principal Executive and
      Financial and Accounting Officer)