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

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

                                       or

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

   For the transition period from _________________ to _____________________.

                        Commission File Number: 0-22419

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


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


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

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

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) had been subject to such
filing requirements for the past 90 days. __X__ Yes ___No

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). ___Yes__X__No

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). ___ Yes ___X____No

As of September 1, 2005 there were  101,437,889  shares of  Registrant's  Common
Stock outstanding.



                                       1
<PAGE>

                                 CARDIMA, INC.
                               TABLE OF CONTENTS
                         PART I. Financial Information

<TABLE>
<CAPTION>

                                                                                                                      Page
                                                                                                                      ----
                                Description
                                -----------

<S>  <C>                                                                                                                <C>
Item 1. Financial Statements (unaudited)                                                                                3
        Condensed Balance Sheets as of June 30, 2005 and December 31, 2004                                              3
        Condensed Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004                    4
        Condensed Statement of Cash Flows for the Six Months Ended  June 30, 2005 and Year ended December 31, 2004      5
        Notes to Condensed Financial Statements                                                                         6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations                          15
        Factors Affecting Future Results                                                                               24
Item 3. Quantitative and Qualitative Disclosure About Market Risk                                                      43
Item 4. Controls and Procedures                                                                                        43

PART II.  Other Information

                                                                                                                      Page
                                                                                                                      ----
                                  Description
                                  -----------

Item 1. Legal Proceedings                                                                                              44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                    44
Item 3. Defaults Upon Senior Securities                                                                                44
Item 4. Submission of Matters to a Vote of Security Holders                                                            45
Item 5. Other Information                                                                                              45
Item 6. Exhibits                                                                                                       45


Signatures                                                                                                             46

                                       2
</TABLE>
<PAGE>

PART I.

Item 1.  Financial Statements

                                 CARDIMA, INC.
                            CONDENSED BALANCE SHEETS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                                  June 30,     December 31,
                                                                                   2005            2004
                                                                                (Unaudited)        (1)
                                                                                ------------ ------------
ASSETS
<S>                                                                             <C>          <C>
Current assets:
        Cash and cash equivalents ............................................. $        23  $     3,854
        Accounts receivable, net of allowances for doubtful accounts
                of $35 for June 30, 2005 and December 31, 2004 ................         193          303
        Inventories ...........................................................         736          878
        Prepaid expenses ......................................................         640          456
        Notes receivable from officers ........................................         282          575
        Other current assets ..................................................          44           38
                                                                                ------------ ------------
                Total current assets ..........................................       1,918        6,104
Property and equipment, net ...................................................          33          395
Other assets ..................................................................           -           38
                Total assets .................................................. $     1,951  $     6,537
                                                                                ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
        Accounts payable ...................................................... $     1,474  $       870
        Accrued compensation ..................................................         563          604
        Other current liabilities .............................................          75          321
        Credit obligation and Agility line of credit ..........................         387           79
        Deferred rent .........................................................          18           41
        Capital lease obligation - current portion ............................          23           31
                                                                                ------------ ------------
             Total current liabilities ........................................       2,540        1,946
                                                                                ------------ ------------
Capital lease obligation - noncurrent portion .................................          40           52
                                                                                ------------ ------------
Commitments and contingencies (Note 2)

Stockholders' equity (deficit) (Note 3):
     Common stock, $0.001 par value; 300,000,000 shares authorized,
      101,437,889 and 101,305,613 shares issued and outstanding at June 30,
      2005 and December 31,2004, respectively..................................     117,984      117,973
             Accumulated deficit ..............................................    (118,613)    (113,434)
                                                                                ------------ ------------
             Total stockholders' equity (deficit) .............................        (629)       4,539
                                                                                ------------ ------------
             Total liabilities & equity (deficit) ............................. $     1,951  $     6,537
                                                                                ============ ============
</TABLE>

-----------

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

            See accompanying notes to condensed financial statements


                                       3
<PAGE>

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



                                                           Three months ended        Six months ended
                                                                 June 30,                  June 30,
                                                        =======================   =======================
                                                             2005       2004          2005         2004
                                                        ----------   ----------   ----------   ----------
<S>                                                         <C>          <C>          <C>          <C>
Net sales                                               $     510    $     578    $   1,065    $   1,214

Cost of goods sold                                            611          510        1,055        1,228
                                                        ----------   ----------   ----------   ----------
        Gross margin                                         (101)          68           10          (14)
                                                        ----------   ----------   ----------   ----------
Operating expenses:
        Research and development                              758        1,204        1,400        2,192
        Selling, general and administrative                 1,319        1,548        3,016        2,775
        Impairment of long-lived assets                        46            -          404            -
        Impairment of inventory                               133            -          133            -
                                                        ----------   ----------   ----------   ----------
                 Total operating expenses                   2,256        2,752        4,953        4,967
Operating loss                                             (2,357)      (2,684)      (4,943)      (4,981)
Interest and other income                                       4           15          263           (9)
Interest expense                                             (497)          (4)        (499)          (8)
Warrant expense                                                 -            -            -          (33)
                                                        ----------   ----------   ----------   ----------
Net loss                                                $  (2,850)   $  (2,673)   $  (5,179)   $  (5,031)
                                                        ==========   ==========   ==========   ==========
Basic and diluted net loss per share                    $   (0.03)       (0.03)   $   (0.05)   $   (0.06)
                                                        ==========   ==========   ==========   ==========
Shares used in computing basic and diluted
net loss per share                                        101,438       84,624      101,438       84,624
                                                        ==========   ==========   ==========   ==========
</TABLE>


            See accompanying notes to condensed financial statements


                                       4
<PAGE>
                                 CARDIMA, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (Unaudited)
<TABLE>
<CAPTION>


                                                                                     Six months ended
                                                                                          June 30,
                                                                                -------------------------
                                                                                    2005         2004
                                                                                ------------ ------------
<S>                                                                                   <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                                        $    (5,179) $    (5,031)
Adjustments to reconcile net loss to net cash used in operations:
    Depreciation and amortization                                                        61          131
    Non-cash stock-based compensation                                                     1           60
    Derivative revaluation                                                               --           33
    Impairment of long-lived assets                                                     404           --
    Impairment of inventory                                                             133           --
    Write-off of payroll tax refund liability                                          (245)          --
    Loss on disposal of assets                                                           --            2
    Non-cash interest (income) charge on notes receivable from officers                  (7)          57
    Reserve on notes receivable from officers                                           300           --
    Changes in operating assets and liabilities:
        Accounts receivable, net                                                        110          (92)
        Inventories                                                                       9          (82)
        Prepaid expenses                                                                 (5)        (150)
        Other assets                                                                     32           21
        Accounts payable                                                                604          246
        Accrued employee compensation                                                   (41)         (52)
        Other current liabilities                                                        (1)          (8)
        Deferred rent                                                                   (23)           1
                                                                                ------------ ------------
                Net cash used in operating activities                                (3,847)      (4,864)
                                                                                ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment                                                     (103)         (43)
                                                                                ------------ ------------
        Net cash used in investing activities                                          (103)         (43)
                                                                                ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases and credit facility                            (185)         (45)
Proceeds from Agility line of credit & accrual of exit fee                              750           --
Payment of loan and partial exit fee                                                   (456)          --
Payments of issuance costs                                                              (31)         (70)
Net proceeds from sale of common stock                                                   41        3,146
                                                                                ------------ ------------
        Net cash provided by financing activities                                       119        3,031
                                                                                ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                            (3,831)      (1,876)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                        3,854        6,446
                                                                                ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                        $        23  $     4,570
                                                                                ============ ============
</TABLE>

           See accompanying notes to condensed financial statements.


                                       5
<PAGE>
                                 CARDIMA, INC.

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

1. BASIS OF PRESENTATION

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

     The operating  results for the six month period ended June 30, 2005 are not
necessarily  indicative  of the results that may be expected for the fiscal year
ending  December  31, 2005 or for future  operating  results.  The  accompanying
financial  statements  should be read in conjunction with the audited  financial
statements  and notes thereto  included in the  Company's  Annual Report on Form
10-K for the fiscal year ended December 31, 2004. The accompanying balance sheet
at December 31, 2004 has been derived from those audited financial statements.


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

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


Certain  reclassifications  have been made to prior period amounts to conform to
the current period presentation.  After cost analysis studies were performed, to
properly reflect costs of goods sold of the company, certain staff salaries were

                                       6
<PAGE>

transferred out of the manufacturing to the research and development department.
These  reclassifications  had the following  effect on prior reported results of
operations.

2. MANAGEMENT'S PLANS

     As of June 30, 2005  Cardima,  Inc. had  approximately  $23,000 in cash and
cash  equivalents,  negative  working  capital of $622,000,  and an  accumulated
deficit of $118,613,000.

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

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

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

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

On August  15,  2005 the  Company  re-hired  certain  furloughed  employees  and
re-started operations.

On August 28, 2005, the Company signed a loan agreement with Apix International,
which  increased  the total amount to be financed from $2 million to $3 million.
The principal  amount of the promissory  note dated August 12, 2005 for $500,000
was rolled over into the new loan agreement.  The Company received an additional
$500,000 on this  closing  date and  received  another  $500,000 on September 8,
2005.  The  remainder  of the loan will be received  as follows:  $500,000 on or
after October 12, 2005,  $350,000 on or after November 18, 2005,  $350,000 on or
after  December  18, 2005 and $300,000 on or after  January 18,  2006.  The loan
agreement  will be  secured  by a first  lien on all the  Company's  assets  and
intellectual  property. All funds will bear interest at a rate of 10% per annum.
The  Company  will pay a facility  fee of $60,000 and an exit fee of $900,000 at
the end of the loan agreement. The facility, exit fees and accrued interest due

                                       7
<PAGE>
under the loan are convertible  into shares of the Company's common stock at a a
rate of $0.10 per share. Additionally, the Company will provide the lender, Apix
International,  with  Warrants  to  purchase  capital  stock  in the  amount  of
30,000,000 shares with a strike price of $0.10 per share. The financing facility
has a term of 6 months ending  February 28, 2006.  The facility fee and the exit
fee will be amortized as non-cash interest expense over the life of the loan. In
addition,  any  beneficial  conversion  effect  resulting from the excess of the
average market price of the stock over the $0.10 per share conversion price will
also be charged to non-cash interest during the periods the loan is outstanding.
Based on Management's current  expectations,  Apix International $3 million loan
agreement gives the company  sufficient  cash to operate through  December 2005.
Only if the Company is able to raise  sufficient  funds will  Cardima be able to
continue  to work  towards  regulatory  approval  and  commercialization  of the
REVELATION(R)  Tx  in  the  United  States,  commercialization  of  the  Cardima
SurgSurgical  Ablation  System and the  commercialization  of the  REVELATION(R)
Helix in Europe.

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

We may appeal the Nasdaq Staff's Determination to a Listing Qualification Panel,
pursuant to the procedures set forth in the Nasdaq Marketplace Rule 4800 Series.
There can be no assurance that we will appeal the Nasdaq  Staff's  Determination
or, if we do appeal the Nasdaq Staff's  Determination,  that such appeal will be
successful.  In the meantime,  management is currently  working toward obtaining
listing on the Nasdaq Bulletin Board.

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

Although  our  management  recognizes  the need to raise funds in the  immediate
future, there can be no assurance that we will be successful in consummating any

                                       8
<PAGE>
fundraising  transaction,  or, if we do consummate such a transaction,  that its
terms and conditions  will not be  unfavorable to us. We are also  contractually
prohibited  from issuing  certain kinds of  convertible  securities  without the
consent of some of our investors.  We are evaluating  various  courses of action
including selling or licensing some of our proprietary technologies.  If we fail
to obtain  additional  funding  later this year,  our business will fail and our
stockholders  will  likely  lose  the  entire  value of  their  investment.  Our
independent  registered  public  accountants have stated in their opinion on our
December 31, 2004 financial statements that there is substantial doubt as to our
ability to continue as a going concern.



3. CRITICAL ACCOUNTING POLICIES

     Use of Estimates

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

     Revenue Recognition

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

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

     Revenue is presented net of  discounts,  allowances,  and returns.  Payment
terms are either open trade or cash. Customers are not entitled to any rights of
product return.  Although our customers are not legally entitled to returns,  on
occasion  returns  have  occurred  in such  circumstances  as  shipping or order
errors,  product complaints or for customer relations  purposes.  Returns are at
the sole  discretion  of the Company and can be  reasonably  estimated  based on
prior history. Net revenue for the quarter ended June 30, 2005 was $510,000, net
of $4,000 in product  returns in the quarter.  We have  distributors in Asia and
Europe and we record as revenue the wholesale price we charge our  distributors.
Title and risk of loss are assumed by the distributors and end users at shipping
point.


                                       9
<PAGE>

     Allowance for Doubtful Accounts

     We establish estimates of the uncollectability of accounts receivable.  Our
management  analyzes accounts  receivable,  historical  write-offs as bad debts,
customer concentrations, current economic trends and changes in customer payment
terms when  evaluating the adequacy of the allowance for doubtful  accounts.  We
maintain an allowance for doubtful  accounts at an amount that we estimate to be
sufficient  to  provide  adequate   protection  against  losses  resulting  from
collecting  less than  full  payment  on  receivables.  We have not  experienced
significant bad debt expense and we believe our reserve for doubtful accounts of
$35,000 is  adequate  for any  exposure  to loss in our June 30,  2005  accounts
receivable


     Inventory Revaluation

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

     Stock-Based Compensation

The  Company  has  elected to follow  Accounting  Principles  Board  Opinion No.
("APB")  25,   "Accounting   for  Stock   Issued  to   Employees"   and  related
interpretations  in  accounting  for  its  employee  stock  options,   including
Financial Accounting Standard Board  Interpretation  ("FIN") 44, "Accounting for
Certain  Transactions  Involving Stock  Compensation."  Compensation  expense is
based on the difference,  if any, between the fair value of our common stock and
the exercise price of the option or share right on the measurement  date,  which
is typically the grant date.

This amount is recordable as "deferred stock compensation" in the Balance Sheets
and  amortized  as a  charge  to  operations  over  the  vesting  period  of the
applicable  options or share rights.  In accordance  with Statement of Financial
Accounting   Standards   ("SFAS")   No.   123,   "Accounting   for   Stock-Based
Compensation," we have provided below the pro forma disclosures of the effect on
net  loss and loss per  share  as if SFAS  123 had  been  applied  in  measuring
compensation expense for all periods presented.

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

                                       10
<PAGE>

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

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

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

                                                          Three Months               Six Months
                                                          Ended June 30,            Ended June 30,
                                                   -------------------------------------------------

                                                        2005         2004        2005          2004
                                                        ----         ----        ----          ----
<S>                                                  <C>             <C>         <C>            <C>
Net loss applicable to common shareholders
 - as reported                                     $    (2,850)    (2,673)     (5,179)        (5,031)
Add:
  Stock-based employee compensation expense
  included in reported net income,
  net of applicable tax effects                            ---          2         ---             94
Deduct:
  Total stock-based employee compensation expense
  determined under fair value based method for all
  awards, net of applicable tax effects                   (198)      (201)       (398)          (600)
                                                   --------------------------------------------------
Pro forma net loss                                 $    (3,048)    (2,872)     (5,577)        (5,537)
                                                   ==================================================

Basic and diluted net loss per share:
                                                   ==================================================


  As reported                                      $     (0.03)     (0.03)      (0.05)         (0.06)

  Pro forma                                        $     (0.03)     (0.03)      (0.05)         (0.07)
Shares used in computing basic and diluted
 net loss per share                                    101,438     84,624     101,438         84,624
                                                   --------------------------------------------------
</TABLE>

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


                                                           Three Months
                                                          Ended June 30,

                                                          2005         2004
                                                          ----         ----
Expected life (years).................................     3.2          4.0
Interest Rate.........................................    3.73%        3.50%
Volatility............................................  120.22%       127.8%

Dividend Yield........................................       0%           0%


     Research and Development

                                       11
<PAGE>

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


4. WARRANTS

     During the first quarter of 2004,  warrants  were  exercised for a total of
4,144,839  shares of common  stock at exercise  prices  ranging  from $0.7282 to
$0.8375 per share;  Total net proceeds  from the exercise of these  warrants was
$3.1 million.

     The Company filed a registration statement with the SEC with respect to the
shares  underlying  the  warrants  issued in December  2003,  which was declared
effective in February 2004.  Accordingly,  the warrant liability was transferred
to additional paid in capital during the first quarter of 2004.

5. CONCENTRATIONS OF RISK

     During the quarter ended June 30, 2005, our net sales to foreign  customers
increased to 59% of total net sales, with 47% to Asia (Japan) and 12% to Europe.
During the quarter ended June 30, 2004, net sales to foreign  customers were 54%
of total net sales,  with 37% to Asia (Japan),  16% to Europe,  and 1% to other.
The countries  which  produced the largest net sales in the quarter  ending June
30, 2005 were the US at 41% and Japan at 47% for the same  quarter in 2004,  the
countries  which  produced the largest net sales were the US at 46% and Japan at
37%.

     During  the first six months of 2004,  our net sales to  foreign  customers
increased to 55% of total net sales, with 43% to Asia (Japan) and 12% to Europe.
During the six months ended June 30, 2004,  net sales to foreign  customers were
52% of total net  sales,  with 33% to Asia  (Japan),  18% to  Europe,  and 1% to
other.  The  countries  which  produced  the largest net sales in the six months
ending  June 30,  2005  were the US at 45% and Japan at 43% and for the same six
months in 2004,  the countries  which produced the largest net sales were the US
at 48% and Japan at 33%.

     During the quarter ended June 30, 2005  revenues to one customer  comprised
47% of the company's  total product  sales.  During the quarter  ending June 30,
2004, one customer comprised 37% of the company's total net product sales.

     For the first six months of 2005 revenues to one customer  comprised 43% of
the company's  total net product  sales.  This is an increase from the first six
months of 2004  where one  customer  comprised  33% of the  company's  total net
sales.


6. INVENTORIES

                                       12
<PAGE>

Inventories consist of the following (in thousands):

                                      June 30,                December 31,
                                         2005                    2004
                                    ------------             ------------
        Raw materials               $         94             $       152
        Work-in-process                      115                      99
        Finished goods                       527                     627
                                    $        736             $       878

     Inventory  amounts  shown  above  are net of  write-downs  for  excess  and
obsolete  inventory of $682,000 at June 30, 2005 and $655,000 December 31, 2004.
The Company provides reserves for inventory amounts by considering the potential
excess  inventory  in  relation  to  sales  forecasts  and the  obsolescence  of
inventory  as a  result  of  technological  advancements.  Included  in the  net
inventory  value is an impairment  charge of $133,000 to bring the net inventory
to their fair value less disposal costs in the second quarter of 2005.


7. IMPAIRMENT OF ASSETS

Because there were indicators of impairment,  including  continued  losses,  the
Company  conducted  an analysis  during the first and second  quarter of 2005 to
determine  if there was  impairment  of any  long-lived  assets.  This  analysis
involved a review of the Company's  fixed assets and took an  impairment  charge
against fixed assets of $358,000 in the first quarter and an additional  $46,000
in the second quarter of 2005. The Company determined based on the conditions of
impairment  to  reduce  the net value of the fixed  assets by  impairing  assets
greater  than six months of age.  This  charge was  required  to bring the fixed
assets to their fair value less  disposal  costs.  Based on the same  impairment
indicators,  the Company  conducted an analysis of  inventory  during the second
quarter of 2005 to determine if there was an impairment  charge  required.  This
analysis  included  a review  of the  inventory  and based on this  analysis  an
impairment  charge of $133,000 was recorded in the second  quarter 2005 to bring
inventory asset to their fair value less disposal costs.

8. NET LOSS PER SHARE

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

                                                    June 30,        December 31,
                                                      2005            2004
                                                  ----------        ----------
 Warrants........................................ 22,137,341        24,717,722
 Stock Options...................................  6,747,770         6,684,112
                                                  ----------        ----------
 Total Warrants and Options...................... 28,885,111        31,401,834



                                       13
<PAGE>
9. RECENT ACCOUNTING PRONOUNCEMENTS


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

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

     In November 2004,  Statement of Financial Accounting Standards ("SFAS") No.
151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4", was issued which
amends the guidance in Accounting  Research  Bulletin ("ARB") No. 43, Chapter 4,
"Inventory  Pricing," to clarify the  accounting  for  abnormal  amounts of idle
facility  expense,  freight,  handling costs, and wasted  material.  Among other
provisions,  the new rule  requires  that items such as idle  facility  expense,
excessive  spoilage,  double  freight,  and  rehandling  costs be  recognized as
current-period  charges  regardless  of whether  they meet the  criterion of "so
abnormal"  as stated in ARB No. 43.  Additionally,  SFAS 151  requires  that the
allocation of fixed production  overheads to the costs of conversion be based on
the normal  capacity of the  production  facilities.  SFAS 151 is effective  for
fiscal years  beginning  after June 15, 2005.  We are currently  evaluating  the
effect that the adoption of SFAS 151 will have on our results of operations  and
financial condition upon adoption.

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

10. COMMITMENTS AND CONTINGENCIES

                                       14
<PAGE>

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


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

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

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

     o    the risk that if we do not meet our payment obligations under our Loan
          Agreement with Apix International  Limited, our secured lender, by the
          loan due date of February  28,  2006,  Apix will  exercise  its rights
          under the loan  agreement  and  liquidate  the  company to satisfy the
          outstanding loan balance.

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

     o    uncertainties  associated  with our  ability  to  secure  distribution
          partners,

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

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

                                       15
<PAGE>

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

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

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

Overview

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

     More recently, we have leveraged our proprietary  technologies for treating
atrial  fibrillation,  or AF, into the  development of products for the surgical
market.  On  January  29,  2003,  we  received  notice  from the FDA that it had
approved for  commercialization  the Cardima Surgical Ablation System for use in
ablating  cardiac tissue during cardiac  surgery.  This new system  connects the
Cardima  Surgical  Ablation  Probe, a deflectable  multi-electrode  linear array
microcatheter  technology,  to a commercially  available  electrosurgical  radio
frequency generator through the INTELLITEMP(R), a multi-channel radio frequency,
or RF, energy management device. This system allows surgeons to direct RF energy
through any combination of up to eight probe electrodes simultaneously into

                                       16
<PAGE>

cardiac tissue,  a feature which can  significantly  reduce the time required to
perform an ablation-based  "maze" procedure.  Since September 2003, the Surgical
Ablation  System has been  utilized on a limited basis to treat AF as an adjunct
procedure  to valve  replacement.  In the first  quarter of 2004,  the  Surgical
Ablation  System (SAS) was utilized in two less invasive cases for the treatment
of AF, opening the door to the prospect of the SAS technology being broadly used
in a stand-alone  procedure to treat AF. We do not currently  plan to market our
Surgical  Ablation  System  ourselves,  and  are  currently  seeking  to sell or
otherwise consummate a strategic transaction for this system.

     We have generated  revenues of approximately  $20.6 million from inception,
September 1, 1994 to June 30, 2005.  Prior to January 1997,  these revenues were
generated  primarily in Europe and Japan from sales of our PATHFINDER and TRACER
microcatheter systems for diagnosing ventricular  tachycardia and our REVELATION
microcatheter  system for diagnosing atrial  fibrillation,  as well as ancillary
products such as the VENAPORT  guiding  catheters.  Since 1997 and the U.S. Food
and Drug  Administration's  clearance of certain of our  products,  sales in the
United  States  consist  primarily of our  PATHFINDER  and  REVELATION  lines of
microcatheters for diagnosing  ventricular  tachycardia and atrial fibrillation,
respectively.  To date, our international sales have been made through our small
direct  sales  force,   which  currently   consists  of  one  salesperson,   and
distributors  who sell our products to physicians and hospitals.  European sales
consist  primarily of the REVELATION Tx,  REVELATION T-Flex and REVELATION Helix
microcatheters for treatment of atrial fibrillation following receipt of CE Mark
for  those  products  in  December  1998,   December  2001  and  November  2002,
respectively.

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

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

     Our  focus  is on  obtaining  FDA  approval  in the  United  States  of the
REVELATION(R) Tx microcatheter  system for the treatment of atrial fibrillation.
On September  30, 2002,  we submitted a PMA  application  for this system to the
FDA. On May 29, 2003, we met with the  Circulatory  System Devices Panel,  which
recommended that the FDA not approve our PMA application. The Circulatory System
Devices  Panel  commented  favorably  on the  safety  and need for this  type of
device. However, the Panel felt that efficacy data was not sufficiently clear

                                       17
<PAGE>

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

     On May 27, 2005,  we entered into a loan  agreement  with Agility  Capital,
LLC, which included a security interest in all the Company's assets. On June 16,
2005, the lender  notified us that in its view, an event of default had occurred
and that all  amounts  outstanding  were then due and  payable.  The lender also
swept our bank accounts containing  approximately $456,000 and used the proceeds
to pay a portion of a $450,000 "Exit Fee" due under the loan  agreement.  We had
cash and cash equivalents of approximately $23,000 as of June 30, 2005.

     On  June  17,  2005,  our  cash  balances  were  insufficient  to  continue
operations,  and all our employees were furloughed in order to conserve cash. On
August  12,  2005,  the  Company   entered  into  a  loan  agreement  with  Apix
International  Limited,  receiving  the  first  $500,000  of a $3  million  loan
facility.  Subsequently,  we received two  additional  advances of $500,000,  on
August 28, 2005 and  September  8, 2005.  There  remains  $1.5 million in unused
financing available under the Apix loan facility.  These funds will be received:
$500,000 on or after October 12, 2005,  $350,000 on or after  November 18, 2005,
$350,000  on or after  December  18, 2005 and  $300,000 on or after  January 18,
2006.

     Although our management  recognizes the need to raise  additional  funds in
the  immediate  future,  we  cannot  assure  you that we will be  successful  in
consummating  any  fundraising  transaction,  or,  if we do  consummate  such  a
transaction, that its terms and conditions will not be unfavorable to us. We are
evaluating  various courses of action including selling or licensing some of our
proprietary  technologies.  If we  fail  to  obtain  additional  funding  in the
immediate  future,  our business  will fail and our  stockholders  will lose the
entire value of their investment. In their opinion accompanying our December 31,
2004  financial  statements,   our  independent  registered  public  accountants
concluded  that there is  substantial  doubt as to our  ability to continue as a
going concern for a reasonable  period of time,  and have,  therefore,  modified
their report in the form of an explanatory  paragraph describing the events that
have given rise to this uncertainty.

                                       18
<PAGE>

Results Of Operations - Three and Six Months Ended June 30, 2005 and 2004

Net Sales

     For the six month period ended June 30, 2005,  net sales  decreased  12% to
$1,065,000 in 2005 from  $1,214,000 for the same period in 2004. By region,  net
sales in the United  States  decreased  18% to $476,000 for the six month period
ended June 30, 2005 from  $582,000 for the same period in 2004,  while  European
net sales decreased 40% to $131,000 for the six month period ended June 30, 2005
from $219,000 for the same period in 2004.  The decline in European sales is due
to the competition our single-use  catheter is facing from multi-use  catheters.
In the United  States,  the  decrease  in net sales was due to the  company-wide
furlough on June 17, 2005,  which  included our sales team and the  cessation of
operations  in the later half of June 2005.  By product,  therapeutic  net sales
decreased  for the six month period ended June 30, 2005 to $48,000 from $206,000
net sales for the same period in 2004. Diagnostic product net sales increased 3%
to $731,000 for the six month  period ended June 30, 2005 from  $709,000 for the
same  period in 2004.  Guiding  catheters  product  net sales  decreased  13% to
$235,000 for the six month period ended June 30, 2005 from $269,000 for the same
period in 2004.

     Net sales for the  quarter  ended June 30, 2005  decreased  12% to $510,000
from  $578,000  for the same  period  in 2004.  Regionally,  net sales in Europe
decreased 30% to $63,000 in the second quarter of 2005, from $90,000 in the same
period of 2004. Net sales in the United States  decreased 22% to $208,000 in the
second quarter of 2005 from $265,000 for the same period in 2004.  This decrease
was partially offset by an increase in Japan (Asia) net sales to $239,000 in the
second  quarter of 2005 from $212,000 for the same period in 2004.  The decrease
in net sales in Europe and the United  States in this  quarter was caused by the
company wide furlough starting June 17, 2005.

     Accounts  receivable  decreased  36% to  $193,000  as of June 30, 2005 from
$303,000 as of December  31, 2004.  This  decrease is due to lower sales in this
quarter  compared to the quarter  ending  December 31, 2004.  The  allowance for
doubtful  accounts  was $35,000 as of June 30, 2005 and also as of December  31,
2004.

Cost of Goods Sold

     Cost of  goods  sold  primarily  includes  raw  materials  costs,  catheter
fabrication  costs,  system assembly and testing costs, and manufacturing  labor
and overhead.  Cost of goods sold for the quarter ended June 30, 2005  increased
20%, or $101,000 to $611,000 from $510,000 for the same period in 2004.  Cost of
goods  sold for the six  month  period  ended  June 30,  2005  decreased  14% to
$1,055,000 from $1,228,000 for the same period in 2004. The gross margin for the
second  quarter of 2005 was negative 20%, as compared to 12% for the same period
in 2004. The decline in gross margin was due to greater  destructive  testing of
product in preparation for FDA approvals and inventory write-downs of $27,000 in
the six months ended June 30, 2005.



                                       19
<PAGE>
Research and Development Expenses


     Research and development  expenses  include product  development,  clinical
testing and regulatory expenses. Total research and development expenses for the
quarter ended June 30, 2005  decreased 37% to $758,000 from  $1,204,000  for the
same period in 2004.

     Total research and  development  expenses for the six months ended June 30,
2005  decreased 36% to $1,400,000  from  $2,192,000 for the same period in 2004.
This decrease was due to a reduction in regulatory and clinical expenses for the
first six months of 2005,  or 19%, to $566,000 from $702,000 for the same period
in 2004,  which was  attributable  to a reduction  in  headcount  following  the
submission  of the  REVELATION(R)  Tx PMA to the FDA in 2004.  Also,  our direct
product development costs for the first six months of 2005,  decreased $656,000,
or 44%, to $834,000 from  $1,490,000 for the same period in 2004.  This decrease
was due to the completion of the Intellitemp project costs as this project moved
from research and development to production.

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


                  3 months ended                     6 months ended
                     June 30,                           June 30,
          --------------------------------     ----------------------------
              2005              2004              2005            2004
          --------------    --------------     ------------    ------------

NPD/Pilot           424               856              834           1,490
RA/QA               334               348              566             702
          --------------    --------------     ------------    ------------
                    758             1,204            1,400           2,192
          ==============    ==============     ============    ============



     Selling, General and Administrative Expenses

     Selling,  general and administrative expenses for the six months ended June
30, 2005 increased  $241,000,  or 9%, to $3,016,000 from $2,775,000 for the same
period in 2004.  More  specifically,  selling  expenses for the six months ended
June 30, 2005 decreased $107,000, or 20%, to $421,000 from $528,000 for the same
period in 2004. General and administrative  expenses for the first six months of
2005 increased by $396,000,  or 20%, to $2,375,000 from $1,979,000 for the first
six months of 2004.  The  increase was due to  increased  costs  relating to the
implementation  of a Sarbanes-Oxley  Act compliance  program of $279,000,  a bad
debt reserve of $300,000  that was  established  against notes  receivable  from
officers and  directors of the company due to the  declining  value of the stock
option collateral.  Offsetting these increases was expense decreases of $217,000
in  executive  bonuses  previously  accrued  but later  deemed  non-payable  and
expenses related to the June 17, 2005 furlough reducing salary expenses over the
period.  Marketing  expenses  for the  first six  months of 2005 also  decreased
$48,000, or 18%, to $220,000 from $268,000 for the same period in 2004.

                                       20
<PAGE>

     Selling, general and administrative expenses for the quarter ended June 30,
2005  decreased  $229,000,  or 15%, to $1,319,000  from  $1,548,000 for the same
period in 2004. The decrease in selling, general and administrative expenses was
due to in part to the company-wide  furlough,  which took place on June 17, 2005
and the write off of $217,000 in executive bonuses in the period.  This decrease
contributed in the reduction of $291,000 in compensation  and benefits costs for
the quarter.  In addition,  the company experienced  substantially  higher costs
related to the  implementation of the  Sarbanes-Oxley  Act compliance program in
the same period in 2004.


                           3 months ended                   6 months ended
                              June 30,                         June 30,
                   -----------------------------  -----------------------------
                       2005           2004           2005             2004
                   -------------- --------------  ------------    -------------

General and
Administrative             1,024          1,125         2,375            1,979
Marketing                    103            143           220              268
Sales                        192            280           421              528
                   -------------- --------------  ------------    -------------
                           1,319          1,548         3,016            2,775
                   ============== ==============  ============    =============



Interest and Other Income

     The Company recognized a gain of $263,000 in other income in the six months
of 2005.  This was a payroll tax refund  received in 2002 but not  recognized in
income until this year when we received final  confirmation of the nature of the
refund from our payroll service.

Interest expense

     There was  interest  expense  of  $499,000  in the first six months of 2005
compared to $8,000 in the same period in 2004. This increase in interest expense
for the quarter  ended June 30, 2005 was  primarily  attributed to the loan with
Agility Capital, which included an exit fee of $450,000 under the agreement.

Warrant Expense

     There was no Warrant  expense for the first six months  ended June 30, 2005
compared to $33,000 for the same period in 2004. The warrant  expense of $33,000
for the six months  ended June 30,  2004 was related to the  warrants  issued in
connection  with our  December  2003  private  placement  that were  carried  as
liabilities, and represented the 2004 portion of the difference of the warrants'
valuation  between  their date of issuance and the date of  registration  of the
shares underlying the warrants.

Impairment Charges

     Because there were indicators of impairment,  including  continued  losses,
the Company conducted an analysis during the first and second quarter of 2005 to
determine  if there  was  impairment  of any  long-lived  assets.  Based on this
analysis, the Company increased its impairment of fixed assets by $46,000 in the

                                       21
<PAGE>

second quarter of 2005 from $358,000 in the first quarter of 2005 for a total of
$404,000  in the first six months of 2005.  There were no  impairment  of assets
charges in 2004.

     The Company also took an impairment of inventory  charge of $133,000 in the
second quarter of 2005. There were no inventory impairment charges in 2004.


Liquidity and Capital Resources

Cardima had cash and cash  equivalents of  approximately  $23,000 as of June 30,
2005.  On May 27, 2005,  the company  entered  into a $1.5 million  secured loan
agreement  with Agility  Capital,  LLC which funded the company  $300,000 of the
loan on  closing.  Under  the  terms of the  agreement,  the  lender at its sole
discretion  could  fund  the  remainder  in  $200,000,   $500,000  and  $500,000
installments  dependent on the company achieving certain  milestones.  To secure
its obligations under the loan agreement,  the company granted Agility Capital a
security interest in substantially all of its assets, including its intellectual
property.  Also, according to the loan agreement, all amounts outstanding became
due and  payable the earlier of an event of default by the company or August 15,
2005.  The  company was also  required  to pay Agility  Capital an "Exit Fee" of
$450,000 upon an Event of Default.

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

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

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

On August  15,  2005 the  Company  re-hired  certain  furloughed  employees  and
re-started operations.

On August 28, 2005, the Company signed a loan agreement with Apix  International
Limited,  which  increased the total amount to be financed from $2 million to $3
million.  The principal  amount of the promissory note dated August 12, 2005 for
$500,000 was rolled over into the new loan  agreement.  The Company  received an
additional  $500,000  on this  closing  date and  received  another  $500,000 on
September  8, 2005.  The  remainder  of the loan will be  received  as  follows:
$500,000 on or after October 12, 2005,  $350,000 on or after  November 18, 2005,
$350,000  on or after  December  18, 2005 and  $300,000 on or after  January 18,
2006.  The loan  agreement  will be secured by a first lien on all the Company's
assets and intellectual  property. All funds will bear interest at a rate of 10%
per annum. The Company will pay a facility fee of $60,000 and an exit fee of

                                       22
<PAGE>

$900,000 at the end of the loan agreement.  The facility,  exit fees and accrued
interest due under the loan are convertible  into shares of the Company's common
stock at a rate of $0.10 per share.  Additionally,  the Company will provide the
lender,  Apix  International,  with  Warrants to purchase  capital  stock in the
amount  of  30,000,000  shares  with a  strike  price of $0.10  per  share.  The
financing facility has a term of 6 months ending February 28, 2006.

We have financed our operations to date principally  through private  placements
of equity  securities,  which have  resulted in net  proceeds  of  approximately
$117,177,000  through  December 31,  2004,  the initial  public  offering of our
common  stock in June 1997,  which  resulted in net  proceeds  of  approximately
$13,600,000,  together with interest income on such proceeds, borrowings under a
$3,000,000 line of credit, sale of certain of our non-core patents to Medtronic,
Inc. for $8,000,000 in 2001,  and equipment  leases to finance  certain  capital
equipment which have provided  proceeds in the amount of $4,700,000.  As of June
30, 2005 we had approximately $ 23,000 in cash and cash equivalents.

Net cash used in  operating  activities  for the  first  six  months of 2005 was
approximately  $3,847,000  compared to the net cash used of  $4,864,000  for the
first six months of 2004. The decrease of  $1,017,000,  or 21%, in net cash used
in operating  activities  is mainly due to an increase in our payables and lower
operating  expenses.  Net cash used in investing  activities was $103,000 in the
first six months of 2005  related to the capital  expenditures  of property  and
equipment,  as compared to $43,000 for the same period in 2004. Net cash used by
financing  activities  was  approximately  $119,000  for the first six months of
2005,  compared to net cash provided of $3,031,000  for the same period in 2004.
This  change was due to the  exercise of  warrants  during the first  quarter of
2004,  following our redemption  call for warrants  issued as part of the August
2003  private  placement.  Also,  in the first six months of 2005,  the  Company
received  $300,000 in loans from Agility  Capital with exit fees associated with
the Agility  loan of  $450,000,  which  resulted in cash used of $502,000  and a
balance owed of $294,000 as of June 30, 2005.

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

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

                                       23
<PAGE>

FACTORS AFFECTING FUTURE RESULTS

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

     We currently  have only  $463,000 in cash as of September 21, 2005. We will
need to raise additional  capital by the end of the year through a sale or other
strategic  transaction involving our Surgical Ablation System, public or private
financings or other arrangements. We are evaluating various potential courses of
action including selling or licensing some of our proprietary  technologies,  or
selling debt or equity  securities,  to raise  funds.  If we are unable to raise
funds in the immediate future, our business will fail. Management estimates that
our cash  balance as of the filing of this  report  will be  sufficient  to fund
planned  expenditures  only for a limited period of time,  not extending  beyond
December 2005 and possibly earlier.  The actual level of our expenditures cannot
be  predicted  with  certainty  and it is possible  that our cash balance may be
exhausted  sooner in the four  quarter of 2005 than  currently  anticipated.  We
cannot  assure  you  that  additional  capital  will be  available  to us in the
immediate  future,  if at all, or, if available,  will be obtained on terms that
preserve the value of your investment.

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

     On  August  28,  2005,  the  Company  signed  a loan  agreement  with  Apix
International  Limited,  which increased the total amount to be financed from $2
million to $3 million.  The principal amount of the promissory note dated August
12, 2005 for $500,000 was rolled over into the new loan  agreement.  The Company
received  an  additional  $500,000 on this  closing  date and  received  another
$500,000 on  September  8, 2005.  The  remainder of the loan will be received as
follows:  $500,000 on or after October 12, 2005,  $350,000 on or after  November
18,  2005,  $350,000  on or after  December  18,  2005 and  $300,000 on or after
January 18, 2006.  The loan agreement will be secured by a first lien on all the
Company's  assets and intellectual  property.  All funds will bear interest at a
rate of 10% per annum.  The  Company  will pay a facility  fee of $60,000 and an
exit fee of $900,000 at the end of the loan  agreement.  The  facility  and exit
fees and accrued  interest due under the loan are convertible into shares of the
Company's common stock at a rate of $0.10 per share.  Additionally,  the Company
will provide the lender, Apix  International,  with Warrants to purchase capital
stock in the amount of 30,000,000 shares with a strike price of $0.10 per share.
The  financing  facility has a term of 6 months  ending  February 28, 2006.  The
facility  fee and the exit fee will be amortized  as non-cash  interest  expense
over the life of the loan.  In event of a default all loan  related fees will be
expensed.  In addition,  any  beneficial  conversion  effect  resulting from the
excess  of the  average  market  price of the  stock  over the  $0.10  per share
conversion  price will also be charged to non-cash  interest  during the periods
the loan is outstanding. The Apix International, $3 million loan agreement gives
the company sufficient cash to operate through December 2005.

                                       24
<PAGE>

     We have  financed our  operations  since  inception  primarily  through the
private  placement  of  equity  securities,  proceeds  from our  initial  public
offering in June 1997,  loan  facilities  and the sale of certain of our patents
and other  intellectual  property.  We had negative cash flow from operations of
$3.8  million for the first six months of 2005,  and for the twelve month period
ending  December 31, 2004 of over $9.3  million.  If we are able to re-start the
company, we can expect to continue to incur substantial  negative cash flow from
operations for the foreseeable future. We may be required to expend greater than
anticipated funds if unforeseen  difficulties  arise in the course of completing
the  development,  approval  and  marketing  of our  products.  Even if we raise
capital in the near term,  our future cash needs may, at a minimum,  cause us to
delay,  scale  back  or  eliminate  some  or  all of our  product  research  and
development  programs,  to limit the marketing of our products, or to license or
sell to third parties the rights to  commercialize  our products or technologies
that we would  otherwise  develop  and market  ourselves.  Our  failure to raise
capital when needed would likely cause us to cease our operations.

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

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

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

     Our net losses were  approximately  $5.2  million for the six months  ended
June 30, 2005 and approximately $9.7 million,  $13.2 million,  and $12.6 million
for the years ended December 31, 2004, 2003 and 2002,  respectively.  As of June
30, 2005, our accumulated deficit was approximately  $118.6 million. Our limited
sales history,  and the fact that we have very limited cash resources,  makes it
difficult to assess or predict our future results.  We cannot be certain that we
will ever generate substantial revenue or achieve profitability.  Our failure to
generate substantial revenues would harm our business.

                                       25
<PAGE>

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

     On May 6, 2005, we received a Nasdaq Staff Determination indicating that we
had not regained  compliance  with the  requirements  for continued  listing set
forth in  Marketplace  Rule  4310(c)(4),  which we  refer to as the  "Rule"  for
purposes of this discussion, and that our securities are, therefore,  subject to
delisting from The Nasdaq  SmallCap Market at the opening of business on May 17,
2005. As a consequence, our stock was delisted on May 17, 2005.

     The Rule  provides  that if the closing  bid price of a company's  stock is
below $1.00 for more than thirty  consecutive  trading  days,  the company faces
possible  delisting.  On May 10, 2004, we received a letter from Nasdaq  stating
that for the last thirty consecutive  business days the closing bid price of our
common stock had remained  below $1.00 per share.  We were provided 180 calendar
days to regain  compliance with the $1.00 closing bid price  requirement for the
time period required by Nasdaq, as well as Nasdaq's other requirements. Although
we had not  regained  compliance  by  November  8,  2004,  Nasdaq  granted us an
additional  180 calendar days, or until May 5, 2005, to regain  compliance  with
the $1.00  minimum  closing bid price  requirement  for at least 10  consecutive
trading days. We did not regain compliance with the Rule by May 5, 2005.

     We may appeal the Nasdaq Staff's  Determination to a Listing  Qualification
Panel,  pursuant to the procedures set forth in the Nasdaq Marketplace Rule 4800
Series.  There  can be no  assurance  that we will  appeal  the  Nasdaq  Staff's
Determination  or, if the Company does appeal the Nasdaq Staff's  Determination,
that such appeal will be successful.

     In addition,  Nasdaq Marketplace Rule  4310(c)(2)(B)  requires a company to
maintain   at  least  $2.5   million  in   stockholders'   equity  or  a  market
capitalization  of at least  $35  million,  or to have  specified  levels of net
income that we do not anticipate meeting for the foreseeable  future. As of June
30, 2005, as reported in this quarterly  report on Form 10-Q, our  stockholders'
equity  was below  $2.5  million  and our  market  capitalization  was below $35
million as of the filing of this report. We also expect to continue to incur net
losses,  which will cause  continued  reductions  in our  stockholders'  equity.
Accordingly,  we are not currently in compliance with Rule 4310(c)(2)(B) and our
ability to comply with these additional listing  requirements will depend on our
ability  to  raise  substantial  additional  equity  capital  or on  our  market
capitalization  increasing and remaining  above $35 million,  over which we have
limited or no control.

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

     Our stock is no longer listed on the Nasdaq SmallCap Market.  Cardima stock
is currently  listed in the "pink sheets".  This delisting may adversely  affect
the liquidity and value of your investment and could impair our ability to raise
additional  equity  capital,  which  we may  need to  continue  to  operate  our
business.  Among other  things,  if our common  stock is  delisted,  it would be
considered  a "penny  stock" under  regulation  of the  Securities  and Exchange
Commission and would therefore be subject to rules that impose additional sales

                                       26
<PAGE>

practice   requirements  on  broker-dealers  who  sell  our  securities.   These
requirements could discourage  broker-dealers from effecting transactions in our
common  stock,  which could  severely  limit the market  liquidity of the common
stock and your ability to sell our securities in the secondary market. Delisting
makes it more  difficult and expensive for us to register our shares for resale,
which would impair our ability to raise equity capital and increase our costs.

     In addition,  we may face contractual claims under purchase agreements from
our past private placement financings,  and possibly non-contractual claims from
other stockholders,  now that our common stock is delisted. Any such claim would
likely be costly and disruptive, even if resolved favorably to us.

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

     In order to continue  operations beyond the fourth quarter of 2005, we will
need to  raise  additional  capital.  Subject  to the  contractual  restrictions
described  above,  we may attempt to raise capital through the public or private
sale of our common stock or securities  convertible  into or exercisable for our
common stock.  Any such sales will further  dilute the  percentage of our equity
that you own. In addition, our recent private placement financings have involved
the issuance of securities  at a price per share that  represented a discount to
the closing  price of our common stock and any future  private  placements  will
likely  involve the issuance of securities  at a discount to  prevailing  market
prices.  Depending  upon the price per share of  securities  that we sell in the
future,  if any, your interest in us could be further diluted by any adjustments
to the number of shares and the applicable  exercise price required  pursuant to
the terms of the  agreements  under which we previously  issued  securities.  No
assurance can be given that previous or future  investors,  finders or placement
agents  will  not  claim  that  they are  entitled  to  additional  antidilution
adjustments or dispute the Company's  calculation of any such  adjustments.  Any
such claim or dispute  could  require us to incur  material  costs and  expenses
regardless  of the  resolution  and,  if resolved  unfavorably  to us, to effect
dilutive securities issuances or adjustments to previously issued securities. In
addition,  certain of our prior securities  issuances have included,  and future
financings may also include, provisions requiring us to make additional payments
to the  investors  if we fail to obtain or  maintain  the  effectiveness  of SEC
registration  statements by specified dates or take other specified action.  Our
ability to meet these requirements may depend on actions by regulators and other
third parties, over which we will have no control.  These provisions may require
us to make payments or issue additional  dilutive  securities,  or could lead to
costly and disruptive disputes.  In addition,  these provisions could require us
to record additional  non-cash expenses,  as we were required to do in the third
quarter of 2003 with respect to certain warrants issued in that quarter.

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

     As a result of our losses to date and accumulated deficit, the audit report
on our 2004 financial  statements contains an explanatory  paragraph  indicating
that  there  is  substantial  doubt as to our  ability  to  continue  as a going
concern.  The audit reports on our 2003 and 2002 financial  statements contained
similar explanatory paragraphs. Our continuation as a going concern will depend

                                       27
<PAGE>

upon our ability to generate or obtain  sufficient  cash to meet our obligations
on a timely basis and ultimately to attain profitable operations.  Concern about
our ability to continue as a going concern may make it more  difficult for us to
obtain additional  funding to meet our obligations or adversely affect the terms
of any  additional  funding we are able to obtain.  We  anticipate  that we will
continue to incur significant losses until successful  commercialization  of one
or more of our products.  There can be no assurance  that we can or will operate
profitably in the future, or that we will continue as a going concern.

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

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

     o  product design and development;

     o  product testing;

     o  product labeling;

     o  product storage;

     o  premarket clearance and approval;

     o  advertising and promotion; and

     o  product sales and distribution.

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

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

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<PAGE>

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

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

     In the  United  States,  we are  required  to seek a PMA  for our  ablation
products,  including  the  REVELATION  Tx  microcatheter,  since  they have been
classified  as Class III devices.  The process of obtaining a PMA is  expensive,
lengthy and uncertain and requires clinical trials to demonstrate the safety and
effectiveness  of the product.  In December  1997, the FDA approved a 10-patient
atrial  fibrillation  feasibility  study  for  mapping  and  ablation  with  the
REVELATION  Tx. We received FDA  approval to conduct a Phase III clinical  trial
for this system in 2000, and filed portions of the PMA in 2001. On September 20,
2002, we submitted our PMA to the FDA with data on more than 80 patients treated
with our REVELATION Tx microcatheter system. We met with the Circulatory Systems
Device Panel on May 29, 2003, and on that date, the Panel  recommended  that the
FDA not  approve our PMA for the  REVELATION  Tx linear  ablation  microcatheter
system. The Circulatory System Devices Panel felt that the efficacy data was not
sufficiently  clear and supportive for the approval.  The Panel provided the FDA
and the  Company  with  several  suggestions  on how to possibly  reexamine  the
existing  data or how to collect  more data on  existing  patients.  On June 26,
2003, we received a letter from the FDA, which reiterated the  recommendation of
the Panel and stated the FDA concurred with the  recommendation of the Panel. On
January 20,  2004,  we  submitted  an amended PMA that  provided  new  analysis,
including data from an expanded patient base, to the FDA.

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

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<PAGE>

be  necessary to  demonstrate  the  effectiveness  of  REVELATION  Tx for atrial
fibrillation,  and that the nature of the trial's  primary goal would  require a
randomized  clinical trial design.  The development and  implementation of a new
clinical trial would require substantial  expenditures and management attention,
and the timing and success of any such trial cannot be assured.

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

     Through  pre-clinical studies and clinical trials, we must demonstrate that
our products  are safe and  effective  for their  indicated  uses.  Results from
pre-clinical  studies  and early  clinical  trials  may not allow us to  predict
results in later-stage  testing.  No assurance can be given that, even if we are
able to afford to conduct future clinical trials,  those trials will demonstrate
the safety and effectiveness of any of our products or will result in regulatory
approval to market our products.  We may never meet our development schedule for
any of our products in development.  Even if a product is successfully developed
and clinically  tested, we cannot be certain that it will be approved by the FDA
or other  regulatory  agency  on a timely  basis or at all.  If the FDA does not
approve our products for  commercial  sales,  our  business  will be harmed.  As
described above, we have devoted considerable  resources to developing,  testing
and seeking  regulatory  approval for our  REVELATION Tx  microcatheter  systems
designed  for  ablation  of atrial  fibrillation.  On May 28, 2004 we received a
letter,  dated  May  21,  2004,  from  the  FDA,  stating  that  our PMA for the
REVELATION Tx linear ablation  microcatheter  system was not approvable based on
the requirements of applicable regulations. Among other things, the FDA's letter
stated that the FDA believes that the least  burdensome  approach to demonstrate
the safety and effectiveness of REVELATION Tx for the intended  indication is to
collect additional  clinical data using a randomized clinical trial design. At a
meeting  with the FDA's Center for Devices and  Radiological  Health on June 18,
2004, the FDA  representatives  reiterated the view that data from an additional
study would be necessary to demonstrate the  effectiveness  of REVELATION Tx for
atrial  fibrillation,  and that the  nature of the  trial's  primary  goal would
require a randomized  clinical trial design.  The development and implementation
of a new clinical trial would require  substantial  expenditures  and management
attention,  and the timing and success of any such trial  cannot be assured.  We
must  receive PMA  approval  before  marketing  our products for ablation in the
United States.

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

     Current or future clinical trials of our microcatheter systems will require
substantial financial and management resources. In addition, the clinical trials
may  identify  significant  technical  or other  obstacles  that we will need to
overcome  before  obtaining  the  necessary   regulatory   approvals  or  market
acceptance. Our failure to complete our clinical trials, demonstrate product

                                       30
<PAGE>

safety and clinical effectiveness,  or obtain regulatory approval for the use of
our microcatheter  system for the ablation of atrial  fibrillation  would have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

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

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

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

     We  have  entered  into  several  agreements  with  parties  to  act as our
financial  advisors,  finders or agents in  connection  with actual and proposed
equity financings,  including  agreements entered into in April 2001 and on July
15, 2002,  November 13, 2002,  December 9, 2002, December 28, 2002 (with another
agreement signed with the same party in January 2003),  March 11, 2003, July 15,
2003, July 18, 2003, August 2003 (oral agreement), November 2003, September 2004
and October  2004.  These  agreements  have provided that we will pay cash fees,
generally  expressed  as 6% to 8% of the funds  raised,  and issue  warrants  to
purchase  specified  numbers  of  shares  of our  common  stock,  generally  not
exceeding 10% of the number of shares sold, to these parties in connection  with
our  financings.  Additional  details  concerning  the  terms of  these  various
agreements,  and the fees and warrants previously paid to these parties,  can be
reviewed  in our  Annual  Report on Form 10-K as filed with the  Securities  and
Exchange Commission on March 31, 2005.

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

     For example,  the advisor that  assisted us with a 2001 private  placement,
which  we  refer  to as the 2001  Advisor,  communicated  to us in 2002  that it
believes  that it is entitled to cash fees and warrants in  connection  with the
August 2002 private  placement.  We strongly  disagree  with the 2001  Advisor's
interpretation of its letter agreement with us. In August 2002, we sent the 2001
Advisor a termination letter relating to its 2001 agreement. If the 2001 Advisor
prevails on its claims in connection with the August 2002 private placement,  we
would be required to pay this advisor  $381,570,  or 7.5% of the gross  proceeds
that we  received  from the  sale of  common  stock,  and  issue to the  advisor
warrants to purchase up to 698,287 shares of common stock (and if all of the

                                       31
<PAGE>

warrants  issued to the investors in that private  placement are  exercised,  an
additional  $133,549 in cash).  We also  received  letters  from this advisor in
early 2003 asserting that it is also owed  approximately  $300,000 plus warrants
to  purchase  approximately  533,332  shares of our common  stock at an exercise
price of $0.8245 per share,  arising in  connection  with private  placements we
consummated  in December 2002 and January 2003.  There can be no guarantee  that
the 2001 Advisor will not claim  additional  fees or warrants in connection with
our  financings  closed  after  January  2003 or in  connection  with any future
financing.

     In addition,  by letters dated  September 19, 2003 and January 29, 2004, an
advisor  that we had  retained in  November  2002  (under an  agreement  that we
terminated  effective May 18, 2003) has claimed that under its November 13, 2002
agreement with us, we are obligated to pay such advisor cash fees of $82,500 and
warrants to purchase "Units"  (comprising 207,698 shares of our common stock and
warrants  to purchase  62,309  shares of common  stock at an exercise  price per
share of $0.7282) at an exercise price per Unit of $0.58256,  in connection with
three enumerated  purchasers'  investments in our August 2003 private placement.
This  advisor  has  also  stated  its  belief  that  we  would  have  additional
obligations to the advisor in the event that other  investors in the August 2003
private  placement  were  investors  as to which  the  advisor  is  entitled  to
compensation  under its  agreement.  In a letter  dated  January 29,  2004,  the
advisor  submitted  information  alleged to support a portion of its claim,  and
stated its belief that we are obligated to register the claimed  securities  for
resale.  In our  opinion,  this  advisor has not  established  the merits of its
claim.  We  cannot  predict  whether  additional  claims  will be  made,  or the
resolution of any current or future claims, by this former advisor.

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

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

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<PAGE>

advisors'  entitlement to cash and equity compensation  associated with our past
financings,  and additional  disputes may arise in the future.  Any issuances of
equity  compensation  to advisor  could also be  restricted  by, or give rise to
disputes  under,  the terms or our  previously  issued  securities.  Any dispute
relating to these advisors will tend to divert  management's  time and attention
from running our business and may cause us to incur material costs and expenses.

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

     We have only  limited  experience  marketing  and selling  our  products in
commercial  quantities.  Currently,  we are solely responsible for marketing and
distributing  our products in the United  States.  We had  previously  signed an
exclusive three-year distribution agreement with St. Jude Medical Corporation in
2000,  but St. Jude did not meet the first year minimum annual sales quota under
the  distribution  agreement and, in June 2001, we mutually agreed with St. Jude
to  terminate  the  agreement.  If we  receive  FDA  approval  of  our  PMA  for
REVELATION(R)  Tx, we may not have an  adequate  marketing  and  sales  force to
adequately  sell that product.  Expanding our marketing and sales  capability to
support  sales in  commercial  quantities  adequately  will require  substantial
effort and require significant  management and financial resources.  Our failure
to establish an effective  sales and marketing  force will prevent us from being
able to generate significant revenues from the sale of our products.

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

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

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

     We  often  rely  on  multiple   third   parties,   such  as  hospitals  and
universities,  to conduct and collect data for our clinical trials. We depend on
these third parties to provide access to data and cooperate with us in

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<PAGE>

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

We cannot assure the safety or effectiveness of our products.

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

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

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

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

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

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<PAGE>

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

     o    anti-arrhythmic and anti-coagulant drugs;

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

     o    implantable defibrillators;

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

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

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

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

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

     o    fines;

     o    injunctions;

     o    recall or seizure of products;

     o    withdrawal of marketing approvals or clearances;

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

     o    civil and criminal penalties.

     We also are required to demonstrate and maintain  compliance with the FDA's
Quality System Regulations for all of our products. The FDA enforces the Quality
System  Regulations  through  periodic  inspections,  including  a  pre-approval
inspection for PMA products.  The Quality System Regulations  relates to product
testing  and  quality  assurance,  as well as the  maintenance  of  records  and
documentation.  If we do not, or any  third-party  manufacturer  of our products
does not, comply with the Quality System Regulations and cannot be brought into

                                       35
<PAGE>

compliance, we will be required to find alternative  manufacturers.  Identifying
and qualifying  alternative  manufacturers  would likely be a long and difficult
process.  We also are  required to provide  information  to the FDA on deaths or
serious  injuries  alleged to have been  associated  with the use of our medical
devices,  as well as  product  malfunctions  that could  contribute  to death or
serious injury. If we fail to comply with these applicable  regulations,  we may
incur substantial  business  disruption,  expenses,  penalties,  fines and other
liabilities and our business results and financial condition could suffer.

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

     Sales  of  medical  devices  outside  the  United  States  are  subject  to
international  regulatory  requirements  that vary from country to country.  The
time  required for approval  varies from country to country and may be longer or
shorter than the time required in the United  States.  In order to market any of
our products in the member  countries of the European  Union, we are required to
obtain CE Mark certification.  CE Mark certification is an international  symbol
of adherence to quality  assurance  standards and  compliance  with the European
Medical Device  Directives.  We have received CE Mark  certification to sell our
PATHFINDER,  PATHFINDER mini,  REVELATION,  REVELATION Tx, REVELATION Helix, and
TRACER  microcatheters and VENAPORT,  VUEPORT and NAVIPORT guiding catheters for
mapping in the  European  Union,  and  approval to sell some of our  products in
Canada. We received CE Mark Clearance for the INTELLITEMP radio frequency energy
management devices during the first quarter of 2004.

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

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

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

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

Difficulties  presented by  international  factors could  negatively  affect our
business.

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<PAGE>

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

     o    export license requirements for our products;

     o    exchange rate fluctuations or currency controls;

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

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

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

     o    domestic or international trade restrictions; and

     o    changes in tariffs.

Any of these factors could damage our business results.

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

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

     Many of our  competitors  have an  established  presence  in the  field  of
interventional cardiology and electrophysiology,  or the study of the electrical
system of the heart. These competitors include C.R. Bard, Inc., Medtronic, Inc.,
Boston Scientific,  through its EP Technologies and Cardiac Pathways  divisions,
Johnson & Johnson,  through its Biosense-Webster  division and St. Jude Medical,
Inc., through its Daig division.  These competitors have  substantially  greater
financial  and  other  resources  than  we do,  including  larger  research  and
development  staffs  and  greater  experience  and  capabilities  in  conducting
clinical trials,  obtaining regulatory approvals,  and manufacturing,  marketing
and  distributing   products.  In  addition,   other  companies  are  developing
proprietary  systems for the  diagnosis  and  treatment of cardiac  arrhythmias,
including  Biosense-Webster,  a division of Johnson & Johnson,  and  Endocardial
Solutions, Inc. Other companies are also developing, marketing and selling

                                       37
<PAGE>

alternative  approaches for the treatment of atrial fibrillation and ventricular
tachycardia,  including  manufacturers  of  implantable  defibrillators  such as
Guidant  Corporation,  Medtronic,  Inc. and St. Jude Medical,  Inc. We cannot be
certain  that we will  succeed in  developing  and  marketing  technologies  and
products that are safer, more clinically  effective and cost-effective  than the
more  established  treatments or the new approaches and products being developed
and marketed by our competitors.  Furthermore, there can be no assurance that we
will succeed in developing new  technologies and products that will be available
before those of our competitors, particularly because of our financial position.
Our  failure to  demonstrate  the  competitive  advantages  and  achieve  market
acceptance of our products would significantly harm our business.


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

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

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

     We cannot be certain that these  licenses  will continue to be available to
us or will be available to us on reasonable  terms.  The loss of or inability to
maintain any of these  licenses  could result in delays in commercial  shipments
until we could internally develop or identify, license and integrate equivalent

                                       38
<PAGE>

technology.  These delays would have a material  adverse effect on our business,
financial condition and results of operations.

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

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

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

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

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

                                       39
<PAGE>

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

     o    has not received appropriate regulatory clearances or approvals;

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

     o    is experimental, unnecessary or inappropriate.

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

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

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

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

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

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

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

                                       40
<PAGE>

     o    capacity constraints;

     o    production yields;

     o    quality control; and

     o    shortages of qualified personnel.

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

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

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

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

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

                                       41
<PAGE>

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

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

We are dependent upon our key personnel.

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

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

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

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

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

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<PAGE>

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

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

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

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

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

Each of these provisions could discourage potential takeover attempts.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

     We maintain  "disclosure  controls and procedures," as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities  Exchange Act of 1934 (the
"Exchange  Act"),  that are designed to ensure that  information  required to be
disclosed by us in reports that we file or submit under the Exchange Act is

                                       43
<PAGE>

recorded, processed,  summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding  required  disclosure.  In designing  and  evaluating  our  disclosure
controls and procedures,  management  recognized  that  disclosure  controls and
procedures,  no  matter  how well  conceived  and  operated,  can  provide  only
reasonable,  not  absolute,  assurance  that the  objectives  of the  disclosure
controls and procedures are met. Additionally,  in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the  cost-benefit  relationship of possible  disclosure  controls and
procedures.  The design of any disclosure  controls and procedures also is based
in part upon certain  assumptions  about the  likelihood of future  events,  and
there can be no assurance  that any design will succeed in achieving  its stated
goals under all potential future conditions.

     Subject  to  the  limitations   noted  above,  our  management,   with  the
participation of our Chief Executive  Officer and Chief Financial  Officer,  has
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls  and  procedures  as of the  end of the  fiscal  year  covered  by this
Quarterly  Report on Form 10-Q.  Based on that  evaluation,  the Chief Executive
Officer and Chief  Financial  Officer have concluded  that, as of such date, our
disclosure  controls and procedures were not effective to meet the objective for
which they were designed and operate at the  reasonable  assurance  level due to
lack of  segregation  of duties  caused by the Company wide Furlough on June 17,
2005.

Changes in internal control over financial reporting

     On June 17, 2005 the Company  furloughed all of its employees and on August
15,  2005  the  Company  re-hired  approximately  one-half  of the  pre-furlough
employees.  The loss of so many  employees  may affect our  ability to  maintain
adequate internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

     None.

Item 3. Defaults Upon Senior Securities

     None.

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<PAGE>

Item 4. Submission of Matters to a Vote of the Security Holders None.

Item 5. Other Information

     None

Item 6. Exhibits


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

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

                                       45
<PAGE>

                                  CARDIMA, INC.

                                   SIGNATURES

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


DATE: October  12, 2005        CARDIMA, INC.
                               /S/ GABRIEL B. VEGH
                               ------------------------------------------------
                               GABRIEL B. VEGH
                               Chairman   of  the   Board,   Chief   Executive
                               Officer, and Chief Financial Officer
                               (Principal Executive, Financial and Accounting
                               Officer)



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