##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2005


Commission file number: 0-28288





Cardiogenesis Corporation


(Exact name of Registrant as specified in its charter)


|                         |  |                                        
|------------------------ |  | ---------------------------------------
|California               |  | 77-0223740                             
|(State of incorporation) |  | (I.R.S. Employer Identification Number)

26632 Towne Center Drive, Suite 320


Foothill Ranch, California 92610


(Address of principal executive offices)


(714) 649-5000


(Registrants telephone number, including area code)





Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, no par value


(Title of Class)







o þ




o þ




o þ


S-K 10-K 10-K.


o þ


12b-2


o o þ


12b-2


o þ


















---



##### 



INDEX TO
FORM 10-K







|                                                |  |                                                                                                                       |     |      |    | 
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                                |  |                                                                                                                       |     | Page |   
|                                                |  |                                                                                                                       |     |      |   
|PART I                                         
|Item 1.                                         |  | Business                                                                                                              |     |      | 1  | 
|Item 1A.                                        |  | Risk Factors                                                                                                          |     |      | 13 | 
|Item 1B.                                        |  | Unresolved Staff Comments                                                                                             |     |      | 26 | 
|Item 2.                                         |  | Properties                                                                                                            |     |      | 26 | 
|Item 3.                                         |  | Legal Proceedings                                                                                                     |     |      | 26 | 
|Item 4.                                         |  | Submission of Matters to a Vote of Security
    Holders                                                               |     |      | 26 | 
|PART II                                        
|Item 5.                                         |  | Market for Registrants Common Equity,
    Related Shareholder Matters, and Issuer Purchases of Equity
    Securities |     |      | 26 | 
|Item 6.                                         |  | Selected Consolidated Financial Data                                                                                  |     |      | 27 | 
|Item 7.                                         |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                             |     |      | 28 | 
|Item 7A.                                        |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                        |     |      | 37 | 
|Item 8.                                         |  | Consolidated Financial Statements and
    Supplementary Data                                                          |     |      | 38 | 
|Item 9.                                         |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                              |     |      | 39 | 
|Item 9A.                                        |  | Controls and Procedures                                                                                               |     |      | 39 | 
|Item 9B.                                        |  | Other Information                                                                                                     |     |      | 39 | 
|PART III                                       
|Item 10.                                        |  | Directors and Executive Officers of the
    Registrant                                                                |     |      | 40 | 
|Item 11.                                        |  | Executive Compensation                                                                                                |     |      | 43 | 
|Item 12.                                        |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                    |     |      | 49 | 
|Item 13.                                        |  | Certain Relationships and Related
    Transactions                                                                    |     |      | 51 | 
|Item 14.                                        |  | Principal Accountant Fees and Services                                                                                |     |      | 51 | 
|PART IV                                        
|Item 15.                                        |  | Exhibits and Financial Statement
    Schedules                                                                        |     |      | 52 | 
|Signatures                                      |  |                                                                                                                       | 53  |     
|Index to Financial Statements and
    Schedules |  |                                                                                                                       | F-1 |     
|EXHIBIT 10.2                                   
|EXHIBIT 10.3                                   
|EXHIBIT 10.4                                   
|EXHIBIT 10.19                                  
|EXHIBIT 21.1                                   
|EXHIBIT 23.1                                   
|EXHIBIT 23.2                                   
|EXHIBIT 31.1                                   
|EXHIBIT 31.2                                   
|EXHIBIT 32.1                                   





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PART I







|        |          
|------- | ---------
|Item 1. | Business.

This Annual Report on
Form 10-K contains
forward-looking statements that involve risks and uncertainties.
The statements contained herein that are not purely historical
are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including without limitation statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in
this document or incorporated by reference herein are based on
information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our
actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors,
including those set forth in Item 1A of this Part I
and elsewhere.


General










1



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Background
















2



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##### Table of Contents





The TMR and PMC Procedures






Business Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Add Innovative New Technology to our Market Basket. Our
    focus is to add innovative new tools to help address advanced
    cardiovascular disease, and related co-morbidities of patients
    being referred today to cardiovascular surgery. We are committed
    to growing the TMR business with the Advanced TMR Plus platform
    which includes two new minimally invasive handpieces for
    thoracoscopic and robotic assisted TMR. These new products were
    developed with key clinical champions to expand the TMR market.
    We are also committed to identifying potential new products in
    the cardiovascular arena. These two new products are currently
    under IDE clinical study in support of the PMA applications with
    the FDA.                                                                                                                                                                                        
|
| |  | Expand Market for our Products. We are seeking to expand
    market awareness of our products among opinion leaders in the
    cardiovascular field, the referring physician community and the
    targeted patient population. We also currently intend to expand
    our marketing efforts in Europe and to the rest of the world
    through the establishment and expansion of direct international
    sales and support organizations and third party distributors and
    agents. In addition, we have developed a comprehensive training
    program to assist physicians in acquiring the expertise
    necessary to utilize our TMR and PMC products and procedures.                                                                                                                                                                                                                                                                            
|
| |  | Demonstrate Clinical Utility of PMC. We are seeking to
    demonstrate the clinical safety and effectiveness of PMC. We
    have completed a pivotal clinical trial regarding PMC, and the
    study results were submitted to the FDA in a PMA application in
    December 1999, along with subsequent supplements. As discussed
    below under the caption Regulatory Status, the FDA
    Advisory Panel recommended against approval of PMC for public
    sale and use in the United States and further informed us that
    they believe the data submitted in August 2003 in connection
    with the interactive review process is still not adequate to
    support approval by the FDA of our PMC system. In August 2004,
    we met with the FDA and agreed on the steps needed to design and
    initiate a new clinical trial to confirm the safety and efficacy
    of PMC. In January 2005, we again met with the agency and agreed
    on

3



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | major trial parameters. We came to agreement with the FDA on a
    final trial design and received formal FDA approval in January
    2006. We are currently working to understand the specific direct
    and indirect costs and are initiating our pursuit of a corporate
    partner in the interventional cardiology arena. There can be no
    assurance, however, that we will receive a favorable
    determination from the FDA.                                                                                                                                                                                                                                 
|
| |  | Leverage Proprietary Technology. We believe that our
    significant expertise in laser and catheter-based systems for
    cardiovascular disease and the proprietary technologies we have
    developed are important factors in our efforts to demonstrate
    the safety and effectiveness of our TMR and PMC procedures. We
    are seeking to develop additional proprietary technologies for
    TMR, PMC and related procedures. We have and maintain multiple
    U.S. and foreign patents and have multiple U.S. and foreign
    patent applications pending relating to various aspects of TMR,
    PMC and other cardiovascular related devices and therapies.

Products and Technology




| |           
| | ----------
| | TMR System





SolarGen 2100s laser system.


TMR 2000 laser system.


SoloGrip III.




| |           
| | ----------
| | PMC System



PMC Laser.


4



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Axcis Catheter System. over-the




| |                     
| | --------------------
| | New Product Pipeline

PEARL Robotic 5.0 and Thoracoscopic 8.0 Minimally Invasive
Delivery Systems.


Phoenix Revascularization Delivery System.


Regulatory Status


United States.




5



---



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European Union.


Sales and Marketing












Research and Development






6



---



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Manufacturing






Competition












7



---



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Government Regulation








8



---



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Intellectual Property Matters






9



---



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Third Party Reimbursement








10



---



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Product Liability and Insurance




Employees




11



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Executive Officers




|                         |  |     |    |  |          |                                                                             
|------------------------ |  | --- | -- |  | -------- | ----------------------------------------------------------------------------
|Name                     |  | Age |    |  | Position
|                         |  |     |    |  |         
|Michael J. Quinn(1)      |  |     | 62 |  |          | President, Chief Executive Officer, and Director                            
|William R. Abbott        |  |     | 49 |  |          | Senior Vice President & Chief Financial Officer,
    Secretary and Treasurer
|Larry J. Czapla(2)       |  |     | 58 |  |          | Senior Vice President of Worldwide Sales and Business Development           
|Richard P. Lanigan       |  |     | 47 |  |          | Senior Vice President of Operations                                         
|Henry R. Rossell, Jr     |  |     | 50 |  |          | Senior Vice President, General Manager of Atlantic Business Unit            
|Charles J. Scarano       |  |     | 44 |  |          | Senior Vice President of Worldwide Marketing                                
|Gerard A. Arthur         |  |     | 48 |  |          | Vice President, General Manager of Worldwide Services Division              
|John P. McIntyre         |  |     | 41 |  |          | Vice President of Scientific and Regulatory Affairs                         
|Joseph R. Kletzel, II(3) |  |     | 56 |  |          | Interim Chief Operating Officer and Director                                






|    |                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Quinns employment was terminated by the Company
    on July 12, 2006.                                          
|   
|(2) | Mr. Czaplas employment was terminated by the Company
    on July 13, 2006.                                         
|   
|(3) | Effective July 12, 2006, Mr. Kletzel was appointed as
    Chairman of the Board and interim Chief Executive Officer.



10-K


William R. Abbott 1993-1997,


Larry J. Czapla E-Business


12



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Richard P. Lanigan


Henry R. Rossell, Jr.


Charles J. Scarano


Gerard A. Arthur


John P. McIntyre







|         |             
|-------- | ------------
|Item 1A. | Risk Factors



13



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| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to maintain current operations is dependent
    upon sustaining profitable operations or obtaining financing in
    the future.









| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | if commercial adoption of our TMR laser systems by healthcare
    providers in the United States declines;  
|
| |  | until such time, if ever, as we obtain FDA and other regulatory
    approvals for our PMC laser systems; and
|
| |  | for an uncertain period of time after such approvals are
    obtained.                                      



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to successfully market our products if
    third party reimbursement for the procedures performed with our
    products is not available for our health care provider
    customers.









14



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| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | We may fail to obtain required regulatory approvals in the
    United States to market our PMC laser system.









| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | We may incur impairment charges on long-lived assets if
    future events indicate asset values my not be
    recoverable.

forty-month




| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may fail to obtain required regulatory approvals in the
    United States to market our new minimally invasive and
    robotically assisted handpieces.



15



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| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | In the future, the FDA could restrict the current uses of
    our TMR product and thereby restrict our ability to generate
    revenues.





| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | We must comply with FDA manufacturing standards or face
    fines or other penalties including suspension of
    production.





| |   |                                                
| | - | -----------------------------------------------
| |  | fines, injunctions, and civil penalties;       
|
| |  | recalls or seizures of products;               
|
| |  | total or partial suspensions of production; and
|
| |  | criminal prosecutions.                         





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | We may fail to comply with international regulatory
    requirements and could be subject to regulatory delays, fines or
    other penalties.





| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | delays in receipt of, or failure to receive, foreign regulatory
    approvals or clearances;
|
| |  | the loss of previously obtained approvals or clearances; or                                 
|
| |  | the failure to comply with existing or future regulatory
    requirements.                  



16



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| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to meet future product demand on a
    timely basis and may be subject to delays and interruptions to
    product shipments because we depend on single source third party
    suppliers and manufacturers.







| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | if materials and products obtained from outside suppliers and
    manufacturers will always be available in adequate quantities to
    meet our future needs; or                        
|
| |  | whether replacement suppliers and/or manufacturers can be
    qualified on a timely basis if our current suppliers and/or
    manufacturers are unable to meet our needs for any reason.



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Expansion of our business may put added pressure on our
    management and operational infrastructure affecting our ability
    to meet any increased demand for our products and possibly
    having an adverse effect on our operating results.





| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the dependence on the growth of the market for our TMR and PMC
    systems;                                                                                      
|
| |  | our ability to successfully and rapidly expand sales to
    potential customers in response to potentially increasing
    clinical adoption of the TMR procedure;

17



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| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | the costs associated with such growth, which are difficult to
    quantify, but could be significant;
|
| |  | domestic and international regulatory developments;                                                  
|
| |  | rapid technological change;                                                                          
|
| |  | the highly competitive nature of the medical devices
    industry; and                               
|
| |  | the risk of entering emerging markets in which we have limited
    or no direct experience.          





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results are expected to fluctuate and
    quarter-to-quarter
    comparisons of our results may not indicate future
    performance.

quarter-to quarter-to quarter-to




| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Until May 2006, our stock was listed on the OTC
    Bulletin Board and is currently listed on the Pink Sheets
    which, in either case, may have an unfavorable impact on our
    stock price and liquidity.







| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The trading prices of many high technology companies, and
    in particular medical device companies, have been volatile which
    may result in large fluctuations in the price of our common
    stock.



18



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| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | The price of our common stock may fluctuate significantly,
    which may result in losses for investors.

52-week




| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in our quarterly operating
    results;                                                                                            
|
| |  | the timing and amount of conversions and subsequent sales of
    common stock issuable upon conversion of outstanding convertible
    promissory notes and warrants;
|
| |  | announcements of technological innovations or new products or
    services by us or our competitors;                                                                
|
| |  | announcements relating to strategic relationships or
    acquisitions;                                                                                              
|
| |  | additions or terminations of coverage of our common stock by
    securities analysts;                                                                               
|
| |  | statements by securities analysts regarding us or our industry;                                                                                                     
|
| |  | conditions or trends in the medical device industry;                                                                                                                
|
| |  | the lack of liquidity in the market for our common
    stock; and                                                                                                   
|
| |  | changes in the economic performance and/or market valuations of
    other medical device companies.                                                                 





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | We face competition from products of our competitors which
    could limit market acceptance of our products and render our
    products obsolete.







| |   |                                                    
| | - | ---------------------------------------------------
| |  | are more effective than our products;              
|
| |  | are more effectively marketed than our products; or
|
| |  | may render our products or technology obsolete.    





| |   |                                                             
| | - | ------------------------------------------------------------
| |  | develop products;                                           
|
| |  | complete clinical testing and regulatory approval processes;

19



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| |   |                                                         
| | - | --------------------------------------------------------
| |  | obtain third party reimbursement acceptance; and        
|
| |  | supply adequate quantities of the product to the market.



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third party intellectual property rights may limit the
    development and protection of our intellectual property, which
    could adversely affect our competitive position.





| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | obtain patent protection for our products and processes;                               
|
| |  | preserve our trade secrets and proprietary technology; and                             
|
| |  | operate without infringing upon the patents or proprietary
    rights of third parties.







| |                                                                                
| | -------------------------------------------------------------------------------
| | Costly litigation may be necessary to protect intellectual
    property rights.







| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | enforce our issued patents;                                                              
|
| |  | protect our trade secrets or know-how; or                                                
|
| |  | determine the enforceability, scope and validity of the
    proprietary rights of others.





| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | subject us to significant liabilities to third parties;                  
|
| |  | require us to seek licenses from third parties;                          
|
| |  | prevent us from selling our products in certain markets or at
    all; or
|
| |  | require us to modify our products.                                       



20



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| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | We rely on patent and trade secret laws, which are complex
    and may be difficult to enforce.







| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | have not developed or will not develop similar products;       
|
| |  | will not duplicate our products; or                            
|
| |  | will not design around any patents issued to or licensed by us.





| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | others did not first file applications for inventions covered by
    our pending patent applications; or
|
| |  | we will not infringe any patents that may issue to others on
    such applications.                     



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | We may suffer losses from product liability claims if our
    products cause harm to patients.







| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Our insurance may be insufficient to cover product
    liability claims against us.



21



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| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial condition and/or results of operations may
    be adversely affected as a result of claims made by our former
    Chief Executive Officer.





| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | We depend heavily on key personnel and turnover of key
    employees and senior management could harm our business.





| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | We sell our products internationally which subjects us to
    specific risks of transacting business in foreign
    countries.





| |   |                                              
| | - | ---------------------------------------------
| |  | foreign currency fluctuations;               
|
| |  | economic or political instability;           
|
| |  | foreign tax laws;                            
|
| |  | shipping delays;                             
|
| |  | various tariffs and trade regulations;       
|
| |  | restrictions and foreign medical regulations;

22



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| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | customs duties, export quotas or other trade
    restrictions; and
|
| |  | difficulty in protecting intellectual property rights.            



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | If an Event of Default Occurs Under the Convertible
    Note Issued to Laurus, It Could Seriously Harm Our
    Operations.







| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A failure to pay interest and principal payments when due;                                                                                                     
|
| |  | a breach by us of any material covenant or term or condition of
    the note or any agreement made in connection therewith;                                    
|
| |  | a breach by us of any material representation or warranty made
    in the note or in any agreement made in connection therewith;                               
|
| |  | if we make an assignment for the benefit of our creditors, or a
    receiver or trustee is appointed for us;                                                   
|
| |  | any form of bankruptcy or insolvency proceeding is instituted by
    or against us and is not dismissed within 60 days;                                        
|
| |  | any money judgment entered or filed against us for more than
    $50,000 and remains unresolved for 30 days;                                                   
|
| |  | our failure to timely deliver shares of common stock when due
    upon conversions of the note;                                                                
|
| |  | we experience an event of default under any other debt
    obligations; and                                                                                    
|
| |  | we experience a loss, damage or encumbrance upon collateral
    securing the Laurus debt which is valued at more than $100,000
    and is not timely mitigated.





| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | We may continue to incur significant non-operating,
    non-cash charges resulting from changes in the fair value of
    warrants and derivatives.



23



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| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The restrictions on our activities contained in the Laurus
    financing documents could negatively impact our ability to
    obtain financing from other sources.





| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Low market prices for our common stock would result in
    greater dilution to our shareholders, and could negatively
    impact our ability to convert the Laurus debt into equity





| |                                                                  
| | -----------------------------------------------------------------
| | Future sales of our common stock could lower our stock
    price.



24



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| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of our certificate of incorporation as well as
    our rights agreement could discourage potential acquisition
    proposals and could deter or prevent a change of control.





| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Changes in, or interpretations of, accounting rules and
    regulations could result in unfavorable accounting
    charges.





| |                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Recent rulemaking by the Financial Accounting Standards
    Board will require us to expense equity compensation given to
    our employees and could significantly harm our operating results
    and may reduce our ability to effectively utilize equity
    compensation to attract and retain employees.



25



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| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We currently do not have adequate internal controls over
    financial reporting as noted in Item 9A. Controls and
    Procedures and we are exposed to risks from recent legislation
    requiring companies to evaluate those internal controls.








|         |                           
|-------- | --------------------------
|Item 1B. | Unresolved Staff Comments.








|        |            
|------- | -----------
|Item 2. | Properties.








|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.








|        |                                                         
|------- | --------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders.






PART II







|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related Shareholder
    Matters and Issuer Purchases of Equity Securities.



26



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|               |  |      |      |  |     |   |      | 
|-------------- |  | ---- | ---- |  | --- | - | ---- | 
|2004           |  | High |      |  | Low |  
|               |  |      |      |  |     |  
|First Quarter  |  | $    | 1.40 |  |     | $ | 0.59 | 
|Second Quarter |  | $    | 0.87 |  |     | $ | 0.44 | 
|Third Quarter  |  | $    | 0.75 |  |     | $ | 0.47 | 
|Fourth Quarter |  | $    | 0.70 |  |     | $ | 0.35 | 

|               |  |      |      |  |     |   |      | 
|-------------- |  | ---- | ---- |  | --- | - | ---- | 
|2005           |  | High |      |  | Low |  
|               |  |      |      |  |     |  
|First Quarter  |  | $    | 0.79 |  |     | $ | 0.48 | 
|Second Quarter |  | $    | 0.64 |  |     | $ | 0.38 | 
|Third Quarter  |  | $    | 0.68 |  |     | $ | 0.44 | 
|Fourth Quarter |  | $    | 0.51 |  |     | $ | 0.32 | 







Securities Authorized for Issuance Under Equity Compensation
Plans


10-K







|        |                                      
|------- | -------------------------------------
|Item 6. | Selected Consolidated Financial Data.





27



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Selected Consolidated Financial Data


|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|------------------------------------------------ |  | ---------------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | - |  | ---- | -------- | - |  | - | -------- | -
|                                                 |  | Years Ended December 31,                 |         
|                                                 |  |                                          |         
|                                                 |  | 2005                                     |          |   | 2004 |   |          | 2003 |  |   | 2002     |   |  | 2001 |         
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|                                                 |  | (In thousands, except per share amounts) |         
|Consolidated Statement of Operations Data:       |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Net revenues                                     |  | $                                        | 16,341   |   |      | $ | 15,454   |      |  | $ | 13,518   |   |  | $    | 13,048   |   |  | $ | 14,153   |  
|Cost of revenues                                 |  |                                          | 2,998    |   |      |   | 2,193    |      |  |   | 2,295    |   |  |      | 2,935    |   |  |   | 5,777    |  
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|Gross profit                                     |  |                                          | 13,343   |   |      |   | 13,261   |      |  |   | 11,223   |   |  |      | 10,113   |   |  |   | 8,376    |  
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|Operating expenses:                              |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Research and development                         |  |                                          | 1,725    |   |      |   | 1,442    |      |  |   | 1,944    |   |  |      | 657      |   |  |   | 1,863    |  
|Sales, general and administrative                |  |                                          | 14,110   |   |      |   | 11,322   |      |  |   | 9,590    |   |  |      | 12,297   |   |  |   | 15,119   |  
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|Total operating expenses                         |  |                                          | 15,835   |   |      |   | 12,764   |      |  |   | 11,534   |   |  |      | 12,954   |   |  |   | 18,015   |  
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|Operating income (loss)                          |  |                                          | (2,492   | ) |      |   | 497      |      |  |   | (311     | ) |  |      | (2,841   | ) |  |   | (9,639   | )
|Interest and other (expense) income, net         |  |                                          | 635      |   |      |   | (1,816   | )    |  |   | (37      | ) |  |      | 2,311    |   |  |   | (608     | )
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|Net loss                                         |  | $                                        | (1,857   | ) |      | $ | (1,319   | )    |  | $ | (348     | ) |  | $    | (530     | ) |  | $ | (10,247  | )
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|Net loss per share  basic and diluted           |  | $                                        | (0.04    | ) |      | $ | (0.03    | )    |  | $ | (0.01    | ) |  | $    | (0.01    | ) |  | $ | (0.31    | )
|                                                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |         
|Shares used in per share calculation             |  |                                          | 43,414   |   |      |   | 41,152   |      |  |   | 37,303   |   |  |      | 36,911   |   |  |   | 33,311   |  
|Consolidated Balance Sheet Data:                 |  |                                          |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   |          |  
|Cash, cash equivalents and marketable securities |  | $                                        | 1,843    |   |      | $ | 4,740    |      |  | $ | 1,013    |   |  | $    | 1,490    |   |  | $ | 2,629    |  
|Working capital                                  |  |                                          | 638      |   |      |   | 6,907    |      |  |   | 1,955    |   |  |      | 1,442    |   |  |   | 948      |  
|Total assets                                     |  |                                          | 12,538   |   |      |   | 15,683   |      |  |   | 6,460    |   |  |      | 7,755    |   |  |   | 11,309   |  
|Long-term debt, less current portion             |  |                                          | 356      |   |      |   | 7,329    |      |  |   | 6        |   |  |      | 1        |   |  |   | 32       |  
|Accumulated deficit                              |  |                                          | (168,134 | ) |      |   | (166,277 | )    |  |   | (164,958 | ) |  |      | (164,610 | ) |  |   | (164,080 | )
|Total shareholders equity                       |  |                                          | 4,866    |   |      |   | 4,735    |      |  |   | 3,820    |   |  |      | 3,711    |   |  |   | 3,582    |  






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations.

10-K.


28



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Overview










Results of Operations




| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2005 Compared to Year Ended
    December 31, 2004



| |             
| | ------------
| | Net Revenues





29



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| |             
| | ------------
| | Gross Profit





| |                         
| | ------------------------
| | Research and Development







| |                                  
| | ---------------------------------
| | Sales, General and Administrative





| |                               
| | ------------------------------
| | Non-Operating Income (Expense)



30



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|                                                                                         |  |                          |       |   |      |   |        |        |  |   |       |   |  |  |     |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ------ | ------ |  | - | ----- | - |  |  | --- | -
|                                                                                         |  | Years Ended December 31, |      
|                                                                                         |  |                          |      
|                                                                                         |  | 2005                     |       |   | 2004 |   |        | Change | 
|                                                                                         |  |                          |       |   |      |   |        |        | 
|                                                                                         |  | ($ In thousands)         |      
|Interest expense  Secured Convertible Term Note                                         |  | $                        | (444  | ) |      | $ | (77    | )      |  | $ | (367  | ) |  |  | 476 | %
|Interest expense  other                                                                 |  |                          | (125  | ) |      |   | (27    | )      |  |   | (67   | ) |  |  | 115 | %
|Interest income                                                                          |  |                          | 162   |   |      |   | 48     |        |  |   | 114   |   |  |  | 238 | %
|Non-cash interest expense  Accretion of discount on
    Note                            |  |                          | (827  | ) |      |   | (141   | )      |  |   | (686  | ) |  |  | 487 | %
|Non-cash interest expense  Amortization of debt
    issuance costs relating to the Note |  |                          | (200  | ) |      |   | (66    | )      |  |   | (165  | ) |  |  | 471 | %
|Non-cash interest expense- Loss on conversion of debt                                    |  |                          | (387  | ) |      |   |       |        |  |   | (387  | ) |  |  | 100 | %
|Change in fair value of derivative                                                       |  |                          | 2,100 |   |      |   | (1,263 | )      |  |   | 3,363 |   |  |  | 266 | %
|Other non-cash income (expense)- Change in fair value of warrants                        |  |                          | 356   |   |      |   | (290   | )      |  |   | 646   |   |  |  | 223 | %
|                                                                                         |  |                          |       |   |      |   |        |        |  |   |       |  
|Total interest income (expense), net                                                     |  | $                        | 635   |   |      | $ | (1,816 | )      |  | $ | 2,451 |   |  |  | 135 | %
|                                                                                         |  |                          |       |   |      |   |        |        |  |   |       |  



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003



| |             
| | ------------
| | Net Revenues









| |             
| | ------------
| | Gross Profit



31



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| |                         
| | ------------------------
| | Research and Development







| |                                  
| | ---------------------------------
| | Sales, General and Administrative





| |                               
| | ------------------------------
| | Non-Operating Income (Expense)





|                                                                                         |  |                          |        |   |      |   |     |        |  |   |        |   |  |  |      |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | --- | ------ |  | - | ------ | - |  |  | ---- | -
|                                                                                         |  | Years Ended December 31, |       
|                                                                                         |  |                          |       
|                                                                                         |  | 2004                     |        |   | 2003 |   |     | Change | 
|                                                                                         |  |                          |        |   |      |   |     |        | 
|                                                                                         |  | ($ In thousands)         |       
|Interest expense  Secured Convertible Term Note                                         |  | $                        | (77    | ) |      | $ |    |        |  | $ | (77    | ) |  |  | 100  | %
|Interest expense  other                                                                 |  |                          | (27    | ) |      |   | (44 | )      |  |   | 17     |   |  |  | 39   | %
|Interest income                                                                          |  |                          | 48     |   |      |   | 7   |        |  |   | 41     |   |  |  | 586  | %
|Non-cash interest expense  Accretion of discount on
    Note                            |  |                          | (141   | ) |      |   |    |        |  |   | (141   | ) |  |  | 100  | %
|Non-cash interest expense  Amortization of debt
    issuance costs relating to the Note |  |                          | (66    | ) |      |   |    |        |  |   | (66    | ) |  |  | 100  | %
|Change in fair value of derivative                                                       |  |                          | (1,263 | ) |      |   |    |        |  |   | (1,263 | ) |  |  | 100  | %
|Other non-cash expense- Change in fair value of warrants                                 |  |                          | (290   | ) |      |   |    |        |  |   | (290   | ) |  |  | 100  | %
|                                                                                         |  |                          |        |   |      |   |     |        |  |   |        |  
|Total interest expense, net                                                              |  | $                        | (1,816 | ) |      | $ | (37 | )      |  | $ | (1,779 | ) |  |  | 4808 | %
|                                                                                         |  |                          |        |   |      |   |     |        |  |   |        |  

32



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Liquidity and Capital Resources












33



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34



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|                                             |       |                        |       |           |        |   |       |       |  |     |       |           |         |   |   |   |  |   |   |   | 
|-------------------------------------------- | ----- | ---------------------- | ----- | --------- | ------ | - | ----- | ----- |  | --- | ----- | --------- | ------- | - | - | - |  | - | - | - | 
|                                             |       | Payments Due by Period
|                                             |       |                       
|                                             |       |                        |       | Less than |        |   | 1-3   |       |  | 4-5 |       | More than
|Contractual Obligations                      |       | Total                  |       |           | 1 Year |   |       | Years |  |     | Years |           | 5 Years
|                                             |       |                        |       |           |        |   |       |       |  |     |       |           |        
|                                             |       | (In thousands)        
|Secured convertible term note(1)             |       | $                      | 4,709 |           |        | $ | 3,666 |       |  | $   | 1,043 |           |         | $ |  |   |  | $ |  |  
|Secured convertible term note interest(1)(2) |       |                        | 479   |           |        |   | 447   |       |  |     | 32    |           |         |   |  |   |  |   |  |  
|Capital Lease Obligations                    |       |                        | 17    |           |        |   | 5     |       |  |     | 12    |           |         |   |  |   |  |   |  |  
|Short term note payable                      |       |                        | 16    |           |        |   | 16    |       |  |     |      |           |         |   |  |   |  |   |  |  
|Operating Leases                             |       |                        | 310   |           |        |   | 310   |       |  |     |      |           |         |   |  |   |  |   |  |  
|                                             |       |                        |       |           |        |   |       |       |  |     |       |           |         |   |  
|                                             | Total |                        | $     | 5,531     |        |   | $     | 4,444 |  |     | $     | 1,087     |         |   | $ |  |  |   | $ |  | 
|                                             |       |                        |       |           |        |   |       |       |  |     |       |           |         |   |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Payout amounts assume we will not be in default of the
    provisions in the secured convertible term note as discussed in
    Item 1A. Risk Factors. In May 2006, we repaid $2,417,000 of
    the Notes restricted balance and related interest of
    $314,000. We have included those amounts in the less than
    1 year column accordingly. In connection with the
    repayment, we were required to pay a prepayment penalty of
    $483,000 out of our unrestricted cash and this amount has not
    been included above.
|   
|(2) | Assumes 8.25% interest rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Critical Accounting Policies and Estimates








| |                     
| | --------------------
| | Revenue Recognition:







35



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| |                     
| | --------------------
| | Accounts Receivable:





| |             
| | ------------
| | Inventories:

first-in,


36



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| |                                
| | -------------------------------
| | Valuation of Long-lived Assets:





| |              
| | -------------
| | Income Taxes:








|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk.

Quantitative
Disclosures








37



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|                                                      |  |              |       |   |      |   |       |      |  |   |      |   |      |   |                  |  |  |   |   |  |  |   |       |  
|----------------------------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | ---- |  | - | ---- | - | ---- | - | ---------------- |  |  | - | - |  |  | - | ----- | -
|                                                      |  | 2006         |       |   | 2007 |   |       | 2008 |  |   | 2009 |   | 2010 |   | Total Fair Value | 
|                                                      |  |              |       |   |      |   |       |      |  |   |      |   |      |   |                  | 
|                                                      |  | In Thousands |      
|Assets:                                               |  |              |       |   |      |   |       |      |  |   |      |   |      |   |                  |  |  |   |   |  |  |   |       |  
|Cash, cash equivalents                                |  | $            | 1,843 |   |      | $ |      |      |  | $ |     |   |      | $ |                 |  |  | $ |  |  |  | $ | 1,843 |  
|Weighted average interest rate                        |  |              | 5.0   | % |      |   |      |      |  |   |     |   |      |   |                 |  |  |   |  |  |  |   | 5.0   | %
|Liabilities:                                          |  |              |       |   |      |   |       |      |  |   |      |   |      |   |                  |  |  |   |   |  |  |   |       |  
|Fixed rate debt lease obligation                      |  | $            | 5     |   |      | $ | 6     |      |  | $ | 6    |   |      | $ |                 |  |  | $ |  |  |  | $ | 17    |  
|Weighted average interest rate                        |  |              | 6.8   | % |      |   | 6.8   | %    |  |   | 6.8  | % |      |   |                 |  |  |   |  |  |  |   | 6.8   | %
|Variable rate note payable, net of restricted cash(1) |  | $            | 1,249 |   |      | $ | 1,043 |      |  | $ |     |   |      | $ |                 |  |  | $ |  |  |  | $ | 2,292 |  
|Weighted average effective interest rate(2)           |  |              | 25    | % |      |   | 25    | %    |  |   |     |   |      |   |                 |  |  |   |  |  |  |   | 25    | %






|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Payout amounts assume the Company will not be in default of the
    provisions in the secured convertible note as discussed in
    Item 1A. Risk Factors.                          
|   
|(2) | Includes interest expense at the prime rate plus 2%, accretion
    of the debt discount, and amortization of debt issuance costs
    relating to the Secured Convertible Term Note.



| |                        
| | -----------------------
| | Qualitative Disclosures

Interest Rate Risk.







|        |                                                              
|------- | -------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and Supplementary
    Data.

Quarterly Results of Operations




|                                              |  |                                       |        |   |         |   |        |          |  |   |         |  |  |          |        |  |         |   |        |          |  |   |         |   |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | ------------------------------------- | ------ | - | ------- | - | ------ | -------- |  | - | ------- |  |  | -------- | ------ |  | ------- | - | ------ | -------- |  | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                              |  | Three Months Ended                    |       
|                                              |  |                                       |       
|                                              |  | 2005                                  |        |   | 2004    |  
|                                              |  |                                       |        |   |         |  
|                                              |  | March 31                              |        |   | June 30 |   |        | Sept. 30 |  |   | Dec. 31 |  |  | March 31 |        |  | June 30 |   |        | Sept. 30 |  |   | Dec. 31 |  
|                                              |  |                                       |        |   |         |   |        |          |  |   |         |  |  |          |        |  |         |   |        |          |  |   |         |  
|                                              |  | (In thousands, except per share data) |       
|Net revenues                                  |  | $                                     | 2,991  |   |         | $ | 4,885  |          |  | $ | 4,392   |  |  | $        | 4,073  |  |         | $ | 4,041  |          |  | $ | 3,376   |   |  | $ | 2,837  |   |  | $ | 5,200  |  
|Gross profit                                  |  | $                                     | 2,386  |   |         | $ | 3,960  |          |  | $ | 3,583   |  |  | $        | 3,414  |  |         | $ | 3,488  |          |  | $ | 2,858   |   |  | $ | 2,338  |   |  | $ | 4,577  |  
|Operating income (loss)                       |  | $                                     | (1,708 | ) |         | $ | (1,634 | )(1)     |  | $ | 462     |  |  | $        | 388    |  |         | $ | 269    |          |  | $ | (244    | ) |  | $ | (928   | ) |  | $ | 1,400  |  
|Net income/(loss)                             |  | $                                     | (2,811 | ) |         | $ | (858   | )        |  | $ | 807     |  |  | $        | 1,005  |  |         | $ | 267    |          |  | $ | (264    | ) |  | $ | (924   | ) |  | $ | (398   | )
|Net income/(loss):                            |  |                                       |        |   |         |   |        |          |  |   |         |  |  |          |        |  |         |   |        |          |  |   |         |   |  |   |        |   |  |   |        |  
|Basic                                         |  | $                                     | (0.07  | ) |         | $ | (0.02  | )        |  | $ | 0.02    |  |  | $        | 0.02   |  |         | $ | 0.01   |          |  | $ | (0.01   | ) |  | $ | (0.02  | ) |  | $ | (0.01  | )
|Diluted                                       |  | $                                     | (0.07  | ) |         | $ | (0.02  | )        |  | $ | 0.01    |  |  | $        | 0.02   |  |         | $ | 0.01   |          |  | $ | (0.01   | ) |  | $ | (0.02  | ) |  | $ | (0.01  | )
|Weighted average shares outstanding  Basic   |  |                                       | 41,899 |   |         |   | 42,808 |          |  |   | 43,989  |  |  |          | 44,921 |  |         |   | 40,490 |          |  |   | 41,279  |   |  |   | 41,338 |   |  |   | 41,446 |  
|Weighted average shares outstanding  Diluted |  |                                       | 41,899 |   |         |   | 42,808 |          |  |   | 54,537  |  |  |          | 45,098 |  |         |   | 41,204 |          |  |   | 41,279  |   |  |   | 41,338 |   |  |   | 41,446 |  

38



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|    |                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In June 2005, we reported an operating loss of $1,034,000.
    However, we subsequently have determined that a $600,000 legal
    settlement originally included in non-operating expense should
    have been included in operating expenses. Therefore, we have
    changed the June 30, 2005 operating loss to reflect this
    reclassification.



Recently Issued Accounting Standards











|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure.








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

13a-15(e) 15d-15(e)













|         |                  
|-------- | -----------------
|Item 9B. | Other Information



39



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PART III







|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant.

Board of Directors




|                            |  |     |    |  |          |                                                             
|--------------------------- |  | --- | -- |  | -------- | ------------------------------------------------------------
|Name                        |  | Age |    |  | Position
|                            |  |     |    |  |         
|Michael J. Quinn(1)         |  |     | 62 |  |          | Chairman of the Board, President and Chief Executive Officer
|Joseph R. Kletzel, II(2)(3) |  |     | 56 |  |          | Director, Interim Chief Operating Officer                   
|Robert L. Mortensen(3)      |  |     | 72 |  |          | Director                                                    
|Marvin J. Slepian, M.D.(3)  |  |     | 50 |  |          | Chief Scientific Officer, Director                          
|Gary S. Allen, M.D.(3)      |  |     | 40 |  |          | Director                                                    






|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Quinns employment was terminated by the Company
    on July 12, 2006. Although he remains a director,
    Mr. Quinns service as Chairman of the Board
    terminated as of July 12, 2006.
|   
|(2) | Mr. Kletzel was appointed the Companys Chairman of
    the Board and interim Chief Executive Officer effective
    July 12, 2006.                                                             
|   
|(3) | Member of the Executive Committee of the Board of Directors.                                                                                                                                   





Michael J. Quinn


Joseph R. Kletzel, II


40



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##### Table of Contents





Robert L. Mortensen


Marvin J. Slepian, M.D.


Gary S. Allen, MD


Executive Officers


10-K


Audit Committee




41



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##### Table of Contents





Section 16(a) Beneficial Ownership Reporting
Compliance






















42



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##### Table of Contents







Code of Ethics









|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

Executive Officer Compensation




Summary Compensation Table


|                            |                                           |        |      |                     |           |   |         |              |  |              |              |        |  |     |        |       |      |  |         |         | 
|--------------------------- | ----------------------------------------- | ------ | ---- | ------------------- | --------- | - | ------- | ------------ |  | ------------ | ------------ | ------ |  | --- | ------ | ----- | ---- |  | ------- | ------- | 
|                            |                                           |        |      |                     |           |   |         |              |  | Long Term    |             
|                            |                                           |        |      |                     |           |   |         |              |  | Compensation |             
|                            |                                           |        |      |                     |           |   |         |              |  | Awards       |             
|                            |                                           |        |      |                     |           |   |         |              |  |              |             
|                            |                                           |        |      |                     |           |   |         | Securities   | 
|                            |                                           |        |      | Annual Compensation |           |   | Other   |              |  | Underlying   |             
|                            |                                           | Fiscal |      |                     |           |   |         | Compensation |  |              | Options/SARs |       
|Name and Principal Position |                                           | Year   |      |                     | Salary($) |   |         | Bonus($)     |  |              | ($)          |        |  | (#) |       
|                            |                                           |        |      |                     |           |   |         |              |  |              |              |        |  |     |       
|Michael J. Quinn            |                                           |        | 2005 |                     |           | $ | 417,000 |              |  | $            | 205,000      |        |  | $   | 14,000 | (1)   |      |  | 200,000 |        
|                            | Former Chief Executive Officer, President |        |      | 2004                |           |   |         | 410,000      |  |              |              | 90,000 |  |     |        | 7,000 | (2)  |  |         | 155,000 | 
|                            | and Chairman of the Board                 |        |      | 2003                |           |   |         | 388,000      |  |              |              | 80,000 |  |     |        | 7,000 | (2)  |  |         | 439,008 | 
|Christine G. Ocampo(3)      |                                           |        | 2005 |                     |           |   | 191,000 |              |  |              | 50,000       |        |  |     | 10,000 | (4)   |      |  | 75,000  |        
|                            | Former Chief Financial Officer, Senior    |        |      | 2004                |           |   |         | 175,000      |  |              |              | 25,000 |  |     |        | 6,000 | (5)  |  |         | 50,000  | 
|                            | Vice President and Treasurer              |        |      | 2003                |           |   |         | 136,000      |  |              |              | 20,000 |  |     |        | 5,000 | (6)  |  |         | 94,138  | 
|Richard P. Lanigan          |                                           |        | 2005 |                     |           |   | 262,000 |              |  |              | 60,000       |        |  |     | 13,000 | (7)   |      |  | 75,000  |        
|                            | Senior Vice President of Operations       |        |      | 2004                |           |   |         | 250,000      |  |              |              | 40,000 |  |     |        | 7,000 | (2)  |  |         | 50,000  | 
|                            |                                           |        |      | 2003                |           |   |         | 224,000      |  |              |              | 30,000 |  |     |        | 7,000 | (2)  |  |         | 233,134 | 
|Henry R. Rossell            |                                           |        | 2005 |                     |           |   | 187,000 |              |  |              | 101,000      |        |  |     | 13,000 | (7)   |      |  | 90,000  |        
|                            | Senior Vice President of Domestic Sales   |        |      | 2004                |           |   |         | 175,000      |  |              |              | 25,000 |  |     |        | 7,000 | (2)  |  |         | 50,000  | 
|                            |                                           |        |      | 2003                |           |   |         | 175,000      |  |              |              |       |  |     |        | 4,000 | (8)  |  |         | 150,000 | 
|Charles J. Scarano          |                                           |        | 2005 |                     |           |   | 162,000 |              |  |              | 44,000       |        |  |     | 9,000  | (9)   |      |  | 15,000  |        
|                            | Senior Vice President of Marketing        |        |      | 2004                |           |   |         | 82,000       |  |              |              |       |  |     |        | 1,000 | (10) |  |         |        | 
|Joseph R. Kletzel, II(11)   |                                           |        | 2005 |                     |           |   | 143,000 |              |  |              | 63,000       |        |  |     | 7,000  | (2)   |      |  | 40,000  |        
|                            | Director and Interim Chief Executive      |        |      | 2004                |           |   |         | 89,000       |  |              |              | 26,000 |  |     |        | 500   | (12) |  |         |        | 
|                            | Officer and Chief Operating Officer       |        |      |                     |           |   |         |              |  |              |              |        |  |     |        |       |      |  |         |         | 






| |     |                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Mr. Quinns employment was terminated by the Company
    on July 12, 2006. Although he remains a director,
    Mr. Quinns service as Chairman of the Board
    terminated as of July 12, 2006. Mr. Quinns 2005
    Other Compensation includes $13,000 in contributions to the
    Companys 401(k) plan and $1,000 in life insurance premiums.
|
| | (2) | Includes $6,000 in contributions to the Companys 401(k)
    plan and $1,000 in life insurance premiums.                                                                                                                                                                                                                                         

43



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##### Table of Contents





| |     |                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------
| | (3) | Effective April 5, 2006, Christine G. Ocampo resigned as an
    officer and employee of Cardiogenesis Corporation.
|
| | (4) | Includes $9,000 in contributions to the Companys 401(k)
    plan and $1,000 in life insurance premiums.          
|
| | (5) | Includes $5,000 in contributions to the Companys 401(k)
    plan and $1,000 in life insurance premiums.          
|
| | (6) | Includes $4,000 in contributions to the Companys 401(k)
    plan and $1,000 in life insurance premiums.          
|
| | (7) | Includes $12,000 in contributions to the Companys 401(k)
    plan and $1,000 in life insurance premiums.         
|
| | (8) | Includes $3,000 in contributions to the Companys 401(k)
    plan and $1,000 in life insurance premiums.          
|
| | (9) | Includes $8,000 in contributions to the Companys 401(k)
    plan and $1,000 in life insurance premiums.          



|     |                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes $500 in contributions to the Companys 401(k) plan
    and $500 in life insurance premiums.                                                                                                                                                          
|    
|(11) | Effective May 22, 2006, the Board of Directors of the
    Company appointed Joseph R. Kletzel II, a director of the
    Company, as interim Chief Operating Officer, and effective
    July 12, 2006, as its Chairman and interim Chief Executive
    Officer.
|    
|(12) | Includes $500 in life insurance premiums.                                                                                                                                                                                                                     

Option Grants in Fiscal Year 2005




Option Grants in Fiscal 2005 Fiscal Year Individual
Grants(1)


|                      |  |            |         |               |              |  |     |           |  |   |                      |                          |                    |    |           |  |     |   |        |  |  |   |         | 
|--------------------- |  | ---------- | ------- | ------------- | ------------ |  | --- | --------- |  | - | -------------------- | ------------------------ | ------------------ | -- | --------- |  | --- | - | ------ |  |  | - | ------- | 
|                      |  |            |         | Percentage of |              |  |     |           |  |   | Potential Realizable |                         
|                      |  | Number of  |         |               | Total        |  |     |           |  |   |                      | Value at Annual Rates of |                   
|                      |  | Securities |         |               | Options      |  |     |           |  |   |                      | Stock Price Appreciation |                   
|                      |  | Underlying |         |               | Granted to   |  |     | Exercise  |  |   |                      |                          | for Option Term(2) |   
|                      |  | Options    |         |               | Employees in |  |     | Price per |  |   | Expiration           |                          |                    |    |          
|Name                  |  | Granted    |         |               | Fiscal Year  |  |     | Share     |  |   | Date                 |                          |                    | 5% |           |  | 10% |  
|                      |  |            |         |               |              |  |     |           |  |   |                      |                          |                    |    |           |  |     |  
|Michael J. Quinn      |  |            | 200,000 |               |              |  | 19  | %         |  | $ | 0.54                 |                          |                    |    | 1/14/2015 |  |     | $ | 67,921 |  |  | $ | 172,124 | 
|Christine G. Ocampo   |  |            | 75,000  |               |              |  | 7   | %         |  | $ | 0.54                 |                          |                    |    | 1/14/2015 |  |     | $ | 25,470 |  |  | $ | 64,546  | 
|Richard P. Lanigan    |  |            | 75,000  |               |              |  | 7   | %         |  | $ | 0.54                 |                          |                    |    | 1/14/2015 |  |     | $ | 25,470 |  |  | $ | 64,546  | 
|Henry R. Rossell      |  |            | 3,750   |               |              |  | 0.4 | %         |  | $ | 0.42                 |                          |                    |    | 12/8/2015 |  |     | $ | 991    |  |  | $ | 2,510   | 
|Henry R. Rossell      |  |            | 5,000   |               |              |  | 0.5 | %         |  | $ | 0.49                 |                          |                    |    | 9/27/2015 |  |     | $ | 1,541  |  |  | $ | 3,905   | 
|Henry R. Rossell      |  |            | 2,500   |               |              |  | 0.2 | %         |  | $ | 0.54                 |                          |                    |    | 9/2/2015  |  |     | $ | 849    |  |  | $ | 2,152   | 
|Henry R. Rossell      |  |            | 3,750   |               |              |  | 0.4 | %         |  | $ | 0.61                 |                          |                    |    | 8/9/2015  |  |     | $ | 1,439  |  |  | $ | 3,646   | 
|Henry R. Rossell      |  |            | 75,000  |               |              |  | 7   | %         |  | $ | 0.54                 |                          |                    |    | 1/14/2015 |  |     | $ | 25,470 |  |  | $ | 64,547  | 
|Charles J. Scarano    |  |            | 15,000  |               |              |  | 1   | %         |  | $ | 0.54                 |                          |                    |    | 1/14/2015 |  |     | $ | 5,094  |  |  | $ | 12,909  | 
|Joseph R. Kletzel, II |  |            | 20,000  |               |              |  | 2   | %         |  | $ | 0.54                 |                          |                    |    | 1/14/2015 |  |     | $ | 6,792  |  |  | $ | 17,212  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each of these options was granted pursuant to our Stock Option
    Plan. Options to purchase a total of 1,036,250 shares of
    common stock were granted to our employees in the year ended
    December 31, 2005.                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | In accordance with the rules of the Securities and Exchange
    Commission, shown are the hypothetical gains or option
    spreads that would exist for the respective options. These
    gains are based on assumed rates of annual compounded stock
    price appreciation of 5% and 10% from the date the option was
    granted over the full option term. The 5% and 10% assumed rates
    of appreciation are mandated by the rules of the SEC and do not
    represent our estimate or projection of future increases in the
    price of our Common Stock.

44



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##### Table of Contents



Options Exercises in Fiscal Year and Year End Option
Values




Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values


|                      |  |              |         |  |          |                        |                      |             |                         |                          |               |  |  |             |        |  |               |   |        |  |  |   |   | 
|--------------------- |  | ------------ | ------- |  | -------- | ---------------------- | -------------------- | ----------- | ----------------------- | ------------------------ | ------------- |  |  | ----------- | ------ |  | ------------- | - | ------ |  |  | - | - | 
|                      |  |              |         |  |          | Number of Securities   |                      |             |                        
|                      |  |              |         |  |          | Underlying Unexercised |                      |             | Value of Unexercised   
|                      |  |              |         |  |          | Options at             |                      |             | In-the-Money Options at
|                      |  | Shares       |         |  |          |                        | Fiscal Year-End (#): |             |                         | Fiscal Year-End ($) (1):
|                      |  | Acquired on  |         |  | Value    |                        |                      |             |                         |                          |              
|                      |  | Exercise (#) |         |  | Realized |                        |                      | Exercisable |                         |                          | Unexercisable |  |  | Exercisable |        |  | Unexercisable
|                      |  |              |         |  |          |                        |                      |             |                         |                          |               |  |  |             |        |  |              
|Michael J. Quinn      |  |              | 100,000 |  |          | $                      | 9,000                |             |                         |                          | 1,631,091     |  |  |             | 37,917 |  |               | $ | 18,901 |  |  | $ |  | 
|Christine G. Ocampo   |  |              |        |  |          |                        |                     |             |                         |                          | 200,750       |  |  |             | 6,167  |  |               | $ |       |  |  | $ |  | 
|Richard P. Lanigan    |  |              |        |  |          |                        |                     |             |                         |                          | 530,800       |  |  |             | 20,834 |  |               | $ | 13,313 |  |  | $ |  | 
|Henry R. Rossell      |  |              |        |  |          |                        |                     |             |                         |                          | 262,500       |  |  |             | 27,500 |  |               | $ | 10,000 |  |  | $ |  | 
|Charles J. Scarano    |  |              |        |  |          |                        |                     |             |                         |                          | 45,000        |  |  |             | 35,000 |  |               | $ |       |  |  | $ |  | 
|Joseph R. Kletzel, II |  |              |        |  |          |                        |                     |             |                         |                          | 70,000        |  |  |             | 50,000 |  |               | $ |       |  |  | $ |  | 






|    |                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The value for an in the money option represents the
    difference between the exercise price of such option and $0.42,
    the closing price of Cardiogenesis Common Stock on
    December 30, 2005, multiplied by the total number of shares
    subject to the option.

Employment Contracts of Executive Officers




Compensation Committee Interlocks and Insider
Participation






45



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##### Table of Contents



Report of the Compensation Committee of the Board of
Directors








| |                        
| | -----------------------
| | Compensation Philosophy





| |            
| | -----------
| | Base Salary





| |                                                
| | -----------------------------------------------
| | Compensation to Chief Executive Officer in 2005





| |                                                                          
| | -------------------------------------------------------------------------
| | Stock Option Plan, Stock Purchase Plan and Certain Other
    Compensation



46



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##### Table of Contents













| |                        
| | -----------------------
| | Compensation Committee 
|
| | Marvin J. Slepian, M.D.

Director Compensation




Certain Relationships and Related Transactions






47



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##### Table of Contents



Stock Performance Graph






COMPARE 5-YEAR CUMULATIVE TOTAL RETURN


AMONG CARDIOGENESIS CORPORATION,


NASDAQ MARKET INDEX AND NASDAQ MEDICAL DEVICES











48



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##### Table of Contents








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT






| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | each person know to us to be the beneficial owner of more than
    5% of our outstanding common stock;
|
| |  | each named executive officer;                                                                         
|
| |  | each of our directors; and                                                                            
|
| |  | all executive officers and directors as a group.                                                      



|                                                                 |                      |                        |           |            |              |  |      |   | 
|---------------------------------------------------------------- | -------------------- | ---------------------- | --------- | ---------- | ------------ |  | ---- | - | 
|                                                                 |                      | Shares of Common Stock |          
|                                                                 |                      | Beneficially Owned(1)  |          
|                                                                 |                      |                        |          
|                                                                 |                      |                        |           | Percentage |             
|Name of Beneficial Owner                                         |                      | Number                 |           |            | Ownership(2) | 
|                                                                 |                      |                        |           |            |              | 
|5% Shareholders:                                                 |                      |                        |           |            |              |  |      |  
|Perkins Capital Management, Inc.(3)                              |                      |                        | 5,763,700 |            |              |  | 12.7 | %
|                                                                 | 730 East Lake Street |                        |           |            |              |  |      |   | 
|                                                                 | Wayzata, MN 55391    |                        |           |            |              |  |      |   | 
|Non-Employee Directors:                                          |                      |                        |           |            |              |  |      |  
|Robert L. Mortensen(4)                                           |                      |                        | 191,196   |            |              |  | *    |  
|Marvin J. Slepian, M.D.(5)                                       |                      |                        | 135,000   |            |              |  | *    |  
|Gary S. Allen, M.D.(6)                                           |                      |                        | 390,916   |            |              |  | *    |  
|Named Executive Officers:                                        |                      |                        |           |            |              |  |      |  
|Michael J. Quinn(7)(8)                                           |                      |                        | 2,006,380 |            |              |  | 4.3  | %
|Christine G. Ocampo(9)                                           |                      |                        | 20,000    |            |              |  | *    |  
|Richard P. Lanigan(10)                                           |                      |                        | 601,106   |            |              |  | 1.3  | %
|Henry R. Rossell, Jr(11)                                         |                      |                        | 278,750   |            |              |  | *    |  
|Charles J. Scarano(12)                                           |                      |                        | 73,333    |            |              |  | *    |  
|Joseph R. Kletzel, Sr.(13)                                       |                      |                        | 212,222   |            |              |  | *    |  
|All directors and executive officers as a group (12 persons)(14) |                      |                        | 4,383,428 |            |              |  | 9.0  | %






| |   |              
| | - | -------------
| | * | Less than 1%.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Except as otherwise indicated and subject to applicable
    community property and similar laws, the Company assumes that
    each named owner has the sole voting and investment power with
    respect to such owners shares (other than shares subject
    to options). Amount shares beneficially owned includes shares
    which are subject to options that are currently, or within sixty
    days following June 30, 2006, will be, exercisable.
|
| | (2) | Percentage ownership is based on 45,244,194 shares of
    Common Stock outstanding as of June 30, 2006.                                                                                                                                                                                                                                                                                                                                                  

49



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##### Table of Contents





| |     |                                                                                                                                                                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | The number of shares of Common Stock beneficially owned or of
    record has been determined solely from information reported on a
    Schedule 13G as of January 27, 2006.                                                                                                                                                                
|
| | (4) | Includes 165,000 shares of Common Stock subject to stock
    options held by Mr. Mortensen that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                                       
|
| | (5) | Includes 135,000 shares of Common Stock subject to stock
    options held by Dr. Slepian that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                                         
|
| | (6) | Includes 19,166 shares of Common Stock subject to stock
    options held by Dr. Allen that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                                            
|
| | (7) | Mr. Quinns employment was terminated on July 12,
    2006. His address is 31132 Via Consuelo, Coto de Caza, CA 92679                                                                                                                                                                                                                      
|
| | (8) | Includes 1,603,730 shares of Common Stock subject to stock
    options held by Mr. Quinn that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                                         
|
| | (9) | Ms. Ocampo served as the Chief Executive Officer and Senior
    Vice President of the Company until her resignation on
    April 5, 2006. Share numbers represent shares of Common
    Stock subject to options that are exercisable within
    60 days of June 30, 2006. The exercise period for such
    options expires on July 5, 2006.



|     |                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 565,523 shares of Common Stock subject to stock
    options held by Mr. Lanigan that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                          
|    
|(11) | Includes 278,750 shares of Common Stock subject to stock
    options held by Mr. Rossell that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                          
|    
|(12) | Includes 73,333 shares of Common Stock subject to stock
    options held by Mr. Scarano that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                           
|    
|(13) | Includes 212,222 shares of Common Stock subject to stock
    options held by Mr. Kletzel that are exercisable within
    60 days of June 30, 2006.                                                                                                                                                                          
|    
|(14) | Represents shares of Common Stock beneficially owned by all
    directors, named executive officers, and other executive
    officers of the Company as of June 30, 2006, as a group.
    Includes options to purchase an aggregate of
    3,425,252 shares of Common Stock exercisable within
    60 days of June 30, 2006.

Equity Compensation Plan Information




|                                                            |  |                      |            |  |                      |   |                      |                                     |  |  |                      |  |  |  |            | 
|----------------------------------------------------------- |  | -------------------- | ---------- |  | -------------------- | - | -------------------- | ----------------------------------- |  |  | -------------------- |  |  |  | ---------- | 
|                                                            |  | (a)                  |            |  | (b)                  |   |                      | (c)                                 |  |  | (d)                  | 
|                                                            |  |                      |            |  |                      |   |                      |                                     |  |  |                      | 
|                                                            |  | Number of Securities |            |  |                      |   | Number of Securities |                                     |  | 
|                                                            |  | to be Issued         |            |  | Weighted Average     |   |                      | Remaining Available for             |  |  |                     
|                                                            |  | Upon Exercise of     |            |  | Exercise Price of    |   |                      | Issuance Under Equity               |  |  | Total of Securities  | 
|                                                            |  | Outstanding Options, |            |  | Outstanding Options, |   |                      | Compensation Plans (Excluding       |  |  | Reflected in Columns | 
|Plan Category                                               |  | Warrants and Rights  |            |  | Warrants and Rights  |   |                      | Securities Reflected in Column (a)) |  |  | (a) and (c)          | 
|                                                            |  |                      |            |  |                      |   |                      |                                     |  |  |                      | 
|Stock Option Plans Approved by Shareholders(1)              |  |                      | 4,537,000  |  |                      | $ | 1.10                 |                                     |  |  | 4,142,000            |  |  |  | 8,679,000  | 
|Other Equity Compensation Plans Approved by Shareholders(2) |  |                      |           |  |                      |   |                     |                                     |  |  |                     |  |  |  |           | 
|Equity Compensation Plans Not Approved by Shareholders(3)   |  |                      | 6,090,000  |  |                      | $ | 0.95                 |                                     |  |  | N/A                  |  |  |  | 6,090,000  | 
|                                                            |  |                      |            |  |                      |   |                      |                                     |  |  |                      | 
|Total                                                       |  |                      | 10,627,000 |  |                      |   |                      |                                     |  |  | 4,142,000            |  |  |  | 14,769,000 | 
|                                                            |  |                      |            |  |                      |   |                      |                                     |  |  |                      | 

50



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of the Cardiogenesis Corporation Stock Option Plan,
    Employee Stock Purchase Plan and Director Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | Consists of the Cardiogenesis Corporation Employee Stock
    Purchase Plan. The Employee Stock Purchase Plan enables
    employees to purchase the Companys common stock at a 15%
    discount to the lower of market value at the beginning or end of
    each six month offering period. As such, the number of shares
    that may be issued pursuant to the Employee Stock Purchase Plan
    during a given six month period and the purchase price of such
    shares cannot be determined in advance.         
|   
|(3) | Consists of 75,000 shares of common stock at a price of
    $1.63 per share in connection with a facilities lease
    agreement executed in 2001, 275,000 shares of common stock
    at exercise prices ranging from $0.35 to $0.44 per share in
    connection with a credit facility, 3,100,000 shares at a
    price of $1.37 in conjunction with a private equity offering,
    2,640,000 shares of common stock at a price of
    $0.50 per share in connection with the secured convertible
    note agreement.






|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions.










|         |                                        
|-------- | ---------------------------------------
|Item 14. | Principal Accountant Fees and Services.

Audit Fees




|                   |                |      |         |         |      |   |        |         | 
|------------------ | -------------- | ---- | ------- | ------- | ---- | - | ------ | ------- | 
|                   |                | 2004 |         |         | 2005 |  
|                   |                |      |         |         |      |  
|Audit Fees         |                | $    | 189,680 |         |      | $ | 82,200 |        
|Audit-Related Fees |                |      | 93,292  |         |      |   | 93,837 |        
|Tax Fees           |                |      | 39,914  |         |      |   |       |        
|All Other Fees     |                |      | 1,500   |         |      |   | 6,250  |        
|                   |                |      |         |         |      |  
|                   | Total PwC Fees |      | $       | 324,386 |      |   | $      | 182,287 | 
|                   |                |      |         |         |      |  

10-Q








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Audit Committee Policies and Procedures for Preapproval of
Audit and Non-Audit Services


pre-approval







PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedule.

Financial Statements.


|    |  |                                                                                                                  |  |      |      | 
|--- |  | ---------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|    |  |                                                                                                                  |  | Page |     
|    |  |                                                                                                                  |  |      |     
|    |  | Reports of Independent Registered Public Accounting Firms                                                        |  |      | F-2  | 
|    |  | Consolidated Balance Sheets as of December 31, 2005 and 2004                                                     |  |      | F-4  | 
|    |  | Consolidated Statements of Operations for the years ended
    December 31, 2005, 2004 and 2003                   |  |      | F-5  | 
|    |  | Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2005, 2004 and 2003         |  |      | F-6  | 
|    |  | Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, 2004 and 2003                   |  |      | F-7  | 
|    |  | Notes to Consolidated Financial Statements                                                                       |  |      | F-8  | 
|   
|(2) |  | Financial Statement Schedule                                                                                     |  |      |      | 
|    |  | The following financial statement schedule is filed herewith
    Schedule II  Valuation and Qualifying Accounts |  |      | F-27 | 
|   
|(3) |  | Exhibits.                                                                                                        |  |      |      | 
|    |  | The exhibits listed under Item 15(b) are filed or
    incorporated by reference herein                           |  |      |      | 

Exhibits.




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SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.




| |                          
| | -------------------------
| | CARDIOGENESIS CORPORATION



| |     |                          
| | --- | -------------------------
| | By: | /s/ JOSEPH R. KLETZEL, II

| |                                   
| | ----------------------------------
| |                                   
| | Joseph R. Kletzel, II             
| | Interim Chief Executive Officer,  
| | Interim Chief Operating Officer   
| | Chairman of the Board and Director
| | (Principal Executive Officer)     



Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the
date indicated.


|                                                           |  |                                                                                                                                  |  |                 |  | 
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | --------------- |  | 
|Signature                                                  |  | Title                                                                                                                            |  | Date           
|                                                           |  |                                                                                                                                  |  |                
|                                                          
|/s/ JOSEPH R.
    KLETZEL, IIJoseph
    R. Kletzel, II     |  | Interim Chief Executive Officer, Interim Chief Operating
    Officer, Chairman and Director
    (Principal Executive Officer)    |  | August 21, 2006
|                                                          
|/s/ WILLIAM R. ABBOTTWilliam
    R. Abbott                 |  | Senior Vice President, Chief Financial Officer, Secretary and
    Treasurer
    (Principal Financial and
    Accounting Officer) |  | August 21, 2006
|                                                          
|/s/ GARY S.
    ALLEN, M.D.Gary
    S. Allen, M.D.         |  | Director                                                                                                                         |  | August 21, 2006
|                                                          
|/s/ ROBERT L. MORTENSENRobert
    L. Mortensen             |  | Director                                                                                                                         |  | August 21, 2006
|                                                          
|/s/ MARVIN J.
    SLEPIAN, M.D.Marvin
    J. Slepian, M.D. |  | Director                                                                                                                         |  | August 21, 2006

53



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##### Table of Contents






INDEX TO FINANCIAL STATEMENTS AND SCHEDULE


|                                                                                                             |  |      |      | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | ---- | 
|                                                                                                             |  | Page |     
|                                                                                                             |  |      |     
|Reports of Independent Registered Public
    Accounting Firms                                                |  |      | F-2  | 
|Consolidated balance sheets at
    December 31, 2005 and 2004                                                |  |      | F-4  | 
|Consolidated statements of operations for
    the years ended December 31, 2005, 2004 and 2003               |  |      | F-5  | 
|Consolidated statements of
    shareholders equity for the years ended December 31,
    2005, 2004 and 2003 |  |      | F-6  | 
|Consolidated statements of cash flows for
    the years ended December 31, 2005, 2004 and 2003               |  |      | F-7  | 
|Notes to consolidated financial
    statements                                                               |  |      | F-8  | 
|Financial Statement Schedule 
    Schedule II  Valuation and Qualifying
    Accounts                       |  |      | F-27 | 

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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                          
| | -------------------------
| | /s/ Corbin & Company, LLP
| |                          
| | Corbin & Company, LLP    





F-2



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP





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##### Table of Contents



CARDIOGENESIS CORPORATION





CONSOLIDATED BALANCE SHEETS


December 31, 2005 and 2004


|                                                           |                                                                                                               |                                                                                                                                             |       |          |         |  |       |          |         | 
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ----- | -------- | ------- |  | ----- | -------- | ------- | 
|                                                           |                                                                                                               | 2005                                                                                                                                        |       |          | 2004    | 
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                           |                                                                                                               | (In thousands)                                                                                                                              |      
|ASSETS                                                    
|Current assets:                                            |                                                                                                               |                                                                                                                                             |       |          |         |  |       |         
|                                                           | Cash and cash equivalents                                                                                     |                                                                                                                                             | $     | 1,843    |         |  | $     | 4,740    |        
|                                                           | Accounts receivable, net of allowance for doubtful accounts of
    $212 and $11 at December 31, 2005 and 2004 |                                                                                                                                             |       | 3,067    |         |  |       | 3,578    |        
|                                                           | Inventories, net of inventory reserve of $391 and $402 at
    December 31, 2005 and 2004                      |                                                                                                                                             |       | 2,724    |         |  |       | 1,695    |        
|                                                           | Prepaids and other current assets                                                                             |                                                                                                                                             |       | 320      |         |  |       | 513      |        
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                           |                                                                                                               | Total current assets                                                                                                                        |       |          | 7,954   |  |       |          | 10,526  | 
|Property and equipment, net                                |                                                                                                               |                                                                                                                                             | 904   |          |         |  | 688   |         
|Restricted cash                                            |                                                                                                               |                                                                                                                                             | 2,508 |          |         |  | 2,884 |         
|Other assets                                               |                                                                                                               |                                                                                                                                             | 1,172 |          |         |  | 1,585 |         
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                           |                                                                                                               | Total assets                                                                                                                                |       | $        | 12,538  |  |       | $        | 15,683  | 
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                          
|LIABILITIES AND SHAREHOLDERS EQUITY                      
|Current liabilities:                                       |                                                                                                               |                                                                                                                                             |       |          |         |  |       |         
|                                                           | Accounts payable                                                                                              |                                                                                                                                             | $     | 1,077    |         |  | $     | 893      |        
|                                                           | Accrued liabilities                                                                                           |                                                                                                                                             |       | 1,055    |         |  |       | 1,263    |        
|                                                           | Deferred revenue                                                                                              |                                                                                                                                             |       | 394      |         |  |       | 658      |        
|                                                           | Current portion of note payable                                                                               |                                                                                                                                             |       | 16       |         |  |       |         |        
|                                                           | Current portion of capital lease obligation                                                                   |                                                                                                                                             |       | 5        |         |  |       | 5        |        
|                                                           | Current portion of secured convertible term note and related
    obligations                                  |                                                                                                                                             |       | 4,769    |         |  |       | 800      |        
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                           |                                                                                                               | Total current liabilities                                                                                                                   |       |          | 7,316   |  |       |          | 3,619   | 
|Capital lease obligation, less current portion             |                                                                                                               |                                                                                                                                             | 12    |          |         |  | 18    |         
|Other long-term liability                                  |                                                                                                               |                                                                                                                                             | 344   |          |         |  | 496   |         
|Secured convertible term note and related obligations, net |                                                                                                               |                                                                                                                                             |      |          |         |  | 6,815 |         
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                           |                                                                                                               | Total liabilities                                                                                                                           |       |          | 7,672   |  |       |          | 10,948  | 
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|Commitments and contingencies (Note 9)                     |                                                                                                               |                                                                                                                                             |       |          |         |  |       |         
|Shareholders equity:                                      |                                                                                                               |                                                                                                                                             |       |          |         |  |       |         
|                                                           | Preferred stock:                                                                                              |                                                                                                                                             |       |          |         |  |       |          |        
|                                                           |                                                                                                               | no par value; 5,000 shares authorized; none issued and
    outstanding                                                                      |       |          |        |  |       |          |        | 
|                                                           | Common stock:                                                                                                 |                                                                                                                                             |       |          |         |  |       |          |        
|                                                           |                                                                                                               | no par value; 75,000 shares authorized; 45,102 and
    41,500 shares issued and outstanding at December 31,
    2005 and 2004, respectively |       |          | 173,000 |  |       |          | 171,012 | 
|                                                           | Accumulated deficit                                                                                           |                                                                                                                                             |       | (168,134 | )       |  |       | (166,277 | )      
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                           |                                                                                                               | Total shareholders equity                                                                                                                  |       |          | 4,866   |  |       |          | 4,735   | 
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 
|                                                           |                                                                                                               | Total liabilities and shareholders equity                                                                                                  |       | $        | 12,538  |  |       | $        | 15,683  | 
|                                                           |                                                                                                               |                                                                                                                                             |       |          |         | 



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##### Table of Contents



CARDIOGENESIS CORPORATION





CONSOLIDATED STATEMENTS OF OPERATIONS


For the Years Ended December 31, 2005, 2004 and 2003


|                                     |                                   |                          |        |        |        |   |        |        |        |   |        |        |        |  
|------------------------------------ | --------------------------------- | ------------------------ | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                     |                                   | 2005                     |        |        | 2004   |   |        | 2003   |       
|                                     |                                   |                          |        |        |        |   |        |        |       
|                                     |                                   | (In thousands, except    |       
|                                     |                                   | per share amounts)       |       
|Net revenues                         |                                   | $                        | 16,341 |        |        | $ | 15,454 |        |        | $ | 13,518 |       
|Cost of revenues                     |                                   |                          | 2,998  |        |        |   | 2,193  |        |        |   | 2,295  |       
|                                     |                                   |                          |        |        |        |   |        |        |       
|                                     |                                   | Gross profit             |        |        | 13,343 |   |        |        | 13,261 |   |        |        | 11,223 |  
|                                     |                                   |                          |        |        |        |   |        |        |       
|Operating expenses:                  |                                   |                          |        |        |        |   |        |        |        |   |        |       
|                                     | Research and development          |                          |        | 1,725  |        |   |        | 1,442  |        |   |        | 1,944  |       
|                                     | Sales, general and administrative |                          |        | 14,110 |        |   |        | 11,322 |        |   |        | 9,590  |       
|                                     |                                   |                          |        |        |        |   |        |        |       
|                                     |                                   | Total operating expenses |        |        | 15,835 |   |        |        | 12,764 |   |        |        | 11,534 |  
|                                     |                                   |                          |        |        |        |   |        |        |       
|                                     |                                   | Operating income (loss)  |        |        | (2,492 | ) |        |        | 497    |   |        |        | (311   | )
|Other income (expense):              |                                   |                          |        |        |        |   |        |        |        |   |        |       
|Interest expense                     |                                   |                          | (569   | )      |        |   | (135   | )      |        |   | (44    | )     
|Interest income                      |                                   |                          | 162    |        |        |   | 48     |        |        |   | 7      |       
|Non-cash interest expense            |                                   |                          | (1,414 | )      |        |   | (176   | )      |        |   |       |       
|Change in fair value of derivative   |                                   |                          | 2,100  |        |        |   | (1,263 | )      |        |   |       |       
|Other non-cash income (expense)      |                                   |                          | 356    |        |        |   | (290   | )      |        |   |       |       
|                                     |                                   |                          |        |        |        |   |        |        |       
|Total other income (expense)         |                                   |                          | 635    |        |        |   | (1,816 | )      |        |   | (37    | )     
|                                     |                                   |                          |        |        |        |   |        |        |       
|                                     |                                   | Net loss                 |        |        | (1,857 | ) |        |        | (1,319 | ) |        |        | (348   | )
|                                     |                                   |                          |        |        |        |   |        |        |       
|Net loss per share:                  |                                   |                          |        |        |        |   |        |        |        |   |        |       
|                                     | Basic and diluted                 |                          | $      | (0.04  | )      |   | $      | (0.03  | )      |   | $      | (0.01  | )     
|                                     |                                   |                          |        |        |        |   |        |        |       
|Weighted average shares outstanding: |                                   |                          |        |        |        |   |        |        |        |   |        |       
|                                     | Basic and diluted                 |                          |        | 43,414 |        |   |        | 41,152 |        |   |        | 37,303 |       
|                                     |                                   |                          |        |        |        |   |        |        |       



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##### Table of Contents



CARDIOGENESIS CORPORATION





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


For the Years Ended December 31, 2005, 2004 and 2003


|                            |                                                                                                 |                |        |       |             |   |         |         |   |   |          |        |   |   |       |        |  
|--------------------------- | ----------------------------------------------------------------------------------------------- | -------------- | ------ | ----- | ----------- | - | ------- | ------- | - | - | -------- | ------ | - | - | ----- | ------ | -
|                            |                                                                                                 | Common Stock   |        |       |             |   |        
|                            |                                                                                                 |                |        |       | Accumulated |   |         |        
|                            |                                                                                                 | Shares         |        |       | Amount      |   |         | Deficit |   |   | Total    |       
|                            |                                                                                                 |                |        |       |             |   |         |         |   |   |          |       
|                            |                                                                                                 | (In thousands) |       
|Balances, December 31, 2002 |                                                                                                 |                | 37,121 |       |             | $ | 168,321 |         |   | $ | (164,610 | )      |   | $ | 3,711 |       
|                            | Issuance of common stock pursuant to exercise of options                                        |                |        | 607   |             |   |         | 294     |   |   |          |       |   |   |       | 294    |  
|                            | Issuance of common stock pursuant to stock purchased under the
    Employee Stock Purchase Plan |                |        | 131   |             |   |         | 88      |   |   |          |       |   |   |       | 88     |  
|                            | Issuance of common stock purchase warrants                                                      |                |        |      |             |   |         | 75      |   |   |          |       |   |   |       | 75     |  
|                            | Net loss                                                                                        |                |        |      |             |   |         |        |   |   |          | (348   | ) |   |       | (348   | )
|                            |                                                                                                 |                |        |       |             |   |         |         |   |   |          |       
|Balances, December 31, 2003 |                                                                                                 |                | 37,859 |       |             |   | 168,778 |         |   |   | (164,958 | )      |   |   | 3,820 |       
|                            | Issuance of common stock pursuant to exercise of options                                        |                |        | 317   |             |   |         | 184     |   |   |          |       |   |   |       | 184    |  
|                            | Issuance of common stock pursuant to stock purchased under the
    Employee Stock Purchase Plan |                |        | 184   |             |   |         | 87      |   |   |          |       |   |   |       | 87     |  
|                            | Issuance of common stock for cash                                                               |                |        | 3,140 |             |   |         | 2,304   |   |   |          |       |   |   |       | 2,304  |  
|                            | Reclassification of stock purchase warrants to long-term
    liabilities                        |                |        |      |             |   |         | (341    | ) |   |          |       |   |   |       | (341   | )
|                            | Net loss                                                                                        |                |        |      |             |   |         |        |   |   |          | (1,319 | ) |   |       | (1,319 | )
|                            |                                                                                                 |                |        |       |             |   |         |         |   |   |          |       
|Balances, December 31, 2004 |                                                                                                 |                | 41,500 |       |             |   | 171,012 |         |   |   | (166,277 | )      |   |   | 4,735 |       
|                            |                                                                                                 |                |        |       |             |   |         |         |   |   |          |       
|                            | Issuance of common stock pursuant to stock purchased under the
    Employee Stock Purchase Plan |                |        | 273   |             |   |         | 126     |   |   |          |       |   |   |       | 126    |  
|                            | Issuance of common stock for option exercises                                                   |                |        | 146   |             |   |         | 47      |   |   |          |       |   |   |       | 47     |  
|                            | Issuance of common stock related to conversions                                                 |                |        | 3,183 |             |   |         | 1,815   |   |   |          |       |   |   |       | 1,815  |  
|                            | Net loss                                                                                        |                |        |      |             |   |         |        |   |   |          | (1,857 | ) |   |       | (1,857 | )
|                            |                                                                                                 |                |        |       |             |   |         |         |   |   |          |       
|Balances, December 31, 2005 |                                                                                                 |                | 45,102 |       |             | $ | 173,000 |         |   | $ | (168,134 | )      |   | $ | 4,866 |       
|                            |                                                                                                 |                |        |       |             |   |         |         |   |   |          |       



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##### Table of Contents



CARDIOGENESIS CORPORATION





CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2005, 2004 and 2003


|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |       |        |       |      |      |      |      |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------- | ---------------------------------------------------- | ------ | ------ | ------ | ------ | ----- | ------ | ----- | ---- | ---- | ---- | ---- | -
|                                                                                |                                                                                                                                             | 2005                                           |                                   |                                                      | 2004   |        |        | 2003   |      
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                |                                                                                                                                             | (In thousands)                                 |                                  
|Cash flows from operating activities:                                           |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |       |        |       |     
|                                                                                | Net loss                                                                                                                                    |                                                | $                                 | (1,857                                               | )      |        | $      | (1,319 | )     |        | $     | (348 | )   
|Adjustments to reconcile net loss to net cash used in operating
    activities: |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |       |        |       |     
|                                                                                |                                                                                                                                             | Derivative and warrant fair value adjustments  |                                   |                                                      | (2,456 | )      |        |        | 1,553 |        |       |      |     |     
|                                                                                |                                                                                                                                             | Accretion related to discount on notes payable |                                   |                                                      | 827    |        |        |        | 141   |        |       |      |     |     
|                                                                                |                                                                                                                                             | Depreciation and amortization                  |                                   |                                                      | 512    |        |        |        | 260   |        |       |      | 414  |     
|                                                                                |                                                                                                                                             | Loss on conversion of debt                     |                                   |                                                      | 387    |        |        |        |      |        |       |      |     |     
|                                                                                |                                                                                                                                             | Provision for doubtful accounts                |                                   |                                                      | 213    |        |        |        | 19    |        |       |      | 26   |     
|                                                                                |                                                                                                                                             | Inventory reserves                             |                                   |                                                      |       |        |        |        |      |        |       |      | 45   |     
|                                                                                |                                                                                                                                             | Interest expense accrued on note payable       |                                   |                                                      | 255    |        |        |        | 77    |        |       |      |     |     
|                                                                                |                                                                                                                                             | Amortization of other assets                   |                                   |                                                      | 194    |        |        |        | 195   |        |       |      | 195  |     
|                                                                                |                                                                                                                                             | Amortization of debt issuance costs            |                                   |                                                      | 200    |        |        |        | 66    |        |       |      | 44   |     
|                                                                                |                                                                                                                                             | Reduction of clinical trial accrual            |                                   |                                                      |       |        |        |        | (152  | )      |       |      | (601 | )   
|                                                                                |                                                                                                                                             | Changes in operating assets and liabilities:   |                                   |                                                      |        |        |        |        |       |        |       |      |      |     
|                                                                                |                                                                                                                                             |                                                | Accounts receivable               |                                                      |        | 298    |        |        |       | (1,767 | )     |      |      | 105  |     
|                                                                                |                                                                                                                                             |                                                | Inventories                       |                                                      |        | (1,070 | )      |        |       | (402   | )     |      |      | 122  |     
|                                                                                |                                                                                                                                             |                                                | Prepaids and other current assets |                                                      |        | 488    |        |        |       | 259    |       |      |      | 202  |     
|                                                                                |                                                                                                                                             |                                                | Other assets                      |                                                      |        | 19     |        |        |       | (157   | )     |      |      | (103 | )   
|                                                                                |                                                                                                                                             |                                                | Accounts payable                  |                                                      |        | 184    |        |        |       | 17     |       |      |      | (365 | )   
|                                                                                |                                                                                                                                             |                                                | Accrued liabilities               |                                                      |        | (298   | )      |        |       | 256    |       |      |      | (316 | )   
|                                                                                |                                                                                                                                             |                                                | Customer deposits                 |                                                      |        |       |        |        |       | (25    | )     |      |      | (25  | )   
|                                                                                |                                                                                                                                             |                                                | Deferred revenue                  |                                                      |        | (264   | )      |        |       | 85     |       |      |      | (48  | )   
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                |                                                                                                                                             |                                                |                                   | Net cash used in operating activities                |        |        | (2,368 | )      |       |        | (894  | )    |      |      | (653 | )
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|Cash flows from investing activities:                                           |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |       |        |       |     
|                                                                                | Acquisition of property and equipment                                                                                                       |                                                |                                   | (687                                                 | )      |        |        | (474   | )     |        |       | (107 | )   
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                |                                                                                                                                             |                                                |                                   | Net cash used in investing activities                |        |        | (687   | )      |       |        | (474  | )    |      |      | (107 | )
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|Cash flows from financing activities:                                           |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |       |        |       |     
|                                                                                | Decrease in restricted cash, net of interest income                                                                                         |                                                |                                   | 376                                                  |        |        |        |       |       |        |       |     |     
|                                                                                | Net proceeds from issuance of common stock from exercise of
    options and from stock purchased under the Employee Stock
    Purchase Plan |                                                |                                   | 173                                                  |        |        |        | 271    |       |        |       | 307  |     
|                                                                                | Net proceeds from sale of common stock to private entities                                                                                  |                                                |                                   |                                                     |        |        |        | 2,304  |       |        |       |     |     
|                                                                                | Payments on short term borrowings                                                                                                           |                                                |                                   | (278                                                 | )      |        |        | (351   | )     |        |       |     |     
|                                                                                | Net proceeds from issuance of long-term debt                                                                                                |                                                |                                   |                                                     |        |        |        | 2,875  |       |        |       |     |     
|                                                                                | Repayment of note payable                                                                                                                   |                                                |                                   | (107                                                 | )      |        |        |       |       |        |       |     |     
|                                                                                | Repayments of capital lease obligations                                                                                                     |                                                |                                   | (6                                                   | )      |        |        | (4     | )     |        |       | (24  | )   
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                |                                                                                                                                             |                                                |                                   | Net cash provided by financing activities            |        |        | 158    |        |       |        | 5,095 |      |      |      | 283  |  
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                |                                                                                                                                             |                                                |                                   | Net (decrease) increase in cash and cash equivalents |        |        | (2,897 | )      |       |        | 3,727 |      |      |      | (477 | )
|Cash and cash equivalents at beginning of year                                  |                                                                                                                                             |                                                | 4,740                             |                                                      |        |        | 1,013  |        |       |        | 1,490 |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|Cash and cash equivalents at end of year                                        |                                                                                                                                             | $                                              | 1,843                             |                                                      |        | $      | 4,740  |        |       | $      | 1,013 |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|Supplemental schedule of cash flow information:                                 |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |       |        |       |     
|                                                                                | Interest paid                                                                                                                               |                                                | $                                 | 146                                                  |        |        | $      | 10     |       |        | $     | 19   |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                | Taxes paid                                                                                                                                  |                                                | $                                 | 30                                                   |        |        | $      | 41     |       |        | $     | 23   |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|Supplemental schedule of noncash investing and financing
    activities:        |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |       |        |       |     
|                                                                                | Issuance of common stock purchase warrants                                                                                                  |                                                | $                                 |                                                     |        |        | $      |       |       |        | $     | 75   |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                | Legally restricted proceeds from issuance of long-term debt                                                                                 |                                                | $                                 |                                                     |        |        | $      | 2,877  |       |        | $     |     |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                | Issuance of common stock from conversion of debt and accrued
    interest                                                                   |                                                | $                                 | 1,427                                                |        |        | $      |       |       |        | $     |     |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      
|                                                                                | Financing of insurance premiums                                                                                                             |                                                | $                                 | 295                                                  |        |        | $      | 350    |       |        | $     |     |     
|                                                                                |                                                                                                                                             |                                                |                                   |                                                      |        |        |        |        |      



F-7



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##### Table of Contents



CARDIOGENESIS CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                      
|-- | ---------------------
|1. | Nature of Operations:











|   |                                            
|-- | -------------------------------------------
|2. | Summary of Significant Accounting Policies:



| |                  
| | -----------------
| | Use of Estimates:





| |                   
| | ------------------
| | Reclassifications:





| |                           
| | --------------------------
| | Cash and Cash Equivalents:



F-8



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                     
| | --------------------
| | Accounts Receivable:





| |             
| | ------------
| | Inventories:

first-in,




| |                 
| | ----------------
| | Patent Expenses:





| |                 
| | ----------------
| | Restricted Cash:





| |                        
| | -----------------------
| | Property and Equipment:





| |                                                                    
| | -------------------------------------------------------------------
| | Accounting for the Impairment or Disposal of Long-Lived
    Assets:



F-9



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                     
| | ------------------------------------
| | Fair Value of Financial Instruments:





| |                                  
| | ---------------------------------
| | Derivative financial instruments:





| |                     
| | --------------------
| | Revenue Recognition:







F-10



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                          
| | -----------------------------------------
| | Shipping and Handling Costs and Revenues:





| |                          
| | -------------------------
| | Research and Development:





| |            
| | -----------
| | Warranties:





| |             
| | ------------
| | Advertising:





| |              
| | -------------
| | Income Taxes:



F-11



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                          
| | -------------------------
| | Stock-Based Compensation:











F-12



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




(in
thousands, except per share amounts):


|                                                      |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                      |  | Year Ended December 31, |       
|                                                      |  |                         |       
|                                                      |  | 2005                    |        |   | 2004 |   |        | 2003 | 
|                                                      |  |                         |        |   |      |   |        |      | 
|Net loss as reported                                  |  | $                       | (1,857 | ) |      | $ | (1,319 | )    |  | $ | (348   | )
|Stock-based employee compensation                     |  |                         | (303   | ) |      |   | (482   | )    |  |   | (1,135 | )
|                                                      |  |                         |        |   |      |   |        |      | 
|Pro forma net loss                                    |  | $                       | (2,160 | ) |      | $ | (1,801 | )    |  | $ | (1,483 | )
|                                                      |  |                         |        |   |      |   |        |      | 
|Basic and diluted net loss per share as reported      |  | $                       | (0.04  | ) |      | $ | (0.03  | )    |  | $ | (0.01  | )
|Pro forma basic and diluted net loss per share        |  | $                       | (0.05  | ) |      | $ | (0.04  | )    |  | $ | (0.04  | )
|Weighted average basic and diluted shares outstanding |  |                         | 43,414 |   |      |   | 41,152 |      |  |   | 37,303 |  



|                        |  |              |            |   |      |  |         |      |  |  |         |  
|----------------------- |  | ------------ | ---------- | - | ---- |  | ------- | ---- |  |  | ------- | -
|                        |  | December 31, |           
|                        |  |              |           
|                        |  | 2005         |            |   | 2004 |  |         | 2003 | 
|                        |  |              |            |   |      |  |         |      | 
|Expected life of option |  |              | 4.43 years |   |      |  | 7 years |      |  |  | 7 years |  
|Risk-free interest rate |  |              | 3.93       | % |      |  | 3.7     | %    |  |  | 3.68    | %
|Expected dividends      |  |              |           |   |      |  |        |      |  |  |        |  
|Expected volatility     |  |              | 88         | % |      |  | 79      | %    |  |  | 151     | %



|                        |  |              |           |   |      |  |           |      |  |  |           |  
|----------------------- |  | ------------ | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                        |  | December 31, |          
|                        |  |              |          
|                        |  | 2005         |           |   | 2004 |  |           | 2003 | 
|                        |  |              |           |   |      |  |           |      | 
|Expected life           |  |              | 0.5 years |   |      |  | 0.5 years |      |  |  | 0.5 years |  
|Risk-free interest rate |  |              | 3.93      | % |      |  | 3.7       | %    |  |  | 3.68      | %
|Expected dividends      |  |              |          |   |      |  |          |      |  |  |          |  
|Expected volatility     |  |              | 88        | % |      |  | 79        | %    |  |  | 151       | %



F-13



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                             
| | ----------------------------
| | Net Income (Loss) Per Share:







| |                                      
| | -------------------------------------
| | Recently Issued Accounting Standards:





F-14



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|3. | Inventories:

(in thousands)


|                |  |              |       |  |      |   |       | 
|--------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                |  | December 31, |      
|                |  |              |      
|                |  | 2005         |       |  | 2004 |  
|                |  |              |       |  |      |  
|Raw materials   |  | $            | 683   |  |      | $ | 710   | 
|Work in process |  |              | 192   |  |      |   | 183   | 
|Finished goods  |  |              | 1,849 |  |      |   | 802   | 
|                |  |              |       |  |      |  
|                |  | $            | 2,724 |  |      | $ | 1,695 | 
|                |  |              |       |  |      |  



|   |                        
|-- | -----------------------
|4. | Property and Equipment:

(in
thousands):


|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | December 31, |       
|                                               |  |              |       
|                                               |  | 2005         |        |   | 2004 |  
|                                               |  |              |        |   |      |  
|Computers and equipment                        |  | $            | 3,212  |   |      | $ | 3,031  |  
|Manufacturing and demonstration equipment      |  |              | 2,240  |   |      |   | 2,240  |  
|Leasehold improvements                         |  |              | 193    |   |      |   | 193    |  
|Loaned lasers                                  |  |              | 3,417  |   |      |   | 3,447  |  
|                                               |  |              |        |   |      |  
|                                               |  |              | 9,062  |   |      |   | 8,911  |  
|Less accumulated depreciation and amortization |  |              | (8,158 | ) |      |   | (8,223 | )
|                                               |  |              |        |   |      |  
|                                               |  | $            | 904    |   |      | $ | 688    |  
|                                               |  |              |        |   |      |  





|   |              
|-- | -------------
|5. | Other Assets:

(in thousands):


|                           |  |              |       |  |      |   |       | 
|-------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                           |  | December 31, |      
|                           |  |              |      
|                           |  | 2005         |       |  | 2004 |  
|                           |  |              |       |  |      |  
|Debt issuance costs, net   |  | $            | 181   |  |      | $ | 381   | 
|Licensing fee for PMC, net |  |              | 925   |  |      |   | 1,119 | 
|Rental security deposit    |  |              | 66    |  |      |   | 85    | 
|                           |  |              |       |  |      |  
|                           |  | $            | 1,172 |  |      | $ | 1,585 | 
|                           |  |              |       |  |      |  



F-15



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |                     
|-- | --------------------
|6. | Accrued Liabilities:

(in
thousands):


|                                              |  |              |       |  |      |   |       | 
|--------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                              |  | December 31, |      
|                                              |  |              |      
|                                              |  | 2005         |       |  | 2004 |  
|                                              |  |              |       |  |      |  
|Accrued accounts payable and related expenses |  | $            | 123   |  |      | $ | 200   | 
|Accrued vacation                              |  |              | 238   |  |      |   | 206   | 
|Accrued commissions                           |  |              | 279   |  |      |   | 602   | 
|Accrued other                                 |  |              | 415   |  |      |   | 255   | 
|                                              |  |              |       |  |      |  
|                                              |  | $            | 1,055 |  |      | $ | 1,263 | 
|                                              |  |              |       |  |      |  



|   |                                                       
|-- | ------------------------------------------------------
|7. | Secured Convertible Term Note and Related Obligations:







F-16



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Note is convertible at the holders option at any time
    at the fixed conversion price of $.50 per share. This
    conversion feature has been identified as an embedded derivative
    and has been bifurcated and recorded on the Companys
    consolidated balance sheets at its fair value;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Beginning May 2005, the Company is required to make monthly
    principal payments of $104,000 per month. The monthly
    payment as well as related accrued interest must be converted to
    common stock at the fixed conversion price of $0.50 if the fair
    value of the Companys common stock is greater than
    $0.55 per share for the 5 days preceding the payment
    due date. This conversion feature has been identified as an
    embedded derivative and has been bifurcated and recorded on the
    Companys balance sheet at its fair value;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Restricted cash must be converted at a fixed conversion price of
    $0.50 per share if the fair value of the Companys
    common stock is greater than 125%, 150% or 175% (each threshold
    must meet higher trading volume limits) of the initial fixed
    conversion price of $0.50 per share. This conversion
    feature has been identified as an embedded derivative and has
    been bifurcated and recorded on the Companys consolidated
    balance sheets at its fair value;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Annual interest on the Note is equal to the prime
    rate published in The Wall Street Journal from time to
    time, plus two percent (2.0%), provided that such annual rate of
    interest may not be less than six and one-half percent (6.5%).
    For every 25% increase in the Companys common stock fair
    value above $0.50 per share, the interest rate will be
    reduced by 2%. The interest rate may never be reduced below 0%.
    Interest on the Note is payable monthly in arrears on the first
    day of each month during the term of the Note, beginning
    November 2004. The potential interest rate reduction due to
    future possible increases in the Companys stock price has
    been identified as an embedded derivative and has been
    bifurcated and recorded on the Companys consolidated
    balance sheets at its fair value;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The Note agreement includes a liquidated damages provision based
    on any failure to meet registration requirements for shares
    issuable under the conversion of the note or exercise of the
    warrants by February 2005. This liquidated damages feature
    represented an embedded derivative, however since the Company
    has met the registration requirements, this derivative is no
    longer valid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Note agreement contains certain events of default including
    delinquency, bankruptcy, change in control and stop trade or
    trade suspension. In the event of default, Laurus has the right
    to call the debt at a 30% premium, increase the note rate to the
    stated rate, increase the note rate by an additional 12%,
    foreclose on the collateral, and/or seek other remedies.
    Laurus right to increase the interest rate on the debt in
    the event of default represents an embedded derivative. However,
    based on the de minimus value associated with this feature, no
    value has been assigned at issuance and at December 31,
    2005. Pursuant to the terms of the Note, an event of default
    includes a suspension of trading of the Companys common
    stock on the OTC Bulletin Board which remains uncured within
    thirty (30) days of notice of the suspension. To the extent
    that the delisting is deemed a suspension of trading
    and the Company is unable to have its common stock listed on the
    OTC Bulletin Board within such thirty day period, the
    Company will be in default of its obligations under the Note. If
    an event of default occurs under the Note, interest on the Note
    will accrue at the default rate which is the then current prime
    rate plus 12% per annum until the default is cured. In
    addition, the holder of the Note will have the right to
    accelerate the Note and declare it immediately due and payable
    and exercise its rights as a secured creditor under applicable
    law and the security agreement with the Company, including the
    right to foreclose upon the assets of the Company securing the
    Note, which constitute substantially all of the Companys
    assets. Based on the above, the Company has classified the
    entire balance of the secured

F-17



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | convertible term note and related obligations as current at
    December 31, 2005. In addition, to mitigate the financial
    consequences of any possible default, in May 2006, the Company
    repaid approximately $2,417,000 of the outstanding principal
    amount of the Note out of the restricted cash account created
    for the benefit of Laurus and the Company. In connection with
    the repayment, the Company was required to pay a prepayment
    penalty (equal to 20% of the amount to be repaid) out of the
    Companys unrestricted cash.









|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Year Ending December 31, |  |  
|                         |  |  
|2006                     |  |   | 1,249,000 | 
|2007                     |  |   | 1,043,000 | 
|                         |  |   |          
|Total                    |  | $ | 2,292,000 | 
|                         |  |   |          



F-18



---



##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                             |                                                             |              |        |       |              |   |        |       | 
|---------------------------- | ----------------------------------------------------------- | ------------ | ------ | ----- | ------------ | - | ------ | ----- | 
|                             |                                                             | December 31, |        |       | December 31, |  
|                             |                                                             | 2005         |        |       | 2004         |  
|                             |                                                             |              |        |       |              |  
|Principal Note balance       |                                                             | $            | 6,000  |       |              | $ | 6,000  |      
|Principal conversions        |                                                             |              | (1,184 | )     |              |   |       |      
|Cash payments                |                                                             |              | (107   | )     |              |   |       |      
|                             |                                                             |              |        |       |              |  
|                             | Total secured convertible term note                         |              |        | 4,709 |              |   |        | 6,000 | 
|Unamortized discount on Note |                                                             |              | (739   | )     |              |   | (1,488 | )    
|Derivative valuation         |                                                             |              | 237    |       |              |   | 2,337  |      
|Warrant valuation            |                                                             |              | 562    |       |              |   | 766    |      
|                             |                                                             |              |        |       |              |  
|                             | Total secured convertible term note and related obligations |              | $      | 4,769 |              |   | $      | 7,615 | 
|                             |                                                             |              |        |       |              |  





|   |                       
|-- | ----------------------
|8. | Long-term Liabilities:



F-19



---



##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                               
|-- | ------------------------------
|9. | Commitments and Contingencies:



| |                
| | ---------------
| | Operating Lease

(in
thousands):


|                         |  |   |     | 
|------------------------ |  | - | --- | 
|Year Ending December 31, |  |  
|                         |  |  
|2006                     |  |   | 310 | 
|                         |  |   |    
|                         |  | $ | 310 | 
|                         |  |   |    





| |           
| | ----------
| | Litigation







|    |                      
|--- | ---------------------
|10. | Shareholders Equity:



| |                           
| | --------------------------
| | Issuances of Common Stock:





F-20



---



##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |          
| | ---------
| | Warrants:











00-19,




| |                                
| | -------------------------------
| | Options Granted to Consultants:



F-21



---



##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                              
| | -----------------------------
| | Options Granted to Employees:





| |                         
| | ------------------------
| | Shareholder Rights Plan:





| |                   
| | ------------------
| | Stock Option Plan:





| |                              
| | -----------------------------
| | Directors Stock Option Plan:



F-22



---



##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                              
| | -----------------------------
| | Employee Stock Purchase Plan:



(in thousands, except
per share amounts):


|                           |                            |           |       |                     |           |          |         |           |   |   |      |      | 
|-------------------------- | -------------------------- | --------- | ----- | ------------------- | --------- | -------- | ------- | --------- | - | - | ---- | ---- | 
|                           |                            |           |       | Outstanding Options |          
|                           |                            |           |       |                     |          
|                           |                            |           |       |                     |           | Weighted |        
|                           |                            | Shares    |       |                     |           |          | Average |          
|                           |                            | Available |       |                     | Number    |          |         | Price per |  
|                           |                            | for Grant |       |                     | of Shares |          |         | Share     |  
|                           |                            |           |       |                     |           |          |         |           |  
|Balance, December 31, 2002 |                            |           | 1,320 |                     |           |          | 3,477   |           |   | $ | 1.74 |     
|                           | Additional shares reserved |           |       | 1,500               |           |          |         |          |   |   |      |     | 
|                           | Options granted            |           |       | (2,034              | )         |          |         | 2,034     |   |   | $    | 0.52 | 
|                           | Options forfeited          |           |       | 834                 |           |          |         | (834      | ) |   | $    | 1.46 | 
|                           | Options exercised          |           |       |                    |           |          |         | (607      | ) |   | $    | 0.48 | 
|                           |                            |           |       |                     |           |          |         |           |  
|Balance, December 31, 2003 |                            |           | 1,620 |                     |           |          | 4,070   |           |   | $ | 1.37 |     
|                           | Additional shares reserved |           |       | 1,800               |           |          |         |          |   |   |      |     | 
|                           | Options granted            |           |       | (941                | )         |          |         | 941       |   |   | $    | 0.87 | 
|                           | Options forfeited          |           |       | 487                 |           |          |         | (487      | ) |   | $    | 1.72 | 
|                           | Options expired            |           |       | 30                  |           |          |         | (30       | ) |   | $    | 1.44 | 
|                           | Options exercised          |           |       |                    |           |          |         | (317      | ) |   | $    | 0.58 | 
|                           |                            |           |       |                     |           |          |         |           |  
|Balance, December 31, 2004 |                            |           | 2,996 |                     |           |          | 4,177   |           |   | $ | 1.28 |     
|                           |                            |           |       |                     |           |          |         |           |  
|                           | Additional shares reserved |           |       | 1,650               |           |          |         |          |   |   |      |     | 
|                           | Options granted            |           |       | (1,081              | )         |          |         | 1,081     |   |   | $    | 0.55 | 
|                           | Options forfeited          |           |       | 567                 |           |          |         | (567      | ) |   | $    | 1.97 | 
|                           | Options expired            |           |       | 10                  |           |          |         | (10       | ) |   | $    | 1.67 | 
|                           | Options exercised          |           |       |                    |           |          |         | (146      | ) |   | $    | 0.32 | 
|                           |                            |           |       |                     |           |          |         |           |  
|Balance, December 31, 2005 |                            |           | 4,142 |                     |           |          | 4,537   |           |   | $ | 1.10 |     
|                           |                            |           |       |                     |           |          |         |           |  

F-23



---



##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                |  |                     |       |           |                     |  |          |          |                |   |             |          |  |          |       |  |  |   |      | 
|--------------- |  | ------------------- | ----- | --------- | ------------------- |  | -------- | -------- | -------------- | - | ----------- | -------- |  | -------- | ----- |  |  | - | ---- | 
|                |  | Options Outstanding |       |           | Options Exercisable | 
|                |  |                     |       |           |                     | 
|                |  |                     |       | Weighted  |                     |  |          |          |               
|                |  |                     |       | Average   |                     |  | Weighted |          |                |   |             | Weighted | 
|                |  |                     |       | Remaining |                     |  | Average  |          |                |   |             | Average  | 
|                |  | Number              |       |           | Contractual Life    |  |          | Exercise |                |   | Number      |          |  | Exercise |      
|Exercise Prices |  | Outstanding         |       |           | (In Years)          |  |          | Price    |                |   | Exercisable |          |  | Price    |      
|                |  |                     |       |           |                     |  |          |          |                |   |             |          |  |          |      
|                |  | (In thousands)      |       |           |                     |  |          |          | (In thousands) |   |             |         
|$0.32 - $ 0.46  |  |                     | 554   |           |                     |  | 8.92     |          |                | $ | 0.32        |          |  |          | 538   |  |  | $ | 0.32 | 
|$0.48 - $ 0.54  |  |                     | 779   |           |                     |  | 9.41     |          |                | $ | 0.53        |          |  |          | 682   |  |  | $ | 0.51 | 
|$0.56 - $ 0.83  |  |                     | 1,079 |           |                     |  | 8.08     |          |                | $ | 0.66        |          |  |          | 752   |  |  | $ | 0.68 | 
|$0.84 - $ 1.16  |  |                     | 948   |           |                     |  | 7.02     |          |                | $ | 1.00        |          |  |          | 906   |  |  | $ | 1.00 | 
|$1.17 - $ 1.40  |  |                     | 257   |           |                     |  | 7.01     |          |                | $ | 1.27        |          |  |          | 250   |  |  | $ | 1.27 | 
|$1.68 - $ 3.88  |  |                     | 791   |           |                     |  | 5.03     |          |                | $ | 1.82        |          |  |          | 791   |  |  | $ | 1.82 | 
|$4.00 - $ 6.94  |  |                     | 74    |           |                     |  | 3.24     |          |                | $ | 6.29        |          |  |          | 74    |  |  | $ | 6.29 | 
|$7.43 - $11.50  |  |                     | 55    |           |                     |  | 2.10     |          |                | $ | 9.78        |          |  |          | 55    |  |  | $ | 9.78 | 
|                |  |                     |       |           |                     |  |          |          |                |   |             |          |  |          |      
|                |  |                     | 4,537 |           |                     |  | 7.04     |          |                | $ | 1.10        |          |  |          | 4,048 |  |  | $ | 1.16 | 
|                |  |                     |       |           |                     |  |          |          |                |   |             |          |  |          |      





|    |                          
|--- | -------------------------
|11. | Employee Retirement Plan:





|    |                    
|--- | -------------------
|12. | Segment Disclosures



F-24



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##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |              
|--- | -------------
|13. | Income Taxes:

(in thousands):


|                          |  |             |         |   |      |   |         |  
|------------------------- |  | ----------- | ------- | - | ---- | - | ------- | -
|                          |  | December 31 |        
|                          |  |             |        
|                          |  | 2005        |         |   | 2004 |  
|                          |  |             |         |   |      |  
|Net operating losses      |  | $           | 54,496  |   |      | $ | 53,751  |  
|Credits                   |  |             | 3,648   |   |      |   | 3,627   |  
|Research and development  |  |             | 991     |   |      |   | 748     |  
|Reserves                  |  |             | 637     |   |      |   | 355     |  
|Accrued liabilities       |  |             | 288     |   |      |   | 1,099   |  
|Depreciation/Amortization |  |             | 350     |   |      |   | 195     |  
|                          |  |             |         |   |      |  
|Net deferred tax asset    |  |             | 60,410  |   |      |   | 59,775  |  
|Less valuation allowance  |  |             | (60,410 | ) |      |   | (59,775 | )
|                          |  |             |         |   |      |  
|Net deferred tax assets   |  | $           |        |   |      | $ |        |  
|                          |  |             |         |   |      |  











|    |                          
|--- | -------------------------
|14. | Risks and Concentrations:





F-25



---



##### Table of Contents



CARDIOGENESIS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                   
|--- | ------------------
|15. | Subsequent Events:





F-26



---



##### Table of Contents



CARDIOGENESIS CORPORATION





SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


|                                                    |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|--------------------------------------------------- |  | -------------- | ------ |  | ------------ | - | --- | ------------- | ---------- | - | ------ |  |  | - | ------ | 
|                                                    |  | Balance at     |        |  |              |   |     |               | Balance at |  
|                                                    |  | Beginning      |        |  |              |   |     |               | End of     |  
|                                                    |  | of Period      |        |  | Additions(1) |   |     | Deductions(2) |            |   | Period | 
|                                                    |  |                |        |  |              |   |     |               |            |   |        | 
|                                                    |  | (In thousands) |       
|Inventory reserve:                                  |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Year ended December 31, 2003                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Inventory reserve                                   |  | $              | 361    |  |              | $ | 198 |               |            | $ | 186    |  |  | $ | 373    | 
|Year ended December 31, 2004                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Inventory reserve                                   |  | $              | 373    |  |              | $ | 32  |               |            | $ | 3      |  |  | $ | 402    | 
|Year ended December 31, 2005                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Inventory reserve                                   |  | $              | 402    |  |              | $ |    |               |            | $ | 11     |  |  | $ | 391    | 
|Valuation allowance relating to deferred tax asset: |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Year ended December 31, 2003                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Valuation allowance                                 |  | $              | 62,460 |  |              | $ |    |               |            | $ | 2,824  |  |  | $ | 59,636 | 
|Year ended December 31, 2004                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Valuation allowance                                 |  | $              | 59,636 |  |              | $ | 139 |               |            | $ |       |  |  | $ | 59,775 | 
|Year ended December 31, 2005                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Valuation allowance                                 |  | $              | 59,775 |  |              | $ | 929 |               |            | $ |       |  |  | $ | 60,704 | 
|Allowance for doubtful accounts:                    |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Year ended December 31, 2003                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Allowance for doubtful accounts                     |  | $              | 449    |  |              | $ | 26  |               |            | $ | 449    |  |  | $ | 26     | 
|Year ended December 31, 2004                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Allowance for doubtful accounts                     |  | $              | 26     |  |              | $ | 19  |               |            | $ | 34     |  |  | $ | 11     | 
|Year ended December 31, 2005                        |  |                |        |  |              |   |     |               |            |   |        |  |  |   |        | 
|Allowance for doubtful accounts                     |  | $              | 11     |  |              | $ | 213 |               |            | $ | 12     |  |  | $ | 212    | 






|    |                                         
|--- | ----------------------------------------
|(1) | Charged to costs and expenses.          
|   
|(2) | Amounts written off against the reserve.



F-27



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##### Table of Contents



EXHIBIT INDEX


|            |    |              |  |                                                                                                                                                                 
|----------- | -- | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description 
|            |    |             
|            | 3  | .1.1(1)      |  | Restated Articles of Incorporation, as filed with the California
    Secretary of State on May 1, 1996                                                          
|            | 3  | .1.2(2)      |  | Certificate of Amendment of Restated Articles of Incorporation,
    as filed with California Secretary of State on July 18, 2001                                
|           
|            | 3  | .1.3(3)      |  | Certificate of Determination of Preferences of Series A
    Preferred Stock, as filed with the California Secretary of State
    on August 23, 2001             
|           
|            | 3  | .1.4(4)      |  | Certificate of Amendment of Restated Articles of Incorporation,
    as filed with the California Secretary of State on
    January 23, 2004                     
|           
|            | 3  | .2(5)        |  | Amended and Restated Bylaws                                                                                                                                     
|           
|            | 4  | .1(6)        |  | Third Amendment to Rights Agreement, dated October 26,
    2004, between the Company and Equiserve Trust Company N.A                                            
|           
|            | 4  | .2(7)        |  | Second Amendment to Rights Agreement, dated as of
    January 21, 2004, between Cardiogenesis Corporation and
    EquiServe Trust Company, N.A., as Rights Agent
|           
|            | 4  | .3(8)        |  | First Amendment to Rights Agreement, dated as of
    January 17, 2002, between Cardiogenesis Corporation and
    EquiServe Trust Company, N.A., as Rights Agent 
|           
|            | 4  | .4(9)        |  | Rights Agreement, dated as of August 17, 2001, between
    Cardiogenesis Corporation and EquiServe Trust Company, N.A., as
    Rights Agent                     
|           
|            | 4  | .5(10)       |  | Securities Purchase Agreement, dated as of January 21,
    2004, by and among Cardiogenesis Corporation and each of the
    investors identified therein        
|           
|            | 4  | .6(11)       |  | Registration Rights Agreement, dated as of January 21,
    2004, by and among Cardiogenesis Corporation and the investors
    identified therein                
|           
|            | 4  | .7(12)       |  | Form of Common Stock Purchase Warrant, dated January 21,
    2004, having an exercise price of $1.37 per share                                                  
|           
|            | 4  | .8(13)       |  | Securities Purchase Agreement, dated October 26, 2004,
    between the Company and Laurus Master Fund, Ltd.                                                     
|           
|            | 4  | .9(14)       |  | Secured Convertible Term Note, dated October 26, 2004, in
    favor of Laurus Master Fund, Ltd.                                                                 
|           
|            | 4  | .10(15)      |  | Registration Rights Agreement, dated October 26, 2004,
    between the Company and Laurus Master Fund, Ltd.                                                     
|           
|            | 4  | .11(16)      |  | Common Stock Purchase Warrant, dated October 26, 2004, in
    favor of Laurus Master Fund, Ltd.                                                                 
|           
|            | 4  | .12(17)      |  | Security Agreement, dated October 26, 2004, in favor of
    Laurus Master Fund, Ltd.                                                                            
|           
|            | 10 | .1(18)*      |  | Form of Indemnification Agreement by and between the Company and
    each of its officers and directors                                                         
|           
|            | 10 | .2(32)*      |  | Stock Option Plan, as amended and restated July 2005                                                                                                            
|           
|            | 10 | .3(32)*      |  | Director Stock Option Plan, as amended and restated July 2005                                                                                                   
|           
|            | 10 | .4(32)*      |  | Employee Stock Purchase Plan, as amended and restated July 2005                                                                                                 
|           
|            | 10 | .5(19)       |  | Facilities Lease for the Companys executive offices in
    Foothill Ranch, California                                                                          
|           
|            | 10 | .6(20)*      |  | 401(k) Plan, as restated January 1, 2005                                                                                                                        
|           
|            | 10 | .8(21)*      |  | Description of the Stock Option Plan                                                                                                                            
|           
|            | 10 | .9(22)*      |  | Description of the Director Stock Option Plan                                                                                                                   
|           
|            | 10 | .10(23)*     |  | Form of Stock Option Agreement for Executive Officers under the
    Stock Option Plan                                                                           
|           
|            | 10 | .11(24)*     |  | Form of Grant Notice under the Stock Option Plan                                                                                                                
|           
|            | 10 | .12(25)*     |  | Form of Stock Option Agreement for Directors under the Director
    Stock Option Plan                                                                           
|           
|            | 10 | .13(26)*     |  | Form of Grant Notice under the Director Stock Option Plan                                                                                                       
|           
|            | 10 | .14(27)(28)* |  | Employment Agreement, dated as of September 27, 2001,
    between the Company and Michael J. Quinn                                                              



---



##### Table of Contents



|            |    |              |  |                                                                                                                                                                                               
|----------- | -- | ------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description 
|            |    |             
|           
|            | 10 | .15(29)(28)* |  | Amendment No. 1 to Employment Agreement, dated July 3,
    2002, between the Company and Michael J. Quinn                                                                                     
|           
|            | 10 | .16(30)(28)* |  | Amendment No. 2 to Employment Agreement, dated May 19,
    2003, between the Company and Michael J. Quinn                                                                                     
|           
|            | 10 | .17(30)(28)* |  | Amendment No. 3 to Employment Agreement, dated
    March 16, 2005, between the Company and Michael J. Quinn                                                                                   
|           
|            | 10 | .18(31)(28)* |  | Form of Employment Agreement, dated October 28, 2005,
    between the Company and Michael J. Quinn                                                                                            
|           
|            | 10 | .19(32)*     |  | Confidentiality and Intellectual Property Agreement, dated
    October 30, 2005, between the Company and Michael J. Quinn                                                                     
|           
|            | 21 | .1(32)       |  | List of Subsidiaries                                                                                                                                                                          
|           
|            | 23 | .1(32)       |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                         
|           
|            | 23 | .2(32)       |  | Consent of Corbin & Company LLP                                                                                                                                                               
|           
|            | 31 | .1(32)       |  | Certification of the Chief Executive Officer pursuant to
    Rule 13a-14(a) of Securities Exchange Act of 1934, as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002  
|           
|            | 31 | .2(32)       |  | Certification of the Chief Financial Officer pursuant to
    Rule 13a-14(a) of Securities Exchange Act of 1934, as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002  
|            | 32 | .1(32)       |  | Certifications of the Chief Executive Officer and Chief
    Financial Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002






| |   |                                                      
| | - | -----------------------------------------------------
| | * | Management contract, compensatory plan or arrangement



| |     |                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to Exhibit 3.1 to the
    Registrants Registration Statement on
    Form S-1/ A (File
    No. 33-03770),
    filed May 21, 1996
|
| | (2) | Incorporated by reference to Exhibit 3.2 to the
    Registrants Quarterly Report on
    Form 10-Q filed on
    August 14, 2001                           
|
| | (3) | Incorporated by reference to Exhibit 4.2 to the
    Registrants Current Report on
    Form 8-K filed on
    August 20, 2001                              
|
| | (4) | Incorporated by reference to Exhibit 3.1.4 to the
    Registrants Annual Report on
    Form 10-K filed on
    March 10, 2004                             
|
| | (5) | Incorporated by reference to Exhibit 3.2 to the
    Registrants Annual Report on
    Form 10-K filed on
    March 10, 2004                               
|
| | (6) | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on
    Form 8-K filed
    October 28, 2004                                
|
| | (7) | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on
    Form 8-K filed
    January 26, 2004                                
|
| | (8) | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on
    Form 8-K filed
    January 18, 2002                                
|
| | (9) | Incorporated by reference to Exhibit 4.1 to the
    Registrants Current Report on
    Form 8-K filed
    August 20, 2001                                 



|     |                                                                                                                           
|---- | --------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Exhibit 4.4 to the
    Registrants Current Report on
    Form 8-K filed
    January 22, 2004
|    
|(11) | Incorporated by reference to Exhibit 4.5 to the
    Registrants Current Report on
    Form 8-K filed
    January 22, 2004
|    
|(12) | Incorporated by reference to Exhibit 4.6 to the
    Registrants Current Report on
    Form 8-K filed
    January 22, 2004
|    
|(13) | Incorporated by reference to Exhibit 4.2 to the
    Registrants Current Report on
    Form 8-K filed
    October 28, 2004



---



##### Table of Contents





|     |                                                                                                                                                                                                                                                                                                                                                                       
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(14) | Incorporated by reference to Exhibit 4.3 to the
    Registrants Current Report on
    Form 8-K filed
    October 28, 2004                                                                                                                                                                                                                                            
|    
|(15) | Incorporated by reference to Exhibit 4.4 to the
    Registrants Current Report on
    Form 8-K filed
    October 28, 2004                                                                                                                                                                                                                                            
|    
|(16) | Incorporated by reference to Exhibit 4.5 to the
    Registrants Current Report on
    Form 8-K filed
    October 28, 2004                                                                                                                                                                                                                                            
|    
|(17) | Incorporated by reference to Exhibit 4.6 to the
    Registrants Current Report on
    Form 8-K filed
    October 28, 2004                                                                                                                                                                                                                                            
|    
|(18) | Incorporated by reference to the Companys Registration
    Statement on
    Form S-1 (File
    No. 333-03770), as
    amended, filed April 18, 1996                                                                                                                                                                                                                  
|    
|(19) | Incorporated by reference to Exhibit 10.1 to the
    Registrants Quarterly Report on
    Form 10-Q/ A filed
    August 16, 2001                                                                                                                                                                                                                                      
|    
|(20) | Incorporated by reference to Exhibit 10.6 to the
    Registrants Annual Report on
    Form 10-K filed
    March 31, 2005                                                                                                                                                                                                                                             
|    
|(21) | Incorporated by reference to Exhibit 10.1 to the
    Registrants Current Report on
    Form 8-K filed on
    August 4, 2005                                                                                                                                                                                                                                          
|    
|(22) | Incorporated by reference to Exhibit 10.2 to the
    Registrants Current Report on
    Form 8-K filed on
    August 4, 2005                                                                                                                                                                                                                                          
|    
|(23) | Incorporated by reference to Exhibit 10.3 to the
    Registrants Current Report on
    Form 8-K filed on
    August 4, 2005                                                                                                                                                                                                                                          
|    
|(24) | Incorporated by reference to Exhibit 10.4 to the
    Registrants Current Report on
    Form 8-K filed on
    August 4, 2005                                                                                                                                                                                                                                          
|    
|(25) | Incorporated by reference to Exhibit 10.5 to the
    Registrants Current Report on
    Form 8-K filed on
    August 4, 2005                                                                                                                                                                                                                                          
|    
|(26) | Incorporated by reference to Exhibit 10.6 to the
    Registrants Current Report on
    Form 8-K filed on
    August 4, 2005                                                                                                                                                                                                                                          
|    
|(27) | Incorporated by reference to Exhibit 10.11 to the
    Registrants Annual Report on
    Form 10-K filed on
    April 16, 2002                                                                                                                                                                                                                                         
|    
|(28) | The Registrant is currently investigating issues relating to the
    validity and effectiveness of the October 28, 2005
    Employment Agreement filed as Exhibit 10.18 to this Annual
    Report on
    Form 10-K.
    Accordingly, the Registrant has filed both that Agreement and
    the original Employment Agreement (and amendments) with Michael
    J. Quinn
|    
|(29) | Incorporated by reference to Exhibit 10.13 to the
    Registrants Quarterly Report on
    Form 10-Q filed
    August 14, 2002                                                                                                                                                                                                                                        
|    
|(30) | Incorporated by reference to Exhibit 10.11 to the
    Registrants Annual Report on
    Form 10-K filed
    March 31, 2005                                                                                                                                                                                                                                            
|    
|(31) | Incorporated by reference to Exhibit 10.11 to the
    Registrants Quarterly Report on
    Form 10-Q filed
    November 14, 2005                                                                                                                                                                                                                                      
|    
|(32) | Filed herewith