**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10-KSB/A** ****





**[X]**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**


For
      the
      fiscal year ended December 31, 2006





**[ 
              ]**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**


*Commission* *file
        number:* 0-22419








**CARDIMA,
      INC**.


(Exact
        name of registrant as specified in its charter)




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





47266
      BENICIA STREET


FREMONT,
      CALIFORNIA 94538-7330


(Address,
      Including Zip Code of Principal Executive Offices)





(510)
      354-0300


(Issuer's
      telephone number)








Securities
      registered under Section 12(b) of the Exchange Act:


NONE





Securities
      registered under Section 12(g) of the Exchange Act:


COMMON
      STOCK, $0.001 PAR VALUE PER SHARE








Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes [ ] No [X]





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes [ ] No [X]





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





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-B is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. [_]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.





Non-accelerated
      filer [X]





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





State
      issuer's revenues for its most recent fiscal year. $1,541,182.






1




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days. (See definition of affiliate in Rule
      12b-2 of the Exchange Act.). Based on the closing sale price on the OTC Bulletin
      Board on April 10, 2007, the aggregate market value of the registrant's common
      stock held by non-affiliates was approximately $16,813,864. For purposes of
      this
      computation, all directors and executive officers of the registrant are
      considered to be affiliates of the registrant. This assumption is not to be
      deemed an admission by the persons that they are affiliates of the registrant.





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: 102,840,963 as of April 10, 2007.





DOCUMENTS
      INCORPORATED BY REFERENCE:





Part
      III
      incorporates by reference certain information from the registrant’s definitive
      proxy statement (the “Proxy Statement”) for the 2007 Annual Meeting of
      Shareholders to be filed on or before April 30, 2007.








**EXPLANATORY
      NOTE**





**Following
          the initial filing of this Form 10-KSB on April 17, 2007, the Registrant
          discovered two inadvertent clerical typographical errors in the Statements
          of
          Operations and the Management Discussion and Analysis section included
          in the
          Form 10-KSB, specifically, the interest expense and the other income/(expense)
          for the year ended December 31, 2006. The Registrant is amending this Form-KSB
          to insert the correct the Statements of Operations for the year ended December
          31, 2006 and the Management Discussion and Analysis section for the respective
          period. No disclosure was changed as a result of the error and there were
          no
          other changes to the Form 10-KSB for the year ended December 31,
          2006.**








2







**ITEM
          6.** **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
 
 The
          following discussion of our financial condition and results of operations
          should
          be read in conjunction with our financial statements and related notes,
          and the
          other financial information included in Form 10-KSB. With respect to this
          discussion, the terms “Cardima,” “Company,” “we,” “us,” and “our” refer to
          Cardima, Inc.
  **Forward
          Looking Statements**
 *The
          forward-looking comments contained in this discussion involve risks and
          uncertainties. Our actual results may differ materially from those discussed
          here due to factors such as, among others, limited operating history, difficulty
          in developing, exploiting and protecting proprietary technologies, intense
          competition and substantial regulation in the healthcare industry. Additional
          factors that could cause or contribute to such differences can be found
          in the
          following discussion, as well as the section entitled “Risk Factors” in Item 1
          of Part I of this report*
  **OVERVIEW
          AND PLAN OF OPERATION**
 
 Since
          2001, our efforts have primarily focused on developing differentiated products
          that diagnose and treat AF, including our REVELATION® Tx micro-catheter for use
          in the EP market, and our SAS for use in the surgical market. Our EP products
          allow for the mapping (diagnosis) and ablation (treatment) of the two most
          common forms of cardiac arrhythmias: atrial fibrillation and ventricular
          tachycardia.
 
 We
          have
          experienced significant operating losses since inception. We expect that
          our
          operating losses will continue for the foreseeable future as we continue
          to
          invest substantial resources in product development, pre-clinical and clinical
          trials, seeking regulatory approval, sales and marketing and manufacturing.
          Because our cash resources are extremely limited, we must raise additional
          capital in the immediate future in order to continue to pursue FDA approval
          for
          our REVELATION® Tx micro-catheter system, seek to sell or otherwise consummate a
          strategic transaction involving our SAS, and otherwise continue operations.
          Our
          primary focus is to obtain FDA approval in the United States of the REVELATION®
Tx micro-catheter system for the treatment of AF.
 
 On
          July
          19, 2006, the FDA granted a review of the scientific dispute underlying
          its
          refusal to approve our 2002 pre-market approval application (PMA) for the
          REVELATION® Tx micro-catheter System. The review would be conducted by the FDA's
          Medical Devices Dispute Resolution Panel (MDDRP). The MDDRP would be comprised
          of medical experts who, after hearing presentations from both the FDA and
          us and
          conducting its own review of the issues, the MDDRP would make a recommendation
          to the Director of the FDA's CDRH as to whether it believes the PMA should
          be
          approved. The Director of the FDA’s CDRH will then make his own decision on
          whether to approve the PMA .
  On
          March
          23, 2007, the FDA announced that it will convene the MDDRP on April 19,
          2007 to
          consider the approvability of our PMA for the REVELATION® Tx micro-catheter
          system for the treatment of symptoms associated with atrial fibrillation.
  We
          believe that the data submitted in January 2004 in an amended PMA for the
          REVELATION Tx provides sufficient support for safety and effectiveness
          to reduce
          symptomatic AF burden and improve the quality of life of patients suffering
          from
          self-terminating but very uncomfortable AF within the least burdensome
          guidelines of the FDA.
  We
          had
          cash and cash equivalents of approximately $942,000 as of December 31,
          2006 and
          approximately $670,000 as of March 31, 2007. During 2005, we entered into
          a Loan
          Facility Term Sheet with Apix International Limited (Apix), which provided
          us a
          $3 million loan financing. On February 14, 2006, we entered into a new
          loan
          facility term sheet (the “New Loan Facility”) with Apix, which provided for the
          rollover of the original loan agreement and the grant of an additional
          loan
          facility in the amount of $660,000.
 
 On
          January 15, 2007, the Company entered into a new term sheet with Apix,
          which
          provides for the rollover of prior loan facilities and subsequent advances
          (Prior Facilities) and an additional loan facility between the parties
          (the "New
          Facility"). The New Facility provides for the following terms and conditions:
   3
 
 (i)
                Additional
                    loan facility - Apix has granted the Company an additional loan
                    facility
                    in the amount of $5,625,000. Advances pursuant to the additional
                    facility
                    shall be made on a bi-weekly basis the Company’s discretion in
                    denominations of $225,000 per advance;
 (ii)
                New
                    maturity date - the maturity date of the New Facility and Prior
                    Facilities
                    is the earlier of (a) December 31, 2007 or (b) the date that
                    Apix makes a
                    demand for payment;
 (iii)
                Facility
                    fee adjustment - the aggregate facility fee for the Prior Facilities
                    and
                    the New Facility shall be $500,000 (the “Facility Fee”) which is payable
                    through the issuance of five million shares of our preferred
                    stock with
                    the following minimum preferences: (a) 28 votes per share at
                    any general
                    or extraordinary meeting of the common shares of the company
                    convened by
                    the Company or its shareholders for a total of 140 million votes
                    at any
                    such meeting; and (b) convertible into common shares of the Company
                    at any
                    time at the sole and absolute discretion of the holder on the
                    basis of two
                    (2) common shares for each preferred share tendered for conversion
                    for a
                    total of ten (10) million common shares in the event all preferred
                    shares
                    are tendered for conversion;
 (iv)
                Exit
                    fees - the aggregate exit fees for the Prior Facilities and the
                    New
                    Facility shall be $2,800,000 plus $80,000 for each advance
                    madewhich
                    shall be due and payable on the earliest to occur of: (1) the
                    maturity
                    date, (2) generally the sale of the company or substantially
                    all of its
                    assets, a reorganization or a new loan facility in excess of
                    $1,000,000,
                    or (3) an event of default;
 (v)
                Price
                    adjustment to existing warrant and new warrants - pursuant to
                    the Prior
                    Facilities, the Company agreed to issue to Apix warrants to purchase
                    118,800,000 shares of the Company's common stock at an exercise
                    price of
                    $0.06 per share (the “Existing Warrants”). Pursuant to the New Facility,
                    the exercise price of the Existing Warrants has been adjusted
                    to $0.04 per
                    share. In addition, the Company has agreed to issue to Apix additional
                    warrants to purchase 20,000,000 shares of the Company’s common stock at an
                    exercise price of $0.03 per share (the “New Warrants”). All warrants have
                    a term of ten years;
 (vi)
                Conversion
                    price adjustment - the loan principal and exit fees are convertible
                    into
                    shares of the Company’s common stock at a conversion price of $0.04 per
                    share; and
 (vii)
                Registration
                    rights - the Company agrees to register a percentage of the shares
                    underlying the loan principal, facility fees, and warrants on
                    a
                    registration statement at its best efforts.
 
 The
          terms
          of the new term sheet are not binding on the parties. Completion of the
          New
          Facility is contingent upon the negotiation and execution of definitive
          agreements and other documentation.
 
 Based
          on
          the above factors, Management concluded that there is substantial doubt
          as to
          our ability to continue as a going concern.
  
 **CRITICAL
          ACCOUNTING POLICIES**
 
 Our
          discussion and analysis of our financial condition and results of operations
          are
          based on our financial statements, which have been prepared in accordance
          with
          U.S. generally accepted accounting principles. The preparation of these
          financial statements requires us to make estimates and judgments that affect
          the
          reported amounts of assets, liabilities and expenses and related disclosure
          of
          contingent assets and liabilities. We review our estimates on an ongoing
          basis.
          We base our estimates on historical experience and on various other assumptions
          that we believe to be reasonable under the circumstances, the results of
          which
          form the basis for making judgments about the carrying values of assets
          and
          liabilities. Actual results may differ from these estimates under different
          assumptions or conditions. While our significant accounting policies are
          described in more detail in Note 1 to our financial statements, we believe
          the
          following accounting policies to be critical to the judgments and estimates
          used
          in the preparation of our financial statements:
 
 *Revenue
          Recognition* .
          We
          recognize revenue from two types of customers, end users and distributors.
          Revenue is recognized in accordance with Staff Accounting Bulletin 104,
“Revenue
          Recognition in Financial Statements” when all of the following criteria are met:
          persuasive evidence of an arrangement exists, shipment of the product has
          occurred and title of products transferred at the point of shipment, payment
          of
          the product is reasonably assured and no substantive obligations to the
          customer
          remain. Revenue is presented net of discounts, allowances, and returns.
          Customers are not entitled to any rights of product return. Payment terms
          are
          either open trade credit or cash. We have distributors in Asia and Europe
          and we
          record as revenue the wholesale price we charge our distributors. The
          distributors assume the title and risk of loss at the shipping point.
  *Research
          and Development.* Research
          and development costs, which include clinical and regulatory costs, are
          charged
          to expense as incurred.
  *Allowance
          for Notes Receivable Loss* .
          The
          reserve for doubtful notes represents management’s estimate of principal and
          accrued interest losses as of the balance sheet date. Determination of
          the
          reserve is inherently subjective, as it requires significant estimates,
          including the amounts and timing of expected future cash flows. Also, specific
          reserves are established in cases where management has identified significant
          conditions or circumstances related to an individual’s credit that we believe
          indicates the note is un-collectible. Note losses are charged off against
          the
          reserve, and while recoveries of amounts previously charged off are credited
          to
          the reserve. Evaluations of the reserve balance are conducted
          quarterly.
 
 4
 *Allowance
          for Doubtful Accounts.* We
          use
          the allowance method to account for uncollectible accounts receivable.
          Our
          estimate is based on historical collection experience and a review of the
          current status of accounts receivable. We review our accounts receivable
          balances by customer for accounts greater than 90 days old and make a
          determination regarding the collectibility of the accounts based on specific
          circumstances and the payment history that exists with such customers.
          We also
          take into account our prior experience, the customer’s ability to pay and an
          assessment of the current economic conditions in determining the net realizable
          value of its receivables. We also review our allowances for doubtful accounts
          in
          aggregate for adequacy following this assessment. Accordingly, we believe
          that
          our allowances for doubtful accounts fairly represent the underlying
          collectibility risks associated with its accounts receivable.
 
 *Inventories* . Inventory
          consists of raw materials, work in progress, and finished goods. Inventory
          is
          stated at the lower of cost or market using the first-in, first-out (“FIFO”)
          method. Cost includes the acquisition cost of raw materials and components,
          direct labor, and manufacturing overhead. We periodically review our inventory
          for excess, obsolescence or quality issues. Should we conclude that we
          have
          inventory for which we cannot recover our costs as a result of such review,
          we
          would record a charge to cost of goods sold.
  *Income
          Taxes* **.** Income
          taxes are accounted for under the asset and liability method. Deferred
          income
          tax assets and liabilities are recognized for the future tax consequences
          attributable to differences between the financial statement bases and the
          respective tax bases of the assets and liabilities and operating loss and
          tax
          credit carry forwards. Deferred tax assets and liabilities are measured
          using
          enacted tax rates expected to apply to taxable income in the years in which
          those temporary differences are expected to be recovered or settled. The
          effect
          on deferred tax assets and liabilities of a change in tax rates is recognized
          in
          income in the period that includes the enactment date. Valuation allowances
          are
          established when necessary to reduce deferred tax assets to the amount
          expected
          to be realized, and have been provided for all periods presented.
 
  *Valuation
          of Derivative Financial Instruments* **.** We
          adopted Financial Accounting Standards Board (“FASB”) Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” which establishes
          accounting and reporting standards for derivative instruments, including
          certain
          derivative instruments embedded in other contracts, (collectively referred
          to as
          derivatives) and for hedging activities. It requires that an entity recognize
          all derivatives as either assets or liabilities in the statement of financial
          position and measure those instruments at fair value. All changes in fair
          value
          are reported in other income or expense.
  
 *Stock-Based
          Compensation.* We
          adopted Financial Accounting Standards Board (“FASB”) Statement No. 123R,
“Share Based Payment,” on January 1, 2006. Prior to adoption, we disclosed such
          expenses on a pro forma basis in the notes to our financial statements.
 
 **Recent
          Accounting Pronouncements**
 
 In
          February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
          No. 155, “Accounting for Certain Hybrid Financial Instruments,” which
          amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
          Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
          Financial Assets and Extinguishment of Liabilities.” SFAS No. 155 amends
          SFAS No. 133 to narrow the scope exception for interest-only and
          principal-only strips on debt instruments to include only such strips
          representing rights to receive a specified portion of the contractual interest
          or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to
          allow qualifying special-purpose entities to hold a passive derivative
          financial
          instrument pertaining to beneficial interests that are themselves derivative
          instruments. Management does not expect adoption of SFAS No. 155 to have a
          material impact on the Company’s financial statements.
  In
          June
          2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting
          for Uncertainty in Income Taxes, an interpretation of FASB Statement
          No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes.
          FIN 48 prescribes a recognition threshold and measurement attribute for
          the
          financial statement recognition and measurement of a tax position taken
          or
          expected to be taken in a tax return. FIN 48 requires that we recognize
          in the
          financial statements the impact of the tax position if that position will
          more
          likely than not be sustained on audit, based on the technical merits of
          the
          position. FIN 48 also provides guidance related to de-recognition,
          classification, interest and penalties, accounting in interim periods and
          disclosure. If there are changes in net assets as a result of application
          of FIN
          48, these will be accounted for as an adjustment to retained earnings.
          We are
          currently evaluating the accounting and disclosure requirements of FIN
          48 in
          order to determine the impact that this guidance will have on our results
          of
          operations or financial condition when we adopt FIN 48 at the beginning
          of our
          fiscal year 2007.
 
 5
 In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
which defines fair value, establishes a framework for measuring fair value,
          and
          expands disclosures about fair value measurements. SFAS No. 157 does not
          require any new fair value measurements, but rather eliminates inconsistencies
          in guidance found in various prior accounting pronouncements. We are currently
          evaluating the accounting and disclosure requirements that this guidance
          will
          have on our results of operations or financial condition when we adopt
          SFAS
          No. 157 at the beginning of our fiscal year 2008.
 
 
 **Results
          of Operations - Years Ended December 31, 2006 and 2005**
 
 *Net
          Sales*
 
 For
          the
          year ended December 31, 2006, revenues decreased 17% to $1,541,000 from
          $1,859,000 in 2005, primarily due to the drop in demand from Japan. The
          reduction in demand was primarily a result of the distributor’s reduction of
          orders following our reduced capacity during the year ended December 31,
          2006 as
          a consequence of the June 2005 work furlough and the resulting reduced
          workforce
          in August 2005. This will result in continuing reduced sales from Japan
          in 2007.
 
 North
          American sales decreased slightly by 7% to $636,000 from $682,000 in 2005
          while
          European sales also decreased slightly by 7% to $255,000 from $275,000
          in 2005.
          The decreases were directly related to the lack of salespersons in these
          regions. Sales in the Asia/Pacific market decreased by 28% to $650,000
          from
          $902,000 in 2005. The decrease was primarily due to the order reduction
          from our
          distributor in Japan.
 
 *Cost
          of Goods Sold*
 
 Cost
          of
          goods sold for 2006 increased slightly to $2,023,000 from $1,999,000 for
          2005.
          Cost of goods sold as a percentage of net sales increased by 21%, from
          108% in
          2005 to 131% in 2006. The increase in the cost of goods sold was directly
          related to the addition of manufacturing staff and related training.
 
 *Net
          Loss*
 
 Net
          loss
          increased by $1,205,000, or 15%, to $9,533,000 in 2006 from $8,328,000
          in 2005.
          The increase in net loss resulted primarily from the other expense of $395,000
          in 2006 compared with other income of $1,800,000 in 2005. These expense
          and
          income were mainly from the required quarterly valuation of the Apix warrants
          as
          described in EITF 00-19, “Accounting for Derivative Financial Instruments
          Indexed to, and Potentially Settled in, a Company's Own Stock”.
 
 *Research
          and Development Expenses*
 
 Research
          and development expenses decreased 14% to $1,787,000 in 2006 from $2,074,000
          in
          2005. The decrease in 2006 was primarily due to the decrease in funding
          and
          product sales. Additionally the headcount in the research and development
          dropped from 8 in 2005 to 7 in 2006. The costs associated with research
          and
          pre-clinical programs and clinical development programs were approximately
          (in
          thousands):
 
 **Year
                    ended December 31,****2006**
                
                **2005**Clinical
                    development programs
                
                $
                1,110
                
                $
                1,215Research
                    and preclinical programs
                
                
                677
                
                
                859Total
                    research and development
                
                $
                1,787
                
                $
                2,074
  *Selling,
          General and Administrative Expenses*
 
 Selling,
          general and administrative expenses for 2006 decreased 38% to $2,987,000
          from
          $4,817,000 in 2005. Selling expenses for 2006 decreased 46% to $281,000
          from
          $519,000 in 2005 primarily due to the August 2005 reduction in force. Marketing
          expenses for 2006 also decreased 41% to $161,000 from $273,000 in 2005.
          The
          decrease in marketing expenses was due to the reduction in force and fewer
          marketing events. General and administrative expenses for 2006 decreased
          37% to
          $2,544,000 from $4,025,000 in 2005. The decrease in general and administrative
          expenses was primarily due to the August 2005 reduction in force.
  6
 *Interest
          Expense*
 
 Interest
          expense for 2006 increased 16% to $3,897,000 from $3,350,000 in 2005. The
          increase was primarily due to the additional borrowing from Apix, the new
          loan
          fees’ amortization, and the new loan discount amortization in 2006.
 
 *Other
          Income and Expense*
 
 Other
          expense for 2006 was $381,000 compared with other income of $1,800,000
          in 2005.
          These other income and expense were primarily related to the quarterly
          valuation
          of the Apix warrants.
 
 
 **LIQUIDITY
          AND CAPITAL RESOURCES**
  We
          had
          cash and cash equivalents of approximately $942,000 as of December 31,
          2006 and
          $670,000 as of March 31, 2007. As of December 31, 2006, we had negative
          working
          capital of $13.3 million, and an accumulated deficit of approximately $131
          million. These factors raise substantial doubt about our ability to continue
          as
          a going concern.
 
 During
          2005, we entered into a loan facility with Apix, which provided us a $3
          million
          loan financing. On February 14, 2006, the Company entered into a new loan
          facility with Apix, which provided for the rollover of the original loan
          agreement and the grant of an additional loan facility in the amount of
          $660,000. In January 2007, we entered into another new term sheet with
          Apix,
          which provides for the rollover of prior loan facilities of $3,660,000
          and
          subsequent advances of $4,500,000 and an additional loan facility of $5,625,000.
 
 Net
          cash
          used in operating activities was approximately $4,538,000 and $5,960,000
          for the
          years ended December 31, 2006 and 2005, respectively, resulting primarily
          from
          operating losses incurred. Net cash used in investing activities was $112,000
          in
          2006 and related to the capital expenditures of property and equipment,
          as
          compared to $124,000 used in 2005 for the same expenditures. Net cash provided
          by financing activities was approximately $5,468,000 and $2,354,000 for
          the
          years ended December 31, 2006 and 2005, respectively, resulting primarily
          from
          the Apix loan financing and advances in 2006.
 
 **Contractual
          Commitments** :
 
 Following
          is a schedule of future contractual commitments at December 31, 2006 (in
          thousands):
 
 **2007**
                
                **2008**
                
                **Total**Loan
                    repayment
                
                $
                10,468
                
                $
                -
                
                $
                10,468Operating
                    leases
                
                
                115
                
                
                -
                
                
                115Capital
                    leases
                
                
                21
                
                
                22
                
                
                43Purchase
                    obligations
                
                
                52
                
                
                -
                
                
                52Total
                    minimum payments
                
                $
                10,656
                
                $
                22
                
                $
                10,678
   The
          total
          loan repayment of $10,468,000 and the total operating leases of $43,000
          include
          interest payments of $603,000 and $3,000 interest payments, respectively.
          Our
          purchase obligations are guaranteed payments consisting of contracts relating
          to
          material purchasing.
  **Recent
          Financings**
  *Agility
          Capital*
 
 On
          May
          27, 2005, we entered into a $1.5 million secured loan agreement with Agility
          Capital, which funded us $300,000 of the loan on closing. Under the terms
          of the
          agreement, the lender at its sole discretion could fund the remainder in
          $200,000, $500,000 and $500,000 installments dependent on our achieving
          certain
          milestones. To secure its obligations under the loan agreement, we granted
          Agility Capital a security interest in substantially all of our assets,
          including our intellectual property. Also, according to the loan agreement,
          all
          amounts outstanding become due and payable the earlier of an event of default
          by
          the company or August 15, 2005. We were also required to pay Agility Capital
          an
“Exit Fee” of $450,000 upon an Event of Default.
   7
 
 On
          June
          16, 2005, Agility Capital notified us that in its view an event of default
          had
          occurred and that all amounts outstanding were then due and payable. The
          lender
          also swept our bank accounts containing approximately $456,000 and used
          the
          proceeds for repayment of the loan and a portion of the “Exit Fee” due under the
          loan agreement. Agility Capital also indicated that it was unwilling to
          fund
          further loans under the loan agreement.
 
 On
          June
          17, 2005, our cash balances were insufficient to continue operations and
          all the
          employees were placed on indefinite furlough in order to conserve cash.
 
 *Apix
          International*
 
 On
          August
          12, 2005, we entered into a Loan Facility Term Sheet with Apix, which provided
          us with up to $2 million in new financing. We received the first $500,000,
          a
          portion of which was used to retire our outstanding secured loan agreement
          with
          Agility Capital. On August 15, 2005, we re-hired certain furloughed employees
          and resumed operations.
 
 On
          August
          28, 2005, we signed a loan agreement with Apix, which increased the total
          amounts to be financed from $2 million to $3 million. The principal amount
          of
          the promissory note dated August 12, 2005 for $500,000 was rolled over
          into the
          new loan agreement. We received an additional $500,000 on this closing
          date. Per
          the funding schedule, we received $500,000 on September 8, 2005 and $500,000
          on
          October 11, 2005. The remainder of the loan was received as follows: $350,000
          on
          November 16, 2005, $350,000 on December 14, 2005 and $300,000 on January
          18,
          2006. The loan agreement was secured by a first lien on all our assets
          and
          intellectual property. All funds had interest at a rate of 10% per
          annum.
 
 According
          to the loan agreement, we were required to pay a facility fee of $60,000,
          a due
          diligence fee of $25,000, a document review and preparation fee of $50,000
          and
          an exit fee of $900,000 at the end of the loan agreement. All these fees
          were
          being amortized as non-cash interest expense over the life of the
          loan.
 
 Also
          the
          loan agreement has an optional conversion clause that at its sole option,
          Apix
          may elect to receive payment for all or any portion of the facility fee,
          the
          exit fee and the accrued interest due under the loan, in full or partial
          satisfaction of such amounts, that respective number of our common stock
          at a
          rate of $0.10 per share. Any additional gains or losses on the difference
          between the conversion price and the fair value of the stock at the time
          of
          conversion will be included in our earnings during that period.
 
 Additionally,
          we provided Apix warrants with registration rights to purchase 30,000,000
          shares
          of capital stock with a strike price of $0.10 per share. The warrants were
          free
          standing instruments. As of September 30, 2005, we have failed to file
          a
          registration statement with the SEC, as required by the loan agreement,
          to
          register all of the shares of Common Stock issued or issuable with respect
          to
          these warrants. Apix and we have entered into an amendment to the Loan
          Agreement
          to extend the date by which we are required to file a registration statement
          in
          accordance with Section 10(b)(i) of the Loan Agreement. The amendment agreement
          extends the date by which we are required to file a registration statement
          from
          September 30, 2005 to January 1, 2006.
  On
          February 14, 2006, we entered into a new loan facility with Apix, which
          provided
          for the rollover of the original loan agreement and the grant of an additional
          loan facility in the amount of $660,000 at an interest rate of 10% per
          annum. In
          addition, we and the lender have agreed to the following terms: (i) the
          maturity
          date of the original loan facility is extended from February 28, 2006 to
          May 18,
          2006; (ii) the exercise price of the original warrant has been adjusted
          to $0.06
          per share. In addition, we have granted the Lender a new warrant to purchase
          23,800,000 shares of our common stock at an exercise price of $0.06 per
          share
          for a term of ten years. In addition, upon completion of the full funding
          under
          the new loan facility, we will grant the lender warrants to purchase an
          additional 8,000,000 shares of our common stock at an exercise price of
          $0.06
          per share for a term of ten years; (iii) we have granted the lender the
          right to
          convert the loan principal, interest, facility fees and exit fees into
          shares of
          our common stock at a conversion price of $0.06 per share; (iv) the facility
          fee
          has been increased from $60,000 to $80,000. In addition, the exit fee has
          been
          increased from $900,000 to $1,300,000; (v) upon completion of the full
          funding
          under the new loan facility, the exit fee would be increased by $260,000;
          (vi)
          we agree to register the shares underlying the loan principal, facility
          fees,
          and warrants on a registration statement on Form S-1 as soon as practicable
          after the date of issuing the warrant, but in any event no later than May
          31,
          2006. We received funding under this agreement of $200,000 and $460,000
          in
          February and March 2006, respectively.
 
 8
 On
          January 15, 2007, the Company entered into a new term sheet with Apix,
          which
          provides for the rollover of prior loan facilities and subsequent advances
          (Prior Facilities) and an additional loan facility between the parties
          (the "New
          Facility"). The New Facility provides for the following terms and conditions:
 
 (i)  Additional
          loan facility - Apix has granted the Company an additional loan facility
          in the
          amount of $5,625,000. Advances pursuant to the additional facility shall
          be made
          on a bi-weekly basis the Company’s discretion in denominations of $225,000 per
          advance;
 (ii)  New
          maturity date - the maturity date of the New Facility and Prior Facilities
          is
          the earlier of (a) December 31, 2007 or (b) the date that Apix makes a
          demand
          for payment;
 (iii)  Facility
          fee adjustment - the aggregate facility fee for the Prior Facilities and
          the New
          Facility shall be $500,000 (the “Facility Fee”) which is payable through the
          issuance of five million shares of our preferred stock with the following
          minimum preferences: (a) 28 votes per share at any general or extraordinary
          meeting of the common shares of the company convened by the Company or
          its
          shareholders for a total of 140 million votes at any such meeting; and
          (b)
          convertible into common shares of the Company at any time at the sole and
          absolute discretion of the holder on the basis of two (2) common shares
          for each
          preferred share tendered for conversion for a total of ten (10) million
          common
          shares in the event all preferred shares are tendered for conversion;
 (iv)  Exit
          fees
          - the aggregate exit fees for the Prior Facilities and the New Facility
          shall be
          $2,800,000 plus $80,000 for each advance made  which
          shall be due and payable on the earliest to occur of: (1) the maturity
          date, (2)
          generally the sale of the company or substantially all of its assets, a
          reorganization or a new loan facility in excess of $1,000,000, or (3) an
          event
          of default;
 (v)  Price
          adjustment to existing warrant and new warrants - pursuant to the Prior
          Facilities, the Company agreed to issue to Apix warrants to purchase 118,800,000
          shares of the Company's common stock at an exercise price of $0.06 per
          share
          (the “Existing Warrants”). Pursuant to the New Facility, the exercise price of
          the Existing Warrants has been adjusted to $0.04 per share. In addition,
          the
          Company has agreed to issue to Apix additional warrants to purchase 20,000,000
          shares of the Company’s common stock at an exercise price of $0.03 per share
          (the “New Warrants”). All warrants have a term of ten years;
 (vi)  Conversion
          price adjustment - the loan principal and exit fees are convertible into
          shares
          of the Company’s common stock at a conversion price of $0.04 per share; and
 (vii)  Registration
          rights - the Company agrees to register a percentage of the shares underlying
          the loan principal, facility fees, and warrants on a registration statement
          at
          its best effort.
 
 The
          terms
          of the new term sheet are not binding on the parties. Completion of the
          New
          Facility is contingent upon the negotiation and execution of definitive
          agreements and other documentation.
 
 
 **ITEM
          7. FINANCIAL STATEMENTS**
 
 Reference
          is made to the Index of Financial statements following Part III of this
          Report
          for a listing of the Company’s financial statements and notes
          thereto.
 
  9
 
 CARDIMA,
          INC.
 
 INDEX
          TO
          FINANCIAL STATEMENTS
 
 
  PAGEReport
                      of Marc Lumer & Company, Independent Registered Public Accounting
                      Firm
                  F-2Balance
                      Sheet at December 31, 2006
                  F-3Statements
                      of Operations for the years ended December 31, 2006 and 2005
                  F-4Statement
                        of Stockholders’ Equity (Deficit)for
                        the years ended December 31, 2006, and 2005
                  F-5Statements
                      of Cash Flows for the years ended December 31, 2006, and
                      2005
                  F-6Notes
                      to Financial Statements
                  F-7
 
 
 
 F-1
 
  REPORT
          OF
          MARC LUMER & COMPANY,
 INDEPENDENT
          REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 
 The
          Board
          of Directors and Stockholders
 Cardima,
          Inc.
 
  We
          have
          audited the accompanying balance sheet of Cardima, Inc. as of December
          31, 2006
          and the related statements of operations, stockholders’ equity (deficit), and
          cash flows for years ended December 31, 2006 and 2005. These financial
          statements are the responsibility of the Company’s management. Our
          responsibility is to express an opinion on these financial statements based
          on
          our audit.
  We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. The
          Company has determined that it is not required to have, nor were we engaged
          to
          perform, an audit of its internal control over financial reporting. Our
          audit
          included consideration of internal control over financial reporting as
          a basis
          for designing audit procedures that are appropriate in the
          circumstances ,
          but not
          for the purpose of expressing an opinion on the effectiveness of the Company’s
          internal control over financial reporting. Accordingly, we express no such
          opinion. An audit also includes examining, on a test basis, evidence supporting
          the amounts and disclosures in the financial statements, assessing the
          accounting principles used and significant estimates made by management,
          as well
          as evaluating the overall financial statement presentation. We believe
          that our
          audit provides a reasonable basis for our opinion.
  In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of Cardima, Inc. at December
          31, 2006
          and the results of its operations and its cash flows for the years ended
          December 31, 2006 and 2005 **,** in
          conformity with accounting principles generally accepted in the United
          States of
          America.
  The
          accompanying financial statements have been prepared assuming that the
          Company
          will continue as a going concern. As discussed in Note 1 to the financial
          statements, the Company has suffered recurring losses from operations that
          raise
          substantial doubt about its ability to continue as a going concern. Management’s
          plans in regard to these matters are also described in Note 1. The financial
          statements do not include any adjustments that might result from the outcome
          of
          this uncertainty.
   Marc
          Lumer & Company
  San
          Francisco, California
  April
          17,
          2007
 
 
 F-2
  **CARDIMA,
          INC.**
 **BALANCE
          SHEET**
 **(In
          thousands, except per share amounts)**
 December
                    31, 2006**ASSETS**Current
                    assets:Cash
                    and cash equivalent
                
                $
                942Accounts
                    receivable, net of allowances for doubtful accounts of $14
                
                
                415Inventories
                    (Note 2)
                
                
                324Prepaid
                    expenses
                
                
                123Other
                    current assets
                
                
                62Total
                    current assets
                
                $
                1,866Property
                    and equipment, net (Note 3)
                
                
                280Other
                    assets
                
                
                71TOTAL
                    ASSETS
                
                $
                2,217**LIABILITIES
                    AND STOCKHOLDERS' DEFICIENCY**Current
                    liabilities:Accounts
                    payable
                
                $
                971Accrued
                    compensation
                
                
                402Loans
                    payable (Note 4)
                
                
                8,160Warrant
                    liabilities (Note 5)
                
                
                3,044Notes
                    payable to related parties - current portion (Note 6)
                
                
                8Capital
                    lease - current portion (Note 8)
                
                
                21Accrued
                    interest and fee (Note 7)
                
                
                2,308Other
                    current liabilities
                
                
                96Total
                    current liabilities
                
                $
                15,010Capital
                    lease - noncurrent portion (Note 8)
                
                
                22Notes
                    payable to related parties - noncurrent portion (Note 6)
                
                
                62Commitments
                    and contingencies (see note 8)Stockholders'
                    deficiency:Common
                    stock, $0.001 par value, 300,000,000 shares authorized, 102,354,679
                    shares
                    issued and outstanding at December 31, 2006
                
                
                118,418Preferred
                    stock, $0.001 par value, 5,000,000 shares authorized, none issued
                    and
                    outstanding at December 31, 2006
                
                
                -Accumulated
                    deficit
                
                
                (131,295
                )Total
                    stockholders' deficiency
                
                
                (12,877
                )TOTAL
                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY
                
                $
                2,217
 
  See
          accompanying notes to financial statements
 
 
 F-3
 
 
 
 **CARDIMA,
          INC.**
 **STATEMENTS
          OF OPERATIONS**
 **(In
          thousands, except per share amounts)**
 
 
 Year
                    Ended December 31, 2006
                
                Year
                    Ended December 31, 2005Net
                    sales
                
                $
                1,541
                
                $
                1,859Cost
                    of goods sold
                
                
                2,023
                
                
                1,999Gross
                    deficiencies
                
                
                (482
                )
                
                (140
                )Operating
                    expenses:Research
                    and development
                
                
                1,787
                
                
                2,074Selling,
                    general and administrative
                
                
                2,987
                
                
                4,817Total
                    operating expenses
                
                
                4,774
                
                
                6,891Operating
                    loss
                
                
                (5,256
                )
                
                (7,031
                )Interest
                    income
                
                
                1
                
                
                253Interest
                    expense
                
                
                (3,897
                )
                
                (3,350
                )Other
                    income /(expense)
                
                
                (381
                )
                
                1,800Net
                    loss
                
                $
                (9,533
                )
                $
                (8,328
                )Basic
                    and diluted net loss per share
                
                $
                (0.09
                )
                $
                (0.08
                )Shares
                    used in computing basic and diluted net loss per share
                
                
                101,696
                
                
                101,408
 
 See
          accompanying notes to financial statements
 
 
 F-4
   
 **CARDIMA,
          INC.**
 **Statements
          of Stockholders’ Equity(Deficit)**
 **(In
          thousands, except number of share and per share amounts)**
 
 
 **No.
                    of Shares**
                
                **Common
                    Stock**
                
                **Accumulated
                    Deficit**
                
                **Total
                    Stockholders’ Equity****Balance
                    at December 31, 2004**
                
                **101,305,613**
                
                **$
                    117,973**
                
                **$
                    (113,434)**
                
                **$
                    4,539**Common
                    stock issued under employee stock plans
                
                
                286,045
                
                
                50
                
                
                --
                
                
                50Expense
                    for vesting of stock options granted to non-employees
                
                
                --
                
                
                1
                
                
                --
                
                
                1Common
                    stock issued to non-employees
                
                
                22,000
                
                
                2
                
                
                --
                
                
                2Expense
                    related to private placement
                
                
                --
                
                
                (27
                )
                
                --
                
                
                (27
                )Net
                    Loss
                
                
                --
                
                
                --
                
                
                (8,328
                )
                
                (8,328
                )**Balance
                    at December 31, 2005**
                
                
                **101,613,658**
                
                **$**
                **117,999**
                
                **$**
                **(121,762**
                **)**
                **$**
                **(3,763**
                **)**Common
                    stock issued under employee stock plans
                
                
                711,021
                
                
                28
                
                
                --
                
                
                28Common
                    stock issued to non-employees
                
                
                30,000
                
                
                1
                
                
                --
                
                
                1Expense
                    for vesting of stock options granted to employees
                
                
                --
                
                
                390
                
                
                --
                
                
                390Net
                    Loss
                
                
                --
                
                
                --
                
                
                (9,533
                )
                
                (9,533
                )**Balance
                    at December 31, 2006**
                
                
                **102,354,679**
                
                **$**
                **118,418**
                
                **$**
                **(131,295**
                **)**
                **$**
                **(12,877**
                **)**
 
 See
          accompanying notes to financial statements
 
 F-5
   **CARDIMA,
          INC.**
 **STATEMENTS
          OF CASH FLOWS**
 **(In
          thousands)**
 Years
                    Ended December 31,2006
                
                2005**CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    loss
                
                $
                (9,533
                )
                $
                (8,328
                )Adjustments
                    to reconcile net loss to net cash used in operating activities
                    provided by
                    operations:Depreciation
                    and amortization
                
                
                123
                
                
                201Non-cash
                    stock-based compensation
                
                
                391
                
                
                3Derivative
                    valuation
                
                
                2,806
                
                
                1,800Gain
                    on settlement
                
                
                (35
                )
                
                -Excess
                    and obsolete inventory
                
                
                (18
                )
                
                8Write-off
                    of interest income
                
                
                26
                
                
                -Write-off
                    of payroll tax refund liability
                
                
                -
                
                
                (245
                )Bad
                    debt reserve
                
                
                (12
                )
                
                -Allowance
                    for notes receivable from officers
                
                
                -
                
                
                575Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (138
                )
                
                38Inventories
                
                
                81
                
                
                483Prepaid
                    and other assets
                
                
                396
                
                
                187Accounts
                    payable, accrued compensation and other liabilities
                
                
                102
                
                
                (1,787
                )Notes
                    payable
                
                
                70
                
                
                -Accrued
                    interest & fee
                
                
                1,203
                
                
                1,105Net
                    cash used in operating activities
                
                
                (4,538
                )
                
                (5,960
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Purchase
                    of property and equipment
                
                
                (112
                )
                
                (124
                )Net
                    cash used in investing activities
                
                
                (112
                )
                
                (124
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Principal
                    payments under capital leases and credit facility
                
                
                (20
                )
                
                (369
                )Payments
                    of issuance costs
                
                
                -
                
                
                (31
                )Net
                    proceeds from loan financing
                
                
                5,460
                
                
                2,700Net
                    proceeds from sale of common stock
                
                
                28
                
                
                54Net
                    cash provided by financing activities
                
                
                5,468
                
                
                2,354Change
                    in cash and cash equivalents
                
                
                818
                
                
                (3,730
                )Beginning
                    cash and cash equivalents
                
                
                124
                
                
                3,854Ending
                    cash and equivalents
                
                $
                942
                
                $
                124**SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOWS INFORMATION**Cash
                    paid for interest
                
                $
                6
                
                $
                15**SUPPLEMENTAL
                    SCHEDULE OF NON-CASH INVESTING AND FINANCING
                    ACTIVITIES**Equipment
                    acquired under capital lease arrangements
                
                $
                37
                
                $
                -Warrants
                    issued for loan financing
                
                $
                1,422
                
                $
                3,000
  See
          accompanying notes to financial statements.
  F-6
  **CARDIMA,
          INC.**
 **Notes
          to Financial Statements**
 **December
          31, 2006**
 
  **1.**  **Nature
          of Business and Summary of Significant Accounting Policies**
  ***Nature
          of Business***
  The
          Company was incorporated in the State of Delaware on November 12, 1992.
          The
          Company designs, develops, manufactures and markets minimally invasive,
          single-use, micro-catheter systems for the mapping and ablation of the
          two most
          common forms of cardiac arrhythmias: atrial fibrillation and ventricular
          tachycardia. The Company has licensed its micro-catheter technology for
          use in
          the treatment of electrophysiological diseases affecting areas other than
          the
          central nervous system from Target Therapeutics. The Company sells its
          products
          worldwide through both direct sales and distribution channels, with a
          substantial portion of its sales to international customers.
  ***Going
          Concern***
  The
          accompanying financial statements have been prepared on a going concern
          basis,
          which contemplates the realization of assets and the settlement of liabilities
          and commitments in the normal course of business. As reflected in the
          accompanying financial statements, as of December 31, 2006, the Company
          had cash
          on hand of $942,000, negative working capital of $13.3 million, and an
          accumulated deficit of approximately $131 million. These factors raise
          substantial doubt about its ability to continue as a going concern. In
          January
          2007, the Company entered into a new loan facility of $5.6 million with
          Apix
          International Limited (Apix) as explained in Note 17, however, the ability
          of
          the Company to continue as a going concern is dependent on the Company’s ability
          to implement its business plan and raise additional funds.
 
 ***Use
          of Estimates***
  The
          preparation of financial statements in conformity with generally accepted
          accounting principles in the United States requires management to make
          estimates
          and assumptions that affect the amounts of assets and liabilities, disclosures
          of contingent assets and liabilities at the date of the financial statements
          and
          the reported amounts of revenues and expenses during the reported period.
          Actual
          results could differ from those estimates and such differences could affect
          the
          results of operations reported in future periods.
 
 ***Revenue
          Recognition***
  The
          Company recognizes revenue from two types of customers, end users and
          distributors. Revenue is recognized in accordance with Staff Accounting
          Bulletin
          104, “Revenue Recognition,” when all of the following criteria are met:
          persuasive evidence of an arrangement exists, shipment of the product has
          occurred and title of products transferred at the point of shipment, payment
          of
          the product is reasonably assured and no substantive obligations to the
          customer
          remain. Revenue is presented net of discounts, allowances, and returns.
          Customers are not entitled to any rights of product return. Payment terms
          are
          either open trade credit or cash. We have distributors in Asia and Europe
          and we
          record as revenue the wholesale price we charge our distributors. The
          distributors assume the title and the risk of loss at the shipping point.
          The
          distributors do not have any price protection or return rights.
 
 ***Cost
          of Goods Sold***
 
 Cost
          of
          goods sold primarily includes raw material costs, catheter fabrication
          costs,
          system assembly, shipping and handling charges, testing costs and manufacturing
          overhead.
 
 ***Research
          and Development***
  Research
          and development costs, which include clinical and regulatory costs, are
          charged
          to expense as incurred.
  
 F-7
 
 ***Reclassification***
 
 Certain
          reclassifications have been made to prior period amounts to conform to
          the
          current year presentation.
 
  ***Income
          Taxes***
  Income
          taxes are accounted for under the asset and liability method. Deferred
          income
          tax assets and liabilities are recognized for the future tax consequences
          attributable to differences between the financial statement bases and the
          respective tax bases of the assets and liabilities and operating loss and
          tax
          credit carry forwards. Deferred tax assets and liabilities are measured
          using
          enacted tax rates expected to apply to taxable income in the years in which
          those temporary differences are expected to be recovered or settled. The
          effect
          on deferred tax assets and liabilities of a change in tax rates is recognized
          in
          income in the period that includes the enactment date. Valuation allowances
          are
          established when necessary to reduce deferred tax assets to the amount
          expected
          to be realized, and have been provided for all periods presented.
 
 ***Stock
          Based Compensation***
 
 Prior
          to
          January 2006, the Company used Statement of Financial Accounting Standards
          No.
          148 "Accounting for Stock-Based Compensation - Transition and Disclosure"
          (SFAS
          No. 148) to account for our stock based compensation arrangements. This
          statement amended  the
          disclosure provision of FASB statement No. 123 to require prominent disclosure
          about the effects on reported net income of an entity's accounting policy
          decisions with respect to stock-based employee compensation. As permitted
          by
          SFAS No. 123 and amended by SFAS No. 148, the Company continued to apply
          the
          intrinsic value method under Accounting Principles Board ("APB") Opinion
          No. 25,
          "Accounting for Stock Issued to Employees," to account for its stock-based
          employee compensation arrangements.
 
 The
          following table illustrates the effect on reported net loss per share if
          the
          Company had applied the fair value recognition provisions of SFAS 123(R)
          to
          stock-based awards for the year ended December 31, 2005: (in thousands,
          except
          per share amounts):
  **Year
                    ended December 31, 2005**Net
                    loss applicable to common shareholders - as reported
                
                
                ($8,328
                )Add:Stock-based
                    employee compensation expense included inreported
                    net income, net of applicable tax effects
                
                
                ---Less:Total
                    stock-based employee compensation expensedetermined
                    under fair value based method for all awards,net
                    of applicable tax effects
                
                
                (778
                )Pro
                    forma net loss applicable to common shareholders
                
                
                ($9,106
                )Basic
                    and diluted net loss per share applicable to commonshareholders
                    - as reportedAs
                    reported
                
                
                ($0.08
                )Pro
                    forma
                
                
                ($0.09
                )
 
 In
          December 2004, the Financial Accounting Standards Board issued Statement
          Number 123 (“FASB 123 (R)”), Share-Based Payments, which was effective for the
          reporting period beginning on January 1, 2006. The statement required the
          Company to recognize compensation expense in an amount equal to the fair
          value
          of share-based payments such as stock options granted to employees. The
          Company,
          which had the option to either apply FASB 123 (R) on a modified prospective
          method or to restate previously issued financial statements, has chosen
          to
          utilize the modified prospective method. Under this method, the Company
          was
          required to record compensation expense (as previous awards continue to
          vest)
          for the unvested portion of previously granted awards that remain outstanding
          at
          the date of adoption.
  F-8
 In
          January 1, 2006, the Company adopted the expense recognition provisions
          of FASB
          No. 123 (R) which requires the measurement and recognition of compensation
          expense for all share-based payment awards based on estimated fair values.
          The
          total stock-based compensation expense was approximately $390,000 for the
          year
          ended December 31, 2006. The fair value of employee stock options granted
          was determined using the Black-Scholes method based on the following
          weighted-average assumptions:
 
 
 2006
                
                2005Expected
                    life (years)
                4.0
                
                4.0Interest
                    Rate
                4.6%
                
                4.4%Volatility
                160%
                
                128%Dividend
                    Yield
                0%
                
                0%
 
  ***Net
          Loss Per Share***
   Net
          loss
          per share is computed using the weighted average number of shares of common
          stock outstanding during the applicable period. Shares associated with
          stock
          options and warrants are not included because they are anti-dilutive. There
          are
          no differences between basic and diluted net loss per share for all periods
          presented.
  The
          following table presents the calculation of basic and diluted net loss
          per
          share: (in thousands, except per share amounts)
  2006
                
                2005Net
                    loss available to common shareholders
                
                $
                (9,533
                )
                $
                (8,328
                )Weighted
                    average common shares outstanding
                
                
                101,696
                
                
                101,408Basic
                    and diluted net loss per share available to common
                    shareholders
                
                $
                (0.09
                )
                $
                (0.08
                )
  The
          following historical outstanding anti-dilutive securities are not included
          in
          the calculation of diluted net loss per share attributable to common
          stockholders:
  2006
                
                2005Options
                    to purchase common stock
                
                
                5,108,628
                
                
                7,557,035Warrants
                    to purchase common stock
                
                
                75,793,526
                
                
                49,369,168Total
                
                
                80,902,154
                
                
                56,926,203
  ***Cash
          and Cash Equivalents***
  The
          Company considers all highly liquid investments with maturity of three
          months or
          less, when acquired, to be cash equivalents.
 
 ***Allowance
          for Doubtful Accounts***
 
  The
          Company uses the allowance method to account for uncollectible accounts
          receivable. The Company’s estimate is based on historical collection experience
          and a review of the current status of accounts receivable. The Company
          reviews
          its accounts receivable balances by customer for accounts greater than
          90 days
          old and makes a determination regarding the collectibility of the accounts
          based
          on specific circumstances and the payment history that exists with such
          customers. The Company also takes into account its prior experience, the
          customer’s ability to pay and an assessment of the current economic conditions
          in determining the net realizable value of its receivables. The Company
          also
          reviews its allowance for doubtful accounts in aggregate for adequacy following
          this assessment. Accordingly, the Company believes that its allowance for
          doubtful accounts fairly represent the underlying collectibility risks
          associated with its accounts receivable. For the period ended December 31,
          2006, the Company established an allowance for doubtful accounts of $14,000.
 
 F-9
 ***Allowance
          for Loan Loss***
 
 The
          allowance for loan loss represents management’s estimate of principal and
          accrued interest losses as of the balance sheet date. Determination of
          the
          reserve is inherently subjective, as it requires significant estimates,
          including the amounts and timing of expected future cash flows. Also specific
          reserves are established in cases where management has identified significant
          conditions or circumstances related to an individual credit that we believe
          indicates the note is un-collectible. Note losses are charged off against
          the
          reserve, and while recoveries of amounts previously charged off are credited
          to
          the reserve. Evaluations of the reserve balance are conducted
          quarterly.  Interest
          is not accrued on non-performing loan. A loan is considered non-performing
          if
          the accrued interest is not received on the due date.
  ***Property
          and Equipment***
  Property
          and equipment, including equipment under capital leases, are carried at
          cost
          less accumulated depreciation and amortization. Property and equipment
          are
          depreciated using the straight-line method over the estimated useful lives,
          generally three to five years. Leasehold improvements are amortized using
          the
          straight-line method over the shorter of the estimated useful life of the
          asset
          or the remaining term of the lease. Depreciation expense includes amortization
          of capital leases and leasehold improvements.
  ***Long-Lived
          Assets***
  The
          Company accounts for the impairment and disposition of long-lived assets
          in
          accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
          Long-Lived Assets.” In accordance with SFAS No.144, long-lived assets to be held
          are reviewed whenever events and changes in circumstances indicate that
          their
          carrying value may not be recoverable. The Company reviews the carrying
          value of
          long-lived assets to determine whether or not, an impairment to such value
          has
          occurred. During the year ended December 31, 2006, the Company believes
          that
          there has been no indicator of impairment.
   ***Income
          Taxes***
 
 Income
          taxes are accounted for under the asset and liability method. Deferred
          income
          tax assets and liabilities are recognized for the future tax consequences
          attributable to differences between the financial statement bases and the
          respective tax bases of the assets and liabilities and operating loss and
          tax
          credit carry forwards. Deferred tax assets and liabilities are measured
          using
          enacted tax rates expected to apply to taxable income in the years in which
          those temporary differences are expected to be recovered or settled. The
          effect
          on deferred tax assets and liabilities of a change in tax rates is recognized
          in
          income in the period that includes the enactment date. Valuation allowances
          are
          established when necessary to reduce deferred tax assets to the amount
          expected
          to be realized, and have been provided for all periods presented.
 
 ***Warrants***
  The
          Company accounts for warrants in accordance with FASB Statement of Financial
          Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial
          Instruments with Characteristics of both Liabilities and Equity.” At the date of
          issuance, a fair value is ascribed to the warrants based on a valuation
          using
          the Black-Scholes model. The value of warrants outstanding at the end of
          each
          fiscal quarter is marked to market based on a valuation using the Black-Scholes
          model.
  ***Segment
          Reporting***
  The
          Company identifies its operating segments based on how management internally
          evaluates separate financial information (if available), business activities
          and
          management responsibilities. The Company operates in a single business
          segment,
          the manufacturing and sale of device-based medical therapies. All of the
          Company’s revenues have been derived from this business segment.
  F-10
 ***Fair
          Value of Financial Instruments***
  The
          Company’s financials instruments at December 31, 2006 consist of cash, accounts
          receivable, notes receivable from officers, accounts payable, warrant
          liabilities, other current liabilities, loan payable and capital lease
          obligation. The carrying values of these financial instruments approximate
          their
          fair values.
  ***Off-Balance-Sheet
          Arrangements***
 
 As
          of
          December 31, 2006, the Company did not have any off-balance sheet
          arrangements.
 
 ***Recent
          Accounting Pronouncements***
  In
          February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
          No. 155, “Accounting for Certain Hybrid Financial Instruments,” which
          amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
          Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
          Financial Assets and Extinguishment of Liabilities.” SFAS No. 155 amends
          SFAS No. 133 to narrow the scope exception for interest-only and
          principal-only strips on debt instruments to include only such strips
          representing rights to receive a specified portion of the contractual interest
          or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to
          allow qualifying special-purpose entities to hold a passive derivative
          financial
          instrument pertaining to beneficial interests that are themselves derivative
          instruments. Management does not expect adoption of SFAS No. 155 to have a
          material impact on the Company’s financial statements.
  In
          June
          2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting
          for Uncertainty in Income Taxes, an interpretation of FASB Statement
          No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes.
          FIN 48 prescribes a recognition threshold and measurement attribute for
          the
          financial statement recognition and measurement of a tax position taken
          or
          expected to be taken in a tax return. FIN 48 requires that we recognize
          in the
          financial statements the impact of the tax position if that position will
          more
          likely than not be sustained on audit, based on the technical merits of
          the
          position. FIN 48 also provides guidance related to de-recognition,
          classification, interest and penalties, accounting in interim periods and
          disclosure. If there are changes in net assets as a result of application
          of FIN
          48, these will be accounted for as an adjustment to retained earnings.
          We are
          currently evaluating the accounting and disclosure requirements of FIN
          48 in
          order to determine the impact that this guidance will have on our results
          of
          operations or financial condition when we adopt FIN 48 at the beginning
          of our
          fiscal year 2007.
 
 In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
which defines fair value, establishes a framework for measuring fair value,
          and
          expands disclosures about fair value measurements. SFAS No. 157 does not
          require any new fair value measurements, but rather eliminates inconsistencies
          in guidance found in various prior accounting pronouncements. We are currently
          evaluating the accounting and disclosure requirements that this guidance
          will
          have on our results of operations or financial condition when we adopt
          SFAS
          No. 157 at the beginning of our fiscal year 2008.
 
  F-11
  
 **2.
          Inventories**
 
 Inventories
          are stated at the lower of cost or market. Cost is based on actual costs
          computed on a first-in, first-out basis. Inventories consist of the following
          (in thousands):
  December
                    31, 2006Raw
                    Materials
                
                $
                139Work-In-Process
                
                
                86Finished
                    Goods
                
                
                99$
                324
 
 Inventories
          shown above are valued using FIFO and are adjusted to the lower of cost
          or
          market. The Company had allowances for excess and obsolete inventory of
          $579,000
          at December 31, 2006. The Company recorded adjustment to the lower of cost
          or
          market of $7,000 in 2006. Moreover, as of December 31, 2006, the Company
          has
          approximately $68,000 inventories located in foreign countries, which were
          held
          by the local distributors.
 
  **3** ***.*** **Property
          and Equipment**
  Property
          and equipment, including equipment under capital leases, are carried at
          cost
          less accumulated depreciation and amortization. Property and equipment
          are
          depreciated using the straight-line method over the estimated useful lives,
          generally three to five years. Leasehold improvements are amortized using
          the
          straight-line method over the shorter of the estimated useful life of the
          asset
          or the remaining term of the lease. Depreciation expense includes amortization
          of capital leases and leasehold improvements. Depreciation expense was
          $123,000
          and $201,000 for fiscal years 2006 and 2005, respectively.
  Property
          and equipment consist of the following (in thousands):
  December
                    31, 2006Equipment
                
                $1,888Leasehold
                    improvements
                
                
                259$
                2,147Less
                    accumulated depreciation and amortization
                
                
                (1,867
                )$
                280Idle
                    Equipment
                
                $
                1,290Less
                    accumulated depreciation and amortization
                
                
                (1,290
                )$
                -
 
 Equipment
          includes property and equipment financed under capital leases, which was
          $78,000
          at December 31, 2006. Accumulated amortization related to leased assets
          was
          $37,000. With the June 2005 furlough and the August 2005 reduction-in-force,
          the
          Company has fully depreciated idle equipment in the amount of $1,290,000
          as of
          December 31, 2006.
  
 F-12
 
 **4.
          Loans Payable**
 
 On
          August
          28, 2005, the Company entered into a $3,000,000 Secured Loan Agreement
          with Apix
          International Limited (Apix). The term of the loan was six months. All
          the
          loan-related fees were amortized over the period from August 2005 to February
          2006. On February 14, 2006, the Company entered into a new loan facility
          term
          sheet with Apix, which provided for the rollover of the original loan agreement
          and the grant of an additional loan facility in the amount of $660,000
          at an
          interest rate of 10% per annum. The term of this new loan facility was
          three
          months. All the additional new facility-related fees were amortized over
          the
          period from February 2006 to May 2006. In
          addition, the Company and Apix have agreed to the following terms: (i)
          the
          maturity date of the original loan facility is extended from February 28,
          2006
          to May 18, 2006; (ii) the
          exercise price of the original warrant has been adjusted to $0.06 per share.
          Moreover, the Company has granted Apix a new warrant to purchase 23,800,000
          shares of our common stock at an exercise price of $0.06 per share for
          a term of
          ten years. Furthermore, upon completion of the full funding under the new
          loan
          facility, the Company has granted Apix warrants to purchase an additional
          8,000,000 shares of its common stock at an exercise price of $0.06 per
          share for
          a term of ten years; (iii) the
          Company has granted Apix the right to convert the loan principal, interest,
          facility fees and exit fees into shares of its common stock at a conversion
          price of $0.06 per share; (iv) the facility fee has been increased from
          $60,000
          to $80,000. In addition, the exit fee has been increased from $900,000
          to
          $1,300,000; (v) upon completion of the full funding under the new loan
          facility,
          the exit fee would be increased by $260,000; (vi) the Company agrees to
          register
          the shares underlying the loan principal, facility fees, and warrants on
          a
          registration statement as soon as practicable after the date of issuing
          the
          warrant, but in any event no later than May 31, 2006. The Company filed
          a
          registration statement Form SB-2 on May 31, 2006 and it was withdrawn on
          October
          26, 2006. The Company used the interest method to amortize all the loan
          fees
          over the life of the loan. The Company received funding under this agreement
          of
          $200,000 and $460,000 in February and March 2006, respectively.
 
 On
          May
          18, 2006, the Company was not able to repay this Apix loan. The Company’s
          failure to repay the principle and interest by the maturity date constituted
          an
          event of default pursuant to the loan agreement. To secure the repayment
          of
          principle and interest to Apix under the loan agreement, the Company entered
          into a (i) Security Agreement, (ii) Trademark Security Agreement, (iii)
          Patent
          Security Agreement, and (iv) Patent, Trademark and Copyright Security Agreement
          with Apix, granting Apix a first priority security interest in all of the
          Company’s assets and intellectual property now owned or hereafter acquired.
          Apix’s remedies upon default of the loan agreement include taking procession
          and
          selling the collateral, the occurrence of which would cause the Company
          to cease
          its operations indefinitely.
 
 The
          Company had not received a notice of default from Apix, nor has Apix indicated
          to the Company that it intended to place the Company in default under the
          loan
          agreement. In addition to the $3,660,000 loaned to the Company by Apix
          through
          March 31, 2006, Apix has made advances to the Company in the amount of
          $4,500,000 through December 31, 2006. The Company’s loans payable balance as of
          December 31, 2006 and 2005 was $8,160,000 and $2,700,000,
          respectively.
 
 The
          table
          below summarizes the activities in the loans payable account:
 
 AmountAugust
                    2005 loan facility
                
                $
                3,000,000February
                    2006 loan facility
                
                
                660,000April
                    2006 to December 2006 advances
                
                
                4,500,000Total
                
                $
                8,160,000
 
 On
          January 15, 2007, the Company entered into a new term sheet with Apix,
          which
          provides for the rollover of prior loan facilities and subsequent advances
          (Prior Facilities) and an additional loan facility between the parties
          (the "New
          Facility"). The New Facility provides for the following terms and conditions:
 
 (i)
                Additional
                    loan facility - Apix has granted the Company an additional loan
                    facility
                    in the amount of $5,625,000. Advances pursuant to the additional
                    facility
                    shall be made on a bi-weekly basis the Company’s discretion in
                    denominations of $225,000 per advance;
 (ii)
                New
                    maturity date - the maturity date of the New Facility and Prior
                    Facilities
                    is the earlier of (a) December 31, 2007 or (b) the date that
                    Apix makes a
                    demand for payment;
 (iii)
                Facility
                    fee adjustment - the aggregate facility fee for the Prior Facilities
                    and
                    the New Facility shall be $500,000 (the “Facility Fee”) which is payable
                    through the issuance of five million shares of our preferred
                    stock with
                    the following minimum preferences: (a) 28 votes per share at
                    any general
                    or extraordinary meeting of the common shares of the company
                    convened by
                    the Company or its shareholders for a total of 140 million votes
                    at any
                    such meeting; and (b) convertible into common shares of the Company
                    at any
                    time at the sole and absolute discretion of the holder on the
                    basis of two
                    (2) common shares for each preferred share tendered for conversion
                    for a
                    total of ten (10) million common shares in the event all preferred
                    shares
                    are tendered for conversion;
 (iv)
                Exit
                    fees - the aggregate exit fees for the Prior Facilities and the
                    New
                    Facility shall be $2,800,000 plus $80,000 for each advance
                    madewhich
                    shall be due and payable on the earliest to occur of: (1) the
                    maturity
                    date, (2) generally the sale of the company or substantially
                    all of its
                    assets, a reorganization or a new loan facility in excess of
                    $1,000,000,
                    or (3) an event of default;
 (v)
                Price
                    adjustment to existing warrant and new warrants - pursuant to
                    the Prior
                    Facilities, the Company agreed to issue to Apix warrants to purchase
                    118,800,000 shares of the Company's common stock at an exercise
                    price of
                    $0.06 per share (the “Existing Warrants”). Pursuant to the New Facility,
                    the exercise price of the Existing Warrants has been adjusted
                    to $0.04 per
                    share. In addition, the Company has agreed to issue to Apix additional
                    warrants to purchase 20,000,000 shares of the Company’s common stock at an
                    exercise price of $0.03 per share (the “New Warrants”). All warrants have
                    a term of ten years;
 (vi)
                Conversion
                    price adjustment - the loan principal and exit fees are convertible
                    into
                    shares of the Company’s common stock at a conversion price of $0.04 per
                    share; and
 (vii)
                Registration
                    rights - the Company agrees to register a percentage of the shares
                    underlying the loan principal, facility fees, and warrants on
                    a
                    registration statement at its best efforts.
   F-13
 
 The
          terms
          of the new term sheet are not binding on the parties. Completion of the
          New
          Facility is contingent upon the negotiation and execution of definitive
          agreements and other documentation.
 
 With
          the
          loan agreement’s optional conversion clause on all or any portion of the
          facility fee, the exit fee and the accrued interest due under the loan,
          any
          gains or losses on the difference between the conversion price and the
          fair
          value of the stock at the time of conversion will be included in the Company's
          earnings during that period.
 
 **5.
          Warrant Liabilities**
 
 The
          Company had the following warrant liabilities outstanding:
 
 Total
                
                Value
                    at
                
                Value
                    atWarrant
                    Shares
                
                Inception
                
                December
                    31, 2006August
                    2005 Loan
                
                
                30,000,000
                
                $
                3,000,000
                
                $
                1,476,000February
                    2006 Loan
                
                
                31,800,000
                
                $
                1,421,740
                
                $
                1,567,740$
                3,043,740
 
 The
          Company used the Black-Scholes valuation model to value the warrants at
          each
          balance sheet date and recorded the respective (income) or expense based
          on the
          following:
 
 Warrant
                    Granted
                
                FMV
                
                Strike
                    Price
                
                Remaining
                    Life ( in years)
                
                Interest
                    Rate
                
                Volatility
                
                Change
                    in ValueQ1
                    2006
                
                
                Aug-05
                
                $
                0.05
                
                $
                0.06
                
                
                9.42
                
                
                4.73
                %
                
                128
                %
                $
                47,420Feb-06
                
                
                
                
                $
                0.05
                
                $
                0.06
                
                
                9.92
                
                
                4.73
                %
                
                128
                %
                $
                177,000Q1
                    2006 Total
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                224,420Q2
                    2006
                
                
                Aug-05
                
                $
                0.09
                
                $
                0.06
                
                
                9.17
                
                
                5.08
                %
                
                160
                %
                $
                1,275,180Feb-06
                
                
                
                
                $
                0.09
                
                $
                0.06
                
                
                9.67
                
                
                5.08
                %
                
                160
                %
                $
                1,206,000Q2
                    2006 Total
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                2,481,180Q3
                    2006
                
                
                Aug-05
                
                $
                0.05
                
                $
                0.06
                
                
                8.92
                
                
                4.68
                %
                
                160
                %
                
                ($1,254,000
                )Feb-06
                
                
                
                
                $
                0.05
                
                $
                0.06
                
                
                9.42
                
                
                4.68
                %
                
                160
                %
                
                ($1,332,420
                )Q3
                    2006 Total
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                ($2,586,420
                )Q4
                    2006
                
                
                Aug-05
                
                $
                0.05
                
                $
                0.06
                
                
                8.67
                
                
                4.56
                %
                
                160
                %
                $
                147,000Feb-06
                
                
                
                
                $
                0.05
                
                $
                0.06
                
                
                9.17
                
                
                4.56
                %
                
                160
                %
                $
                155,820Q4
                    2006 Total
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                302,820FY2006
                    Total
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                422,000
   F-14
 
 **6.
          Note Payable to Related Parties**
 
 As
          previously disclosed, the Company’s former President and Chief Operating
          Officer, Mr. William K. Wheeler, has threatened to sue the Company for
          the
          recovery of $375,000 plus interest, which he has claimed that he was owed
          under
          the terms of his amended executive agreement. He made a settlement proposal,
          which would extinguish his repayment obligation on the loan that he had
          received
          from the Company in June 2000 and May 2001, in the total principal amount
          of
          $192,500.
 
 In
          December 2006, a settlement agreement was reached in principle, which the
          Company would pay $295,000 to Mr. Wheeler ($5,000 per month for 59 months).
          In
          accordance with the Accounting Principle Board (“APB”) No. 21, “Interest on
          Receivables and Payables”, the $295,000 note payable is discounted at 10% (same
          as the interest rate on the current loan financing) and the $192,500 note
          receivable is discounted at 6% (the original note’s interest rate). The
          discounted value of the note payable and note receivable is $232,287 and
          $162,022, respectively. The net of these two values of $70,265 is the note
          payable balance as of December 31, 2006.
 
 **7.
          Accrued Interest and Fee**
  As
          of
          December 31, 2006, the Company had accrued loan fees of $1,715,000 and
          loan
          interest of $593,000 in conjunction with the Apix loan financings in August
          2005
          and February 2006.
  **8.
          Commitments and Contingencies**
  *Commitments*
  The
          Company leases facilities under an operating lease, which has been extended
          through May 2007. The Company also leases certain equipment under non-cancelable
          capital leases, which bear interest at the rate of 10% per annum. Following
          is a
          schedule of future minimum lease payments under both operating and capital
          leases (in thousands):
  
  Fiscal
                    Year
                
                Operating
                    Leases
                
                Capital
                    Leases2007
                
                $
                115
                
                $
                212008
                
                
                -
                
                
                22Total
                    minimum lease payments
                
                
                115
                
                
                43Less
                    amounts representing interest
                
                
                N/A
                
                
                3Present
                    value of net minimum lease payments
                
                $
                115
                
                $
                40
   Rent
          expense was approximately $260,000 in 2006, and $385,000 in 2005.
  F-15
 *Contingencies*
  The
          Company is subject to numerous risks and uncertainties because of the nature
          and
          status of its operations and could be subject to claims and legal actions
          arising in the ordinary course of business. The Company maintains insurance
          coverage for events in amounts that it deems appropriate. Management believes
          that uninsured losses, if any, will not be materially adverse to the Company’s
          financial position or results of operations.
  **9.
          Concentrations of Risk**
  To
          date,
          product sales have been direct to customers in the United States and to
          distributors primarily in Europe and Japan. During the year ended December
          31,
          2006 and 2005, revenues to the Company’s largest customer, Paramedics Co. Ltd.
          in Japan, comprised 42% and 48% of the Company’s total net product sales
          respectively. No other single customer represented greater than 10% of
          net
          product sales in the years 2006 and 2005. Accounts receivable from this
          customer
          were $284,100 and $214,800 at the end of 2006 and 2005, respectively. The
          total
          export sales represented 59% of net sales for the year ended December 31,
          2006.
          Allowances for doubtful accounts were $14,000 and $26,000 as of December
          31,
          2006 and 2005, respectively. When necessary, estimated provisions for product
          returns are recorded. The geographic distribution of net sales was as follows
          (in thousands):
  Year
                    Ended December 31,2006
                
                2005United
                    States
                
                $
                624
                
                
                41
                %
                $
                682
                
                
                36
                %Germany
                
                
                146
                
                
                9
                %
                
                137
                
                
                8
                %Europe
                    - Other
                
                
                109
                
                
                7
                %
                
                138
                
                
                8
                %Japan
                
                
                650
                
                
                42
                %
                
                897
                
                
                48
                %Others
                
                
                12
                
                
                1
                %
                
                5
                
                
                0
                %Total
                    Net Sales
                
                $
                1,541
                
                
                
                
                $
                1,859
 
 In
          the
          first quarter of 2007, our Japanese distributor notified us of its failure
          to
          maintain the legal documentation standard required to sell our PATHFINDER® in
          Japan. As a result, we had no sales in Japan during the first quarter of
          2007.
          We understand that the reapplication process takes approximately six months.
          We
          are currently exploring our options with regard to selling the PATHFINDER® in
          Japan. During the reapplication process, we may have limited or no sales
          in
          Japan. We anticipate resuming commercial sales before the end of 2007.
          However,
          there can be no assurance that we will be able to resume sales by that
          time.
 
 The
          Company’s diagnostic product group, namely the Pathfinder® family of
          micro-catheter systems, accounted for 74% and 73% of net sales for the
          years
          ended December 31, 2006 and 2005, respectively.
 
 The
          Company purchases certain key components of its products for which there
          are
          relatively few alternative sources of supply including the hydrophilic
          coating
          for certain of its micro-catheters, from sole or limited source supplies.
          Establishing additional or replacement suppliers for any of the numerous
          components used in the Company’s products, if required, may not be accomplished
          quickly and could involve significant additional costs. Any supply interruption
          from vendors or failure of the Company’s products would limit the Company’s
          ability to manufacture its products and would have a material adverse effect
          on
          the Company’s business, financial condition and results of
          operations.
 
 As
          of
          December 31, 2006, the Company had loans payable in the amount of $8,160,000,
          which was financed by one single lender, Apix International
          Limited.
 
 The
          Company receives payments from its customers and deposits them in federally
          insured financial institutions during its normal course of business. From
          time
          to time, the balances with these deposit accounts may exceed the federally
          insured maximum limit, $100,000. As at the end of December 31, 2006, the
          Company
          has cash of $942,000.
 
  F-16
 
  **10.
          Stockholders’ Equity**
  The
          Company is authorized to issue two classes of stock, common stock and preferred
          stock. The total
          number of shares of common
          stock authorized to be issued is three hundred million, par value $0.001
          per
          share, and the total number of shares of preferred stock authorized to
          be issued
          is five million, par value $0.001 per share.
  *Preferred
          stock*
  The
          Company is authorized to issue 5,000,000 shares of preferred stock. The
          preferred stock may be issued from time to time in one or more series,
          without
          further stockholder approval. Series A preferred stock is non-redeemable,
          and
          has certain liquidation preferences. There were no shares of preferred
          stock
          outstanding at December 31, 2006.
  *Common
          Stock*
  The
          Company is authorized to issue 300,000,000 shares of common stock. Holders
          of
          common stock are entitled to one vote per share on all matters to be voted
          upon
          by the stockholders of the Company. No dividends have been declared to
          date.
  As
          of
          December 31, 2006, the Company had 102,354,679 outstanding shares of common
          stock, options to purchase 5,108,628 shares of common stock and warrants
          to
          purchase 75,793,526 shares of common stock.
  *Warrants*
  The
          following table summarizes information about warrants outstanding at December
          31, 2006 and the number of shares of common stock that the holders are
          entitled
          to purchase:
  Date
                In
                    Connection With
                
                Price
                    Range
                
                Outstanding
                Expiration
                    DateOctober-2002
                Finance
                    Consulting for Public Relations
                
                $0.90
                
                160,000
                October-2007January-2003
                Private
                    Placement
                
                $0.83
                
                505,332
                January-2007March-2003
                Private
                    placement
                
                $1.25
                
                1,176,470
                March-2007March-2003
                Private
                    Placement Commission
                
                $0.94
                
                294,117
                March-2007April-2003
                Private
                    Placement
                
                $0.935-$1.25
                
                1,758,234
                April-2007April-2003
                Private
                    Placement Commission
                
                $1.34
                
                404,440
                April-2007August-2003
                Private
                    Placement Commission
                
                $0.779
                    - $0.838
                
                721,552
                August-2008December-2003
                Private
                    Placement
                
                $0.96
                
                1,074,993
                December-2007December-2003
                Private
                    Placement Commission
                
                $0.957-$1.238
                
                324,297
                December-2008November-2004
                Private
                    Placement
                
                $0.43
                
                6,586,165
                November-2009November-2004
                Private
                    Placement Commission
                
                $0.43
                
                987,926
                November-2009February-2006
                Loan
                    Financing
                $0.06
                61,800,000
                February-2016Total
                    Warrants Outstanding
                
                75,793,526
 
  On
          January 22, 2003, the Company issued warrants to purchase an aggregate
          of
          438,000 shares of our common stock at an exercise price of $0.825 per share
          in
          connection with the January 2003 private placement transaction. The Company
          also
          issued warrants to purchase an aggregate of 97,332 shares of our common
          stock at
          an exercise price of $0.8245 as additional commission for the placement
          agent in
          this transaction. These warrants are not redeemable and contain “cashless
          exercise” provisions.
  On
          March
          28, 2003, the Company issued warrants to purchase an aggregate of 1,176,470
          shares of our common stock at an exercise price of $1.25 per share. The
          warrants
          issued to the investors are redeemable by the Company if its common stock
          closes
          at or above $1.70 per share for fifteen consecutive trading days and they
          remain
          unexercised 30 days after the Company gives notice to the holders of the
          warrants of its intent to redeem. Also the Company issued warrants to purchase
          an aggregate of 293,117 shares of our common stock at an exercise price
          of
          $0.935 as additional commission for the placement agents in this transaction.
          The warrants issued to the placement agents are not redeemable.
  F-17
 On
          April
          11, 2003, the Company issued warrants to purchase an aggregate of 1,758,234
          shares of our common stock at an exercise price of $1.25 per share. The
          warrants
          issued to the investors are redeemable by the Company if its common stock
          closes
          at or above $1.70 per share for fifteen consecutive trading days and they
          remain
          unexercised 30 days after the Company gives notice to the holders of the
          warrants of its intent to redeem. The Company also issued warrants to purchase
          an aggregate of 448,557 shares of our common stock at an exercise price
          of
          $0.935 as additional commission for the placement agents in this transaction.
          The warrants issued to the placement agents are not redeemable.
  In
          August
          2003, the Company issued warrants to purchase an aggregate of 3,084,840
          shares
          of our common stock at an exercise price of $0.7282 per share, warrants
          to
          purchase an aggregate of 726,590 shares at an exercise price of $0.7788
          and
          warrants to purchase an aggregate of 293,152 shares at an exercise price
          of
          $0.8338 per share. The warrants issued to the investors are redeemable
          by the
          Company if its common stock closes at or above $1.0592, $1.1328 or $1.2128,
          respectively, for fifteen consecutive trading days and they remain unexercised
          30 days after the Company gives notice to the holders of the warrants of
          its
          intent to redeem. The Company also issued warrants to purchase 321,057
          shares of
          our common stock at an exercise price of $0.8375 and warrants to purchase
          up to
          440,812 shares of common stock at exercises prices that range for $0.90
          per
          share to $1.1025 per share as commission for the placement agents in this
          transaction. In August 2003, the Company issued redeemable warrants to
          purchase
          an aggregate of 4,104,582 shares of our common stock at exercise prices
          of
          $0.7282 to $0.8338 per share. In connection with this transaction, the
          Company
          also issued warrants to purchase 761,869 shares of our common stock at
          exercise
          prices of $0.8375 to $1.1025 per share as commission for the placement
          agents in
          this transaction. The warrants issued to the investors are redeemable by
          the
          Company if its common stock closes at or above $1.0592, $1.1328 or $1.2128,
          respectively, for fifteen consecutive trading days and they remain unexercised
          30 days after the Company gives notice to the holders of the warrants of
          its
          intent to redeem.
  On
          December 19, 2003, the Company issued warrants to purchase an aggregate
          of
          1,074,993 shares of our common stock at an exercise price of $0.957 per
          share.
          The warrants became exercisable beginning June 19, 2004, subject to reduction
          on
          a share-for-share basis to the extent that an investor sold our common
          stock or
          other securities during the six-month period between the closing and June
          19,
          2004. The warrants issued to the investors are redeemable by the Company
          if its
          common stock closes at or above $1.70 per share for fifteen consecutive
          trading
          days and they remain unexercised 30 days after the Company gives notice
          to the
          holders of the warrants of its intent to redeem. The Company also issued
          warrants to purchase an aggregate of 303,608 shares of our common stock
          at an
          exercise price of $0.957 per share and an aggregate of 20,689 shares of
          our
          common stock at an exercise price of $1.2375 per share as additional commission
          for the placement agents in this transaction. The warrants issued to the
          placement agents are not redeemable.
  On March
          17,
          2004, all of the
          warrants  issued
          on
          August 13, 2003, as well
          as a portion of the warrants issued on August 14 and 18, 2003, were
          exercised for a total of 4,144,839 shares of common stock. Warrant exercise prices ranged from
          $0.7282 to $0.8375 per share. Cardima issued a notice of redemption on
          October
          10, 2003 in connection with its election to redeem all outstanding warrants
          issued on August 13, 2003. Total net proceeds from the exercise of these
          warrants were $3.1 million.
 
 On
          November 24, 2004, the Company issued warrants to purchase an aggregate
          of
          6,586,165 shares of our common stock at an exercise price of $0.4295 per
          share.
          The warrants were exercisable beginning on May 24, 2005. We also issued
          to the
          parties that acted as our placement agents in connection with this private
          placement warrants to purchase 987,926 shares of our common stock at an
          exercise
          price of $0.4295 per share. In addition, we adjusted certain warrants to
          purchase our common stock that were issued in the February 25, 2000 private
          placement, as required by these warrants’ anti-dilution provisions. The number
          of shares of common stock issuable upon exercise of these warrants was
          increased
          by 372,088.
 
 On
          August
          26, 2005, the Company issued warrants with registration rights to purchase
          an
          aggregate of 30,000,000 shares of our common stock at an exercise price
          of $0.10
          per share. The warrants would be exercisable beginning on August 28, 2005
          for a
          period of ten years. The August 2005 warrants were valued at inception
          and
          revalued at December 31, 2005 and the change in the fair value of the August
          2005 warrants on the two valuation dates were recorded as other income
          of
          $1,800,000 for the year ended December 31, 2005. As the registration was
          not yet
          declared effective by December 31, 2005, the $1,200,000 fair value of August
          2005 warrants was reported on the balance sheet as warrant liability at
          December
          31, 2005.
 
 On
          February 14, 2006, pursuant to the New Loan Facility, the Company adjusted
          the
          exercise price of the August 2005’s 30,000,000 warrants to $0.06 per share. In
          addition, the Company has issued new warrants to purchase 31,800,000 shares
          of
          the Company’s common stock at an exercise price of $0.06 per share. These
          61,800,000 warrants would be exercisable beginning on February 14, 2006
          for a
          period of ten years.
 
 As
          of
          December 31, 2006, the Company has reserved 75,793,526 shares of common
          stock
          for issuance upon exercise of all the warrants described above.
  On
          January 15, 2007, the Company entered into a new term sheet with Apix
          International Limited, which will require us to issue additional warrants
          to
          Apix (see Note 17).
  **11.
          Stock Based Compensation**
  The
          Company adopted Financial Accounting Standards Board (“FASB”) Statement
          No. 123R, “Share Based Payment,” on January 1, 2006. The total stock-based
          compensation expense was approximately $390,000 for the year ended
          December 31, 2006. Prior to January 1, 2006, the Company accounted for
          the stock-based compensation expense under the recognition and measurement
          provisions of APB Opinion No. 25. Accordingly, the Company did not
          typically recognize compensation expense for stock option grants, as it
          granted
          stock options at an exercise price equal to the fair market value of the
          Company’s common stock on the date of grant. Prior to adoption, the Company
          disclosed such expenses on a pro forma basis in the notes to its financial
          statements.
 
 The
          following table illustrates the effect on reported net loss per share if
          the
          Company had applied the fair value recognition provisions of SFAS 123(R)
          to
          stock-based awards for the year ended December 31, 2005: (in thousands,
          except
          per share amounts):
  **Year
                    ended December 31, 2005**Net
                    loss applicable to common shareholders - as reported
                
                
                ($8,328
                )Add:Stock-based
                    employee compensation expense included inreported
                    net income, net of applicable tax effects
                
                
                ---Less:Total
                    stock-based employee compensation expensedetermined
                    under fair value based method for all awards,net
                    of applicable tax effects
                
                
                (778
                )Pro
                    forma net loss applicable to common shareholders
                
                
                ($9,106
                )Basic
                    and diluted net loss per share applicable to commonshareholders
                    - as reportedAs
                    reported
                
                
                ($0.08
                )Pro
                    forma
                
                
                ($0.09
                )
 
 *2003
          Stock Option Plan*
  On
          April
          17, 2003 Cardima Board of Directors adopted the 2003 Stock Option Plan
          (the
“Stock Plan”). The Stock Plan authorizes the Board of Directors or one or more
          of its members to grant to employees, consultants and non-employee directors
          options to purchase Common Stock of the Company. Options granted under
          the Stock
          Plan may be incentive stock options or non-statutory stock options as determined
          by the Board of Directors or its delegate.
  F-18
 Under
          the
          Stock Plan, 8,200,000 shares of Common Stock have been reserved for issuance.
          Under the plan, any optionee who owns more than 10% of the combined voting
          power
          of all classes of outstanding stock is not eligible for the grant of an
          incentive stock option unless the exercise price of the option is at least
          110%
          of the fair market value of the Common Stock on the date of the
          grant.
  Under
          the
          Stock Plan, except 10% stockholders, the exercise price of incentive stock
          option will not be less than 100% of the fair value of the Common Stock
          at the
          grant date. Each option agreement specifies the term as to when the option
          is to
          become exercisable. Standard option issuances are for grants with vesting
          periods of four years with six months 12.5% cliff vesting and ratable monthly
          vesting thereafter. However, in no event shall an incentive stock option
          granted
          under the Stock Plan be exercisable more than 10 years from the date of
          the
          grant, and in the case of 10% stockholders, no more than 5 years from the
          date
          of the grant.
  The
          following table summarizes activities under the 2003 Stock Option
          Plan:


Outstanding
                  OptionsShares
                  Available
              
              Number
                  of Shares
              
              Exercise
                  Price Per Share
              
              Weighted-Average
                  Exercise PriceBalance
                  as of 12/31/2004
              
              2,154,000
              
              2,046,000
              
              $0.37
                  - $1.24
              
              $0.95Shares
                  Reserved in 2005
              
              
              4,000,000
              
              
              ---
              
              
              ---
              
              
              ---Options
                  Granted in 2005
              
              
              (1,431,000
              )
              
              1,431,000
              
              $
              0.06
                  - $0.35
              
              $
              0.06Options
                  Cancelled in 2005
              
              
              645,531
              
              
              (645,531
              )
              $
              0.66
                  - $0.71
              
              $
              0.71Balance
                  as of 12/31/2005
              
              
              5,368,531
              
              
              2,831,469
              
              $
              0.06
                  - $1.24
              
              $
              0.53Shares
                  Reserved in 2006
              
              
              ---
              
              
              ---
              
              
              ---
              
              
              ---Options
                  Granted in 2006
              
              
              (200,500
              )
              
              200,500
              
              $
              0.05
                  - $0.25
              
              $
              0.07Options
                  Cancelled in 2006
              
              
              948,198
              
              
              (948,198
              )
              $
              0.05
                  - $1.04
              
              $
              0.48Balance
                  as of 12/31/2006
              
              
              6,116,229
              
              
              2,083,771
              
              $
              0.05
                  - $1.24
              
              $
              0.45




At
          December 31, 2006, 2,083,771 options were outstanding and exercisable under
          the
          2003 Stock Plan. All options granted in 2006 and 2005 were granted at exercise
          price equal to the common stock’s fair value. The weighted average fair value of
          options granted under the Stock Plan was $0.07 and $0.06 per share for
          2006 and
          2005 respectively.
  The
          following table summarizes information about stock options outstanding
          under the
          2003 Stock Plan at December 31, 2006:
  Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of Exercise Prices
                
                Number
                    of shares Outstanding
                
                Weighted-Average
                    Remaining Contractual Life
                
                Weighted-Average
                    Exercise Price
                
                Number
                    of shares Exercisable
                
                Weighted-Average
                    Exercise Price$0.06
                    - $0.07
                
                
                1,212,000
                
                
                9.0
                
                $
                0.06
                
                
                341,531
                
                $
                0.06$0.25
                    - $1.24
                
                
                871,771
                
                
                7.2
                
                $
                0.99
                
                
                651,406
                
                $
                1.012,083,771
                
                
                8.2
                
                $
                0.45
                
                
                992,937
                
                $
                0.68


F-19




*1993
          Stock Option Plan*
  During
          1993, the Board of Directors adopted the 1993 Stock Option Plan, as amended,
          and
          reserved 7,650,690 shares of common stock for issuance under the plan.
          The plan
          provides for both incentive and non-statutory stock options to be granted
          to
          employees, directors and consultants. Exercisability, option price, fair
          value
          and other terms are determined by the Board of Directors; however, the
          exercise
          price of each incentive stock option shall be not less than 100% of the
          fair
          market value of the stock issuable upon exercise of the option on the date
          the
          option is granted. The exercise price of each non-statutory stock option
          shall
          not be less than 85% of the fair market value of the stock subject to the
          option
          on the date the option is granted. All options granted prior to the initial
          public offering shares were generally exercisable upon grant, but shares
          received upon exercise prior to vesting are subject to repurchase upon
          the
          stockholder’s termination of service to the Company. Subsequent to the Company’s
          initial public offering, only fully vested shares are exercisable. Shares
          purchased upon exercise of options generally vest at the rate of 12.5%
          after six
          months from the date of grant, and monthly thereafter over the following
          42
          months. No option shall have a maximum term in excess of ten years from
          the
          grant date and no option granted to a 10% stockholder shall have a maximum
          term
          in excess of five years from the grant date.
  The
          1993
          plan expired on June 10, 2003, and no additional grants would be made under
          this
          plan.
  The
          following table summarizes activities under the 1993 Stock Option
          Plan:
  Outstanding
                    OptionsNumber
                    of Shares
                
                Exercise
                    Price Per Share
                
                Weighted-Average
                    Exercise PriceBalance
                    as of 12/31/2004
                
                
                4,116,049
                
                $
                0.34
                    - $7.00
                
                $
                1.21Options
                    Exercised in 2005
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Cancelled in 2005
                
                
                (120,546
                )
                $
                0.34
                    - $3.25
                
                $
                1.29Balance
                    as of 12/31/2005
                
                
                3,995,503
                
                $
                0.34
                    - $7.00
                
                $
                1.20Options
                    Exercised in 2006
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Cancelled in 2006
                
                
                (1,310,646
                )
                $
                0.34
                    - $7.00
                
                $
                1.21Balance
                    as of 12/31/2006
                
                
                2,684,857
                
                $
                0.34
                    - $5.25
                
                $
                1.18
  At
          December 31, 2006 and 2005, 2,684,857 and 3,972,466 options were outstanding
          and
          exercisable under the plan, respectively. There were no options granted
          in 2006
          and 2005.
  
  F-20
  
  The
          following table summarizes information about stock options outstanding
          under the
          1993 Stock Option Plan at December 31, 2006:
  Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of Exercise Prices
                
                Number
                    of shares Outstanding
                
                Weighted-Average
                    Remaining Contractual Life
                
                Weighted-Average
                    Exercise Price
                
                Number
                    of shares Exercisable
                
                Weighted-Average
                    Exercise Price$0.34
                    - $1.49
                
                
                1,676,303
                
                
                4.81
                
                $
                0.92
                
                
                1,635,532
                
                $
                0.91$1.50
                    - $5.25
                
                
                1,008,554
                
                
                4.67
                
                $
                1.63
                
                
                1,008,554
                
                $
                1.632,684,857
                
                
                4.76
                
                $
                1.18
                
                
                2,644,086
                
                $
                1.19
 
  *1997
          Directors' Stock Option Plan*
  In
          March
          1997, the Board of Directors adopted the 1997 Directors’ Stock Option Plan. A
          total of 900,000 shares of common stock have been reserved for issuance
          under
          this plan, which included a reservation of 700,000 shares in 2005. This
          plan
          provides for the grant of non-statutory stock options to non-employee directors
          of the Company. In 2006, options to purchase 340,000 shares were granted
          with a
          weighted average exercise price of $0.06. In 2006, 290,000 options were
          cancelled with a weighted average exercise price of $0.50 and no options
          were
          exercised. A total of 8,000 options are outstanding and exercisable under
          this
          plan.
  The
          following table summarizes activity under the 1997 Director’s Stock Option
          Plan:
  Outstanding
                    OptionsShares
                    Available
                
                Number
                    of Shares
                
                Exercise
                    Price Per Share
                
                Weighted-Average
                    Exercise PriceBalance
                    as of 12/31/2004
                
                
                106,000
                
                
                90,000
                
                $
                0.84
                    - $1.94
                
                $
                1.47Shares
                    Reserved in 2005
                
                
                700,000
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Granted in 2005
                
                
                (208,000
                )
                
                208,000
                
                $
                0.10
                
                $
                0.10Balance
                    as of 12/31/2005
                
                
                598,000
                
                
                298,000
                
                $
                0.10
                    - $1.94
                
                $
                0.51Options
                    Granted in 2006
                
                
                (340,000
                )
                
                340,000
                
                $
                0.03
                    - $0.07
                
                $
                0.06Options
                    Cancelled in 2006
                
                
                290,000
                
                
                (290,000
                )
                $
                0.10
                    - $1.94
                
                $
                0.50Balance
                    as of 12/31/2006
                
                
                548,000
                
                
                348,000
                
                $
                0.03
                    - $1.45
                
                $
                0.09
   On
          December 31, 2006, options covering 348,000 shares were outstanding and
          8,000
          shares were exercisable under the 1997 Directors’ stock Option Plan. All options
          granted in 2006 were granted at exercise prices equal to the common stock’s fair
          value. The weighted average fair value of options granted under the plan
          was
          $0.06 and $0.05 per share for 2006 and 2005, respectively.
  F-21
 .
  The
          following table summarizes information about stock options outstanding
          under the
          1997 Directors’ Stock Option Plan at December 31, 2006:
  Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of Exercise Prices
                
                Number
                    of shares Outstanding
                
                Weighted-Average
                    Remaining Contractual Life
                
                Weighted-Average
                    Exercise Price
                
                Number
                    of shares Exercisable
                
                Weighted-Average
                    Exercise Price$0.03
                    - $0.07
                
                
                340,000
                
                
                9.48
                
                $
                0.06
                
                
                -
                
                
                ---$0.08
                    - $1.45
                
                
                8,000
                
                
                5.92
                
                $
                1.01
                
                
                8,000
                
                $
                1.01348,000
                
                
                9.40
                
                $
                0.09
                
                
                8,000
                
                $
                1.01
 
  *1997
          Employee Stock Purchase Plan*
  In
          March
          1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan,
          as
          amended, and has reserved 2,500,000 shares of common stock for issuance
          under
          the purchase plan. The purchase plan is intended to provide an opportunity
          for
          eligible employees of the Company and its designated subsidiaries to acquire
          common stock on a favorable basis. The purchase plan is implemented by
          a series
          of offering periods of twelve months duration, with two consecutive purchase
          periods of six months in duration. New offering periods commence on or
          about
          February 1 and August 1 of each year (or at such other time or times as
          may be
          determined by the Board of Directors). Through periodic payroll deductions,
          which may not exceed $25,000 per offering period or 10% of any employee’s
          compensation, eligible employees may purchase common stock at a price equal
          to
          the lower of: (i) 85% of the fair market value of the common stock on the
          offering date; or (ii) 85% of the fair market value of the common stock
          on the
          purchase date. As of December 31, 2006, 2,040,333 shares of common stock
          have
          been issued under the purchase plan. In 2006 and 2005, a total of 537,129
          and
          286,045 shares were issued under the plan, respectively.
  *Share-Based
          Compensation to Non-Employees*
  On
          March 5,
          2003, the Company granted non-statutory stock options to certain directors
          of
          the corporation to purchase 121,998 of common stock at $1.03 per share
          and with
          immediate vesting. A Black-Scholes calculation was used to record $55,000
          of
          non-cash stock compensation expense in 2004.
  On
          June 30,
          2003, the Company approved a grant of 100,000 non-qualified stock options
          to a
          consultant with an immediate vesting of one third of the shares and monthly
          vesting for the remaining portion of the grant, over a two-year term. A
          Black-Scholes calculation was used to record $600, $9,000 and $21,000 of
          non-cash stock compensation expense in 2005, 2004 and 2003,
          respectively.
  On
          July 29,
          2003, the Company agreed to issue to a physician as compensation for consulting
          services to be provided by that physician’s group, options to purchase 422,535
          shares of our common stock at an exercise price of $0.71 per share. The
          options
          become exercisable upon the achievement of specific milestones as defined
          in the
          related consulting and options agreements. As of December 31, 2003, the
          Company
          determined that 55,000 shares had become exercisable based on milestone
          achievements through that date. A Black-Scholes calculation was used to
          record
          $30,000 non-cash compensation expense during 2003 for outside consulting
          fees.
          No additional shares were vested in 2004 and no expense was recorded during
          2004. All of these options expired by the end of 2004.
  On
          October
          22, 2003, the Company agreed to grant accelerated vesting and an extended
          exercise period for the stock options granted to a senior officer of the
          company
          as part of a negotiated separation agreement. All affected options were
          reclassified from Incentive Stock options to Non-Qualified options and
          a
          non-cash stock compensation expense was taken for the unvested portion
          of
          options with exercise prices below market value, as of the date of Board
          Approval. The non-cash stock compensation expense of $79,000 recorded in
          2003
          was based on the acceleration of vesting for 302,917 shares with exercise
          prices
          of $0.34 and $1.03.
  F-22
 On
          February
          12, 2004, the Company approved a grant of 100,000 non-qualified stock options
          to
          a consultant with monthly vesting of shares over a four-year term. A
          Black-Scholes calculation was used to record $400, $11,000 of non-cash
          stock
          compensation expense in 2005 and 2004, respectively.
  On
          July 9,
          2005 and July 28, 2005, the Company approved a stock issuance in the amount
          of
          10,000 and 12,000 shares of the common stock, respectively, to two consultants.
          A non-cash stock compensation expense of $2,000 was recorded in
          2005.
  On
          April
          21, 2006, the Company approved a stock issuance in the amount of 30,000
          shares
          of the common stock to a third party for its services. A non-cash stock
          compensation expense of $1,200 was recorded in 2006.
  **12.**  **Related-Party
          Transactions**
  The
          Company has entered into employment agreements with several of its key
          employees. The agreements specify various employment-related matters, including
          confidentiality requirements, competitive restrictions, assignment of
          inventions, annual compensation, and severance benefits ranging from six
          months’
to thirty-six months’ salary in the event of termination without
          cause.
  In
          December 1997, the Company entered into a $300,000 note receivable agreement
          with Phillip Radlick, Ph.D., a Director of the Company and then President
          and
          Chief Executive Officer, to facilitate the purchase of a principal residence
          in
          the San Francisco Bay Area. The note bears interest at the minimum Applicable
          Federal Rate, and was due and payable in a single lump sum forty-eight
          months
          from the note date. In August, 2001, the Board of Directors amended Dr.
          Radlick’s agreement to extend this loan until the first of (i) the date that Dr.
          Radlick no longer serves as a member of the Board of Directors, (ii) the
          date
          when Dr. Radlick sells his house and (iii) December 16, 2005. As a security
          for
          the note, Dr. Radlick granted the Company a security interest in his vested
          stock options. At December 16, 2005, Dr. Radlick informed the Company that
          he
          was unable to repay the loan. At December 31, 2005, the balance of the
          loan is
          approximately $357,085, including approximately $78,585 of accrued interest.
          No
          interest accrual was made after December 31, 2004. The loan balance is
          fully
          reserved as of the end of December 31, 2006.
  In
          June
          2000, the Company entered into a note receivable agreement with William
          Wheeler,
          its President and Chief Operating Officer, to facilitate the purchase of
          a
          principal residence in the San Francisco Bay Area. The note called for
          an
          initial payment by the Company of $142,500 with an additional $5,000 per
          month
          up to a maximum of $300,000. The note bears interest at the minimum Applicable
          Federal Rate and was due and payable in a single lump sum forty-eight months
          from the note date, or June 2005. The Board of Directors amended Mr. Wheeler’s
          agreement by granting Mr. Wheeler a $75,000 bonus in May 2001 in lieu of
          further
          additional monthly payments to him. As a security for the note, Mr. Wheeler
          granted Cardima a security interest in his vested stock options. At December
          31,
          2006, the balance of the loan is approximately $ 162,000. (See Note 6,
“Notes
          Payable to Related Parties”.)
 
  **13.**  **Income
          Taxes**  ****
  There
          has
          been no provision for current or deferred federal or state income taxes
          for any
          period as the Company has incurred losses in all periods.
  A
          reconciliation of income taxes at the statutory federal income tax rate
          to net
          income taxes included in the accompanying statement of operations is as
          follows:


2006
              
              2005Tax
                  benefit at expected federal rate
              -34.00%
              
              -34.00%State,
                  net of federal benefit
              -5.80%
              
              -5.80%Research
                  and development credits
              -0.80%
              
              0.00%Non-deductible
                  derivative and other expense
              19.60%
              
              0.10%Net
                  operating loss net benefited
              21.10%
              
              39.90%Other,
                  net
              -0.10%
              
              -0.20%0.00%
              
              0.00%







F-23
 
 As
          of
          December 31, 2006, the Company had federal and state net operating loss
          carry
          forwards of approximately $117,908,000 and $41,731,000 respectively. The
          federal
          and state net operating loss carry forwards expires at various dates beginning
          in 2007 through 2026, if not utilized.
  The
          Company also had federal and state research and development tax credit
          carry
          forwards of approximately $1,129,000 and $1,072,000, respectively. The
          federal
          research and development tax credits begin to expire at various dates beginning
          2008 through 2025, if not utilized. The state research and development
          tax
          credits carry forward indefinitely, if not utilized.
  Utilization
          of the net operating losses and credits may be subject to a substantial
          annual
          limitation due to the “change in ownership” provisions of the Internal Revenue
          Code of 1986, as amended, and similar state provisions. The annual limitation
          may result in the expiration of net operating losses and credits before
          utilization.
  Significant
          components of the Company's deferred tax assets for federal and state income
          taxes as of December 31, 2006 are as follows (in thousands):
  December
                    31,
                
                December312006
                
                2005Net
                    operating loss carry forwards
                
                $
                42,523
                
                $
                42,284Research
                    credits carry forwards (federal and state)
                
                
                1,836
                
                
                1,702Manufacturing
                    investment credit carry forwards
                
                
                78
                
                
                78Capitalized
                    research and development
                
                
                1,375
                
                
                1,044Other,
                    net
                
                
                532
                
                
                597Total
                    deferred tax assets
                
                
                46,344
                
                
                45,705Valuation
                    allowance for deferred tax assets
                
                
                (46,344
                )
                
                (45,705
                )$
                -
                
                $
                -
 
 As
          of
          December 31, 2006 and 2005, the Company had deferred tax assets of approximately
          $46,344,000 and $45,705,000, respectively. Realization of the deferred
          tax
          assets is dependent upon future taxable income, if any, the amount and
          timing of
          which are uncertain. Accordingly, the net deferred tax assets have been
          fully
          offset by a valuation allowance. The net valuation allowance increased
          by
          approximately $641,000 and $3,342,000 during the years ended December 31,
          2006
          and 2005, respectively. Deferred tax assets primarily relate to net operating
          loss and tax credit carry forwards.
 
 The
          Company realizes tax benefits as a result of the exercise of non-qualified
          stock
          options and the exercise and subsequent sale of certain incentive stock
          options
          (disqualifying dispositions). For financial reporting purposes, any reduction
          in
          income tax obligations as a result of these tax benefits will be credited
          to
          additional paid-in capital upon utilization of the NOLs including these
          benefits.
 
 **14.
          License Rights**
  In
          May
          1993, in exchange for an equity interest in the Company, Target Therapeutics,
          Inc. granted the Company an exclusive royalty-free worldwide license to
          use
          Target Therapeutics' technology and to make, use and sell or otherwise
          distribute products for the diagnosis and treatment of electrophysiological
          diseases in the body, other than in the central nervous system, including
          the
          brain. The exclusive license grant applied to any Target Therapeutics’
technology developed through May 1996 and will expire upon the expiration
          of the
          last of the patents relating to Target Therapeutics’ technology. Under the
          License Agreement, the Company granted back to Target Therapeutics an exclusive
          royalty-free license to use technology developed through May 1996 in the
          fields
          of neurology, interventional neuro-radiology, interventional radiology,
          reproductive disorders and vascular prostheses (the "Target Field"). Such
          license will expire upon the expiration of the last of the patents relating
          to
          Target Therapeutics’ technology. Target Therapeutics granted the Company a
          non-exclusive, royalty-free license to use Target Therapeutics’ technology to
          make, use and sell or otherwise distribute the Company's products for use
          within
          the cardiology field, provided the Company's products represent a substantial
          improvement. A substantial improvement is any modification, improvement
          or
          enhancement by the Company of Target Therapeutics’ technology in a particular
          product that results in a material change in the function, purpose or
          application of such product. The Company believes that the incorporation
          of
          electrodes in its micro-catheter systems, together with other modifications,
          satisfies the substantial improvement requirements. As part of the same
          agreement, the Company granted to Target Therapeutics an exclusive, royalty-free
          license to use the Company's technology to make, have made, use and sell
          or
          otherwise distribute products within the Target Field.
   F-24
  In
          addition, the Company agreed not to conduct material research and development,
          acquire corporate entities or make or sell products in the Target Field
          or to
          sell products, other than products utilizing Target Therapeutics' technology,
          for use in diagnosis or treatment of diseases related to the production
          of
          electrical current in tissue located in areas of the body other than the
          heart,
          without first notifying Target Therapeutics and negotiating a distribution
          agreement. The Company also agreed that it would not sell products utilizing
          Target Therapeutics' technology for use in diagnosis or treatment of diseases
          related to the production of electrical current in tissue located in areas
          of
          the body other than the heart without, if selling to a distributor, first
          notifying Target Therapeutics and offering it the right of first refusal
          with
          respect to the terms of the distribution, or if selling directly to the
          consumer, paying to Target Therapeutics an amount equal to 40% of the gross
          profit for such product.
  **15.
          Retirement Benefit Plan**
 
 The
          Company has a 401(k) plan (“the 401(k) Plan”) whereby eligible employees may
          contribute a percentage of eligible compensation but not greater than 60%
          of
          their earnings up to the maximum as required by law. Company contributions
          are
          discretionary. No such Company contributions have been made since inception
          of
          the 401(k) Plan
 
 **16.**  **Subsequent
          Event**
 
 On
          January 15, 2007, the Company entered into a new term sheet with Apix,
          which
          provides for the rollover of prior loan facilities and subsequent advances
          (Prior Facilities) and an additional loan facility between the parties
          (the "New
          Facility"). The New Facility provides for the following terms and conditions:
 
 (i)
                Additional
                    loan facility - Apix has granted the Company an additional loan
                    facility
                    in the amount of $5,625,000. Advances pursuant to the additional
                    facility
                    shall be made on a bi-weekly basis the Company’s discretion in
                    denominations of $225,000 per advance;
 (ii)
                New
                    maturity date - the maturity date of the New Facility and Prior
                    Facilities
                    is the earlier of (a) December 31, 2007 or (b) the date that
                    Apix makes a
                    demand for payment;
 (iii)
                Facility
                    fee adjustment - the aggregate facility fee for the Prior Facilities
                    and
                    the New Facility shall be $500,000 (the “Facility Fee”) which is payable
                    through the issuance of five million shares of our preferred
                    stock with
                    the following minimum preferences: (a) 28 votes per share at
                    any general
                    or extraordinary meeting of the common shares of the company
                    convened by
                    the Company or its shareholders for a total of 140 million votes
                    at any
                    such meeting; and (b) convertible into common shares of the Company
                    at any
                    time at the sole and absolute discretion of the holder on the
                    basis of two
                    (2) common shares for each preferred share tendered for conversion
                    for a
                    total of ten (10) million common shares in the event all preferred
                    shares
                    are tendered for conversion;
 (iv)
                Exit
                    fees - the aggregate exit fees for the Prior Facilities and the
                    New
                    Facility shall be $2,800,000 plus $80,000 for each advance
                    madewhich
                    shall be due and payable on the earliest to occur of: (1) the
                    maturity
                    date, (2) generally the sale of the company or substantially
                    all of its
                    assets, a reorganization or a new loan facility in excess of
                    $1,000,000,
                    or (3) an event of default;
 (v)
                Price
                    adjustment to existing warrant and new warrants - pursuant to
                    the Prior
                    Facilities, the Company agreed to issue to Apix warrants to purchase
                    118,800,000 shares of the Company's common stock at an exercise
                    price of
                    $0.06 per share (the “Existing Warrants”). Pursuant to the New Facility,
                    the exercise price of the Existing Warrants has been adjusted
                    to $0.04 per
                    share. In addition, the Company has agreed to issue to Apix additional
                    warrants to purchase 20,000,000 shares of the Company’s common stock at an
                    exercise price of $0.03 per share (the “New Warrants”). All warrants have
                    a term of ten years;
 (vi)
                Conversion
                    price adjustment - the loan principal and exit fees are convertible
                    into
                    shares of the Company’s common stock at a conversion price of $0.04 per
                    share; and
 (vii)
                Registration
                    rights - the Company agrees to register a percentage of the shares
                    underlying the loan principal, facility fees, and warrants on
                    a
                    registration statement at its best efforts.
 
 The
          terms
          of the new term sheet are not binding on the parties. Completion of the
          New
          Facility is contingent upon the negotiation and execution of definitive
          agreements and other documentation.
 In
          the
          first quarter of 2007, our Japanese distributor notified us of its failure
          to
          maintain the legal documentation standard required to sell our PATHFINDER® in
          Japan. As a result, we had no sales in Japan during the first quarter of
          2007.
          We understand that the reapplication process takes approximately six months.
          We
          are currently exploring our options with regard to selling the PATHFINDER® in
          Japan. During the reapplication process, we may have limited or no sales
          in
          Japan. We anticipate resuming commercial sales before the end of 2007.
          However,
          there can be no assurance that we will be able to resume sales by that
          time.
 
  F-25
 
 
 
 **SIGNATURES**
 
 Pursuant
          to the requirements of Section 13 or 15(d) of the Securities Exchange Act
          of
          1934, as amended, the Registrant has duly caused this report to be signed
          on its
          behalf by the undersigned thereunto duly authorized.
  CARDIMA,
                    INC.Date: May
                  24, 2007
                By:
                /s/ Gabriel
                  B. VeghGabriel
                    B. VeghChief
                    Executive Officer and Chairman of the
                    Board
  
 **POWER
          OF ATTORNEY**
 
 KNOW
          ALL
          PERSONS BY THESE PRESENTS, that each person whose signature appears below
          constitutes and appoints Gabriel B. Vegh, his attorney-in-fact, each with
          the
          power of substitution, for him in any and all capacities, to sign any amendments
          in this Annual Report on Form 10-KSB, and to file the same, with exhibits
          thereto and other documents in connections therewith, with the Securities
          and
          Exchange Commission, hereby ratifying and conforming all that each of said
          attorneys-in-fact, or his or her substitutes, may do or cause to be done
          by
          virtue of hereof.
 
 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 and in
          the
          capacities and on the dates indicated.


NAME
              
              TITLE
              
              DATE/s/
                  Gabriel B. Vegh
              
              Chief
                  Executive Officer, Acting Chief Financial
              
              May
                  24, 2007Gabriel
                  B. Vegh
              
              Officer,
                  Acting Secretary and Chairman(Principle
                  Executive Officer)/s/
                  Phillip Radlick, Ph.D.
              
              Director
              
              May
                  24, 2007Phillip
                  Radlick, Ph.D./s/
                  John R. Cheney
              
              Director
              
              May
                  24, 2007John
                  R. Cheney/s/
                  Tony K. Shum
              
              Director
              
              May
                  24, 2007Tony
                  K. Shum/s/
                  Tina Sim
              
              Director
              
              May
                  24, 2007Tina
                  Sim/s/
                  Andrew K. Lee
              
              Director
              
              May
                  24, 2007Andrew
                  K. Lee





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