UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X] ANNUAL  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 2005

[ ] 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                   (I.R.S. Employer
  incorporation or organization                  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
             SERIES A PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS


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-K (229.405 of this chapter) 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-K
or any amendment to this Form 10-K. [_]

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]

<PAGE>
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 the
last  business day of the  registrant's  most recently  completed  second fiscal
quarter.  Based on the closing sale price on the OTC Bulletin  Board on June 30,
2005,  the  aggregate  market  value of the  registrant's  common  stock held by
non-affiliates was approximately  $6,980,765.  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: 101,664,503 as of March 31, 2006.


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<PAGE>
                                TABLE OF CONTENTS

PART I

ITEM 1.  BUSINESS

ITEM 1A. RISK FACTORS

ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 2.  PROPERTIES

ITEM 3.  LEGAL PROCEEDINGS

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
         PURCHASE OF EQUITY SECURITIES

ITEM 6.  SELECTED FINANCIAL DATA

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES


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<PAGE>
FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K includes  forward-looking  statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, which we refer
to in  this  annual  report  as  the  Securities  Act,  and  Section  21E of the
Securities  Exchange Act of 1934,  as amended,  which we refer to in this annual
report as the Exchange Act.  Forward-looking  statements  are not  statements of
historical  fact but rather  reflect our  current  expectations,  estimates  and
predictions about future results and events. These statements may use words such
as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project"
and similar  expressions  as they relate to us or our  management.  When we make
forward-looking  statements,  we are basing them on our management's beliefs and
assumptions,  using information currently available to us. These forward-looking
statements are subject to risks,  uncertainties  and assumptions,  including but
not limited to, risks,  uncertainties  and assumptions  discussed in this annual
report.  Factors that can cause or contribute to these differences include those
described  under the headings  "Risk  Factors" and  "Management  Discussion  and
Analysis and Plan of Operation."

If one or more of these or other risks or uncertainties  materialize,  or if our
underlying assumptions prove to be incorrect, actual results may vary materially
from what we projected.  Any  forward-looking  statement you read in this annual
report  reflects our current  views with respect to future events and is subject
to  these  and  other  risks,  uncertainties  and  assumptions  relating  to our
operations, results of operations, growth strategy and liquidity. All subsequent
written and oral forward-looking  statements  attributable to us, or individuals
acting  on our  behalf  are  expressly  qualified  in  their  entirety  by  this
paragraph.  You should  specifically  consider  the factors  identified  in this
annual  report,  which would cause  actual  results to differ  before  making an
investment  decision.  We are under no duty to update any of the forward-looking
statements  after the date of this annual report or to conform these  statements
to actual results.


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<PAGE>
                                     PART I

ITEM 1. BUSINESS

Overview

     We are  focused on the  diagnosis  and  treatment  of cardiac  arrhythmias.
Arrhythmias  are  abnormal  electrical  heart  rhythms  that cause  fast  and/or
otherwise  irregular  heartbeats,  which can potentially be fatal.  Our products
have been developed for the diagnosis and treatment of the two most common forms
of  arrhythmias:  atrial  fibrillation  (AF) and ventricular  tachycardia  (VT);
however,  our current  efforts are focused on  products  for the  diagnosis  and
treatment  of AF. We develop,  manufacture  and market  those  products  for two
distinct market segments: electrophysiology (EP) and cardiac surgery.

     The principal clinical goal in the treatment of AF is effective creation of
thin linear lesions  mimicking  those scar lesions created by Dr. Jim Cox in his
ground-breaking,  open surgical maze procedure for the curative treatment of AF.
Dr. Cox  demonstrated  that if an  anatomically  placed scar lesion pattern were
created in the heart walls of the atrium, these scar lesions could interrupt the
arrhythmia  patterns of  electrical  activity and keep the heart in normal sinus
rhythm,  or normal heart beat.  Cardima's  technology is designed to create this
scar lesion  pattern by ablating,  or killing,  cells with heat energy,  using a
linear  catheter  technology in  conjunction  with radio  frequency (RF) energy,
which can be used by both electro-physiologists and surgeons.


Heart and Arrhythmic Disorders

     The  heart is an  electromechanical  pump  that  relies  on  self-generated
electrical  signals to contract its muscle fibers and pump blood  throughout the
body. It is divided into four chambers:  the two upper chambers,  or atria,  and
the two lower chambers,  or ventricles.  The heart consists of two pumps working
side by side, each with its own atrium and ventricle. The pump on the right side
collects venous blood being returned from the body and sends it to the lungs for
oxygenation.  The pump on the left side receives the  oxygenated  blood from the
lungs and pumps it back out  throughout  the body.  The process is repeated,  on
average, 72 times per minute.

     The  heart,  as with any other  organ,  requires  oxygen and  nutrients  to
function efficiently. Because the heart has large oxygen and nutrient demands of
its own, it  requires an  extensive,  well-developed  vascular  network to bring
blood to and carry blood away from its muscle tissue.  This vascular  network is
located  throughout  the majority of the heart's walls and serves to nourish the
heart tissue  directly.  This  network is comprised of an arterial  system and a
venous system, both of which originates on the epicardium,  or outer surface, of
both the atria and the ventricles,  and penetrates into the tissues of the walls
of the heart.  Thus,  the anatomy of the heart walls consists of a thick mass of
muscle cells supported by a framework of blood vessels.

     The heart's  pumping  action is  controlled  by its  electrical  conduction
system within the heart muscle tissue.  This conduction system allows electrical
signals to propagate  through the heart in a systematic  and very organized way.
These  specialized  conduction cells are placed throughout the walls of the four
chambers of the heart.  In a  systematically  timed  sequence,  this  conduction
system carries electrical signals to the muscle cells throughout the heart. This
electrical conduction cycle results in a normal heartbeat that originates in the
right atrium,  commencing in a specialized group of cells called the Sino-Atrial
node.

     The  Sino-Atrial   node  is  the  heart's  natural   pacemaker,   regularly
discharging an electrical signal that is responsible for setting the heart rate,
usually at a rate of 60 to 100 beats per  minute.  The signal  generated  in the
Sino Atrial node is  propagated  through the atrial  tissue until it reaches the
Atrio-Ventricular node, located just above the ventricles.  A momentary delay of
the signal  provides enough time for the atria to fill the ventricles with blood
before the ventricles are signaled to contract.

     Once the electrical signal exits the Atrio-Ventricular  node, it is rapidly
conducted  down the Bundle of His, a thin bundle of  specialized  cardiac muscle
which conducts the electrical  signals from the right atrium to the  ventricles,
and is distributed  widely  throughout both ventricles via the Purkinje  Fibers,
modified  cardiac  muscle fibers which  conduct the  electrical  signals  passed
through  the  Bundle  of His to the  whole  of the left  and  right  ventricles,
delivering the electrical signal to both ventricles at the same time and causing
them to contract in unison. Since the ventricles pump blood to the lungs and the
rest of the body,  they are  surrounded by a larger amount of muscle tissue than
the  atria.  The left  ventricle,  in  particular,  is the  stronger  of the two
ventricles,  generating  higher  pressure  and  working  harder in order to pump


                                       5
<PAGE>
oxygenated blood through the entire body. In the normal heart, the four chambers
work  rhythmically  with each other to ensure that properly  oxygenated blood is
constantly  delivered  throughout  the body.  This "normal" heart rate is called
"normal sinus rhythm."

Arrhythmias

     Arrhythmias are abnormal electrical heart rhythms that adversely affect the
mechanical activities of the heart, have detrimental physical effects and impair
a person's quality of life. Arrhythmias result in insufficient blood flow, which
may cause dizziness, inadequate function of important organs in the body, stroke
and even death.  Arrhythmias have numerous causes,  including congenital defects
and tissue damage from either heart attacks or  arteriosclerosis.  There are two
general types of arrhythmias:  tachycardia, a fast resting heart rate, typically
more than 100 beats per minute;  and  bradycardia,  a slow  resting  heart rate,
typically less than 60 beats per minute. Tachycardias fall into one of two major
categories:  (i) atrial tachycardia,  which has its origin in the atria and (ii)
ventricular  tachycardia,  which has its  origin in the wall of the  ventricles.
Generally, arrhythmias are degenerative and worsen over time.

Atrial Fibrillation

     Atrial  fibrillation,  the most  common  form of  atrial  tachycardias,  is
characterized by the irregular fluttering and/or very rapid beating of the atria
that results from  malfunctioning  of the  electrical  conduction  system in the
walls of the atria, leading to irregular and chaotic atrial beating.  During AF,
the regular  pumping action of the atria is replaced by irregular,  disorganized
and quivering spasms of atrial muscle tissue. Symptoms of AF typically include a
rapid and irregular  heartbeat,  palpitations,  discomfort and  dizziness.  This
malfunction  results  in the  failure  of  the  atria  to  fill  the  ventricles
completely and, consequently,  the failure of the heart to pump adequate amounts
of blood to the body. Once AF becomes  symptomatic,  it is typically  associated
with significant  morbidity  related to reduced blood flow.  Often, the greatest
concern is that the  reduced  cardiac  output  can lead to blood  pooling in the
atria and cause the formation of blood clots. Over time, blood clots in the left
atrium can dislodge and travel through the  bloodstream to the brain,  resulting
in stroke or even death.

     According  to the  American  Heart  Association's  (AHA) Heart  Disease and
Stroke  Statistics - 2004 Update, AF affects more than 2.2 million people in the
United States.  The AHA statistics  update also estimates that AF is responsible
for over 100,000  strokes each year in the United  States.  AF is an independent
risk  factor  for  stroke,  increasing  the  risk  five-fold.  According  to the
Framingham Heart Study reported in Circulation  magazine,  the lifetime risk for
the development of AF in men and women 40 years of age and older is 25%.

     Standard  electrocardiograms  may be unable to locate the origin, or focus,
of the AF. The preferred  diagnostic  method,  called mapping,  involves placing
catheters  with  electrodes  inside  the  chambers  of the heart to  record  the
electrical  signals  generated  by the heart in order to locate  the  focus,  or
origin, of the arrhythmia.

     Current AF treatments  are primarily  supportive  and palliative and do not
cure AF. The most common therapies used in treating AF are  anti-arrhythmic  and
anticoagulant drugs.  Anti-arrhythmic  drugs are typically used in an attempt to
reduce the number of episodes of AF  severity  and/or to reduce the  duration of
each individual episode.  Anti-coagulants are used to reduce the normal clotting
mechanism  of the blood,  therefore  reducing the  potential  of creating  blood
clots. Anti-arrhythmic drug therapy often becomes less effective over time, with
approximately  half of the  patients  developing  resistance  to the  drugs.  In
addition,  anti-arrhythmic drugs have potentially severe side effects, including
pulmonary fibrosis and impaired liver function, and may significantly affect the
patient's  quality of life.  Another  palliative  procedure  for AF is  external
cardioversion,  or the  application  of a  strong  electrical  current  using an
external  defibrillator  to attempt to shock the heart  back into  normal  sinus
rhythm.  This treatment only affects a single episode of AF; therefore it has no
effect on the basic cause of AF and is not  curative.  Another  treatment is the
deliberate destruction of the atrio-ventricular node and subsequent implantation
of a pacemaker.  This is typically  considered a treatment of last resort for AF
patients  as it does not cure or treat the AF  itself,  but rather  allows  rate
control of the  ventricles.  The  patient  still has AF.  Also,  the  patient is
dependent on the pacemaker for life.  Pacemakers are a device implanted into the
chest, are battery-powered and typically require replacement approximately every
seven to ten  years,  depending  on  manufacturer,  type of device and amount of
electrical  energy  delivered.  Patients with pacemakers are usually required to
continue with chronic anticoagulant drug therapy to attempt to prevent clotting.
Anticoagulant  drug therapy may result in the  weakening of the blood vessels in
the brain that may increase the risk of hemorrhagic stroke.

     The only  curative  therapy  for AF used today is an  open-heart  operation
commonly  known  as  the  surgical  "maze"  procedure.  In the  maze  procedure,
concomitant  with another heart procedure such as valve  replacement or coronary
artery  bypass  surgery,  a  surgeon  makes  a  series  of  cuts  in a  specific
"maze-like"  formation  through  the wall of the atrium  with a scalpel and then
sutures  these cuts back  together.  The scars that  result from the healed cuts
re-direct and contain the chaotic electrical impulses and channel the electrical


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<PAGE>
signal  emanating  from the  Sino-Atrial  node,  thereby  returning the heart to
normal sinus rhythm.  This open-heart  operation is traumatic to the patient, is
very  expensive  and is associated  with long  hospital  stays and may require a
three to six month  recovery  time.  Although this approach is not commonly used
because it is limited to AF patients who also have some other  surgical need, it
is generally considered highly effective in controlling AF.

     Some  leaders  in   electrophysiology   are  experimenting  with  minimally
invasive,  catheter-based  ablation  procedures that replicate the surgical maze
procedure from inside the heart,  thereby  reducing the procedure time,  patient
recovery  time and  overall  procedural  costs.  If a catheter  procedure  is to
successfully  mimic the maze  procedure,  it is necessary to make various shaped
lines, including straight, curvilinear and circumferential lesions. Therefore we
developed the REVELATION(R)  Tx,  REVELATION(R)  T-Flex and REVELATION(R)  Helix
respectively, to mimic these required shapes.

Ventricular Tachycardia

     Ventricular tachycardia is a life-threatening condition in which heartbeats
are improperly  initiated from within the  ventricular  wall, in addition to the
sino-atrial node,  bypassing the heart's normal conduction  system. A typical VT
patient has  experienced a myocardial  infarction,  or heart  attack,  which can
result in the formation of a scar or electrical barrier inside the tissue of the
ventricular  wall,  leading  to  improper  electrical  conduction  in the  cells
immediately  surrounding the scar. During episodes of VT, the ventricles beat at
such an  abnormally  rapid  rate that they are  unable to fill  completely  with
blood,  thus reducing the amount of oxygenated blood being pumped throughout the
body. The resulting reduction in the amount of oxygen transported to the tissues
and organs of the body can cause  dizziness  and loss of  consciousness.  VT can
often progress into ventricular  fibrillation,  an extremely irregular,  chaotic
and ineffective  spasming of the ventricles.  Ventricular  fibrillation is fatal
within a few  minutes of its  occurrence,  unless  orderly  contractions  of the
ventricles are restored through immediate external  electrical  cardioversion or
defibrillation.

     According to the AHA's Heart  Disease and Stroke  Statistics - 2004 Update,
few deaths are  statistically  listed as being  directly  caused by  ventricular
tachycardia.  However,  it is estimated that most of the  approximately  340,000
sudden cardiac deaths per year from coronary artery disease may be attributed to
ventricular fibrillation.

Limitations of Current Catheter-Based Diagnosis and Therapy

     The demonstrated medical benefits and cost efficiency of minimally invasive
procedures have encouraged electro-physiologists to seek new, minimally invasive
techniques  for the diagnosis and treatment of  arrhythmias.  In the case of AF,
electro-physiologists  have  experimented  with  a  treatment  technique,  often
referred  to as the  "drag  and burn  procedure,"  in which  conventional  radio
frequency  tip ablation  catheters are dragged  across the inside  surface of an
atrium to attempt  to create a linear  lesion.  Electro-physiologists  have also
experimented  with the "dot to dot"  procedure,  whereby the doctor  attempts to
make  a line  by  connecting  a  series  of dot  burns  in the  atria.  Creating
continuous,  linear,  trans-mural lesions to isolate portions of the atria using
either of these methods with  standard tip  catheters has proven time  consuming
and difficult.

     We maintain that the disadvantages of existing catheter-based approaches to
treat  AF are  attributable  not  to  the  minimally  invasive  approach  of the
procedure,  but  rather  to the  existing  catheter  technology.  The  catheters
currently  used are  larger  and  stiffer  than our  products  and have a single
electrode at the end of the  catheter  designed to create an ablation at the tip
only.  This  single  electrode  catheter  approach  makes  creating  a solid  or
continuous line of scar lesion very difficult

     Based    on    experience    with    standard    endocardial     catheters,
electro-physiologists recognize the need to record and evaluate a greater amount
of electrical  information from various areas in the heart simultaneously during
AF or VT  procedures.  In the case of AF, we  maintain  that there is a need for
catheters  that are able to access  both right and left  atria to create  linear
lesions replicating, less invasively, the surgical maze procedure.

Cardima's Micro-catheter System Solution

     We believe our micro-catheter-based systems have the potential to offer the
effectiveness of the open-heart  surgical cure for AF (the "maze" procedure) but
with less trauma, fewer complications,  reduced pain, shorter hospital stays and
lower  procedure  costs.  The  principal  clinical  goals in the  diagnosis  and
treatment of AF are effective mapping and safely creating  appropriate  lesions.
To achieve those goals, the  electro-physiologist or surgeon must be able to use
easy-to-perform  techniques  to  access  areas of the heart  that are  currently
inaccessible.   In  our  quest  to  achieve   those  goals,   we  have  designed
micro-catheter systems that we believe provide more extensive and safe access to


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the  arrhythmia-causing  tissue.  We also  believe it is important to be able to
both map (diagnose) and ablate (treat) with a single catheter.  A micro-catheter
that both maps and  ablates  may  decrease  procedure  time,  improve  treatment
outcomes and enhance the overall  safety of the procedure.  Our completed  Phase
III  clinical  trial  to  treat  AF with the  REVELATION(R)  Tx  involved  three
anatomical ablation lines placed in pre-determined areas of the atria, mimicking
the surgically performed maze procedure.  All of our micro-catheter  systems are
designed to offer the following perceived advantages over existing,  competitive
catheters:

     o    Minimally invasive approach.  Our micro-catheter  systems are designed
          to provide  greater  access  simply  because they are smaller and more
          flexible than competitive technologies. Size constraints prevent other
          systems from reaching some small vessels that our  micro-catheters can
          reach.  We believe  that this  increased  access  results in decreased
          procedure  time,  shorter  hospital  stays,  lower procedure costs and
          fewer complications than the procedures currently in use.

     o    Single  micro-catheter  that  can both map and  ablate.  We  initially
          developed  micro-catheters  for  diagnosing  arrhythmias.  Our primary
          focus today is the development of therapeutic  micro-catheters,  which
          we call the REVELATION(R)  family of micro-catheters,  capable of both
          mapping and ablating.  Because our micro-catheter systems can both map
          and  ablate,  we  believe  that they will  decrease  procedure  times,
          improve  treatment  outcomes  and enhance  the  overall  safety of the
          procedure.

     o    Enhanced access to the vasculature of the heart.  Our  micro-catheters
          are  approximately  one-third  to  one-fourth  the  size  of  standard
          electrophysiology  catheters,  and incorporate what is called variable
          stiffness  technology.  Variable stiffness technology involves our use
          of a  tapered  core  guide  wire as the basic  building  block of each
          catheter.  We then  attach a highly  flexible,  atraumatic  tip to the
          leading end of each catheter.  As a result of this variable  stiffness
          technology,  our micro-catheters are more torqueable and flexible than
          standard electrophysiology catheters and thus allow more extensive and
          less traumatic  access to the vasculature of the heart.  This variable
          stiffness  technology  also  allows  for our  REVELATION(R)  series of
          mapping and ablation  catheters  to easily  conform to the contours of
          the heart wall, thereby maintaining  controlled,  regular contact even
          in a fast-beating heart.

     o    Less tissue damage at safer power setting.  Because our  REVELATION(R)
          series ablation catheters are smaller,  we create thinner lesion lines
          while  maintaining  the  same  depth  of  tissue   penetration.   This
          significant  reduction  in surface  tissue  damage may be important in
          lesion  formation in and around the  pulmonary  veins where  pulmonary
          vein stenosis,  (or the narrowing of the lumen of the pulmonary  veins
          which restricts the flow of re-oxygenated blood returning to the heart
          from the lungs) after  conventional  ablation therapy is an issue. The
          REVELATION(R)  series of ablation catheters creates thinner lines. Our
          catheters  also can  create  these  lesions  at lower  power  settings
          because of the  effect of current  density  emitted  from our  smaller
          coiled electrodes.  While  conventional  catheters require at least 30
          watts to ablate, our products can ablate at power settings as low as 5
          watts.  We believe  that  lower  power  means  being  effective  while
          preserving  more cardiac  tissue and therefore  more cardiac  function
          when compared to conventional ablation.

     o    Compatible with existing capital equipment. Our micro-catheter systems
          are designed to be compatible  with leading  electrophysiology  signal
          display  systems and radio  frequency  generators  currently in use by
          electrophysiology  departments.  This  eliminates  the  need  for  new
          investment  in  additional  capital  equipment.  As a  result  of  the
          compatibility  between our  micro-catheter  systems and the  equipment
          used by most  electrophysiology  labs, we believe our  micro-catheters
          will be most effective for these labs.

     o    Reduced  procedure and radiation  exposure  times. We believe that the
          dual functionality of our micro-catheter systems will reduce procedure
          times and enhance  safety.  Since the  electro-physiologists  must use
          x-rays  to place  and  determine  location  of all  catheters,  faster
          procedures equate to decreased  cumulative x-ray exposure to patients,
          physicians and lab personnel.

Curative Treatment for Atrial Fibrillation

     Our REVELATION(R), REVELATION(R) Tx and REVELATION(R) T-Flex micro-catheter
systems are  designed  to  diagnose  and treat AF in the right atria by creating
long,  thin,  continuous,  linear,  transmural  lesions.  A  new  model  of  the
REVELATION(R)  T-Flex, with an atraumatic  ball-tip,  and available with 8 or 16
electrodes,  received CE Mark  approval in June 2005.  Our  REVELATION(R)  Helix
micro-catheter  system is designed to diagnose and treat AF that originates from
the pulmonary veins, located in the left atria. The REVELATION(R) Helix can both
diagnose  and treat  focal,  or  localized,  AF. The  REVELATION(R)  Helix makes


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<PAGE>
circumferential or partially  circumferential scar patterns within the pulmonary
veins,  on the ostia or outer base of the  pulmonary  veins,  and on the outside
wall where the  pulmonary  veins  enter the atria in order to contain AF causing
signals. A newer model, the REVELATION(R) Helix STX received CE Mark approval in
the European  Union from its European  Notified Body  Rheinisch  Westphaelischer
Technischer Ueberwachungsverein e.V., (RWTUV) in 2003 to treat AF originating in
the pulmonary veins.

     Our  REVELATION(R)  Tx Phase III clinical  trial data was  submitted to the
Food and Drug Administration (FDA) on September 30, 2002 in the United States to
treat AF. On January 20, 2004, we filed an amendment to that original Pre-Market
Approval (PMA)  application in response to suggestions  and comments made by the
Circulatory  System  Devices  Panel  following our May 29, 2003 meeting with the
panel.  On May 21,  2004,  we received a "not  approvable"  letter from the FDA,
which   stated  that  our  PMA  for  the   REVELATION(R)   Tx  linear   ablation
micro-catheter system was not approvable based on the requirements of applicable
regulations.  The letter stated that, although we had provided information on an
additional  32 patients in the  clinical  trial in our PMA  amendment  submitted
January 2004, the concerns identified in the FDA's initial non-approvable letter
of June 26, 2003 remain unresolved.  Among other things, the FDA's letter stated
that the FDA's position that the least  burdensome  approach to demonstrate  the
safety and  effectiveness of REVELATION(R) Tx for the intended  indication is to
collect  additional  clinical data using a randomized  clinical trial design. We
have  engaged  in  continuing  dialogue  with the FDA since our  receipt  of the
non-approvable  letter on May 28,  2004.  At a meeting with the FDA's Center for
Devices and Radiological Health (CDRH) on June 18, 2004, the FDA representatives
reiterated  the view that data from an  additional  study would be  necessary to
demonstrate the effectiveness of REVELATION(R) Tx for AF, and that the nature of
the trial's primary goal would require a randomized  clinical trial design.  The
development and implementation of a new clinical trial would require substantial
expenditures  and management  attention,  and the timing and success of any such
trial cannot be assured.

     On June 10,  2005,  we met with the  FDA's  CDRH to  continue  the  process
towards  seeking  approval  for  the  REVELATION(R)  Tx  ablation  catheter  for
treatment of AF. The focus of this latest  meeting was to exchange views on each
other's  positions and to discuss the issues stated in the May 21, 2004, and the
June 26, 2003, FDA  non-approvable  letters.  No conclusions were reached at the
end of the three-hour meeting, but both sides agreed to continue the dialog. The
parties have not set a date for a follow-up meeting.

     We maintain  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.  The trial data  indicated  substantial  and
statistically  significant  improvements  were realized almost uniformly for all
measured arrhythmia symptoms as well as for quality-of-life  measures. The study
demonstrated that the addition of right atrial catheter ablation to a regimen of
previously   ineffective   antiarrhythmic  drugs  (AADs)  yields  a  significant
reduction in the  frequency,  duration and severity of AF episodes and symptoms.
Of the ninety-three  subjects included in the trial,  eighty-four subjects (90%)
provided   six-month  AF  episode  frequency  data.  This  data  demonstrated  a
significant  decrease in  symptomatic  frequency  when compared to baseline.  In
addition,  forty-nine  subjects  (58%) were  considered  a  clinical  success by
protocol definition.

     Our  micro-catheter  systems are  designed to improve  atrial  function and
reduce the risk of blood clotting,  thereby reducing or possibly eliminating the
need for chronic  anticoagulant  therapy.  Our micro-catheter  systems typically
deliver less radio  frequency  energy and create  thinner  lesions than standard
electrophysiology  catheters,  preserving  a greater  amount  of  atrial  tissue
following  the   procedure.   Our   micro-catheter   systems  also   incorporate
temperature-sensing  bands  between  each  electrode  that are designed to be in
direct  contact  with  the  atrial  tissue.  This  direct  contact  between  the
temperature  sensing  bands and the  atrial  tissue is  designed  to give a more
accurate  temperature reading during ablation.  Temperature sensing is extremely
important  when  treating  tissue  in the  left  atria.  The  delivery  of radio
frequency  energy creates scar tissue and has the potential to coagulate  blood.
Blood clots are extremely  dangerous on the left side of the heart because these
clots  can flow  through  the  arterial  system to the brain and cause a stroke.
Competitive  systems use temperature  sensors  positioned under their electrodes
that are not in direct  contact with the tissue.  Given  concerns about creating
clots or coagulum  during an ablation  procedure,  we believe the direct contact
design  and  more  accurate  temperature  monitoring  during  an  ablation  is a
competitive  advantage.  We believe this approach has the potential to offer the
effectiveness  of the  open-heart  surgical  cure for AF, but with less  trauma,
fewer  complications,  reduced pain,  shorter hospital stays and lower procedure
costs.

Curative Approach for Ventricular Tachycardia

     Our   PATHFINDER(R),    PATHFINDER(R)   mini   and   TRACER(R)   diagnostic
micro-catheter  systems  for  mapping  VT are all  designed  for use  inside the
vasculature of the heart wall, facilitating access to arrhythmia-causing  tissue
through  the venous  system.  We  believe  that at least half of the VT foci are
located in the intramyocardium and the epicardium,  areas that are ineffectively
accessed using standard endocardial catheters or basket type catheters currently
in  development.  The  intravascular  approach to VT ablation  should permit our
micro-catheters  to be positioned in close  proximity to the  arrhythmia-causing


                                       9
<PAGE>
tissue,  facilitating the creation of smaller,  more focused lesions. We believe
that  this  approach  has the  potential  to be  more  effective  than  standard
endocardial ablation procedures, with reduced destruction of surrounding healthy
tissue,  thus  maximizing and optimizing the normal  function of the heart after
the  procedure.  We  also  believe  that  the  smaller  catheter  sizes  of  our
ventricular  systems may be particularly  appealing to the pediatric  market. We
are aware of at least one other  epicardial  mapping catheter in addition to the
PATHFINDER(R),  PATHFINDER(R)  mini,  TRACER(R)  and  THERASTREAM(TM)  which was
formerly under development.  In January 2001, we decided to focus our efforts on
our AF program  and  postpone  our work on the  therapeutic  VT  program.  These
products are currently used to help localize placement of bi-ventricular  pacing
leads via CS access.

Our Business Strategy

     Our  objective is to be a leading  developer of  innovative  products  that
provide safer and more effective diagnosis and treatment of AF. Our primary goal
is to commercialize all of our REVELATION(R) series of ablation products for the
treatment of AF in the electrophysiology market.

     Our Surgical Ablation System (SAS), a  micro-catheter-based  surgical probe
coupled to the  INTELLITEMP(R),  a RF energy management device,  received 510(k)
clearance for use in the United States in January 2003.  Due to our focus on the
EP  market,  we do not  currently  plan to  market  our SAS  ourselves,  and are
currently  seeking  to sell or  otherwise  consummate  a  strategic  transaction
involving this system.  We have retained a financial  advisory firm to assist us
in this effort.

     With  respect  to  the  electrophysiology   market,  we  are  focusing  our
development  efforts on obtaining  regulatory  approval in the United States for
REVELATION(R)  Tx  micro-catheter  to treat  AF.  If we are able to  obtain  the
additional funding that we need to continue our operations, and if REVELATION(R)
Tx is  approved  in the  United  States,  we  intend  to focus  our  efforts  on
commencement  of a  clinical  trial in the United  States for the  REVELATION(R)
T-Flex and the  INTELLITEMP(R)  for mapping and treating AF  originating  in the
pulmonary  veins of the heart.  Our  strategy  incorporates  the  following  key
elements:

     o    Seek funding necessary to continue operations. Due to our very limited
          cash  resources,  we plan to  continue  to  seek  additional  funding,
          including  through the potential sale or other  strategic  transaction
          involving our SAS, in order to attempt to continue operations.

     o    Develop micro-catheter  technology to address unmet clinical needs for
          both mapping and ablation. We are developing micro-catheter systems to
          address  clinical needs that are not  adequately  addressed by current
          technology.  We are  focusing  on  endocardial  access  for AF. We are
          designing  systems,  which incorporate  variable  stiffness  guidewire
          technology  originally  developed  at Target  Therapeutics,  including
          guiding  catheters  and  fixed-systems,   in  order  to  optimize  the
          physician's  ability  to  access  the areas of  interest  in the heart
          easily and safely.  Additionally,  we believe our REVELATION(R) family
          of ablation  micro-catheters  will be used to create long,  continuous
          linear lesions  designed to replicate the "maze"  surgical  procedure.
          The maze procedure,  while expensive and highly  invasive,  has a high
          rate of success.

     o    Provide  micro-catheter  systems  that  lower  the  cost  of  treating
          electrophysiological   disorders.   Our  micro-catheter   systems  are
          designed to reduce the average time required for AF and the diagnostic
          and  therapeutic  procedures for VT. As a result,  less time should be
          spent  in  high  cost  electrophysiology  laboratories,  reducing  the
          overall cost of AF or VT treatments.  The shorter  procedure time that
          we believe  will  result  from the use of our  micro-catheter  systems
          should  enable  physicians  to  perform a  greater  number of AF or VT
          procedures and reduce the overall cost per procedure.  In addition, we
          intend to use data  derived  from our  clinical  studies to  establish
          enhanced   reimbursement   for  AF  and  VT   procedures   using   our
          micro-catheter  systems.  We believe that our  micro-catheter  systems
          will   appeal  to   patients   and   third-party   payors   seeking  a
          cost-effective solution to the diagnosis and treatment of AF and VT.

     o    Accelerate  acceptance and adoption of our  micro-catheter  systems by
          leading  electro-physiologists.  We  have  formed  relationships  with
          leading  medical  centers  in the United  States,  Europe and Japan to
          perform  clinical  trials  of  our  micro-catheter   systems  for  the
          diagnosis and treatment of AF. We believe that  successful  acceptance
          and  adoption  of these  systems by widely  recognized  experts in the
          field of  electrophysiology is an important step in the overall market
          acceptance  of our  micro-catheter  systems.  We intend to continue to
          work with leading  physicians and medical  centers to demonstrate  the
          safety and effectiveness of our micro-catheter systems in treating AF.


                                       10
<PAGE>
          We hope this will allow us to establish broad market acceptance of our
          products.  In addition,  we intend to accelerate  physician  education
          regarding our micro-catheter  systems through additional training with
          our clinical investigators and peer-reviewed  publications  concerning
          the clinical trials of our micro-catheter systems. However, because of
          the  limitation of health care  reimbursement  in Europe and Asia, our
          profit  margins  remain  small  because of our  overall  manufacturing
          level.

     o    Increase sales by further penetrating international markets. We intend
          to selectively increase international sales,  especially in Europe, by
          leveraging  our  current  network  of  international  distributors  to
          further penetrate  international markets. We are cautiously optimistic
          that our INTELLITEMP(R) energy management device, which was granted CE
          Mark in January 2004,  will stimulate  interest in our  micro-catheter
          systems by offering the opportunity to substantially  reduce procedure
          times for the  treatment  of AF. We received and maintain ISO 9001 (EN
          46001) Quality Systems certification for our manufacturing  facilities
          from the European  Union  regulators,  as well as CE Mark  approval to
          market a number of our micro-catheter products. We received regulatory
          approval in the United States, Europe, Japan, Australia and Canada for
          our  PATHFINDER(R)  micro-catheter  system  for  mapping  VT and  have
          received regulatory approval in the United States,  Europe,  Japan and
          Australia for our REVELATION(R)  micro-catheter system for mapping AF.
          We   received   CE  Mark   approval   to  market  the   REVELATION(R),
          REVELATION(R)  Tx,   REVELATION(R)   T-Flex  and  REVELATION(R)  Helix
          ablation  micro-catheter  systems to treat AF in the European Union in
          August 1998, December 1998, June 2000 and December 2001, respectively.
          A newer model, the  REVELATION(R)  Helix STX received CE Mark approval
          in the  European  Union  from its  European  Notified  Body  Rheinisch
          Westphaelischer Technischer  Ueberwachungsverein e.V., (RWTUV) in 2003
          to treat AF  originating  in the pulmonary  veins.  A new model of the
          REVELATION(R) T-Flex, with an atraumatic ball-tip,  and available with
          8 or 16 electrodes, received CE Mark approval in June 2005. .

Products

     We are  currently  focused on  developing  micro-catheter  systems  for the
diagnosis  and  treatment of AF.  These  systems are designed to access both the
right and left atria.  Our  micro-catheter  systems are designed to be used both
endocardially  and  epicardially on the atria, to diagnose and ablate AF through
the   creation  of  long,   thin,   continuous,   linear,   curvilinear   and/or
circumferential  lesions.  The  series of  electrodes  at the distal end of each
micro-catheter, depending on the particular product, may both receive electrical
signals for mapping, and, emit radio frequency energy for ablation. In addition,
these micro-catheter systems are smaller in diameter and are designed to be more
flexible than other existing  electrophysiology  catheters,  providing  thinner,
continuous linear lesions,  and therefore cause less destruction of tissue.  Our
micro-catheters  are single  use,  disposable  products.  We are  designing  our
products to be used with existing electrophysiology  recording systems and radio
frequency  ablation  generators.  Our  ancillary  products,   including  guiding
catheters,   electrical  switch  boxes  and  connecting  cables,  support  these
micro-catheter systems.

     The following table  describes our products and their intended  indications
and regulatory status:

<TABLE>
<CAPTION>
                                                                               U.S. Regulatory           International
Therapeutic Products            Description               Indication              Status(1)           Regulatory Status(1)
====================    =============================    ============      ======================    ========================
<S>                                 <C>                     <C>                        <C>                     <C>
REVELATION(R)           Eight-electrode micro-catheter     Mapping          510(k)  (2) clearance    Approved in the European
                        designed to map in both right                       obtained.                Economic Area (CE Mark)
                        and left atria.                                                              (3) and Canada.

                                                           Ablation         N/A                      Approved in the European
                        Can also be used for linear                                                  Economic Area (CE Mark)
                        ablation in approved markets.                                                for ablation.


                                       11
<PAGE>
REVELATION(R) Tx        Guidewire based eight-electrode    Mapping and      Phase III IDE(4)         Approved in the European
                        micro-catheter system with         Ablation         clinical trial           Economic Area (CE Mark)
                        tissue temperature sensors                          conducted from August    and Canada.
                        designed to map and create                          2000 to present; PMA(5)
                        long, thin, continuous, linear,                     Application filed
                        transmural lesions in the                           September 2002;
                        atrium.                                             Non-approval status
                                                                            determined May 29, 2003,
                                                                            application resubmitted
                                                                            January 20, 2004.
                                                                            Non-approval letter
                                                                            received from FDA
                                                                            May 28, 2004.

REVELATION(R) T-Flex    Deflectable and steerable          Mapping and      Supplemental PMA         Approved in the European
                        eight-electrode micro-catheter     Ablation         submission to FDA        Economic Area (CE Mark)
                        system with temperature sensors                     planned if REVELATION(R) and Canada.
                        designed to map and create                          TX is approved.
                        long, thin, continuous, linear,
                        transmural lesions in the right
                        atrium.

REVELATION(R) Helix     Helical shaped guide-wire          Mapping and      On hold pending          Approved in the European
                        eight-electrode micro-catheter     Ablation         Revelation(R) TX         Economic Area (CE Mark)
                        system with temperature sensors                     approval.                and Canada. European
                        designed to map and create                                                   clinical trial complete.
                        circumferential, focal linear
                        lesions in the pulmonary vein
                        ostia of the left atrium.

REVELATION(R) Helix     Helica shaped guide-wire 16        Pacing           On hold pending          Approved in European
STX                     -electrode micro-catheter          Mapping and      Revelation(R) TX         Economic Area (CE Mark)
                        system with temperature sensors    Ablation         approval.
                        and designed to map and create
                        circumferential, focal linear
                        lesions in larger pulmonary
                        vein ostia of the left atrium.

NavAblator(TM)          Deflectable and steerable          Mapping and      Incorporated into        No submission currently
                        ablation micro-catheter system     Ablation         U.S.-PMA(5)              planned.
                        with a temperature sensor                           application for
                        designed to map and create                          REVELATION(R)  Tx as part
                        transmural spot lesions in the                      of the mapping and
                        right atrium                                        ablation system.

INTELLITEMP(R)          Multi-channel RF controller        Accessory to     Cleared under 510(k)     Approval in European
Multi-channel RF        that allows controlled,            catheter         for use in surgical      Economic Area (CE Mark);
Controller              simultaneous delivery of RF        ablation system  ablation of cardiac      approval covers both
                        energy across multiple                              tissue.                  endocardial and surgical
                        electrodes with individual                          To be added through PMA  use.
                        temperature feedback.                               supplement as device
                                                                            accessory to
                                                                            REVELATION(R) TX
                                                                            micro-catheter system.

CARDIMA(R) Ablation     Eight-electrode, eight adjacent    Ablation of      510(k) clearance         Approved in the European
System                  thermocouple surgical probe        cardiac tissue   obtained.                Economic Area (CE Mark)
                        plus an RF energy management                                                 and Canada.
                        device which channels RF energy
                        simultaneously through any
                        combination of electrodes


                                       12
<PAGE>

Diagnostic Products
===================
PATHFINDER(R)           Guide-wire based                   Mapping          510(k) clearance         Approved in the European
                        multi-electrode micro-catheter                      obtained.                Economic Area (CE Mark)
                        system designed for accessing                                                Canada and Japan
                        coronary sinus vasculature to
                        locate arrhythmia-causing
                        tissue.

PATHFINDER(R) mini      Smallest Cardima PATHFINDER(R)     Mapping          510(k) clearance         Approved in the European
                        micro-catheter (1.5 French)                         obtained.                Economic Area (CE Mark),
                        designed to provide access to                                                Japan and Canada.
                        more distal and smaller
                        coronary veins

TRACER(R)               Over-the-wire multi-electrode      Mapping          510(k) clearance         Approved in the European
                        micro-catheter system designed                      obtained.                Economic Area (CE Mark),
                        to be used in the veins of the                                               Canada and Japan.
                        heart wall over a guidewire.

THERASTREAM(TM)         Over-the-wire multi-electrode      Ablation         U.S. IDE(4)  approved    No trial currently
                        micro-catheter system designed                      for feasibility trial.   planned in the European
                        for mapping and ablation from                       Clinical trial on hold.  Economic Area.
                        within the veins of the heart
                        wall.

Support Products
===================
VENAPORT(R)             Guiding catheters to access        Venous access    510(k) clearance         Approved in the European
                        coronary sinus with a family of                     obtained.                Economic Area (CE Mark),
                        curve shapes and lengths.                                                    Canada, Japan and
                        Designed to deliver Cardima                                                  Australia.
                        micro-catheters.

VUEPORT(R)              Balloon-tipped coronary sinus      Venous access,   510(k) clearance         Approved in the European
                        guiding catheter designed to       delivery of      obtained.                Economic Area (CE
                        facilitate delivery of             Electro-Physiology,                       Mark),  Canada and
                        electro-physiology catheters,      or "EP                                    Australia.
                        for injection of contrast          Catheters,"
                        material to facilitate and         venography
                        provide occlusive venography.

NAVIPORT(R)             Deflectable guiding catheter       EP catheter      510(k) clearance         Approved in the European
                        designed to facilitate delivery    delivery and     obtained.                Economic Area (CE Mark),
                        of EP catheters.                   support                                   Canada and Australia.

Accessories
===================
EP SELECT(R)            Switch box designed to             Connectivity     510(k) clearance         Approved in European
                        interface with existing            for pacing and   obtained.                Economic Area (CE Mark),
                        electrophysiology lab equipment    electrophysiology                         Canada, Japan and
                        and multi-electrode catheters.     recording.                                Australia.


                                       13
<PAGE>
TX SELECT(TM)           Switch box designed to             Connectivity     Incorporated into        Approved in European
                        interface with existing            for pacing,      U.S.-PMA(5)              Economic Area (CE Mark)
                        electrophysiology lab equipment    electrophy       application for          and Canada.
                        and multi-electrode catheters.     siology          REVELATION(R) Tx as part
                                                           recording        of the mapping and
                                                           and radio        ablation system.
                                                           frequency ablation.

</TABLE>
(1)  The regulatory  status of our  micro-catheter  systems reflects our current
     status of regulatory  submission or approvals in the United States,  Europe
     and Japan. See "--Government Regulation." The actual submission times could
     differ  materially from those anticipated in these estimates as a result of
     certain   factors,   including   failure   to   complete   development   of
     micro-catheter  systems  or  to  demonstrate  safety  or  effectiveness  in
     clinical  studies,  as  well as the  other  factors  set  forth  under  our
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations - Factors Affecting Future Results" and elsewhere in this Annual
     Report on Form 10-K.

(2)  510(k)  clearance  is granted when a product has been found by the Food and
     Drug  Administration  to be  substantially  equivalent to other similar and
     legally   marketed   devices  and   receives   clearance   for   commercial
     distribution.  A 510(k) product  usually  requires less time to receive FDA
     approval to market than a Class III PMA device.

(3)  CE Mark  means  that a medical  device is in  substantial  compliance  with
     provisions set forth under the jurisdiction of the Medical Device Directive
     93/42/EC and national derivatives in any European Member State. The affixed
     CE Mark allows  commercial  distribution  throughout the European  Economic
     Area.

(4)  An  Investigational  Device  Exemption  (IDE) is issued by the U.S.  FDA to
     study the safety and effectiveness of an unapproved  investigational device
     in humans.  Approval  to begin an IDE study is issued if the U.S.  Food and
     Drug  Administration  concludes that the device potentially offers benefits
     for public health that outweigh the identified risk(s).

(5)  PMA is the most stringent type of device marketing  application required by
     FDA. A PMA application is submitted to FDA to request  clearance to market,
     or to continue  marketing,  a Class III medical device.  Unlike  pre-market
     notification,  PMA approval is based on a determination by FDA that the PMA
     application  contains  sufficient valid  scientific  evidence that provides
     reasonable assurance that the device is safe and effective for its intended
     use(s).

Products Designed for Mapping and Ablating

     Our  REVELATION(R)family  of  micro-catheters  can  access the atria of the
heart in a minimally  invasive  procedure.  They are designed to effectively map
and ablate the  cardiac  tissue  creating  (i) long,  thin,  continuous,  linear
lesions in the right or left atria and (ii) focal or circumferential  lesions in
and around the pulmonary veins located in the left atria.

REVELATION(R) for Mapping

     The REVELATION(R)  micro-catheter  system is designed to facilitate mapping
of  the  atria.   The   REVELATION(R)is   a  thin,   flexible,   eight-electrode
micro-catheter.  The REVELATION(R)  micro-catheter system is a 3 French diameter
micro-catheter that incorporates  variable stiffness technology to permit access
to any area of the atria and has eight coil electrodes for added  flexibility to
enhance contact and conformance to atrial tissue. This micro-catheter  system is
being  marketed  for  mapping AF in the  United  States,  Europe and Japan.  The
REVELATION(R) is also approved for treatment of AF in the European Union.

     Mapping prior to ablation may be useful to identify different etiologies of
the  arrhythmia,  each  of  which  could  require  slightly  different  ablation
procedures.  For example,  some  electro-physiologists  believe most AF patients
will need to be mapped  and  ablated  in both the left and  right  atria,  while
others believe each side individually and separately needs intervention.  During
the  `Maze'  procedure,  the  surgeon  does not map the  atria,  rather a set of
predetermined  cuts are made in anatomical  areas of the atria.  We believe that
our products will have  clinical  utility in  determining  both where to ablate,
and, in ablating in either the right or the left atria.


                                       14
<PAGE>
REVELATION(R) Tx for Ablation

     The  REVELATION(R)  Tx  is a 3.7  French  thin,  flexible,  eight-electrode
micro-catheter that incorporates  variable stiffness technology to permit access
to any area of the  heart  and has coil  electrodes  for  added  flexibility  to
enhance  contact to  surrounding  heart tissue.  The  REVELATION(R)  Tx also has
temperature-sensing  thermocouples  placed  between  each  coiled  electrode  to
monitor tissue  temperature  during  ablation.  The eight electrodes are closely
grouped and can be used to create a long, continuous lesion that extends through
the thickness of the atrial wall. We believe that the electro-physiologist  will
be able to use the REVELATION(R) Tx micro-catheter  system to create long, thin,
continuous,  linear,  lesions  in  the  right  atria  thereby  restoring  normal
electrical function in the atria by isolating the arrhythmia-causing tissue in a
manner similar to the open-heart surgical maze procedure, without the associated
risk and at a reduced expense.  Unlike other catheter-based ablation techniques,
such as the "drag and burn"  approach,  our approach does not require  resetting
the catheter  position during the linear ablation  procedure.  As a result,  the
REVELATION(R)  Tx may have the ability to isolate more  effectively  and rapidly
the arrhythmia-causing tissue.

     The   REVELATION(R)  Tx  micro-catheter  is  designed  with  narrow  coiled
electrodes that are able to deliver ablation energy to the atrial tissue at much
lower power settings than documented with standard electrophysiology  catheters.
These  lower  power  settings  may  improve  the  safety of the  procedure.  The
REVELATION(R)  Tx  micro-catheter  system was designed to be used with virtually
all cardiac  electrophysiology  radio frequency generators and electrophysiology
mapping systems.

     The REVELATION(R) Tx  micro-catheter  has been tested in clinical trials in
the  European  Union and the U.S.  The Phase III  portion of the  United  States
clinical study, updated as of December 2003, treated and followed 98 patients, a
sufficient  number to provide the necessary  volume of safety and  effectiveness
data required for acceptance by the FDA of our PMA application. On September 30,
2002, we submitted our PMA  application  to the FDA and on November 5, 2002, our
PMA application  was accepted and we were granted  expedited  review status.  On
March 6,  2003,  the FDA  notified  us that we would  meet with the  Circulatory
Systems Device panel on May 29, 2003. After the May 29 meeting,  the application
was  deemed  not  approvable  by the  FDA.  Recruitment  in the  clinical  trial
continued,  and on January 20, 2004 a PMA  application  amendment was filed with
the FDA.  This  amendment  summarized  the  experience  a total of 93 Phase  III
patients who underwent  ablation and 88 who reached six months of follow-up.  On
May 28, 2004, we received a "not approvable"  letter dated May 21, 2004 from the
FDA stating that our PMA for the REVELATION(R) Tx linear ablation micro-catheter
system was not approvable based on the  requirements of applicable  regulations.
The letter stated that, although we had provided information on an additional 32
patients in the clinical trial in our PMA amendment  submitted January 2004, the
concerns identified in the FDA's initial  non-approvable letter of June 26, 2003
remain unresolved.  Among other things, the FDA's letter stated the FDA position
that the least burdensome  approach to demonstrate the safety and  effectiveness
of  REVELATION(R)  Tx for  the  intended  indication  is to  collect  additional
clinical data using a randomized clinical trial design.

     We have engaged in  continuing  dialogue  with the FDA since our receipt of
the  non-approvable  letter on May 28, 2004. At a meeting with the FDA's CDRH on
June 18, 2004,  the FDA  representatives  reiterated  the view that data from an
additional  study  would  be  necessary  to  demonstrate  the  effectiveness  of
REVELATION(R)  Tx for AF, and that the nature of the trial's  primary goal would
require a randomized  clinical trial design.  The development and implementation
of a new clinical trial would require  substantial  expenditures  and management
attention,  and the timing and success of any such trial  cannot be assured.  On
June 10,  2005,  we met with the FDA's  CDRH to  continue  the  process  towards
seeking approval for the REVELATION(R) Tx ablation catheter for treatment of AF.
The focus of this latest meeting was to exchange views on each other's positions
and to discuss the issues stated in the May 21, 2004, and the June 26, 2003, FDA
non-approvable letters. No conclusions were reached at the end of the three-hour
meeting,  but both sides agreed to continue the dialog. The parties have not set
a date for a follow-up meeting.

     We maintain  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.  The trial data  indicated  substantial  and
statistically  significant  improvements  were realized almost uniformly for all
measured arrhythmia symptoms as well as for quality-of-life  measures. The study
demonstrated that the addition of right atrial catheter ablation to a regimen of
previously  ineffective  AADs yields a significant  reduction in the  frequency,
duration and severity of AF episodes and symptoms.  Of the ninety-three subjects
included in the trial,  eighty-four subjects (90%) provided six-month AF episode
frequency  data.  This data  demonstrated a significant  decrease in symptomatic
frequency when compared to baseline. In addition, forty-nine subjects (58%) were
considered a clinical success by protocol definition.


                                       15
<PAGE>
     Approval from the FDA of our PMA  application  will be required  before the
Cardima  REVELATION(R)  Tx can be marketed in the United States to treat AF. See
"Government Regulation".  The REVELATION(R) Tx does have CE Mark approval in the
European Economic Area and conditional approval for sale in Canada.


REVELATION(R) T-Flex for Ablation

     The REVELATION(R)  T-Flex has the same operational  characteristics  as the
REVELATION(R)  Tx,  but is  slightly  larger in  diameter  (5.0  French)  and is
deflectable/steer-able.  The  addition  of the  ability  to  deflect  makes  the
REVELATION(R)  T-Flex more  maneuverable,  to enable  formation  of  curvilinear
lesions and potentially  easier to position in the atrial anatomy.  This product
has CE Mark approval in the European Economic Area and in Canada.

     We  plan  to  submit  a  supplemental  PMA  application  to the FDA for the
REVELATION(R)  T-Flex if the PMA application for  REVELATION(R)  Tx receives FDA
approval.  We also plan to approach the FDA about a left atrial study using both
the INTELLITEMP(R)  and the REVELATION(R)  T-Flex for the creation of continuous
linear lesions.

REVELATION(R) Helix for ablation

     The REVELATION(R) Helix is a thin, flexible, eight-electrode micro-catheter
with a helical-shaped  distal tip. The REVELATION(R) Helix micro-catheter system
is a 4.0  to 5.0  French  diameter  micro-catheter  that  incorporates  variable
stiffness,  "memory  metal"  guidewire  technology  and  permits  access  to the
pulmonary  vein areas of the atria  where the anatomy  requires  circumferential
contact   with   the   endocardium.    The   REVELATION(R)    Helix   also   has
temperature-sensing  thermocouples  placed  between  each  coiled  electrode  to
monitor tissue  temperature  during  ablation.  The eight or sixteen  electrodes
(depending  on catheter  type) are  closely  grouped and can be used to create a
continuous lesion in cardiac tissue, such as the atrial wall.

     Like the  REVELATION(R)  Tx,  the  REVELATION(R)  Helix  micro-catheter  is
designed with narrow-coiled  electrodes that are able to deliver ablation energy
to atrial  tissue at much lower power  settings  than  documented  with standard
electrophysiology  catheters.  These  lower power  settings  are crucial in left
atrial  therapy due to potential  for creation of coagulum  and  pulmonary  vein
stenosis. Lower power settings may equate to less potential for creation of this
coagulum  and may also  equate to less  clotting  or stroke  potential.  We have
designed our REVELATION(R) Helix  micro-catheter  system to be used with leading
cardiac  electrophysiology  radio  frequency  generators  and  electrophysiology
mapping computer systems.

     We believe that electro-physiologists will be able to use the REVELATION(R)
Helix  micro-catheter  system to create thin, linear or curvilinear,  lesions in
the atria both  continuous  and focally,  thereby  restoring  normal  electrical
function in the atria by  isolating  the  arrhythmia-causing  tissue in a manner
similar to the open-heart  surgical maze procedure,  without the associated risk
and at a reduced expense. Unlike other catheter-based ablation techniques,  such
as the "drag and burn" or "dot-to-dot"  approach,  our approach does not require
resetting  the catheter  position  during the linear  ablation  procedure.  As a
result, the REVELATION(R)  Helix has the ability to more effectively and rapidly
isolate the arrhythmia-causing tissue.

     On December  10,  2001,  we received  approval to market the  REVELATION(R)
Helix  in  Europe  under  the  CE  Mark.  A  multi-center,  43-patient  clinical
investigation of the REVELATION(R) Helix began with the first patient treated on
August 9, 2001.  As of June 6, 2002,  all 43  patients  had been  treated and by
December 31, 2002, all 43 patients had achieved their six-month assessment.  The
clinical data from this investigation may be used to support a U.S.  application
for an IDE and to provide  clinical  data to support  sales and marketing of the
device in  Europe.  No  complications,  specifically  pulmonary  vein  stenosis,
associated with the device, has been reported by the initial 43 patients.

Products Designed for Mapping and Ablating Ventricular Tachycardia

     Our intravascular  approach allows our  micro-catheters to be positioned in
the veins on the outer surface of the heart (epicardially) in close proximity to
the  VT-causing  tissue and  provides  stable  positioning  within the  coronary
vascular  system.  We believe this approach  will result in greater  accuracy of
diagnosis and more  effective  treatment.  Our  intravascular  electrophysiology
micro-catheters,   exclusive  of  the  guiding  catheters,  are  coated  with  a
hydrophilic coating. This coating has been used on Target Therapeutics' products
designed  to  access  the   vessels  of  the  brain.   We  believe  the  coating
significantly  improves product  functionality.  We have an exclusive license to
use the hydrophilic  coating  technology in products  designed to map and ablate
cardiac arrhythmias while positioned within coronary vasculature.


                                       16
<PAGE>
PATHFINDER(R), PATHFINDER(R) mini and TRACER(R) for Tachycardia Mapping

     These  micro-catheter  systems  used for  diagnosing  VT are designed to be
positioned  within  the  coronary   vasculature  using  a  guiding  catheter  or
guidewire,  similar to those used in  angioplasty  procedures,  and which have a
series  of   electrodes   at  their   distal   ends  in  order  to   perform  as
electrophysiology  catheters.  Our  PATHFINDER(R)  and TRACER(R)  micro-catheter
systems  can be used to  sub-select  vessels  and even  access  the small  veins
located at the apex, or lower tip of the heart. Our PATHFINDER(R) micro-catheter
systems are configured with four,  eight,  sixteen or twenty  electrodes and our
TRACER(R)  micro-catheter  systems are configured  with four,  eight and sixteen
electrodes,  which enable the physician to perform an evaluation  over a greater
area.  The  PATHFINDER(R)  mini, our smallest  micro-catheter,  is 1.5 French in
diameter  and  provides  more distal  access to the smaller  vasculature  of the
heart. The PATHFINDER(R) mini micro-catheter is approximately one fifth the size
of existing catheters used for mapping.  The PATHFINDER(R) can safely map VT via
the  coronary  veins.  Up to four  PATHFINDER(R)s  have been  placed in  various
vessels of the coronary system  simultaneously,  thereby aiding in the diagnosis
of VT and placement of pacing leads.

     We received  510(k)  clearance in the United States and CE Mark approval in
the European Union for our PATHFINDER(R)  micro-catheter for mapping VT. We sell
our  PATHFINDER(R)  for VT mapping in the United States  whereas in Europe it is
sold through one direct sales representative and a network of distributors.  Our
products are sold in Japan through our independent distributor.

     We have postponed  further  development on the  THERASTREAM(TM)  VT program
until  such time that we have the  appropriate  funding.  We expect to  continue
development  of  the  VT  program  if we  raise  sufficient  funds  to  continue
operations  and obtain FDA approval  for, and  successfully  commercialize,  our
REVELATION(R) Tx micro-catheter.

Research and New Product Development

     We believe  that,  assuming  we obtain the  funding  necessary  to continue
operations,  our future  success  will  depend in large  part on our  ability to
develop and introduce  clinically  advanced  diagnostic and therapeutic  systems
that are effective,  easy to use, safe and reliable. Our New Product Development
department  focuses on the continued  development and refinement of our existing
diagnostic devices, systems and procedures, as well as on the development of new
devices,  systems and procedures  for treating  cardiac  arrhythmias.  While the
primary responsibility of the department is to develop new products and transfer
them to manufacturing,  the department also performs applied research to improve
device  performance  during the earlier stages of product  development.  The SAS
received 510(k) clearance from the FDA in 2003. We have initiated a research and
development  program in the minimally invasive surgery area, with the SAS as our
predicate  device.  with the goal of  developing  a viable  product that will be
manufactured  and  commercialized  in 2006.  In 2005,  we conducted  preclinical
programs in support of planned U.S.  clinical trials employing the REVELATION(R)
T-Flex  deflectable  linear ablation catheter with the  INTELLITEMP(R) EP energy
management device.  This ablation system permits  simultaneous  ablation through
multiple electrodes, thereby selectively creating linear and curvilinear lesions
in the atrial  chambers of the heart. In addition,  we are developing  ancillary
devices  that  support  our   therapeutic   devices  by  improving   access  and
visualization  of our  devices  within  the  atrial  chambers,  using  not  only
fluoroscopic but also ultrasonic imaging modalities. We do not currently plan to
market our SAS ourselves,  and are currently seeking a strategic transaction for
this system.

     Research and  development  expenses for the years ended  December 31, 2005,
2004 and 2003, were $2.1 million, $3.9 million and $5.0 million, respectively.

Marketing and Distribution

     We have one direct sales  representative  responsible for U.S. sales of our
products,  which have received 510(k) clearance, and we are focusing our efforts
on expanding our domestic  customer  base. We believe that there are between 500
and 600 hospitals in the United States that perform electrophysiology procedures
on a routine  basis.  Further,  we  believe  there are over 700 board  certified
electro-physiologists practicing domestically.

     Our European sales presence  includes one sales consultant and distribution
through third party distributors in key target markets.  These on-going European
distributor  relationships  provide coverage in France, the Mediterranean  area,
the United  Kingdom,  and in Central and Eastern  Europe.  We believe  there are
about 400 hospitals that perform electrophysiology  procedures and approximately
600 board certified  electro-physiologists  located outside of the U.S. We have,
for  the  time  being,  suspended  distribution  in  China  but  have  otherwise
maintained our Asian sales  channels.  We will be required to expend  additional
resources to operate this remote sales force effectively.


                                       17
<PAGE>
     As of December 31, 2005,  we had a limited  number of customers  worldwide.
Paramedic Co., Ltd., our distributor in Japan,  accounted for 48.4%,  36.2%, and
37.5% of our total net product sales in 2005, 2004 and 2003, respectively.

Manufacturing

     We fabricate certain  proprietary  components of our products and assemble,
inspect, test and package most components into finished products.  Designing and
manufacturing  our products  from raw  materials  allows us to maintain  greater
control of quality and  manufacturing  process  changes and the ability to limit
outside access to our proprietary technology.

     We believe our  custom-designed,  proprietary  processing  equipment  is an
important component of our manufacturing  strategy.  In some cases, we developed
proprietary  enhancements  for existing  production  machinery to facilitate the
manufacture  of our  products  to exacting  standards.  We also  developed  core
manufacturing  technologies  and  processes,   including  proprietary  extrusion
techniques and equipment,  polymer-processing capabilities,  including composite
lamination,  welding of dissimilar  materials,  balloon forming and proprietary,
precision guidewire-grinding  techniques enabling fabrication of a large variety
of guidewire core profiles.  Furthermore,  our technological  expertise includes
braiding,  precision coil winding,  hydrophilic  coating  application,  material
cleaning and surface preparation.

     Catheter  manufacturing  involves  complex  operations  with  a  number  of
separate processes and similar components. Catheters are assembled and tested by
us prior to  sterilization.  If we receive  approval  from the FDA to market our
products,  we may need to  expend  significant  capital  resources  and  develop
additional   manufacturing  capacity  to  establish  large-scale   manufacturing
capabilities.  We have  limited  experience  manufacturing  our  products in the
volumes that will be necessary for us to achieve  significant  commercial sales,
and there can be no assurance that reliable,  high-volume manufacturing capacity
can be established or maintained at commercially reasonable costs.

     Components and raw materials are purchased from various qualified suppliers
and subjected to stringent quality  specifications.  We conduct supplier quality
audits and have  established a supplier  qualification  program.  Several of the
components  and equipment,  such as laminate  tubing,  connector  components and
hydrophilic  coating,  are provided by sole source suppliers.  Our intravascular
electrophysiology  micro-catheters,  exclusive  of the  guiding  catheters,  are
coated  with a  hydrophilic  coating.  This  coating  has  been  used on  Target
Therapeutics'  products  designed  to access the  vessels  of the brain.  Target
Therapeutics is a subsidiary of Boston  Scientific  Corporation,  a company that
develops,  markets and sells  cardiac  electrophysiology  products  that compete
directly  with the  micro-catheter  products we are  developing.  We believe the
coating significantly improves product  functionality.  There are relatively few
alternative  sources of  supply,  and  establishing  additional  or  replacement
suppliers  for such  components,  particularly  laminate  tubing,  could  not be
accomplished  quickly.  The  inability to identify and contract  with  alternate
suppliers  could have a material  adverse  effect on our ability to  manufacture
products and,  therefore,  on our business,  financial  condition and ability to
test or market our  products on a timely  basis.  We plan to qualify  additional
suppliers if, and as, future production  volumes  increase.  Because of the long
lead time for some  components,  which  are  currently  available  from a single
source,  a supplier's  inability to supply such  components  in a timely  manner
could have a material adverse effect on our ability to manufacture  products and
therefore on our business, financial condition and ability to test or market our
products on a timely basis.

     Our  manufacturing  facilities  are  subject to  periodic  inspection  from
regulatory  authorities,  and its  operations  must  undergo FDA Quality  System
Requirements (QSR) and ISO 13485 compliance inspections conducted by the FDA and
the RWTUV before we can market our  products.  We have  obtained ISO  13485:2003
Quality  Systems  certification  from RWTUV and have obtained the right to affix
the CE Mark to certain  electrophysiology  mapping and  ablation  catheters  and
accessories  as  well as  electrosurgical  units.  We are  subject  to  periodic
inspections  by the  FDA  and  California  Department  of  Heath  Services.  Our
facilities  and  manufacturing   processes  have  undergone   successful  annual
surveillance and audit re-certification by RWTUV since 1995 with the most recent
RWTUV audit in January  2006.  In  November  2000,  the FDA  conducted a Quality
System Inspection  Technique,  (or QSIT) Audit, of our Quality System,  which we
successfully  passed.  Cardima also successfully  passed a pre PMA inspection by
the  FDA  in  January  2003.  However,  there  can  be  no  assurance  that  our
manufacturing  facilities will continue to meet such compliance  audits and will
maintain such compliance standards. See "Government Regulation."

Patents and Proprietary Rights

     Our  success  will  depend  in part on our  ability  to obtain  patent  and
copyright  protection  for our  products  and  processes,  to preserve our trade
secrets and to operate without infringing or violating the proprietary rights of
third  parties.  Our strategy is to actively  pursue  patent  protection  in the
United  States and key foreign  jurisdictions  for  technology  we believe to be
proprietary and which offers a potential competitive advantage for our products.
We have filed and intend to continue to file  patent  applications,  both in the


                                       18
<PAGE>
United  States  and  selected  international  markets,  to seek  protection  for
proprietary  aspects of our technology.  We own 23 issued United States patents,
of which 2 were issued in 2005.  In addition,  we have 3 pending  United  States
patent applications.  In December 2000, we sold four non-therapeutic patents and
seven  issued  follow-on  patents,  as well as one pending  and one  provisional
patent,  to Medtronic,  Inc. for  $8,000,000 in cash. The pending patent has now
issued;  the  then  provisional  patent  application  was  converted  to a  full
application, which has also issued. In addition, a continuation-in-part has been
filed for one of those  applications.  We received  back a perpetual,  worldwide
co-license  at  no  cost  from  Medtronic  to  use  those  patents  and  related
intellectual   property  in  our   products   for   mapping   and   ablation  of
arrhythmia-causing  tissue. In addition,  Medtronic agreed not to sublicense the
patents within our field of use to any party not affiliated with Medtronic, Inc.
We have also licensed a proprietary surface-coating material from another vendor
used on certain of our  micro-catheters.  As of December 31, 2005,  we have also
filed 45 patent  applications in major  international  markets, of which 10 have
been issued.  No  assurance  can be given that these  patent  applications  will
provide  competitive  advantages for our products or that any patent application
filed by us will issue as a patent. In addition,  there can be no assurance that
any of our patents or patent  applications will not be challenged,  invalidated,
or circumvented in the future.  There can also be no assurance that competitors,
many of whom have greater resources than us and have substantial  investments in
competing  technologies,  will not  apply  for and  obtain  patents  which  will
prevent,  limit or interfere with our ability to make, use, or sell our products
either in the United States or internationally.

     We also  obtained  rights to certain  technology  by entering  into license
arrangements.  Pursuant  to a license  agreement  with Target  Therapeutics,  we
obtained an exclusive,  royalty-free,  worldwide  license under certain  patents
issued in the  United  States  and  corresponding  international  patents 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 applies to any of Target  Therapeutics'  technology
developed  through May 1996 and will terminate on April 23, 2013, the expiration
date of the last-to-issue of the licensed patents covering Target  Therapeutics'
technology  developed prior to May 31, 1996,  unless  terminated  earlier upon a
breach,  specified  insolvency and  bankruptcy  related events or our failure to
continue  to be engaged  in  specified  fields of  business  for 12  months.  In
addition to this  exclusive  license to use Target  Therapeutics'  technology to
develop products for electrophysiological  diseases, we obtained a non-exclusive
license to use Target Therapeutics'  technology,  provided we make a substantial
improvement  on such  technology,  for the diagnosis or treatment of diseases of
the heart  other than by balloon  angioplasty.  As defined in the  agreement,  a
substantial  improvement  is any  modification,  improvement  or  enhancement of
Target  Therapeutics'  technology  that  results  in a  material  change  in the
function,  purpose or application of a particular product  incorporating  Target
Therapeutics' technology.

     Under  the  Target  Therapeutics'  agreement,  we  granted  back to  Target
Therapeutics  an exclusive,  royalty-free,  worldwide  license to use technology
developed  by us  through  May 1996 in the fields of  neurology,  interventional
neuropathology,  interventional  radiology,  reproductive disorders and vascular
prostheses.  In  addition,  we  agreed  not to  conduct  material  research  and
development,  acquire corporate entities or make or sell products in these areas
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. We also agreed that we 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 we intend to sell 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.

     We obtained  rights to a  biocompatible  hydrophilic-coating  material  and
process  through  a  royalty-bearing  license  to use  the  hydrophilic  coating
technology  in products  designed to map and ablate  cardiac  arrhythmias  while
positioned  within the coronary  arteries and coronary  veins.  The license will
terminate  upon the later of 15 years from first  commercial  sale of  catheters
treated  with  the  coating  material  or the  expiration  of the  last-to-issue
licensed  patent,  unless  terminated  earlier for material breach or due to our
being  in  insolvency,   dissolution,  bankruptcy  or  receivership  proceedings
affecting the operation of our business.

     In  addition  to patents  and  licenses,  we also rely upon trade  secrets,
technical know-how and continuing  technical  innovation to develop and maintain
our competitive position. We typically require our employees,  consultants,  and
advisors to execute  confidentiality  and assignment of invention  agreements in
connection with their employment,  consulting or advisory relationships with us.
There can be no assurance,  however, that the agreements will not be breached or
that we will have adequate  remedies for any breach.  Furthermore,  no assurance


                                       19
<PAGE>
can be given  that  competitors  will not  independently  develop  substantially
equivalent  proprietary  information  and techniques or otherwise gain access to
our proprietary  knowledge,  or that we can  meaningfully  protect our rights in
unpatented proprietary technology.

     U.S. patent applications filed prior to November 29, 2000 are maintained in
secrecy until patents are issued,  however, U.S. patent applications filed after
this date,  unless  foreign  filing is specially  disclaimed,  are  published 18
months from filing or from the priority date.  Publication of discoveries in the
scientific  or patent  literature  tend to lag  behind  actual  discoveries  and
related patent  applications,  and the large number of patents and  applications
and the fluid state of our  development  activities  make  comprehensive  patent
searches and analysis  impractical  or not  cost-effective.  Patents  issued and
patent  applications  filed relating to medical devices are voluminous and there
can be no  assurance  that  current and  potential  competitors  and other third
parties have not filed or will not file  applications  for, or have not received
or will receive,  patents and will obtain additional proprietary rights relating
to products, materials or processes used or proposed to be used by us.

     The medical device industry has experienced  extensive litigation regarding
patents and other  intellectual  property  rights,  and companies in the medical
device  industry  have  employed  intellectual  property  litigation  to  gain a
competitive  advantage.  We  have  from  time  to time  received  inquiries  and
allegations from parties concerning their  intellectual  property rights, and we
expect to receive intellectual  property inquiries and claims in the future. Any
such claims,  with or without merit,  could be  time-consuming  and expensive to
respond to and could divert our technical and management personnel. If any third
party patent  claims are upheld as valid and  enforceable  in any  litigation or
administrative  proceeding,  we could be prevented  from  practicing the subject
matter claimed in such patents, or could be required to obtain licenses from the
patent  owners of each  patent,  or redesign  our products or processes to avoid
infringement.  There can be no assurance  such licenses will be available or, if
available,  will  be  available  on  terms  acceptable  to us or that we will be
successful  in any  attempt to  redesign  our  products  or  processes  to avoid
infringement.   Accordingly,   an  adverse   determination   in  a  judicial  or
administrative  proceeding or failure to obtain necessary licenses could prevent
us from  manufacturing  and  selling our  products,  which would have a material
adverse effect on our business,  financial condition, and results of operations.
We intend to vigorously protect and defend our intellectual property. Costly and
time-consuming  litigation  brought by us may be  necessary  to enforce  patents
issued  to  us to  protect  trade  secrets  or  know-how  or  to  determine  the
enforceability, scope and validity of the proprietary rights of others.

     The validity and breadth of claims in medical  technology  patents  involve
complex legal and factual  questions and,  therefore,  may be highly  uncertain.
There can be no  assurance  that any issued  patent or patents  based on pending
patent applications or any future patent application will exclude competitors or
provide competitive  advantages to us that any of our patent or patents in which
we have licensed  rights will be held valid if  subsequently  challenged or that
others  will  not  claim  rights  in or  ownership  of  our  patents  and  other
proprietary rights held or licensed by us. There can be no assurance that others
have not developed or will not develop  similar  products,  duplicate any of our
products or design around any patents issued to or licensed by us or that may be
issued in the future to us. Since patent  applications  in the United States are
maintained  in secrecy for a period of time as stated  above,  we also cannot be
certain that others did not first file  applications  for inventions  covered by
our pending patent applications, nor can we be certain that we will not infringe
any  patents  that may  issue to others on such  applications.  We  periodically
review the scope of patents of which we are aware.  Although  we do not  believe
that  we  are  infringing  on  patents  known  to us,  the  question  of  patent
infringement  involves  complex  legal and  factual  issues  and there can be no
assurance  that any  conclusion  reached by us  regarding  infringement  will be
consistent with the resolution of any such issues by a court.

     In addition, the United States patent laws exempt medical practitioners and
related  health  care  entities  from  infringement  liability  for  medical and
surgical  procedures in certain  circumstances.  We cannot predict  whether this
exception  might have a material  adverse  effect on our  ability to protect our
proprietary methods and procedures.

Competition

     We believe our primary competitors to be large companies who are engaged in
the development and marketing of existing catheter technology.  Their treatments
include drugs, external electrical cardioversion and defibrillation, implantable
defibrillators,   open-heart   surgery  and   purposeful   destruction   of  the
atrio-ventricular  node,  followed  by  implantation  of  a  pacemaker.  Several
competitors  are also developing new approaches and new products for the mapping
and  ablation of AF and VT.  These  approaches  include  mapping  systems  using
contact  mapping,  single-point  spatial  mapping  and  non-contact,  multi-site
electrical   mapping   technologies  and  ablation  systems  using   ultrasound,
microwave,  laser and  cryoablation  technologies.  In addition,  companies  are
developing  surgical  procedures that could potentially be used by physicians to
perform the surgical maze procedure in a minimally  invasive  manner.  If any of
these  new  approaches  or new  products  proves to be safe and  effective,  our
products  could be  rendered  non-competitive  or  obsolete,  which could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.


                                       20
<PAGE>
     Many of our  competitors  have an  established  presence  in the  field  of
interventional cardiology and/or electrophysiology, including Boston Scientific,
C.R. Bard, Inc., St. Jude Medical,  Inc. (through its Daig Division),  Johnson &
Johnson (through its Cordis  division),  and Medtronic,  Inc. These  competitors
have  substantially  greater financial and other resources than we do, including
larger  research  and  development   staffs  and  more  experience  and  greater
capabilities in conducting research and development activities, testing products
in clinical trials, obtaining regulatory approvals, and manufacturing, marketing
and distributing products.

     Other  companies are  developing  proprietary  systems for the diagnosis of
cardiac  arrhythmias  including Biosense Webster,  Inc., a division of Johnson &
Johnson;  Cardiac  Pathways,  Inc.  and EP  Technologies,  divisions  of  Boston
Scientific;  and Endocardial Solutions,  Inc., a subsidiary of St. Jude Medical,
Inc. Other  companies  develop,  market and sell  alternative  approaches to the
treatment  of AF and VT,  including  Guidant,  Medtronic,  Inc.,  and  St.  Jude
Medical,  Inc., which manufacture  implantable  defibrillators.  There can be no
assurance  that we will succeed in  developing  and marketing  technologies  and
products that are more clinically  effective and cost-effective than the current
treatments,  or the new approaches and products being  developed and marketed by
our competitors.  Furthermore, there can be no assurance that we will succeed in
developing  new  technologies  and  products  that  are  available  prior to our
competitors'  products. Our failure to demonstrate the competitive advantages of
our  products  continues  to have a  material  adverse  effect on our  business,
financial condition and results of operations.

     In the market for cardiac mapping and ablation devices, we believe that the
primary competitive factors are safety, clinical effectiveness,  ease of use and
overall cost to the health care system. In addition, the length of time required
for  products  to be  developed  and to receive  regulatory  and, in some cases,
reimbursement  approval is an important  competitive  factor. The medical device
industry  is  characterized  by  rapid  and  significant  technological  change.
Accordingly,  our success will depend in part on our ability to respond  quickly
to medical and technological changes through the development and introduction of
new products.  Product development  involves a high degree of risk and there can
be no  assurance  that our new product  development  efforts  will result in any
commercially  successful  products.  We believe our products  that have received
regulatory approvals compete with respect to these factors, although there is no
assurance  that  we  will be able to  continue  to do so.  Our  other  products'
competitiveness  will  depend  on  further  regulatory   approvals,   which  are
inherently uncertain.

Government Regulation

     The pre-clinical and clinical testing,  manufacturing,  labeling, marketing
and  distribution  of  our  products  are  subject  to  extensive  and  rigorous
government  regulation  in the  United  States and other  countries.  Failure to
comply with applicable regulatory  requirements can result in enforcement action
by the FDA or  comparable  foreign  regulatory  bodies  including,  among  other
things,  fines,  injunctions,  civil  penalties,  recall or seizure of products,
refusal to grant  marketing  clearances  or  approvals,  withdrawal of marketing
approvals and criminal prosecution.

U.S. Regulation

     A medical  device  may be  marketed  in the United  States  only with prior
authorization  from the U.S. FDA.  Devices  classified by the FDA as posing less
risk are  placed  either in Class I or II. All Class II and some Class I devices
require  510(k)  clearance  from the FDA  prior  to  marketing.  Such  clearance
generally  is granted when  submitted  information  establishes  that a proposed
device  is   "substantially   equivalent"   in  intended   use  and  safety  and
effectiveness  to a Class I or II device  already  legally on the market or to a
"pre-amendment"  Class  III  device  (i.e.,  one  that  has  been in  commercial
distribution since before May 28, 1976) for which the FDA has not required a PMA
application.  The FDA recently has been requiring a more rigorous  demonstration
of substantial  equivalence than in the past,  including in some cases requiring
clinical  trial data.  During this process,  the FDA may determine that it needs
additional  information  or that a proposed  device is precluded  from receiving
clearance  because it is not  "substantially  equivalent" to a legally  marketed
Class I or II device. After a device receives 510(k) clearance, any modification
that could significantly affect its safety or effectiveness, which constitutes a
major change in its intended use, will require a supplemental  510(k) clearance.
We believe that generally it takes approximately 4 to 12 months from the date of
submission  to  obtain  510(k)  clearance.   The  process  may,  however,   take
substantially  longer,  depending  on the  circumstances,  and  there  can be no
assurance that 510(k) clearance will ever be obtained.

     To  date,  we  have  received  510(k)  clearances  from  the  FDA  for  our
PATHFINDER(R),  PATHFINDER(R)  mini and TRACER(R)  over-the-wire  micro-catheter
systems for mapping VT and REVELATION(R)  micro-catheter  system for mapping AF.
In addition,  we have received  510(k)  clearance  for our line of  VENAPORT(R),
VUEPORT(R) and NAVIPORT(R) guiding catheters used to introduce electrophysiology
catheters into the heart. We have also received 510(k)  clearance for a surgical
probe, based on REVELATION(R)  catheter technology,  for the ablation of cardiac
tissue during surgery.


                                       21
<PAGE>
     A device that does not qualify for 510(k) clearance is placed in Class III,
which is  reserved  for devices  classified  by the FDA as posing  greater  risk
(e.g., life-sustaining,  life-supporting or implantable devices, or devices that
are not  substantially  equivalent  to a  legally  marketed  Class I or Class II
device) or when there is no similar device already approved.  A Class III device
generally must go through the PMA  application  process to receive FDA approval.
This  process   requires  that  the   manufacturer   establish  the  safety  and
effectiveness  of the  device  to the  FDA's  satisfaction.  This  requires  the
manufacturer to provide  extensive  pre-clinical and clinical data,  information
about the manufacture of the device and its components and information about the
labeling and promotional  material.  As part of the PMA application process, the
FDA may inspect the manufacturer's facilities for compliance with the QSR, which
includes an extensive  review of design,  manufacturing,  and process  controls,
documentation and other quality assurance procedures.

     Upon  submission  of  the  PMA  application,  the  FDA  determines  if  the
application is sufficiently complete to permit a substantive review, and, if so,
the  application  is accepted  for filing.  The FDA then  commences  an in-depth
review of the PMA  application,  which  typically takes six months to two years,
but may take longer. The review time is often significantly extended as a result
of the FDA asking for more information or  clarification of information  already
provided.  The FDA also may respond with a "not approvable"  determination based
on deficiencies in the application and require  additional  clinical trials that
are often expensive and time consuming and can delay approval for months or even
years.  Recently,  the FDA has  heightened  its scrutiny of clinical  trial data
submitted  in support of PMA  applications.  In  addition,  the FDA may visit an
applicant's  facilities  and/or its  investigator's  sites to audit the clinical
data and/or the data collection  process and procedures.  Near the completion of
the PMA application  process,  an FDA advisory  committee,  typically a panel of
clinicians,  will generally be convened to review the  application and recommend
to the FDA  whether,  or upon what  conditions,  the device  should be approved.
Although  the FDA is not  bound by the  advisory  panel  decision,  the  panel's
recommendation is important to the FDA's overall decision-making process and the
panel's recommendation is generally accepted.

     If the  FDA's  evaluation  of the PMA  application  is  favorable,  the FDA
typically issues an "approvable  letter" requiring the applicant's  agreement to
comply  with  specific  conditions  (e.g.,  changes  in  labeling)  or to supply
specific  additional data (e.g., longer patient follow up) or information (e.g.,
submission  of final  labeling)  in order to secure  final  approval  of the PMA
application.  Once the approvable letter conditions are satisfied,  the FDA will
issue an Approval Order for the approved indications,  which can be more limited
than those originally sought by the manufacturer. The Approval Order can include
post -approval  conditions that the FDA believes  necessary to ensure the safety
and effectiveness of the device including,  among other things,  restrictions on
labeling,  promotion,  sale  and  distribution.   Failure  to  comply  with  the
conditions of approval can result in enforcement action, including withdrawal of
the approval.  The PMA application process can be expensive and lengthy,  and no
assurance can be given that any of our PMA  applications  will ever be approved.
Even after  obtaining  approval,  a new PMA  application  or PMA  supplement  is
generally  required  for any  modification  to the device,  its  labeling or its
manufacturing process.

     We have confirmed that our ablation  products,  including the REVELATION(R)
Tx, REVELATION(R) T-Flex and REVELATION(R) Helix will be designated as Class III
devices requiring PMA approval. There can be no assurance that a PMA application
will be  submitted  for any such  products  or  that,  once  submitted,  the PMA
application  will be  accepted  for  filing,  found  approvable,  or,  if  found
approvable,  will not take longer than  expected to obtain,  or will not include
unfavorable restrictions.

     A clinical  trial in support of a 510(k)  submission  or a PMA  application
requires an IDE application approved in advance by the FDA for a specific number
of patients.  The IDE application must be supported by appropriate data, such as
animal and  laboratory  testing  results.  Clinical  trials may begin if the IDE
application is approved by the FDA and by the appropriate  institutional  review
boards  at the  clinical  trial  sites.  During a  clinical  trial,  we would be
permitted to sell  products used in the study for an amount that does not exceed
recovery  of the  costs of  manufacture,  research,  development  and  handling.
Failure to adhere to regulatory  requirements  generally  applicable to clinical
trials and to the conditions of an IDE could result in a material adverse effect
on us,  including  termination  of the IDE and an inability to obtain  marketing
clearance or approval for our products.

     We received FDA approval to conduct a pivotal  Phase III clinical  trial of
our REVELATION(R) Tx micro-catheter system for AF in August 2000. As of December
2003, 98 patients had been treated with the REVELATION(R) Tx micro-catheter  and
88 of those  patients  had been  followed  for at least six months,  the time at
which the trial's  primary end point  (reduction in the frequency of symptomatic
AF) was assessed.  In January 2004, a summary of these data was submitted to FDA
as an amendment  to our  original  September  2002  analysis,  which the FDA had
indicated in June 2003,  it would not  approve.  However,  on May 28,  2004,  we
received a letter dated May 21, 2004, from the FDA, stating that our PMA for the
REVELATION(R) Tx linear ablation  micro-catheter system was not approvable based


                                       22
<PAGE>
on the requirements of applicable regulations.  The letter stated that, although
we had provided  information  on an additional 32 patients in the clinical trial
in our PMA  amendment  submitted  January 2004,  the concerns  identified in the
FDA's initial  non-approvable  letter of June 26, 2003 remain unresolved.  Among
other  things,  the  FDA's  letter  stated  the  FDA's  position  that the least
burdensome approach to demonstrate the safety and effectiveness of REVELATION(R)
Tx for the intended  indication is to collect  additional  clinical data using a
randomized  clinical trial design.  We have engaged in continuing  dialogue with
the FDA since our receipt of the  non-approvable  letter on May 28,  2004.  At a
meeting with the FDA's CDRH on June 18, 2004, the FDA representatives reiterated
the view that data from an  additional  study would be necessary to  demonstrate
the effectiveness of REVELATION(R) Tx for AF, and that the nature of the trial's
primary goal would require a randomized  clinical trial design.  The development
and   implementation   of  a  new  clinical  trial  would  require   substantial
expenditures  and management  attention,  and the timing and success of any such
trial cannot be assured.

     On June 10,  2005,  we met with the  FDA's  CDRH to  continue  the  process
towards  seeking  approval  for  the  REVELATION(R)  Tx  ablation  catheter  for
treatment of AF. The focus of this latest  meeting was to exchange views on each
other's  positions and to discuss the issues stated in the May 21, 2004, and the
June 26, 2003, FDA  non-approvable  letters.  No conclusions were reached at the
end of the three-hour meeting, but both sides agreed to continue the dialog. The
parties have not set a date for a follow-up meeting.

     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.  Trial  data  indicated  substantial  and
statistically  significant  improvements  were realized almost uniformly for all
measured arrhythmia symptoms as well as for quality-of-life  measures. The study
demonstrated that the addition of right atrial catheter ablation to a regimen of
previously  ineffective  AADs yields a significant  reduction in the  frequency,
duration and severity of AF episodes and symptoms.  Of the ninety-three subjects
included in the trial,  eighty-four subjects (90%) provided six-month AF episode
frequency  data.  This data  demonstrated a significant  decrease in symptomatic
frequency when compared to baseline. In addition, forty-nine subjects (58%) were
considered a clinical success by protocol definition.

     An IDE  for our  THERASTREAM(TM)  VT  ablation  micro-catheter  system  was
approved  by the FDA in  November  1999 and  approval  to  expand  the study was
received  in 2000.  We  decided  to focus  our  efforts  on our AF  program  and
postponed work on our VT program by closing the  investigational  study for this
device.

     Any devices manufactured or distributed by us pursuant to FDA clearances or
approvals will be subject to pervasive and continuing  regulation by the FDA and
certain  state  agencies.  We are  subject  to  inspection  by the  FDA  and the
California  Department of Health  Services and have to comply with various other
regulatory  requirements  that usually apply to medical devices  marketed in the
United   States.   These   regulatory   requirements   include,   among  others,
manufacturing and design control regulations, labeling, Medical Device Reporting
regulations which require that a manufacturer report to the FDA certain types of
adverse  events  involving  its  products,  and the FDA's  prohibitions  against
promoting  approved products for unapproved,  or "off-label," uses. In addition,
Class II devices,  such as our mapping  products,  can be subject to  additional
special controls (e.g., performance standards, post-market surveillance, patient
registries,  and FDA  guidelines)  that do not  apply  to Class I  devices.  Our
failure  to comply  with  applicable  regulatory  requirements  could  result in
enforcement action by the FDA, which could have a material adverse effect on us.

     Unanticipated  changes  in  existing  regulatory  requirements,  failure to
comply  with such  requirements  or adoption  of new  requirements  could have a
material  adverse effect on us. We also are subject to numerous  federal,  state
and local  laws  relating  to such  matters  as safe  working  conditions,  good
manufacturing  practices,  environmental  protection,  fire  hazard  control and
hazardous  material  disposal.  There  can be no  assurance  we will  not  incur
significant costs to comply with such laws and regulations in the future or that
such  laws or  regulations  will not have a  material  adverse  effect  upon our
business, financial condition and results of operations.

Foreign Regulation

     In order for us to market our products in Europe and certain  other foreign
jurisdictions,  we must obtain regulatory approvals and clearances and otherwise
comply with  extensive  regulations  in those  jurisdictions  regarding  safety,
performance  as  well as  product  design  and  manufacturing  processes.  These
regulations, including the requirements for regulatory approval or clearance and
the time period required for regulatory review, vary from country to country. In
addition,  there  may be  foreign  regulatory  barriers  other  than  pre-market
approval.  There can be no  assurance  we will obtain  regulatory  approvals  or
clearances  in  such  countries  or  that  we  will  not be  required  to  incur
significant costs in obtaining or maintaining our foreign  regulatory  approvals
or clearances.  Under certain circumstances,  FDA approval is required for us to


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<PAGE>
export our  products.  Delays in receipt of  approvals  to market our  products,
failure to receive  these  approvals or loss of  previously  received  approvals
could have a material  adverse effect on our business,  financial  condition and
results of operations.

     The European Union has promulgated  rules that require  commercial  medical
products to bear the CE Mark. The CE Mark is recognized by the European Union as
a symbol of adherence to strict quality  systems  requirements  set forth in the
ISO 9001, EN 46001 and ISO 13485 quality  standards,  as well as compliance with
93/42/EEC,  the Medical  Device  Directive.  The CE Mark allows us to market our
products throughout the European Economic Area. We received ISO 9001 (EN 46001),
Quality  Systems  certification  for our  manufacturing  facilities  in Fremont,
California,  which were re-certified in November 2002. These  certifications and
repeated  inspections  are required in order to continue to affix the CE Mark to
our  approved  products in Europe.  In  addition,  ISO 13485  certification  was
obtained  in March 2004 to include  electrosurgical  generators  and  associated
equipment.

     We  have  received  regulatory  approval  to  affix  the  CE  Mark  to  our
REVELATION(R),  REVELATION(R) Tx,  REVELATION(R)  T-Flex and REVELATION(R) Helix
micro-catheters  for  treatment  of AF as well as our  PATHFINDER(R)  diagnostic
family of  micro-catheters.  Failure to receive regulatory approval to affix the
CE Mark would prohibit us from selling these products in member countries of the
European Union.

Third-Party Reimbursement

     In the United  States,  health  care  providers,  including  hospitals  and
physicians,  that  purchase  medical  products for  treatment of their  patients
generally  rely on  third-party  payors,  principally  federal  Medicare,  state
Medicaid and private health  insurance  plans, to reimburse all or a part of the
costs and fees  associated  with the procedures  performed using these products.
Our success will be dependent  upon,  among other things,  the ability of health
care providers to obtain satisfactory  reimbursement from third-party payors for
medical  procedures in which our products are used.  Third-party payors may deny
reimbursement  if they  determine  that a  prescribed  device  has not  received
appropriate  regulatory clearances or approvals,  is not used in accordance with
cost-effective treatment methods as determined by the payor, or is experimental,
unnecessary,  inappropriate  or  used  for a  non-approved  indication.  If  FDA
clearance or approval were received, third-party reimbursement would also depend
upon  decisions by the United  States  Centers for Medicare & Medicaid  Services
(CMS),  as well  as by  individual  health  maintenance  organizations,  private
insurers  and other  payors.  Government  agencies,  private  insurers and other
payors determine whether to provide coverage for a particular procedure based on
its medical necessity for the patient in question. The federal Medicare program,
many state Medicaid  programs and other payors  reimburse  health care providers
for  medical   treatment  at  a  fixed  rate  based  on,  or  adapted  from  the
diagnosis-related  group established by the CMS. The fixed rate of reimbursement
is typically based on the patient's diagnosis and the procedure  performed,  but
may be related to the  specific  type or number of devices  used in a procedure.
There can be no assurance that  reimbursement for our products will be available
in  sufficient  amounts,  if at all,  or that future  reimbursement  policies of
payors will not  adversely  affect our ability to sell  products on a profitable
basis.

     In  addition,  Medicare  traditionally  has  considered  items or  services
involving devices that have not been approved or cleared for marketing by FDA to
be precluded from Medicare coverage.  However,  under a policy which has been in
effect since November 1, 1995, Medicare coverage will not be precluded for items
and related  services  involving  devices  that have been  classified  by FDA as
"non-experimental / investigational" (Category B) devices and that are furnished
in accordance with the  FDA-approved IDE governing  clinical  trials.  Even with
items or services involving Category B devices,  however,  Medicare coverage may
be  denied  if any  other  coverage  requirements  are not  met,  such as if the
treatment  is not  medically  needed for the specific  patient.  There can be no
assurance  that our  products  will be  covered  when they are used in  clinical
trials  and,  if  covered,  whether  the  payment  amounts for their use will be
considered  to be adequate by hospitals and  physicians.  If the devices are not
covered or the payments are  considered  to be  inadequate,  we may need to bear
additional  costs to sponsor such  trials,  and such costs could have a material
adverse effect on our business, financial condition and results of operations.

     There is also new federal legislation that changed the traditional Medicare
payment system by creating a new  visit-based  payment system called  ambulatory
payment  classification  (APC)  groups,  that  establishes  fixed  payments  for
specific  medical  procedures that are performed on an outpatient  basis. If our
products  increase  the cost per  procedure  above  the  fixed  rate  under  the
ambulatory  payment  classification  groups  system,  market  acceptance of such
products  could be impaired,  which would have a material  adverse effect on our
business, financial condition and results of operations.

     The U. S. Congress had previously enacted and we had previously  received a
"pass-through  reimbursement  allowance  category"in  March  2001  on  all  U.S.
approved  diagnostic and guiding catheter products  including the PATHFINDER(R),
REVELATION(R),  TRACER(R), NAVIPORT(R), VUEPORT(R) and VENAPORT(R). Pass-through
reimbursement  allowed  for  the  direct  charging  of a  specific  product  for


                                       24
<PAGE>
reimbursement.  The temporary  category status expired on December 31, 2002. The
products now sell without the need for such categorization.

     Reimbursement  systems  in  international  markets  vary  significantly  by
country and by region within some countries, and reimbursement approvals must be
obtained  on  a  country-by-country   basis.  Many  international  markets  have
government  managed  health care  systems  that  control  reimbursement  for new
products and procedures. In most markets, there are private insurance systems as
well as  government-managed  systems.  Market  acceptance  of our products  will
depend on the availability  and level of reimbursement in international  markets
targeted by us. There can be no assurance that we will obtain  reimbursement  in
any country within a particular  time,  for a particular  time, for a particular
amount, or at all.

     Regardless of the type of reimbursement  system,  we believe that physician
advocacy of our products  will be required to obtain  reimbursement.  We believe
that less invasive procedures generally provide less costly overall therapies as
compared to conventional  drug,  surgery and other treatments.  In addition,  we
believe that a patient's underlying  arrhythmia should typically not recur after
treatment  with  procedures  using our  products.  We  anticipate  that hospital
administrators  and  physicians  would  justify  the use of our  products by the
attendant  cost  savings  and  clinical  benefits  derived  from  the use of our
products. However, there can be no assurance this will be the case. There can be
no assurance that reimbursement for our products will be available in the United
States  or  in  international   markets  under  either   government  or  private
reimbursement   systems,   or  that   physicians   will   support  and  advocate
reimbursement for procedures using our products.  Failure by hospitals and other
users of our  products  to obtain  reimbursement  from  third-party  payors,  or
changes  in  government  and  private   third-party   payors'   policies  toward
reimbursement  for procedures using our products,  would have a material adverse
effect on our business, financial condition and results of operations.

Product Liability and Insurance

     The development,  manufacture and sale of our micro-catheter systems expose
us to an inherent risk of product liability  claims.  Although we currently have
general  liability  insurance  with  coverage in the amount of $1.0  million per
occurrence,  subject to a $2.0 million annual limitation,  and product liability
insurance with coverage in the amount of $5.0 million per occurrence, subject to
a $5.0 million annual  limitation,  there can be no assurance that such coverage
will be  available  to us in the  future  on  reasonable  terms,  if at all.  In
addition,  there  can be no  assurance  that all of the  activities  encompassed
within our business are or will be covered under our policies.  Although all our
guiding, diagnostic and therapeutic products are labeled for single use only, we
are aware that some  physicians  are  re-sterilizing  and reusing such products.
Moreover,  despite  labeling our  micro-catheters  for  diagnostic  use only, we
believe physicians are using such mapping micro-catheters for ablation. Multiple
use or  "off-label"  use of our  micro-catheters  could  subject us to increased
exposure to product liability claims, which could have a material adverse effect
on our business,  financial condition and results of operations.  We may require
additional   product   liability    coverage   if   we   significantly    expand
commercialization  of our  products.  Such  additional  coverage  is  expensive,
difficult to obtain and may not be available in the future on acceptable  terms,
if at all. Any claims or series of claims against us,  regardless of their merit
or  eventual  outcome,  could have a material  adverse  effect on our  business,
financial condition and results of operations.

Employees

     At December 31, 2005, we had 28 employees,  of whom 4 were engaged directly
in research  and new  product  development,  2 in  regulatory  affairs,  quality
assurance and clinical activities, 12 in manufacturing, 3 in sales and marketing
and 7 in finance and administration.

     We  maintain  compensation,   benefits,  equity  participation,   and  work
environment  policies  intended to assist in attracting and retaining  qualified
personnel.  We believe the success of our business will depend,  in  significant
part, on our ability to attract and retain such personnel. None of our employees
is represented by a collective bargaining agreement, nor have we experienced any
work  stoppage.  We consider our relations  with our  employees to be good.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and "Factors  Affecting  Future  Results-- We are dependent upon our
key personnel".

ITEM 1A. RISK FACTORS

     You should  carefully  consider  the  following  risk factors and the other
information included herein as well as the information included in other reports
and filings made with the SEC before  investing in our common  stock.  If any of
the  following  risks  actually  occurs,  our business,  financial  condition or
results of  operations  could be harmed.  The trading  price of our common stock
could  decline due to any of these  risks,  and you may lose part or all of your
investment.


                                       25
<PAGE>
RISKS RELATED TO OUR FINANCIAL RESULTS:

If we fail to raise additional capital in the near future, our business will
fail.

     We have very  limited  cash  resources  and will  need to raise  additional
capital in the immediate  future through a sale or other  strategic  transaction
involving our Surgical  Ablation System,  public or private  financings or other
arrangements  in order to  continue  operations.  If we are unable to do so, our
business will fail. Even assuming no increase in our cash  utilization rate from
recent months,  management  estimates that our cash balance as of March 31, 2006
will be sufficient to fund planned  expenditures  only for a very limited period
of time,  although the actual  level of  expenditures  cannot be predicted  with
certainty and it is possible that our cash balance may be exhausted  sooner than
currently  anticipated.  We cannot  assure you that  additional  capital will be
available to us when needed,  if at all, or, if  available,  will be obtained on
terms attractive to us.

     Our financing  arrangements  contain,  and, if we succeed in closing future
financings,  those  future  financings  will likely  contain,  terms which place
substantial  restrictions on our ability to raise the further  funding,  such as
anti-dilution protection in the event of subsequent financings.  We had negative
cash flow from  operations for the twelve months ended December 31, 2005 of $6.0
million,  and we expect to continue to incur substantial negative cash flow from
operations for the foreseeable future. We may be required to expend greater than
anticipated funds if unforeseen  difficulties  arise in the course of completing
the development,  approval and marketing of our products, such as the additional
clinical trial  activities  that the U.S. FDA recently  stated would be required
with  respect  to our PMA for  REVELATION(R)  Tx,  or in  other  aspects  of our
business.  Even if we raise capital in the near term, our future cash needs may,
at a  minimum,  cause us to delay,  scale back or  eliminate  some or all of our
product  research  and  development  programs,  to limit  the  marketing  of our
products, or to license or sell to third parties the rights to commercialize our
products or technologies  that we would otherwise  develop and market ourselves.
Furthermore,  our November 2004 equity  financing  included,  and future debt or
equity financing, if available,  will likely involve,  restrictive covenants and
other  restrictions  that  impair our  ability to raise  additional  capital and
operate our  business.  Our failure to raise  capital  when needed  would likely
cause us to cease our operations.

     We have  financed our  operations  since  inception  primarily  through the
private  placement  of  equity  securities,  proceeds  from our  initial  public
offering in June 1997,  loan  facilities  and the sale of certain of our patents
and other intellectual property.  Although our management recognizes the need to
raise funds in the immediate  future,  there can be no assurance that we will be
successful in consummating any fundraising  transaction,  or if we do consummate
such a transaction,  that its terms and  conditions  will not require us to give
investors  valuable rights with respect to our products or technology,  warrants
or other valuable rights to purchase additional  interests in our company, or be
otherwise  unfavorable to us. Among other things,  the agreements under which we
issued some of our existing securities  include,  and any securities that we may
issue in the future will likely include,  terms that could impede our ability to
raise  additional  funding,  such as terms  requiring  the  consent  of  certain
security  holders  before  we  issue  or  register  additional   securities  and
anti-dilution  protection  giving those holders the right to receive  additional
shares of our common stock  depending on the terms of our later  financings.  We
may be required to issue preferred  stock,  debt or other securities with rights
and  preferences  senior to the  rights  of  holders  of our  common  stock.  In
addition, the issuance of additional securities will likely dilute the interests
of existing common stockholders, and could impose additional restrictions on how
we operate and finance our business.

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

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

     Our net losses were  approximately $8.3 million for the year ended December
31, 2005 and approximately  $9.7 million,  and $13.2 million for the years ended
December  31,  2004  and  2003,  respectively.  As of  December  31,  2005,  our
accumulated deficit was approximately $121.8 million. Our limited sales history,
and the fact that we have very  limited  cash  resources,  makes it difficult to
assess or predict  our future  results.  We cannot be certain  that we will ever
generate substantial revenue or achieve  profitability.  Our failure to generate
substantial revenues would harm our business.


                                       26
<PAGE>
Our need to raise  additional  capital in the near future  could have a dilutive
effect on your investment.

     In  order  to  continue  operations,  we  will  need to  immediately  raise
additional capital.  Subject to the contractual restrictions described above, we
may attempt to raise  capital  through the public or private  sale of our common
stock or securities convertible into or exercisable for our common stock.

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

The  audit  report   accompanying  our  2005  financial   statements   expresses
substantial doubt as to our ability to continue as a going concern.

     As a result of our losses to date and accumulated deficit, the audit report
on our 2005 financial  statements contains an explanatory  paragraph  indicating
that  there  is  substantial  doubt as to our  ability  to  continue  as a going
concern.  The audit reports on our 2004 and 2003 financial  statements contained
similar explanatory paragraphs.  Our continuation as a going concern will depend
upon our ability to generate or obtain  sufficient  cash to meet our obligations
on a timely basis and ultimately to attain profitable operations.  Concern about
our ability to continue as a going concern may make it more  difficult for us to
obtain additional  funding to meet our obligations or adversely affect the terms
of any  additional  funding we are able to obtain.  We  anticipate  that we will
continue to incur significant losses until successful  commercialization  of one
or more of our products.  There can be no assurance  that we can or will operate
profitably in the future, or that we will continue as a going concern.

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

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

     o    product testing;

     o    product labeling;

     o    product storage;

     o    pre-market clearance and approval;

     o    advertising and promotion; and

     o    product sales and distribution.

     Before we can market  any of our  products  in the  United  States or other
countries,  we must  demonstrate  that our products are safe and  effective  and
obtain approval or clearance from the applicable  governmental  authorities.  In
the United States,  we must obtain from the FDA 510(k)  pre-market  notification
clearance  for devices that are  classified  as Class II or lower,  or a PMA for
devices  classified as Class III, such as REVELATION(R) Tx, in order to market a


                                       27
<PAGE>
product.  Currently, the process for 510(k) clearance requires approximately 120
days and PMA application  review process  requires  approximately  six to twelve
months.  The PMA application  review process is in addition to the time required
to conduct clinical trials demonstrating safety and effectiveness.  However, the
timing of such  processes  can be uncertain and may involve  significantly  more
time. We cannot guarantee either the timing or receipt of regulatory approval or
clearance for any of our products in development.  The FDA may request extensive
clinical data to support either 510(k) clearance or a PMA. The approval process,
including any necessary clinical trials,  can involve  substantial  expense.  No
assurance  can be  given  that we will  ever be  able to  obtain  the  necessary
approvals for any of our products.  Our failure to do so on a timely basis would
have a material adverse effect on our business,  financial condition and results
of operations.

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

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

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

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

     On May 28, 2004 we  received a letter,  dated May 21,  2004,  from the FDA,
stating  that our PMA  application  for the  REVELATION(R)  Tx  linear  ablation
micro-catheter system was not approvable based on the requirements of applicable
regulations.  The letter stated that, although we had provided information on an
additional 32 patients in the clinical  trial in our PMA  application  amendment
submitted  in  January  2004,  the  concerns  identified  in the  FDA's  initial
non-approvable  letter of June 26, 2003 remain  unresolved.  Among other things,
the FDA's letter stated that FDA position that the least burdensome  approach to
demonstrate the safety and  effectiveness  of  REVELATION(R) Tx for the intended
indication is to collect  additional  clinical data using a randomized  clinical
trial  design.  At a  meeting  with the  FDA's  CDRH on June 18,  2004,  the FDA
representatives  reiterated the view that data from an additional study would be
necessary to demonstrate the  effectiveness of REVELATION(R) Tx for AF, and that
the nature of the trial's primary goal would require a randomized clinical trial
design. The development and implementation of a new clinical trial would require
substantial expenditures and management attention, and the timing and success of
any such trial cannot be assured.  On June 10, 2005,  we met with the FDA's CDRH
to continue  the process  towards  seeking  approval  for the  REVELATION(R)  Tx
ablation  catheter for treatment of AF. The focus of this latest  meeting was to
exchange views on each other's positions and to discuss the issues stated in the
May 21, 2004, and the June 26, 2003, FDA non-approvable  letters. No conclusions
were  reached at the end of the  three-hour  meeting,  but both sides  agreed to
continue the dialog. The parties have not set a date for a follow-up meeting.


                                       28
<PAGE>
     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.  Trial  data  indicated  substantial  and
statistically  significant  improvements  were realized almost uniformly for all
measured arrhythmia symptoms as well as for quality-of-life  measures. The study
demonstrated that the addition of right atrial catheter ablation to a regimen of
previously  ineffective  AADs yields a significant  reduction in the  frequency,
duration and severity of AF episodes and symptoms.  Of the ninety-three subjects
included in the trial,  eighty-four subjects (90%) provided six-month AF episode
frequency  data.  This data  demonstrated a significant  decrease in symptomatic
frequency when compared to baseline. In addition, forty-nine subjects (58%) were
considered a clinical success by protocol definition.

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

     Through  pre-clinical studies and clinical trials, we must demonstrate that
our products  are safe and  effective  for their  indicated  uses.  Results from
pre-clinical  studies  and early  clinical  trials  may not allow us to  predict
results in later-stage  testing.  No assurance can be given that, even if we are
able to afford to conduct future clinical trials,  those trials will demonstrate
the safety and effectiveness of any of our products or will result in regulatory
approval to market our products.  We may never meet our development schedule for
any of our products in development.  Even if a product is successfully developed
and clinically  tested, we cannot be certain that it will be approved by the FDA
or other  regulatory  agency  on a timely  basis or at all.  If the FDA does not
approve our products for  commercial  sales,  our  business  will be harmed.  As
described above, we have devoted considerable  resources to developing,  testing
and seeking regulatory approval for our REVELATION(R) Tx micro-catheter  systems
designed for ablation of AF. On May 28, 2004 we received a letter, dated May 21,
2004, from the FDA,  stating that our PMA application for the  REVELATION(R)  Tx
linear  ablation   micro-catheter   system  was  not  approvable  based  on  the
requirements  of applicable  regulations.  Among other things,  the FDA's letter
stated the FDA's position that the least burdensome  approach to demonstrate the
safety and  effectiveness of REVELATION(R) Tx for the intended  indication is to
collect additional  clinical data using a randomized clinical trial design. At a
meeting with the FDA's CDRH on June 18, 2004, the FDA representatives reiterated
the view that data from an  additional  study would be necessary to  demonstrate
the effectiveness of REVELATION(R) Tx for AF, and that the nature of the trial's
primary goal would require a randomized  clinical trial design.  The development
and   implementation   of  a  new  clinical  trial  would  require   substantial
expenditures  and management  attention,  and the timing and success of any such
trial  cannot  be  assured.  On June 10,  2005,  we met with the  FDA's  CDRH to
continue the process towards seeking approval for the  REVELATION(R) Tx ablation
catheter for  treatment of AF. The focus of this latest  meeting was to exchange
views on each other's  positions and to discuss the issues stated in the May 21,
2004, and the June 26, 2003, FDA  non-approvable  letters.  No conclusions  were
reached at the end of the three-hour meeting,  but both sides agreed to continue
the dialog. The parties have not set a date for a follow-up meeting.

     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.  Trial  data  indicated  substantial  and
statistically  significant  improvements  were realized almost uniformly for all
measured arrhythmia symptoms as well as for quality-of-life  measures. The study
demonstrated that the addition of right atrial catheter ablation to a regimen of
previously  ineffective  AADs yields a significant  reduction in the  frequency,
duration and severity of AF episodes and symptoms.  Of the ninety-three subjects
included in the trial,  eighty-four subjects (90%) provided six-month AF episode
frequency  data.  This data  demonstrated a significant  decrease in symptomatic
frequency when compared to baseline. In addition, forty-nine subjects (58%) were
considered  a clinical  success by  protocol  definition.  We must  receive  PMA
approval before marketing our products for ablation in the United States.

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

     Current  or future  clinical  trials  of our  micro-catheter  systems  will
require  substantial  financial  and  management  resources.  In  addition,  the
clinical  trials may identify  significant  technical or other obstacles that we
will need to overcome  before  obtaining the necessary  regulatory  approvals or
market  acceptance.  Our failure to complete  our clinical  trials,  demonstrate
product safety and clinical effectiveness, or obtain regulatory approval for the
use of our  micro-catheter  system for the  ablation of AF would have a material
adverse effect on our business, financial condition and results of operations.


                                       29
<PAGE>
Delays in enrolling  patients in our clinical trials could increase our expenses
and harm our business.

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

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

     We  have  entered  into  several  agreements  with  parties  to  act as our
financial  advisors,  finders or agents in  connection  with actual and proposed
equity  financings during 2001 through 2004. These agreements have provided that
we will pay cash fees,  generally expressed as 6% to 8% of the funds raised, and
issue  warrants to  purchase  specified  numbers of shares of our common  stock,
generally  not  exceeding  10% of the number of shares sold, to these parties in
connection with our financings. Additional details concerning the terms of these
various agreements,  and the fees and warrants previously paid to these parties,
can be reviewed in our Annual  Report on Form 10-K as filed with the  Securities
and Exchange Commission on March 31, 2005.

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

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

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

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


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<PAGE>
equity  compensation  to advisor  could also be  restricted  by, or give rise to
disputes  under,  the terms or our  previously  issued  securities.  Any dispute
relating to these advisors will tend to divert  management's  time and attention
from running our business and may cause us to incur material costs and expenses.

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

     We have only  limited  experience  marketing  and selling  our  products in
commercial  quantities.  Currently,  we are solely responsible for marketing and
distributing  our products in the United  States.  If we receive FDA approval of
our PMA application for REVELATION(R) Tx, we may not have an adequate  marketing
and sales force to  adequately  sell that  product.  Expanding our marketing and
sales  capability  to support  sales in commercial  quantities  adequately  will
require  substantial  effort and require  significant  management  and financial
resources.  Our failure to establish an effective sales and marketing force will
prevent us from being able to generate significant revenues from the sale of our
products.

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

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

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

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


We cannot assure the safety or effectiveness of our products.

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


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

     Our  micro-catheter  systems  represent novel  approaches to diagnosing and
treating AF and VT and our SAS represents a novel  approach to ablating  cardiac
tissue during surgery.  Acceptance of our products and procedures by physicians,
patients  and  health  care  payors  will be  necessary  in  order  for us to be
successful.  If the  market  does not  accept our  products  and the  procedures
involved  in their use,  our  business  would be harmed and our  revenues  would
decline.

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

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

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

     o    anti-arrhythmic and anti-coagulant drugs;

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

     o    implantable defibrillators;

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

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

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

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

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

     o    fines;

     o    injunctions;

     o    recall or seizure of products;

     o    withdrawal of marketing approvals or clearances;

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

     o    civil and criminal penalties.

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


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

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

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

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

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

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

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

Difficulties  presented by  international  factors could  negatively  affect our
business.

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

     o    exchange rate fluctuations or currency controls;

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

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

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

     o    domestic or international trade restrictions; and

     o    changes in tariffs.

     Any of these factors could damage our business results.


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<PAGE>
We may be unable to successfully  commercialize  our  micro-catheter or surgical
products, as the industry for them is highly competitive.

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

     Many of our  competitors  have an  established  presence  in the  field  of
interventional cardiology and electrophysiology,  or the study of the electrical
system of the heart. These competitors include C.R. Bard, Inc., Medtronic, Inc.,
Boston Scientific,  through its EP Technologies and Cardiac Pathways  divisions,
Johnson & Johnson,  through its Biosense-Webster  division and St. Jude Medical,
Inc., through its Daig division.  These competitors have  substantially  greater
financial  and  other  resources  than  we do,  including  larger  research  and
development  staffs  and  greater  experience  and  capabilities  in  conducting
clinical trials,  obtaining regulatory approvals,  and manufacturing,  marketing
and  distributing   products.  In  addition,   other  companies  are  developing
proprietary  systems for the  diagnosis  and  treatment of cardiac  arrhythmias,
including  Biosense-Webster,  a division of Johnson & Johnson,  and  Endocardial
Solutions,  Inc.  Other  companies  are also  developing,  marketing and selling
alternative  approaches for the treatment of AF and VT, including  manufacturers
of implantable  defibrillators such as Guidant Corporation,  Medtronic, Inc. and
St. Jude  Medical,  Inc. We cannot be certain that we will succeed in developing
and  marketing  technologies  and  products  that  are  safer,  more  clinically
effective and  cost-effective  than the more  established  treatments or the new
approaches  and  products  being  developed  and  marketed  by our  competitors.
Furthermore,  there can be no assurance  that we will succeed in developing  new
technologies   and  products  that  will  be  available   before  those  of  our
competitors,  particularly  because of our  financial  position.  Our failure to
demonstrate  the  competitive  advantages and achieve  market  acceptance of our
products would significantly harm our business.

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

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

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

     We cannot be certain that these  licenses  will continue to be available to
us or will be available to us on reasonable  terms.  The loss of or inability to
maintain any of these  licenses  could result in delays in commercial  shipments


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<PAGE>
until we could internally develop or identify,  license and integrate equivalent
technology.  These delays would have a material  adverse effect on our business,
financial condition and results of operations.

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

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

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

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

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

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

     o    has not received appropriate regulatory clearances or approvals;

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

     o    is experimental, unnecessary or inappropriate.

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

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

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


                                       35
<PAGE>
     o    that physicians will support and advocate reimbursement for procedures
          using our products.

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

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

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

     o    capacity constraints;

     o    production yields;

     o    quality control; and

     o    shortages of qualified personnel.

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

     Our  manufacturing   facilities  are  subject  to  periodic  inspection  by
regulatory  authorities.  Our  operations  must either  undergo  QSR  compliance
inspections  conducted  by  the  FDA  or  receive  an FDA  exemption  from  such
compliance inspections in order for the FDA to permit us to produce products for
sale in the United  States.  Our  facilities  and  manufacturing  processes  are
subject to inspections from time to time by the FDA, the State of California and
European Notified Bodies. We have demonstrated compliance with ISO 13485:2003 or
ISO 9001 quality  standards,  as well as compliance with 93/42/EEC,  the Medical
Device  Directive.  We comply with  procedures  to produce  products for sale in
Europe. Any failure by us to comply with the QSR requirements or to maintain our
compliance with ISO 13485:2003 or ISO 9001 standards and 93/42/EEC,  the Medical
Device  Directive,   will  require  us  to  take  corrective  actions,  such  as
modification of our policies and procedures.  In addition, we may be required to
cease  all or part of our  operations  for  some  period  of time  until  we can
demonstrate  that  appropriate  steps have been taken to comply  with QSR or ISO
13485:2003  or ISO 9001  standards.  There can be no  assurance  that we will be
found in  compliance  with the QSR by  regulatory  authorities,  or that we will
maintain  compliance with ISO 13485:2003 or ISO 9001 standards in future audits.
Our  failure  to comply  with  state or FDA QSR,  maintain  compliance  with ISO
13485:2003 or ISO 9001  standards,  or develop our  manufacturing  capability in
compliance  with such  standards,  would have a material  adverse  effect on our
business, financial condition and results of operations.

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

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

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


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

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

We are dependent upon our key personnel.

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

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

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

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

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

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

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

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

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

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

     Each of these provisions could discourage potential takeover attempts.

     In May 2002, we adopted a  stockholder  rights plan and declared a dividend
distribution of one right for each outstanding  share of common stock on May 21,
2002. Each right, when  exercisable,  entitles the registered holder to purchase
from us one  one-hundredth  of a share of a new series of preferred stock on the
terms stated in our rights plan.  The rights will  generally  separate  from the
common stock and become exercisable if any person or group acquires or announces


                                       37
<PAGE>
a tender offer to acquire 15% or more of our  outstanding  common stock  without
the  consent of our board of  directors.  Because  the rights may  substantially
dilute  the  stock  ownership  of a person or group  attempting  to take us over
without the  approval of our board of  directors,  our  stockholder  rights plan
could make it more  difficult  for a third party to acquire us (or a significant
percentage of our outstanding  capital stock) without first negotiating with our
board of directors.  In addition,  we are governed by provisions of Delaware law
that may prohibit large stockholders,  in particular those owning 15% or more of
our outstanding voting stock, from merging or combining with us.

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

ITEM 2. PROPERTIES

     We  lease  an  approximately   29,000  square  feet  facility  in  Fremont,
California. Our facility includes a 4,000 square feet clean-room, a machine shop
for prototyping and tooling,  extrusion and braiding  capability,  wire grinding
operations,  general  assembly/test/inspection  areas, and a materials area. Our
amended  facility  lease  expires in May 2007.  Our existing  leased  facilities
exceed  our  current  needs  and we  believe  that we  will  be  able to  obtain
additional commercial space as needed.

ITEM 3. LEGAL PROCEEDINGS

     We  are  currently  not  a  party  to  any  material   legal   proceedings.
Notwithstanding  the  foregoing,  we have entered into several  agreements  with
parties to act as its our  financial  advisors,  finders or agents in connection
with actual and proposed equity financings, which have provided that we will pay
cash fees and issue  warrants  to purchase  shares of our common  stock to these
parties in connection with our financings.  Some of these advisors,  finders and
agents have alleged that they are owed additional cash and warrant  compensation
in  connection  with our prior  financings,  to which we have felt they were not
entitled,  and which  would be in addition  to fees and  warrants  paid to other
advisors with respect to the same investors. Our financial advisors, finders and
agents may assert similar claims in the future.  Additional  details  concerning
the terms of these various agreements, and the fees and warrants previously paid
to these  parties,  can be reviewed  in our Annual  Report on Form 10-K as filed
with the  Securities  and Exchange  Commission on March 31, 2005. An unfavorable
outcome of some or all of these matters could have a material  adverse effect on
our cash flows,  business,  results of  operations  or  financial  position.  An
estimate of potential loss from pending claims cannot be made at this time.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.


                                       38
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON  EQUITY AND RELATED  STOCKHOLDERS  MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

     In  October  2005,  our  common  stock  resumed  quotation  on  the  Nasdaq
Over-the-Counter  Bulletin Board under the symbol CRDM.OB.  Our common stock was
quoted on the Pink Sheets,  Nasdaq  SmallCap  Market and Nasdaq  National Market
from May 2005 to October 2005,  June 2001 to May 2005 and June 1997 to June 2001
respectively.  Prior to that  time,  there was no public  market  for our common
stock. The following table sets forth for the periods indicated the high and low
sale prices of our common stock.

                                                             HIGH        LOW
                                                         -----------  ----------
  YEAR ENDED DECEMBER 31, 2005
       First Quarter ...................................     $0.57      $0.31
       Second Quarter...................................      0.33       0.02
       Third Quarter....................................      0.13       0.06
       Fourth Quarter...................................      0.09       0.04

  YEAR ENDED DECEMBER 31, 2004
       First Quarter ...................................     $1.33      $0.86
       Second Quarter ..................................      0.97       0.39
       Third Quarter....................................      0.55       0.29
       Fourth Quarter...................................      0.75       0.33

     As of March 31, 2006, there were approximately 268 holders of record of our
common stock.

DIVIDEND POLICY

     We have never  declared or paid cash  dividends  on our capital  stock.  We
currently  expect to retain our future  earnings  for use in the  operation  and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.


                                       39
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

     The  following  selected  financial  information  has been derived from the
Company's audited financial statements. The information below is not necessarily
indicative of results of future  operations,  and should be read in  conjunction
with Item 7,  "Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations"  and the financial  statements and related notes thereto
included in Item 8 of this Form 10-K in order to fully  understand  factors that
may affect the comparability of the information  presented below (amounts are in
thousands, except for per share amounts).
<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                       2005             2004           2003            2002          2001
                                                   --------------  --------------- --------------  ------------- --------------
Statement of Operations Data:
<S>                                                     <C>             <C>             <C>             <C>           <C>
Net sales                                          $    1,859      $    2,366      $    2,242      $    2,228    $    1,861
Cost of goods sold                                      1,999           2,608           3,114           3,594         3,717
                                                   --------------  --------------- --------------  ------------- --------------
     Gross deficiencies                                  (140)           (242)           (872)         (1,366)       (1,856)
                                                   --------------  --------------- --------------  ------------- --------------
Operating expenses:
     Research and development                           2,074           3,947           4,951           4,530         4,873
                                                        4,817           5,528           6,566           6,787         6,675
       Selling, general and administrative
                                                   --------------  --------------- --------------  ------------- --------------
         Total operating expenses                       6,891           9,475          11,517          11,317        11,548
                                                   --------------  --------------- --------------  ------------- --------------
Operating loss                                         (7,031)         (9,717)        (12,389)        (12,683)      (13,404)
Interest and other income, net                          2,053              18              72              75           123
Interest expense                                       (3,350)            (14)            (14)            (19)          (60)
Other non-cash expenses                                    --             (33)           (904)             --            --
Gain on sale of intellectual property                      --              --              --              --         4,000
                                                   ------------------------------- --------------  ------------- --------------
Net loss                                           $   (8,328)     $   (9,746)     $  (13,235)     $  (12,627)   $   (9,341)
                                                   ==============  =============== ==============  ============= ==============
Basic and diluted net loss per share               $    (0.08)     $    (0.11)     $    (0.20)     $    (0.28)   $    (0.30)
Shares used in computing basic and diluted         ==============  =============== ==============  ============= ==============
 net loss per share

                                                      101,408          85,703          66,256           45,586       31,114
                                                   ==============  =============== ==============  ============= ==============




                                                                                 DECEMBER 31,
                                                   --------------------------------------------------------------------------
                                                        2005             2004            2003          2002          2001
                                                   ---------------  ----------------  ------------ ------------- -------------

Balance Sheet Data:
Cash, cash equivalents and short-term
   Investments                                     $      124       $    3,854        $    6,446    $   3,385     $   7,542
Working capital (deficit)                              (4,088)           4,158             5,209        1,866         6,936
Total assets                                            1,746            6,537             9,310        7,265        11,818
Capital lease obligation, noncurrent portion               28               52                82           26            64
Line of credit obligation, noncurrent portion              --               --                --           --            --
Accumulated deficit                                  (121,762)        (113,434)         (103,688)     (90,453)      (77,826)
Total stockholders' equity (deficiency)                (3,763)           4,539             6,300        3,550         8,757

</TABLE>

                                       40
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                         Quarterly Results of Operations
                    (In thousands, except per share amounts)
                                   (Unaudited)
                                                                                 For the Quarter Ended
                                                         --------------- -- ---------------    --------------- - ----------------
                                                            Dec. 31,           Sep. 30,           Jun. 30,           Mar. 31,
                                                              2005               2005               2005               2005
                                                         ---------------    ---------------    ---------------   ----------------
<S>                                                            <C>                <C>                <C>               <C>
Net sales                                                $       448        $       346        $       510       $       555
Cost of goods sold                                               275                499                760               465
                                                         ---------------    ---------------    ---------------   ----------------

         Gross margin (deficiencies)                             173               (153)              (250)               90
                                                         ---------------    ---------------    ---------------   ----------------
Operating expenses:
               Research and development                          440                209                769               656
               Selling, general and administrative             1,143                621              1,333             1,720
                                                         ---------------    ---------------    ---------------   ----------------

                  Total operating expenses                     1,583                830              2,102             2,376
                                                         ---------------    ---------------    ---------------   ----------------

Operating loss                                                (1,410)              (983)            (2,352)           (2,286)
Interest and other income                                      1,186                604                  4               259
Interest expense                                              (2,066)              (785)              (497)               (2)
                                                         ---------------    ---------------    ---------------   ----------------

Net loss                                                 $    (2,290)       $    (1,164)       $    (2,845)      $    (2,029)
                                                         ===============    ===============    ===============   ================

Basic and diluted net loss per share                     $     (0.02)       $     (0.01)       $     (0.03)      $     (0.02)
                                                         ===============    ===============    ===============   ================

Shares used in computing basic and diluted net loss          101,551            101,440            101,438           101,391
per shar                                                 ===============    ===============    ===============   ================


                                                                                 For the Quarter Ended
                                                         --------------- -- ---------------    --------------- - ----------------
                                                         Dec. 31, 2004      Sep. 30, 2004      Jun. 30, 2004        Mar. 31,
                                                                                                                       2004
                                                         ---------------    ---------------    ---------------   ----------------

Net sales                                                $       583        $       569        $       578       $       636
Cost of goods sold                                               487                893                510               718
                                                         ---------------    ---------------    ---------------   ----------------

         Gross margin (deficiencies)                              96               (324)                68               (82)
                                                         ---------------    ---------------    ---------------   ----------------
Operating expenses:
         Research and development                                739              1,016              1,204               988
         Selling, general and administrative                   1,383              1,370              1,548             1,227
                                                         ---------------    ---------------    ---------------   ----------------

                  Total operating expenses                     2,122              2,386              2,752             2,215
                                                         ---------------    ---------------    ---------------   ----------------

Operating loss                                                (2,026)            (2,710)            (2,684)           (2,297)
Interest and other income                                         18                  9                 15               (24)
Interest expense                                                  (3)                (3)                (4)               (4)
Other non - cash expense                                           -                  -                  -               (33)
                                                         ---------------    ---------------    ---------------   ----------------

Net loss                                                 $    (2,011)       $    (2,704)       $    (2,673)      $    (2,358)
                                                         ===============    ===============    ===============   ================

Basic and diluted net loss per share                     $     (0.02)       $     (0.03)       $     (0.03)      $     (0.03)
                                                         ===============    ===============    ===============   ================

Shares used in computing basic and diluted net loss           91,458             84,684             84,624            82,051
per share                                                ===============    ===============    ===============   ================

</TABLE>

                                       41
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     The  following   discussion   should  be  read  in  conjunction   with  our
consolidated  financial  statements provided in this annual report on Form 10-K.
Certain statements  contained herein may constitute  forward-looking  statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.
These statements involve a number of risks, uncertainties and other factors that
could cause actual results to differ materially, as discussed more fully herein.

     The  forward-looking  information  set forth in this annual report is as of
the date of this filing,  and we  undertake no duty to update this  information.
More  information  about  potential  factors  that could affect our business and
financial  results is included in the section  entitled  "Risk  Factors" of this
annual report.

OVERVIEW

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

     More recently, we have leveraged our proprietary  technologies for treating
AF into the  development  of products  for the surgical  market.  On January 29,
2003, we received notice from the FDA that it had approved for commercialization
of our SAS for use in cardiac  surgery.  This new system  connects  the  Cardima
Surgical   Ablation   Probe,   a   deflectable   multi-electrode   linear  array
micro-catheter  technology,  to a commercially  available  electrosurgical radio
frequency generator through the INTELLITEMP(R), a multi-channel radio frequency,
or RF, energy management device. This system allows surgeons to direct RF energy
through any  combination  of up to eight probe  electrodes  simultaneously  into
cardiac tissue,  a feature which can  significantly  reduce the time required to
perform an ablation-based  "maze"  procedure.  Since September 2003, the SAS has
been  utilized on a limited  basis to treat AF as an adjunct  procedure to valve
replacement.  In the first  quarter of 2004,  the SAS was  utilized  in two less
invasive  cases for the treatment of AF, opening the door to the prospect of the
SAS technology being broadly used in a stand-alone  procedure to treat AF. We do
not currently  plan to market our SAS  ourselves,  and are currently  seeking to
sell or otherwise consummate a strategic transaction for this system.

     We have generated revenues of approximately $21.3 million from inception to
December  31,  2005.  Prior to  January  1997,  these  revenues  were  generated
primarily  in Europe  and Japan from sales of our  PATHFINDER(R)  and  TRACER(R)
micro-catheter  systems for diagnosing VT and our  REVELATION(R)  micro-catheter
system for diagnosing AF, as well as ancillary  products such as the VENAPORT(R)
guiding  catheters.  Since 1997 and the U.S.  FDA's  clearance of certain of our
products,  sales in the United States consist primarily of our PATHFINDER(R) and
REVELATION(R) lines of micro-catheters  for diagnosing VT and AF,  respectively.
To date, our  international  sales have been made through our small direct sales
force,  which currently  consists of one sales consultant,  and distributors who
sell our products to physicians and hospitals.  European sales consist primarily
of  the  REVELATION(R)  Tx,   REVELATION(R)   T-Flex  and  REVELATION(R)   Helix
micro-catheters  for  treatment  of AF  following  receipt  of CE Mark for those
products in December 1998, December 2001 and November 2002, respectively.

     We have experienced significant operating losses since inception. 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(R)  Tx  micro-catheter  system,  seek  to sell or
otherwise  consummate a strategic  transaction  involving our SAS, and otherwise
continue operations.

                                       42
<PAGE>
     Obtaining and maintaining regulatory approvals is critical to our business.
We are required to conduct clinical trials, demonstrate safety and effectiveness
and obtain  either  510(k) or PMA approval from the FDA in order to legally sell
any of our products for  treating AF or VT in the United  States.  While the SAS
has received  510(k)  approval  from the FDA for the ablation of cardiac  tissue
during  cardiac  surgery  using radio  frequency  energy,  PMA approval  will be
required prior to the introduction in the United States of the REVELATION(R) Tx,
REVELATION(R) T-Flex and REVELATION(R) Helix micro-catheter systems for treating
AF.  Obtaining PMA for any of these  products will require  additional  clinical
trials,  which will require substantial time and expense.  Outside of the United
States,  our  strategy  has  been  to  obtain  regulatory   approvals  in  those
geographies that offer existing  infrastructure to support medical technology as
well as  offer  the  potential  for  adequate  product  demand  with the goal of
positioning us to expand into these geographies once we have sufficient  capital
and other resources.  To date, we have emphasized obtaining regulatory approvals
in Western Europe and select portions of Asia. We cannot assure you that we will
be able to obtain or maintain regulatory approvals.

     Our primary  focus is to obtain FDA  approval  in the United  States of the
REVELATION(R) Tx micro-catheter system for the treatment of AF. On September 30,
2002,  we  submitted  a PMA  application  for this system to the FDA. On May 29,
2003, we met with the Circulatory  System Devices Panel,  which recommended that
the FDA not approve our PMA  application.  The Circulatory  System Devices Panel
commented favorably on the safety and need for this type of device. However, the
Panel felt that efficacy data was not sufficiently  clear and supportive for the
approval.  The Panel provided several  suggestions on how to possibly  reexamine
the existing data or how to collect more data on existing patients.  On June 26,
2003 we received a letter from the FDA, which stated that the FDA concurred with
the Panel's  non-approval  recommendation.  On January 20, 2004 we  submitted an
amendment  to our PMA filing,  in which we provided new analysis and an expanded
patient base. On May 28, 2004 we received a letter, dated May 21, 2004, from the
FDA,  stating that our PMA application for the  REVELATION(R) Tx linear ablation
micro-catheter system was not approvable based on the requirements of applicable
regulations.  The letter stated that, although we had provided information on an
additional 32 patients in the clinical  trial in our PMA  application  amendment
submitted  in  January  2004,  the  concerns  identified  in the  FDA's  initial
non-approvable  letter of June 26, 2003 remain  unresolved.  Among other things,
the FDA's  letter  stated  that the  FDA's  position  that the least  burdensome
approach to demonstrate the safety and effectiveness of REVELATION(R) Tx for the
intended  indication is to collect  additional  clinical data using a randomized
clinical trial design. We have been engaged in continuing  dialogue with the FDA
since our receipt of the  non-approvable  letter on May 28,  2004.  At a meeting
with the FDA's CDRH on June 18, 2004,  the FDA  representatives  reiterated  the
view that data from an additional  study would be necessary to  demonstrate  the
effectiveness  of  REVELATION(R)  Tx for AF, and that the nature of the  trial's
primary goal would require a randomized  clinical trial design.  The development
and   implementation   of  a  new  clinical  trial  would  require   substantial
expenditures  and management  attention,  and the timing and success of any such
trial cannot be assured.

     On June 10,  2005,  we met with the  FDA's  CDRH to  continue  the  process
towards  seeking  approval  for  the  REVELATION(R)  Tx  ablation  catheter  for
treatment  of AF.  The PMA,  which  was  previously  submitted  in June 2003 and
amended  in  January  2004,   included  phase  III  data  obtained  by  treating
self-terminating   AF.  Trial  data  indicated   substantial  and  statistically
significant  improvements  were  realized  almost  uniformly  for  all  measured
arrhythmia  symptoms  as  well  as  for  quality-of-life   measures.  The  study
demonstrated that the addition of right atrial catheter ablation to a regimen of
previously  ineffective  AADs yields a significant  reduction in the  frequency,
duration and severity of AF episodes and symptoms.  Of the ninety-three subjects
included in the trial,  eighty-four subjects (90%) provided six-month AF episode
frequency  data.  This data  demonstrated a significant  decrease in symptomatic
frequency when compared to baseline. In addition, forty-nine subjects (58%) were
considered a clinical success by protocol definition.

     The focus of this  latest  meeting was to  exchange  views on each  other's
positions and to discuss the issues stated in the May 21, 2004, and the June 26,
2003, FDA non-approvable  letters. No conclusions were reached at the end of the
three-hour  meeting,  but both sides agreed to continue the dialog.  The parties
have not set a date for a follow-up meeting.  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  $124,000 as of December
31,  2005 and  approximately  $230,000 as of March 31,  2006.  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. Our management believes that
our cash balances as of March 31, 2006 will be sufficient to fund planned future
expenditures for one month.  Our management  recognizes that the cash balance is


                                       43
<PAGE>
inadequate and the immediate  need to raise funds,  however we cannot assure you
that we will be successful in consummating any fundraising  transaction,  or, if
we do consummate  such a transaction,  that its terms and conditions will not be
unfavorable  to us. Any failure by us to obtain  additional  funding will have a
material and adverse  effect on us, and will likely  result in our  inability to
continue as a going concern. In their opinion accompanying our December 31, 2005
financial  statements,   our  independent   registered  public  accounting  firm
concluded  that there is  substantial  doubt as to our  ability to continue as a
going concern for a reasonable  period of time,  and have,  therefore,  modified
their report in the form of an explanatory  paragraph describing the events that
have given rise to this uncertainty.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The  discussion  and  analysis of our  financial  condition  and results of
operations are based upon our financial statements,  which have been prepared in
accordance with accounting  principles  generally accepted in the United States.
The preparation of these financial  statements requires us to make estimates and
judgments  that affect the  reported  amounts of assets,  liabilities,  revenue,
expenses and related disclosures. We base our estimates on historical experience
and on various other  assumptions  that are believed to be reasonable  under the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  We evaluate these estimates on an ongoing basis.  Actual results
may differ from these estimates under different assumptions or conditions.

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.

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.

Notes Receivable & Allowance for Loan 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,  while recoveries of amounts previously charged
off  are  credited  to the  reserve.  Evaluations  of the  reserve  balance  are
conducted quarterly.

Property and Equipment

     Property and equipment are carried at cost.  Depreciation is recorded using
the  straight-line  method  over  the  estimated  useful  lives  of the  assets.
Improvements  to leased premises are amortized  using the  straight-line  method
over the  shorter of the  initial  term of the lease or the  useful  life of the
improvement.  Leasehold  improvements added late in the lease term are amortized
over the  shorter of the  remaining  term of the lease or the useful life of the
improvement,  whichever  is  lesser.  Gains or losses on the sale of assets  are
recorded at disposal as a component of operating  income.  Assets under  capital
leases are amortized in accordance with the Company's normal depreciation policy
for owned  assets or over the lease term  (regardless  of renewal  options),  if
shorter,  and the charge to earnings is included in depreciation  expense in the
Financial Statements.

                                       44
<PAGE>
Inventories

     Inventories are stated at the lower of cost or market, with cost determined
on a first-in,  first-out basis, and market determined on the basis of estimated
realizable values.  Production cost includes  material,  labor and manufacturing
overhead.  When circumstances  dictate, we write inventory down to its estimated
realizable  value based upon  assumptions  about  future  demand,  technological
innovations, market conditions, plans for disposal and the physical condition of
products.  If  circumstances  change,  causing  us to  reduce  our  estimate  of
realizable  value  for  specific  inventory  items  or  categories,   additional
provisions to cost of sales may be required

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

     We have elected to follow Accounting Principles Board Opinion No. (APB) 25,
"Accounting  for Stock  Issued to  Employees"  and  related  interpretations  in
accounting  for its  employee  stock  options,  including  Financial  Accounting
Standard Board  Interpretation  (FIN) 44,  "Accounting for certain  Transactions
Involving Stock Compensation."  Compensation expense is based on the difference,
if any, between the fair value of our common stock and the exercise price of the
option or share right on the  measurement  date,  which is generally the date of
the grant.  In December 2004, the Financial  Accounting  Standards  Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123R, "Share Based
Payment,"  which  requires all  companies to measure  compensation  cost for all
share-based  payments (including employee stock options) at fair value. The FASB
concluded  that  companies  can adopt the new standard in one of two ways: o the
modified  prospective  transition  method,  in which the company would recognize
share-based  employee  compensation  from the  beginning of the fiscal period in
which the  recognition  provisions are first applied as if the  fair-value-based
accounting  method had been used to account  for all  employee  awards  granted,
modified,  or settled after the  effective  date and to any awards that were not
fully  vested  as  of  the  effective  date;  or o  the  modified  retrospective
transition method, in which a company would recognize employee compensation cost
for periods  presented prior to the adoption of SFAS No. 123R in accordance with
the  original   provisions  of  SFAS  No.  123   "Accounting   for   Stock-Based
Compensation," pursuant to which a company would recognize employee compensation
cost in the amounts reported in the pro forma disclosures provided in accordance
with SFAS No. 123.

     We will adopt SFAS No.  123R  during the first  quarter of fiscal  2006 and
will use the modified prospective  transition method. We anticipate that it will
increase our loss in 2006.

Impairment of Long-Term Assets

     We  periodically  assess the  realizability  of its  long-lived  assets and
evaluates such assets for impairment whenever events or changes in circumstances
indicate  that the  carrying  amount of an asset may not be  recoverable.  Asset
impairment is determined to exist if estimated  future cash flows,  undiscounted
and without interest charges, are less than the carrying amount. Inherent in the
analysis of impairment are subjective judgments about future cash flows. Failure
to make  appropriate  conclusions  regarding  these  judgments  may result in an
overstatement of the value of long-lived assets.

Change in Fair Value of Derivative Instruments

     In accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging  Activities",  as amended, the Company recognizes all derivatives on the
balance sheet at fair value.  For derivatives  that are not designated as hedges
under SFAS No. 133, changes in the fair values are recognized in earnings in the
period of change. The initial recording and change in fair value of the warrants
are non-cash in nature.


                                       45
<PAGE>
Results of Operations - Years Ended December 31, 2005 and 2004

Net Sales

     For the year ended December 31, 2005,  revenues decreased 21% to $1,859,000
from  $2,366,000 in 2004.  Primarily due to the June furlough,  which was due to
the loan default with Agility Capital LLP (Agility Capital),  and the subsequent
elimination of the US sales force in August 2005,  U.S.  sales  decreased 40% to
$682,000 from  $1,142,000 in 2004 while European sales decreased 22% to $275,000
from $351,000 in 2004. Sales in the Asia/Pacific market increased  slightly,  or
5%, to $902,000 from $857,000 in 2004.

Cost of Goods Sold

     Cost of goods sold for 2005 decreased 23% to $1,999,000 from $2,608,000 for
2004. Cost of goods sold as a percentage of net sales decreased by 2%, from 110%
in 2004 to 108% in 2005.  The  decrease  in the cost of goods sold was  directly
related to the decrease in sales.

Research and Development Expenses

     Research and development  expenses decreased 47% to $2,074,000 in 2005 from
$3,947,000  in 2004.  The decrease in 2005 was  primarily due to the decrease in
funding and product  sales.  Additionally  the  headcount  in the  research  and
development  dropped  from 6 in 2004 to 4 in 2005.  The  costs  associated  with
research  and  pre-clinical  programs  and clinical  development  programs  were
approximately (in thousands):

                                             ------------------------------
                                                 Year ended December 31,
                                             ------------------------------
                                                  2005             2004
                                             -------------     ------------
 Research and preclinical programs           $      1,215      $     2,417
 Clinical development programs                        859            1,530
                                             -------------     ------------
  Total research and development             $      2,074      $     3,947
                                             =============     ============


Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses for 2005  decreased  13% to
$4,817,000 from $5,528,000 in 2004.  Selling  expenses for 2005 decreased 47% to
$519,000 from  $983,000 in 2004  primarily due to the June 2005 furlough and the
August 2005 reduction in force.  Marketing  expenses for 2005 also decreased 45%
to $273,000 from $496,000 in 2004. The decrease in marketing expenses was due to
the reduction in force and fewer  marketing  events.  The headcount in the sales
and marketing dropped from 8 in 2004 to 3 in 2005.

Interest and Other Income, Interest Expense

     Interest and other income for 2005  increased  significantly  to $2,053,000
from $18,000 in 2004. The increase was due primarily to the  re-valuation of the
warrants related to Apix's August 2005 financing. Interest expense for 2005 also
increased  tremendously  to  $3,350,000  from $14,000 in 2004.  The increase was
primarily  due to:  (i) the  Apix  loan  interest,  (ii)  the  Apix  loan  fees'
amortization,  (iii) the Apix loan discount  amortization,  and (iv) the Agility
Capital loan default penalty.

Other Non-cash Expense

     There was no other  non-cash  expense for the year ended December 31, 2005.
For the year ended December 31, 2004,  the other  non-cash  expense was $33,000,
which  related to the  warrants  issued in  connection  with our  December  2003
private  placement,  and represents  the  difference in the warrants'  valuation
between their dates of issuance and the  registration  of the shares  underlying
the warrants.

Results of Operations - Years Ended December 31, 2004 and 2003

Net Sales

     For the year ended December 31, 2004,  revenues  increased 6% to $2,366,000
from  $2,242,000 in 2003.  U.S. sales  increased 25% to $1,142,000 from $913,000
primarily due to the introduction of the Surgical  Ablation  products.  European

                                       46
<PAGE>
sales  decreased  21% to $351,000 from  $443,000,  due to the switch from direct
sales at retail prices to sales to distributors at wholesale  prices,  and lower
Pathfinder sales in Germany. Sales in the Asia/Pacific market increased slightly
or 1% to $857,000 from $847,000.

     Because  the   electro-physiology   market  is   comprised  of  a  focused,
specialized  group of  physicians,  we market and distribute our products in the
United States with a small direct sales force and we market and  distribute  our
products  internationally through a small direct sales force and distributors in
selected countries who sell our products to physicians and hospitals.

Cost of Goods Sold

     Cost of goods sold for 2004 decreased 16% to $2,608,000 from $3,114,000 for
2003.  The  decrease  in the cost of goods  sold was  primarily  due to the cost
savings from the 2003 reduction in force,  continuing  overhead  expense control
efforts,  the reduced  impact of under  absorption  of overhead  costs,  and the
change in the allocation of space and manufacturing support provided to research
and development.

Research and Development Expenses

     Research and development  expenses decreased 20% to $3,947,000 in 2004 from
$4,951,000  in  2003.  The  decrease  was due to  lower  costs  associated  with
completion  of the  REVELATION(R)  Tx  product  development  and lower  clinical
expenses   compared  to  2003,  which  were  partially  offset  by  the  product
development  expenses for the  INTELLITEMP(R)  energy  management  system during
2004. The costs associated with research and pre-clinical  programs and clinical
development programs were approximately (in thousands):

                                               --------------------------------
                                                    Year ended December 31,
                                               --------------------------------
                                                   2004               2003
                                               ------------      --------------
    Research and preclinical programs          $     2,417        $      2,316
    Clinical development programs                    1,530               2,635
                                               ------------       -------------
    Total research and development             $     3,947        $      4,951
                                               ============       =============

Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses for 2004  decreased  16% to
$5,528,000 from $6,566,000 in 2003.  Selling  expenses for 2004 decreased 44% to
$983,000  from  $1,747,000 in 2003  primarily due to the June 2003  reduction in
force including lower salaries, bonuses, and commissions. Marketing expenses for
2004  decreased 31% to $496,000 from $723,000 in 2003. The decrease in marketing
expenses was due to the reduction in force and fewer marketing events.

Interest and Other Income, Interest Expense

     Interest and other income for 2004 decreased 75% to $18,000 from $72,000 in
2003.  The  decrease  was due  primarily  to lower  average  yields and to lower
average cash and investment  balances in 2004 as compared to 2003.  There was no
change in interest expense of $14,000 in 2004 and 2003.

Other Non-cash Expense

     Other  non-cash  expense for the year ended December 31, 2004, was $33,000.
This non-cash  expense  relates to the warrants  issued in  connection  with our
December 2003 private placement,  and represents the difference in the warrants'
valuation  between  their dates of issuance and the  registration  of the shares
underlying the warrants.

LIQUIDITY AND CAPITAL RESOURCES

     We had cash and cash equivalents of  approximately  $124,000 as of December
31, 2005 and $230,000 as of March 31, 2006.  Our  management  believes  that our
cash  balances  as of  March  31,  2006  will  be  sufficient  to  fund  planned
expenditures  only for one month.  In April  2006,  Apix  International  Limited
(Apix)  continues to provide loan  financing to us in the amount of $675,000 and
the terms of this additional financing have not been finalized yet. Although our
management recognizes the need to raise funds in the immediate future, there can


                                       47
<PAGE>
be no assurances that we will be successful in doing so, or, if we do consummate
a financing  transaction,  that its terms and conditions will not be unfavorable
to us. Our  financing  which  closed on November  24, 2004  contains  terms that
substantially  restrict  our ability to raise the further  funding  that we will
need to continue  our  operations.  We are also  contractually  prohibited  from
issuing certain kinds of convertible  securities  without the consent of some of
our  investors.  Any  failure  by us to obtain  additional  funding  will have a
material  effect upon us, and will likely result in our inability to continue as
a  going  concern.  Our  independent  auditors  have  concluded  that  there  is
substantial  doubt  as to our  ability  to  continue  as a going  concern  for a
reasonable  period of time,  and have,  therefore,  modified their report in the
form of an explanatory  paragraph  describing the events that have given rise to
this uncertainty.

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

     During 2005, we entered into a Loan  Facility  Term Sheet with Apix,  which
provided us a $3 million  loan  financing.  On February  14,  2006,  the Company
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.  In April 2006,  Apix
continues  to provide  loan  financing  to us in the amount of $675,000  and the
terms of this additional financing have not been finalized yet.

     Net  cash  used  in  operating  activities  was  approximately  $5,960,000,
$9,278,000 and $12,474,000 for the years ended December 31, 2005, 2004 and 2003,
respectively,  resulting primarily from operating losses incurred. Net cash used
in  investing  activities  was  $124,000  in 2005  and  related  to the  capital
expenditures of property and equipment, as compared to $97,000 and $155,000 used
in 2004 and  2003 for the same  expenditures.  Net cash  provided  by  financing
activities was  approximately  $2,354,000,  $6,783,000 and  $15,690,000  for the
years ended December 31, 2005, 2004 and 2003, respectively,  resulting primarily
from the loan  financing  in 2005 and the sale of equity  securities  in private
placement transactions and borrowings under the line of credit in 2004 and 2003.

Contractual Commitments:

     Following is a schedule of future  contractual  commitments at December 31,
2005 (in thousands):

                                       2006      2007        2008       Total
                                    ---------   -------    --------   ---------

Loan Repayment...................   $   4,152   $     -    $      -   $   4,152
Operating Leases.................         272       115           -         387
Capital Leases...................          28        26           3          57
Purchase Obligations.............          12         -           -          12
                                    --------------------------------------------
Total Minimum Payments  .........   $   4,464   $   141    $      3   $   4,608
                                    ============================================


     The total loan  repayment of $4,152,000 and the total  operating  leases of
$272,000  include  interest  payments of $117,000 and $5,000 interest  payments,
respectively.  Our purchase  obligations are guaranteed  payments  consisting of
contracts  relating to internal control over financial  reporting  consultation,
investor relations, and royalties.

     Our future  liquidity  and capital  requirements  will depend upon numerous
factors,  including whether we are successful in closing a transaction involving
our Surgical  Ablation  System that generates  cash for use in  operations,  the
timing and nature of regulatory  developments,  the cost and progress of product
development efforts and clinical trials, and sales and marketing activities, the
extent  to which we  encounter  claims  or  disputes,  the  extent  to which our
products gain market acceptance and other competitive developments.

     As of December 31, 2005, the Company had cash on hand of $124,000, negative
working  capital of $4.1 million,  and an accumulated  deficit of  approximately
$121.8 million. Our management expects to continue to incur additional losses in
the foreseeable  future as we continue to pursue FDA approval for  REVELATION(R)
Tx, and  continue to invest in new  product  development  and  commercialization
efforts, as further explained in Note 1 to the financial statements.


                                       48
<PAGE>
Recent Financings

     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.

     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.

     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.

     Per 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.  We recognize the gains and losses  quarterly.  At
the end of the loan agreement,  if the lender ultimately  exercises this option,
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. Any beneficial conversion effect resulting from the excess of the average
market price of the stock over the $0.10 per share conversion price will also be
charged to non-cash  interest during the periods the loan is outstanding.  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 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 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,


                                       49
<PAGE>
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.  In April 2006, Apix continues to provide loan financing to
us in the amount of $675,000 and the terms of this additional financing have not
been finalized yet.

Prior Equity Financings

     Our  principal  source of the cash needed to fund our  operations  has been
private  placements of common stock and warrants to purchase  common  stock.  In
recent  years,  we have been  required to effect  these equity  financings  at a
discount to the then-prevailing  market price of our common stock. The following
summarizes our equity  financings over the last three years,  including the cash
and equity fees that we have paid to financial advisors in connection with those
financings.

     On December  31, 2002 and January 22,  2003,  we sold by means of a private
placement  an  aggregate  of  5,333,319  shares of our common stock at prices of
$0.74955 per share for gross proceeds of $4,000,000.  In addition,  we issued to
the investors  warrants to purchase  2,400,000  shares of our common stock at an
exercise price of $0.8245 per share. The warrants became  exercisable  beginning
in March 2003,  subject to redemption on a  share-for-share  basis to the extent
that an investor sells our common stock or other securities during the specified
sixty-day  periods  ending in March  2003.  The  warrants  allow for a "cashless
exercise"  whereby the exercising party may use shares issuable upon exercise of
the warrant in payment of the exercise price. We may not redeem the warrants. We
paid to the party that acted as finder in connection with this private placement
upon  execution  of a letter  agreement  a fee of  $325,000  in cash plus 66,667
shares of our common stock and warrants to purchase 533,331 shares of our common
stock at an exercise price of $0.8245. The warrants issued to the finder are not
redeemable and allow for "cashless  exercise"  whereby the finder may use shares
issuable upon exercise of the warrant in payment of the exercise price.

     On March 28, 2003, we sold by means of a private  placement an aggregate of
2,941,175  shares  of our  common  stock at a price of $.085 per share for gross
proceeds of  $2,500,000.  In addition,  we issued to the  investors  warrants to
purchase  1,176,470 shares of our common stock at an exercise price of $1.25 per
share. The warrants became exercisable  beginning on September 28, 2003, subject
to redemption on a  share-for-share  basis to the extent that an investor  sells
our common stock or other  securities  during the six month  period  between the
closing and  September  28,  2003.  We might  redeem the warrants for a price of
$0.001 per share of common stock if the average  closing  price per share of our
common stock had been at least $1.70 (as adjusted  for  subsequent  stock splits
and the like) for fifteen  consecutive  trading days and other  conditions  were
met. We paid to the party that acted as agent in  connection  with this  private
placement a total of $175,000 in cash and warrants to purchase 294,117 shares of
our common stock at an exercise price of $0.935. We used the net proceeds of our
offerings  from  August  2002  through  April 2003 for  development  activities,
clinical trial expenses and increased  regulatory  activities in preparation for
our  May  2003  FDA  Panel  meeting,  commercialization  of  product  offerings,
operating costs and other general corporate purposes.

     On April 11, 2003,  we sold by means of a private  placement an  additional
4,395,587  shares  of our  common  stock at a price of $0.85 per share for gross
proceeds of approximately  $3,700,000.  In addition,  we issued to the investors
warrants to purchase  1,758,234  shares of our common stock at an exercise price
of $1.25 per share.  The warrants  became  exercisable  beginning on October 11,
2003,  subject to  reduction  on a  share-for-share  basis to the extent that an
investor  sold our common  stock  during the six (6) month  period  between  the
closing and October 11, 2003. We might redeem the warrants for a price of $0.001
per share of common stock if the average  closing  price per share of our common
stock had been at least $1.70 (as adjusted for  subsequent  stock splits and the
like) for fifteen  consecutive  trading days and other  conditions  were met. We
paid to the  parties  that  acted as agents  in  connection  with  this  private
placement upon the closing of the  transaction,  a total of $270,000 in cash and
warrants to purchase  448,557 shares of our common stock at an exercise price of
$0.935.

     On August 13,  August 14 and August 18, 2003, we sold by means of a private
placement an aggregate of approximately 10,282,800 shares of our common stock at
a price of $0.5296  per share,  2,421,980  shares of common  stock at a price of
$0.5664 per share and 977,176  shares of common  stock at a price of $0.6064 per
share for net proceeds of approximately $6.8 million. In addition,  we issued to
the investors  warrants to purchase  3,084,840  shares of our common stock at an
exercise  price of $0.7282 per share,  warrants to purchase up to 726,590 shares
at an  exercise  price of $0.7788  per share;  and  warrants  to  purchase up to
293,152 shares of our common stock at an exercise price of $0.8338 per share. We
may redeem the  warrants  for a price of $0.001 per share of common stock if the
average  closing price per share of our common stock has been at least  $1.0592,


                                       50
<PAGE>
$1.1328 or $1.2128,  respectively,  (as adjusted for subsequent stock splits and
the like) for fifteen  consecutive  trading  days,  so long as our stock remains
listed on specified  securities  exchanges or trading markets and a registration
statement  covering the resale of the warrant  shares is effective,  among other
conditions.  We used net proceeds of our August 2003  offering  for  development
activities,  commercialization of product offerings,  operating costs, severance
payments  associated  with our June 2003  reduction in force,  and other general
corporate purposes.

     In October 2003, we called the warrants dated August 13, 2003 with exercise
prices of $0.7282 for redemption on March 15, 2004.  All of the warrants  issued
to August 13, 2003 were exercised prior to the redemption  date, as well as some
warrants  issued on August 14 and August 18, 2004,  resulting in net proceeds of
$3.1 million.  In November  2003,  we called the warrants  dated August 14, 2003
with exercise prices of $0.7788 for redemption on March 15, 2004, but conditions
to this  redemption  were not met and the  redemptions  did not  occur.  We paid
approximately $520,000 in cash to parties that acted as our agents in connection
with this  private  placement,  and issued to the agents  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 our common stock at an exercise  prices that
range from $0.90 per share to $1.1025 per share. The closing of this transaction
caused  additional shares of common stock to be issuable under the anti-dilution
provisions of certain of our  previously  issued  securities.  Additionally,  an
expense of $904,000 was recorded as "Other Non-cash  Expense" for the difference
in the valuation  between the issuance dates and the date of the registration of
the warrants issued in this transaction.  In March 2004, we agreed to reduce the
exercise price of 440,812 shares of the agents' warrants from $1.10, $1.1025 and
$0.90 per share to $0.8375 per share,  to  encourage  the agent to exercise  the
warrants for cash.

     On December 19, 2003, we sold by means of a private placement an additional
3,583,327  shares  of our  common  stock at a price of $0.87 per share for gross
proceeds of approximately  $3,117,000.  In addition,  we issued to the investors
warrants to purchase  1,074,993  shares of our common stock at an exercise price
of $0.957 per share.  The warrants  would be  exercisable  beginning on June 19,
2004 and will be  reduced  on a  share-for-share  basis  to the  extent  that an
investor  sells our common  stock or other  securities  during the six (6) month
period between the closing and June 19, 2004. We might redeem the warrants for a
price of $0.001 per share of common stock if the average closing price per share
of our common stock has been at least $1.74 (as adjusted  for  subsequent  stock
splits and the like) for fifteen  consecutive  trading days and other conditions
were met. Redemptions  initiated prior to June 19, 2004 were subject to deferral
and certain other conditions. We paid to the parties that acted as our agents in
connection with this private placement a total of $218,225 in cash and issued to
the  agents  warrants  to  purchase  303,608  shares of our  common  stock at an
exercise price of $0.957 per share and warrants to purchase 20,689 shares of our
common stock at an exercise price of $1.2375 per share.

     On November 24, 2004,  we sold by means of a private  placement  16,465,439
shares of our common  stock at a price of $0.2733 per share for net  proceeds of
approximately $4.1 million.  In addition,  we issued to the investors  four-year
warrants to purchase  6,586,165  shares of our common stock at an exercise price
of $0.4295 per share.  The warrants  would be  exercisable  beginning on May 24,
2005. We issued to the parties that acted as our placement  agents in connection
with this private placement identical warrants to purchase 987,926 shares of our
common stock.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     During fiscal year 2005, in connection  with the loan  financing from Apix,
we provided the lender warrants with registration  rights to purchase 30,000,000
shares of capital  stock with a strike price of $0.10 per share.  In  accordance
with  SFAS  No.  133,   "Accounting  for  Derivative   Instruments  and  Hedging
Activities",  as amended,  we recognize all  derivatives on the balance sheet at
fair value.  Any beneficial  conversion  effect resulting from the excess of the
average market price of the stock over the $0.10 per share conversion price will
also be charged to non-cash interest during the periods the loan is outstanding.
Also in February  2006,  with the new loan  facility  from Apix,  we granted the
lender  additional  warrants  with  registration  rights  to  purchase  in total
31,800,000  shares of our common stock at an exercise  price of $0.06 per share.
Any beneficial conversion effect resulting from the excess of the average market
price of the  stock  over the  $0.06 per  share  conversion  price  will also be
charged to non-cash interest during the periods the loan is outstanding.


                                       51
<PAGE>
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                  CARDIMA, INC.

                          INDEX TO FINANCIAL STATEMENTS


                                                                                                   PAGE
<S>                                                                                                 <C>
Report of Marc Lumer & Company, Independent Registered Public Accounting Firm.......................F-2
Report of BDO Seidman, LLP, Independent Registered Public Accounting Firm ..........................F-3
Balance Sheets at December 31, 2005 and 2004........................................................F-4
Statements of Operations for the years ended December 31, 2005, 2004, and 2003 .....................F-5
Statement of Stockholders' Equity (Deficit)
     for the years ended December 31, 2005, 2004, and 2003..........................................F-6
Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003......................F-7
Notes to Financial Statements.......................................................................F-8
</TABLE>


                                       F-1
<PAGE>
  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,  2005  and  the  related  statements  of  operations,  stockholders'  equity
(deficit),  and cash flows for the year then ended.  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,
2005 and the  results  of its  operations  and its cash flows for the year ended
December 31, 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.



/s/ Marc Lumer & Company

San Francisco, California

April 14, 2006


                                       F-2
<PAGE>
    REPORT OF BDO SEIDMAN, LLP, 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,  2004 and the  related  statements  of  operations,  stockholders'
equity,  and cash flows for each of the two years in the period  ended  December
31, 2004.  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 audits.

     We  conducted  our audits 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
audits provide 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, 2004 and 2003, and the results of its operations and its cash flows for each
of the two years in the period  ended  December  31, 2004,  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.

/s/    BDO Seidman, LLP
San Francisco, California

February 18, 2005


                                       F-3
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                                 BALANCE SHEETS
                    (In thousands, except per share amounts)


                                                                                              December 31,
                                                                                   ------------------------------------
ASSETS                                                                                 2005                  2004
                                                                                   --------------        --------------
Current assets:
<S>                                                                                      <C>                  <C>
     Cash and cash equivalents...................................................  $         124         $       3,854
     Accounts receivable, net of allowances for doubtful accounts
         of $26 and $81 at December 31, 2005 and 2004, respectively..............            265                   303
     Inventories.................................................................            387                   878
       Prepaid expenses..........................................................            285                   456
       Notes receivable from officers, net ......................................             --                   575
     Deferred charges............................................................            304                    --
       Other current assets......................................................             28                    38
                                                                                   --------------        --------------
         Total current assets....................................................          1,393                 6,104
Property and equipment, net......................................................            318                   395
Other assets.....................................................................             35                    38
                                                                                   --------------        --------------
                                                                                   $       1,746         $       6,537
                                                                                   ==============        ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable............................................................  $         956         $         870
     Accrued compensation........................................................            351                   604
       Warrant liability.........................................................          1,200                    --
     Other current liabilities...................................................             42                   321
     Credit obligation...........................................................          2,890                    79
       Deferred rent.............................................................             18                    41
       Capital lease obligation - current portion................................             24                    31
                                                                                   --------------        --------------
             Total current liabilities ..........................................          5,481                 1,946

Capital lease obligation - noncurrent portion....................................             28                    52
                                                                                   --------------        --------------

Commitments and contingencies (Note 2)

Stockholders' equity (deficit):
     Common stock, $0.001 par value; 300,000,000 shares authorized, 101,613,658
     and 101,305,613 shares issued and outstanding at December 31, 2005 and
     December 31, 2004 respectively..............................................        117,999               117,973
       Accumulated deficit.......................................................       (121,762)             (113,434)
                                                                                   --------------        --------------
     Total stockholders' equity (deficit)........................................         (3,763)                4,539
                                                                                   --------------        --------------
        Total liabilities & stockholders' equity (deficit)                         $       1,746         $       6,537
                                                                                   ==============        ==============
</TABLE>
                 See accompanying notes to financial statements

                                       F-4
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)


                                                                                          Year Ended December 31,
                                                                         ------------------------------------------------------
                                                                              2005               2004                2003
                                                                         ---------------    ---------------     ---------------
<S>                                                                            <C>                <C>                 <C>
Net sales                                                                $        1,859     $        2,366      $        2,242
Cost of goods sold                                                                1,999              2,608               3,114
                                                                         ---------------    ---------------     ---------------

         Gross deficiencies                                                        (140)              (242)               (872)
                                                                         ---------------    ---------------     ---------------
Operating expenses:
         Research and development                                                 2,074              3,947               4,951
         Selling, general and administrative                                      4,817              5,528               6,566

                                                                         ---------------    ---------------     ---------------

                  Total operating expenses                                        6,891              9,475              11,517
                                                                         ---------------    ---------------     ---------------

Operating loss                                                                   (7,031)            (9,717)            (12,389)
Interest and other income                                                         2,053                 18                  72
Interest expense                                                                 (3,350)               (14)                (14)
Non-cash expense                                                                     --                (33)               (904)
                                                                         ---------------    ---------------     ---------------

Net loss                                                                 $       (8,328)    $       (9,746)     $      (13,235)
                                                                         ===============    ===============     ===============

Basic and diluted net loss per share                                     $        (0.08)    $        (0.11)     $        (0.20)
                                                                         ===============    ===============     ===============

 Shares used in computing basic and diluted net loss per share
                                                                                101,408             85,703              66,256
                                                                         ===============    ===============     ===============
</TABLE>
                 See accompanying notes to financial statements

                                       F-5
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                   Statements of Stockholders' Equity(Deficit)
               (In thousands, except share and per share amounts)

                                                                                        Accumu-        Total
                                                                 No. of     Common      lated       Stockholders'
                                                                 Shares     Stock       Deficit        Equity
                                                               ------------ ---------- -----------  --------------
<S>                                                                 <C>         <C>        <C>          <C>
Balance at December 31, 2002                                    54,394,264  $  94,003  $  (90,453)  $      3,550
Common stock issued under employee stock plans                     260,616        159          --            159

Common stock issued through private placements                  25,599,938     14,745          --         14,745
Expense for vesting of stock options granted to employees               --         79          --             79
Expense for options granted to non-employees                            --         51          --             51
Reclassification of warrant liability to equity upon                    --        904          --            904
registration
Common stock issued through warrant exercises                       78,980         47          --             47
Net Loss                                                                --         --     (13,235)       (13,235)
                                                               ------------ ---------- -----------  -------------
Balance at December 31, 2003                                    80,333,798    109,988    (103,688)         6,300
Common stock issued under employee stock plans                     265,322        111          --            111

Common stock issued through cashless exercise of warrants           40,252         --          --             --
Common stock issued through exercises of stock options              55,963         19          --             19
Common stock issued through private placements                  16,465,439      4,084          --          4,084
Expense for vesting of stock options granted to non-employees           --         10          --             10
Expense for options granted to non-employees                            --         55          --             55
Common stock issued through exercise of warrants                 4,144,839      3,120          --          3,120
Reclassification of warrant liability to equity upon                    --        691          --            691
registration
Expense related to private placement                                    --       (105)         --           (105)
Net Loss                                                                --         --      (9,746)        (9,746)
                                                               ------------ ---------- -----------  --------------
Balance at December 31, 2004                                   101,305,613    117,973    (113,434)         4,539
Common stock issued under employee stock plans                     286,045         50          --             50

Expense for vesting of stock options granted to non-employees           --          1          --              1
Common stock issued to non-employees                                22,000          2          --              2
Expense 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)
</TABLE>

                 See accompanying notes to financial statements


                                       F-6
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)


                                                                                            YEAR ENDED DECEMBER 31,
                                                                                  --------------------------------------------
                                                                                      2005            2004            2003
                                                                                  ------------    ------------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                     <C>             <C>             <C>
Net loss                                                                          $  (8,328)      $  (9,746)      $ (13,235)
Adjustments to reconcile net loss to net cash provided by operations:
     Depreciation and amortization                                                      201             251             622
     Non-cash stock-based compensation                                                    3              66             130
       Derivative revaluation                                                            --              33             904
       Impairment of long-lived assets                                                   --              --              --
       Excess and obsolete inventory                                                      8              --              --
       Write-off of payroll tax refund liability                                       (245)             --              --
     Loss on disposal of assets                                                          --               5               9
       Non-cash interest (income) charge on notes receivable from officers
       Allowance for notes receivable from officers                                      --              51             (31)

                                                                                        575              --              --
       Changes in operating assets and liabilities:
         Accounts receivable, net                                                        38              (4)             19
         Inventories, net                                                               483             113             235
         Prepaid expenses                                                               477             227             215
              Other current assets                                                       --              --              51
         Other assets                                                                  (290)             (7)             51
         Accounts payable                                                                86             (40)         (1,119)
         Accrued employee compensation                                                 (253)           (265)           (369)
         Other current liabilities                                                    1,308              42               3
         Deferred rent                                                                  (23)             (4)             41
                                                                                  ------------    ------------    ------------
                  Net cash used in operating activities                              (5,960)         (9,278)        (12,474)
                                                                                  ------------    ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures                                                                   (124)            (97)           (155)
                                                                                  ------------    ------------    ------------
                       Net cash used in investing activities                           (124)            (97)           (155)
                                                                                  ------------    ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases and credit facility                            (369)           (445)             81
Payments of issuance costs                                                              (31)           (522)             --
Net proceeds from loan financing                                                      2,700              --              --
Net proceeds from sale of common stock                                                   54           7,750          15,609
                                                                                  ------------    ------------    ------------
                      Net cash provided by financing activities                       2,354           6,783          15,690
                                                                                  ------------    ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 (3,730)         (2,592)          3,061
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                          3,854           6,446           3,385
                                                                                  ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                            $     124       $   3,854       $   6,446
                                                                                  ============    ============    ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for interest                                            $      15       $      13       $      15
                                                                                  ============    ============    ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital lease arrangements                               $      --       $      --       $      98
Loan financing                                                                        2,839              --              --
Financing of insurance premium                                                          306             358             297
                                                                                  ============    ============    ============
</TABLE>


                 See accompanying notes to financial statements.

                                       F-7
<PAGE>
                                  CARDIMA, INC.

                          NOTES TO FINANCIAL STATEMENTS

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, 2005, the Company had
cash and cash equivalents on hand of $124,000,  negative working capital of $4.1
million,  and an accumulated  deficit of  approximately  $121.8  million.  These
factors  raise  substantial  doubt  about its  ability  to  continue  as a going
concern.  The ability of the Company to continue as a going concern is dependent
on the Company's  ability to raise  additional  funds and implement its business
plan.

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. There
is no price protection or return rights for the distributors.

Research and Development

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


Reclassification of Previously Reported Financial Results

     Certain  reclassifications  have  been  made  to  our  previously  reported
quarterly  financial  statements in order to conform to the  presentation of our
audited annual  financial  statements.  After analysis studies were performed to
evaluate the net realizable values of long-lived  assets, the impairment charges
to the long-lived assets in the first half of fiscal year 2005 were reversed and
the appropriate  depreciation expenses for these long-lived assets were recorded
in the first three quarters respectively. This resulted in the following changes
to our previously reported financial results:


                                       F-8
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

                                                Q1 2005       Q2 2005        Q3 2005
                                               ---------     ---------      ---------

Impairment of long-lived assets
Original filing
<S>                                                  <C>           <C>           <C>
                                               $     358     $     46       $      -
Change
                                                    (358)         (46)             -
                                               ==========    =========      =========
Restated
                                                       -            -              -

Cost of Goods Sold
Original filing
                                                     444          744            483
Change
                                                      21           16             16
                                               ==========    =========      =========
Restated
                                                     465          760            499

Research & Development Expenses
Original filing
                                                     642          758            198
Change
                                                      14           11             11
                                               ==========    =========      =========
Restated
                                                     656          769            209

Selling, General and Administrative Expenses
Original filing
                                                   1,697        1,319            613
Change
                                                      23           14              8
                                               ==========    =========      =========
Restated
                                                   1,720        1,333            621

Net Loss
Original filing
                                                  (2,329)      (2,850)        (1,129)
Change
                                                     300            5            (35)
                                               ==========    =========      =========
Restated
                                                  (2,029)      (2,845)        (1,164)
</TABLE>
Stock Based Compensation

     The Company has elected to follow  Accounting  Principles Board Opinion No.
("APB")  25,   "Accounting   for  Stock  Issued  to   Employees",   and  related
interpretations  in  accounting  for  its  employee  stock  options,   including
Financial Accounting Standard Board  Interpretation  ("FIN") 44, "Accounting for
Certain Transactions Involving Stock Compensation".

     Compensation  expense is based on the difference,  if any, between the fair
value of the  Company's  common  stock and the  exercise  price of the option or
share right on the measurement  date, which is typically the date of grant. This
amount is recordable as "Deferred stock  compensation" in the Balance Sheets and
amortized as a charge to operations  over the vesting  period of the  applicable
options or share rights.  In accordance  with Statement of Financial  Accounting
Standards (SFAS) 123,  "Accounting for Stock-Based  Compensation," as amended by
SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
the Company has provided,  below, the pro forma disclosures of the effect on net
loss  and  loss  per  share  as if  SFAS  123  had  been  applied  in  measuring
compensation expense for all periods presented.

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


                                       F-9
<PAGE>

                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

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

     The following  table  illustrates the effect on reported net loss per share
if the Company had applied the fair value recognition  provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                                                           Years ended
                                                                                           December 31,
                                                                           -------------------------------------------
                                                                                2005           2004           2003
                                                                           -------------------------------------------
<S>                                                                               <C>            <C>           <C>
Net loss applicable to common shareholders - as reported                    $     (8,328)  $   (9,746)   $    (13,235)
Add:
       Stock-based employee compensation expense included in
       reported net income, net of applicable tax effects                            ---         ---              130
Less:
       Total stock-based employee compensation expense determined under fair
       value based method for all awards,
       net of applicable tax effects
                                                                                    (778)      (1,039)         (1,129)
                                                                           -------------------------------------------
Pro forma net loss applicable to common shareholders                       $      (9,106)  $  (10,785)   $    (14,234)
                                                                           ===========================================

Basic and diluted net loss per share applicable to common
shareholders - as reported
        As reported                                                        $       (0.08)  $    (0.11)   $     (0.20)
        Pro forma                                                          $       (0.09)  $    (0.13)   $     (0.21)

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

                               2005               2004                2003
                               ----               ----                ----
Expected life (years)           4.0                4.0                 4.0
Interest Rate                  4.4%               3.0%                2.0%
Volatility                     128%               127%                129%
Dividend Yield                   0%                 0%                  0%


Net Loss Per Share

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

                                     2005           2004              2003
                             -------------- --------------- -----------------
Warrants                        49,369,168      24,717,722        22,336,445
Stock Options                    7,557,035       6,684,112         6,693,513
                             -------------- --------------- -----------------
Total Options and Warrants      56,926,203      31,401,834        29,029,958
                             ============== =============== =================


                                      F-10
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)


Cash and Cash Equivalents

     The  Company  considers  investments  in  highly  liquid  instruments  with
original  maturity of three months or less to be cash  equivalents.  The Company
did not hold any short-term  investments at December 31, 2005 or 2004.  Cash and
cash equivalents consist of the following (in thousands):

                                                        December 31,
                                            ------------------------------------
                                                  2005                 2004
                                            ----------------    ----------------
Cash and cash equivalents:
   Cash..................................   $            124     $           176
   Money market funds....................                ---               3,678
                                            ----------------    ----------------
Total cash and cash equivalents....         $            124     $         3,854
                                            ================    ================


Accounts Receivable and Allowance for Doubtful Accounts

     The Company's  receivables  are recorded  when billed and represent  claims
against  third parties that will be settled in cash.  The carrying  value of the
Company's  receivables,  net of the allowance for doubtful accounts,  represents
their estimated net realizable value. The Company  evaluates the  collectibility
of accounts  receivable on a case-by-case  basis.  The Company records a reserve
for bad debts against amounts due to reduce the net recognized  receivable to an
amount the  Company  believes  will be  reasonably  collected.  The reserve is a
discretionary amount determined from the analysis of aging.

Notes Receivable From Officers and Allowance for Loan Loss

     As of December 31, 2005, the Company has two  outstanding and overdue notes
receivable from related parties,  which are fully reserved. The notes receivable
are as follow:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
  Related Parties    Principal   Maturity Date Interest Rate    Accrued    Reserved Amount Balance as of   Balance as of
  ---------------    ----------  ------------- -------------    --------   --------------- --------------  --------------
                       Amount                                   Interest                      12/31/04        12/31/05
                       ------                                   --------                      --------        --------
---------------------------------------------------------------------------------------------------------------------------

<S>                    <C>            <C>            <C>          <C>           <C>            <C>                <C>
 Current Director   $278,500.00    15-Dec-05      3 Month      $78,600.00    $357,100.00    $357,100.00        $0.00
                                               Treasury Bill
---------------------------------------------------------------------------------------------------------------------------
  Former Officer    $192,500.00    15-Jun-05      3 Month      $25,000.00    $217,500.00    $217,500.00        $0.00
                                               Treasury Bill
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

     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,  while recoveries of amounts previously charged off are credited to the
reserve. Evaluations of the reserve balance are conducted quarterly. No interest
accrual was made after December 31, 2004.


                                      F-11
<PAGE>
                                 CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

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,
                                         --------------------------------------
                                              2005                   2004
                                         ---------------        ---------------
Raw materials..........................  $           90         $         152
Work-in-process........................             101                    99
Finished goods.........................             196                   627
                                         ---------------        ---------------

                                         $          387         $         878
                                         ===============        ===============


     Inventory  amounts shown above are net of allowance for excess and obsolete
inventory,  and adjustments to net realizable  value of $663,000 and $655,000 at
December 31, 2005 and 2004,  respectively.  The Company provides  allowance for:
(i) inventory which is slow moving, (ii) inventory with expiring shelf life, and
(iii)  inventory  that  has  become  obsolete  as  a  result  of   technological
advancements.  Moreover,  as of December 31, 2005, the Company has approximately
$92,000 inventories located in foreign countries.

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.

     Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                        2005                    2004
                                                                    -------------           ------------
            Equipment..........................................
<S>                                                                     <C>                     <C>
                                                                    $       1,915           $     3,216

            Leasehold improvements.............................               218                   218
                                                                    --------------          ------------
                                                                    $       2,133           $     3,434

            Less accumulated depreciation and
                 amortization..................................            (1,815)               (3,039)
                                                                   ---------------          ------------


                                                                    $         318           $       395
                                                                    =============           ============

            Idle Equipment.....................................
                                                                    $       1,382           $         -
            Less accumulated depreciation and
                 amortization..................................            (1,382)                    -
                                                                    --------------          ------------

                                                                    $           -           $         -
                                                                    ==============          ============
</TABLE>
                                      F-12
<PAGE>


                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     Equipment  includes  property and equipment  financed under capital leases,
which were  $134,000 and  $150,000 at December 31, 2005 and 2004,  respectively.
Accumulated  amortization  related to leased  assets was  $72,000 and $51,000 at
December 31, 2005 and 2004,  respectively.  With the June 2005  furlough and the
August  2005   reduction-in-force,   the  Company  has  fully  depreciated  idle
equipments in the amount of $1,382,000 as of December 31, 2005.

Long-Lived Assets

     Long-lived  assets,  other  than  goodwill,  are  reviewed  for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
the  assets  might not be  recoverable.  Conditions  that would  necessitate  an
impairment  assessment  include a significant  decline in the observable  market
value of an asset,  a  significant  change  in the  extent or manner in which an
asset is used,  or a  significant  change that would  indicate that the carrying
amount of an asset or group of assets is not recoverable.  For long-lived assets
to be held and used,  the Company  recognizes  an  impairment  loss based on the
difference  between the carrying amount and fair value.  Long-lived  assets held
for sale are reported at the lower of cost or fair value less costs to sell.

Concentrations of Risk

     To date,  product  sales have been direct to customers in the United States
and to  distributors  primarily in Europe,  Japan and South America.  During the
year ended  December 31, 2005,  2004 and 2003 revenues to the Company's  largest
customer,  Paramedics  Co.  Ltd.  in Japan,  comprised  48%,  36% and 38% of the
Company's  total  net  product  sales  respectively.  No other  single  customer
represented  greater than 10% of product sales in the years 2005, 2004 and 2003,
respectively.  Accounts receivable from this customer were $214,760 and $165,000
at the end of 2005 and 2004,  respectively.  The total export sales  represented
64% of net  sales  for the year  ended  December  31,  2005.  Japan was the only
country that  accounted  for more than 10% of the  Company's net export sales in
2005.  Allowances for doubtful  accounts were $26,000 and $35,000 as of December
31,  2005 and 2004,  respectively.  When  necessary,  estimated  provisions  for
product  returns are recorded.  The geographic  distribution of net sales was as
follows (in thousands):
<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                 ------------------------------------------------------  --------------------------
                                           2005                        2004                        2003
                                 --------------------------  --------------------------  --------------------------
<S>                              <C>                                    <C>                      <C>
United States                    $         682         36%   $        1,142        48%   $          913        41%
Germany                                    137          8%              176         8%              334        15%
Europe - Other                             138          8%              175         7%              109         5%
Asia -- Japan                              897         48%              857        36%              847        38%
Others                                       5          0%               16         1%               39         1%
                                 --------------              ---------------             ---------------

TOTAL NET SALES:                 $       1,859               $        2,366              $        2,242
                                 ==============              ===============             ===============
</TABLE>

     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.


                                      F-13
<PAGE>

                                  CARDIMA, INC.

                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     The Company receives  payments from its customers and deposits 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, 2005, the Company
has cash of $124,000.

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.

Fair Value of Financial Instruments

     The Company's financials  instruments at December 31, 2005 and 2004 consist
of cash  and  cash  equivalents,  accounts  receivable,  notes  receivable  from
officers, accounts payable, warrant liabilities,  credit obligations and capital
lease obligation. The carrying values of these financial instruments approximate
their fair values.

Off-Balance-Sheet Arrangements

     As of December 31, 2005 we did not have any off-balance sheet arrangements,
as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.


Recent Accounting Pronouncements

     In November 2004, the Financial  Accounting  Standards  Board (FASB) issued
SFAS No. 151,  "Inventory  Costs,  an Amendment  of ARB No. 43,  Chapter 4." The
amendments  made by SFAS No.151 are intended to improve  financial  reporting by
clarifying that abnormal  amounts of idle facility  expense,  freight,  handling
costs, and wasted materials  (spoilage)  should be recognized as  current-period
charges  and by  requiring  the  allocation  of fixed  production  overheads  to
inventory  based  on the  normal  capacity  of the  production  facilities.  The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15,  2005.  The  adoption  of SFAS No. 151 is not  expected to have a
material impact on the Company's financial statements.

     In  December  2004,  the FASB  issued  SFAS No.  123(R).  SFAS No.  123(R),
"Share-based  Payment".  SFAS No. 123(R) requires  employee  share-based  equity
awards to be  accounted  for under the fair value  method,  and  eliminates  the
ability  to account  for these  instruments  under the  intrinsic  value  method
prescribed  by APB Opinion No. 25 and allowed  under the original  provisions of
SFAS No. 123. SFAS No. 123(R)  requires the use of an  option-pricing  model for
estimating  fair  value,  which is then  amortized  to expense  over the service
periods.  SFAS No. 123(R) allows for either modified prospective  recognition of
compensation expense or modified retrospective recognition. In the first quarter
of 2006, the Company began to apply the modified prospective  recognition method
and  implemented  the  provisions of SFAS No. 123(R).  The modified  prospective
method  requires that  compensation  expense be recorded for all unvested  stock
options  commencing  January 1, 2006.  The Company is currently  evaluating  the
requirements  of SFAS 123(R) and expects  that the  adoption of SFAS 123(R) will
increase the loss of the Company.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections."  SFAS No. 154 replaces APB Opinion No. 20,  "Accounting  Changes,"
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial  Statements,"
and is effective for fiscal years beginning after December 15, 2005, i.e. fiscal
year ended December 31, 2006. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting  principle,  unless
it is  impracticable  to  determine  either the  period-specific  effects or the
cumulative  effect of the change.  The Company  does not expect the  adoption of
SFAS No. 154 to have a material impact on its financial statements.


                                      F-14
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

2.   Commitments and Contingencies

     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.  Following is a schedule of future minimum lease
payments under both operating and capital leases (in thousands).

                                                     Operating       Capital
 Fiscal Year                                          Leases         Leases
 -------------------------------------------------  ------------   ------------
 2006                                                $      272    $        28
 2007                                                       115             26
 2008                                                       ---              3
                                                    ------------   ------------
 Total minimum lease payments                               387             57
 Less amounts representing interest                         N/A              5
                                                    ------------   ------------
 Present value of net minimum lease payments         $      387    $        52
                                                    ============   ============

     Rent  expense  was  approximately  $385,000  in 2005,  $503,000 in 2004 and
$487,000 in 2003.

     The cost of assets  recorded  under capital leases at December 31, 2005 and
2004  was  $134,000  and  $150,000  respectively,  and the  related  accumulated
depreciation is $72,000 and $51,000, respectively.

     The company is  currently  not a party to any material  legal  proceedings.
Notwithstanding  the  foregoing,  we have entered into several  agreements  with
parties to act as its our  financial  advisors,  finders or agents in connection
with actual and proposed equity financings, which have provided that we will pay
cash fees and issue  warrants  to purchase  shares of our common  stock to these
parties in connection with our financings.  While the Company currently believes
that the ultimate outcome of these  proceedings will not have a material adverse
event  on  our  results  of  operations,   litigation  is  subject  to  inherent
uncertainties,  and unfavorable rulings could occur. Depending on the amount and
timing,  an  unfavorable  outcome of some or all of these  matters  could have a
material  adverse  effect on the  Company's  cash  flows,  business,  results of
operations  or financial  position.  An estimate of potential  loss from pending
proceedings cannot be made at this time.

3. Short-Term Credit Obligations

     The Company had the following short-term credit obligations outstanding:

                                                    December 31, 2005

           Apix Loan                               $        2,700,000

           Apix Loan Fees                                   1,035,000

           Apix Loan Accrued Interest                          70,014

           Insurance Financing                                 47,475
                                                  --------------------
                                                  $         3,852,488

           Less: Notes Discount                              (961,957)
                                                  --------------------
                                                  $         2,890,532
                                                  ====================

                                      F-15
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     The  Company   entered  into  a  $3,000,000   loan   agreement   with  Apix
International  Limited  (Apix) in August  2005.  As of December  31,  2005,  the
balance  of the notes  payable  to Apix was in the  amount of  $2,843,000  which
includes  $2,700,000  cash proceeds  from Apix,  $1,035,000  loan fees,  $70,000
accrued interest and an offsetting $962,000 note discount due to the granting of
the  30,000,000   warrant   shares  to  Apix.  In  addition,   the  Company  had
insurance-related  financing of $47,000 balance as of December 31, 2005. For the
Apix loan fees,  the  Company  has set up deferred  charges  account,  which was
amortized over the life of the  agreement.  As of December 31, 2005, the balance
of these deferred charges was $304,000.  Also the 30,000,000 warrant shares were
valued at inception  and revalued at the balance  sheet date.  The net change in
the fair value of these  warrants was recorded as other income of $1,800,000 for
the year ended December 31, 2005.

4. Stockholder's 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 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, 2005, 2004, and 2003.

   Equity Transactions from 2003 through 2005

     On December 31, 2002 and January 22,  2003,  the Company sold by means of a
private placement an aggregate of 5,333,319 shares of our common stock at prices
of $0.74955 per share for gross proceeds of $4,000,000. In addition, the Company
issued to the  investors  warrants  to purchase  2,400,000  shares of our common
stock at an exercise  price of $0.8245 per share.  The Company paid to the party
that acted as finder in connection with this private placement upon execution of
a letter  agreement  a fee of $25,000 in cash plus  66,667  shares of our common
stock. Upon the closing of the transactions, the Company also paid to the finder
a total of  $300,000  in cash and  issued to the  finder  warrants  to  purchase
533,331 shares of the Company's common stock at an exercise price of $0.8245.

     On March 28,  2003,  the Company  sold by means of a private  placement  an
aggregate of 2,941,175  shares of the Company's common stock at a price of $.085
per share for gross proceeds of $2,500,000.  In addition,  the Company issued to
the investors  warrants to purchase  1,176,470  shares of the  Company's  common
stock at an exercise  price of $1.25 per share.  The  Company  paid to the party
that  acted  as agent in  connection  with  this  private  placement  a total of
$175,000 in cash and warrants to purchase 294,117 shares of the Company's common
stock at an exercise price of $0.935.

     On April 11,  2003,  the Company  sold by means of a private  placement  an
additional  4,395,587  shares of its common  stock at a price of $0.85 per share
for gross proceeds of approximately  $3,700,000. In addition, the Company issued
to the investors  warrants to purchase  1,758,234 shares of the Company's common
stock at an exercise  price of $1.25 per share.  The Company paid to the parties
that acted as agents in connection with this private  placement upon the closing
of the  transaction,  a total of  $270,000  in cash  and  issued  to the  agents
warrants to purchase 448,557 shares of the Company's common stock at an exercise
price of $0.935.

     On August 13, August 14 and August 18, 2003, the Company sold by means of a
private placement an aggregate of approximately  10,282,800 shares of our common
stock at a price of $0.5296  per share,  2,421,980  shares of Common  Stock at a
price of  $0.5664  per share and  977,176  shares of common  stock at a price of
$0.6064 per share for net proceeds of approximately  $6.8 million.  In addition,
the Company issued to the investors warrants to purchase 3,084,840 shares of its
common stock at an exercise price of $0.7282 per share,  warrants to purchase up
to 726,590  shares at an  exercise  price of $0.7788  per share and  warrants to
purchase  up to  293,152  shares of its  common  stock at an  exercise  price of
$0.8338 per share.


                                      F-16
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)


     In October 2003, the Company called the warrants dated August 13, 2003 with
exercise  prices of $0.7282 for  redemption on March 15, 2004. In November 2003,
the Company  called the warrants  dated August 14, 2003 with exercise  prices of
$0.7788 for redemption on March 15, 2004, but conditions to this  redemption was
not met and the  redemptions  did not  occur.  The  Company  paid  approximately
$520,000  in cash to parties  that acted as our agents in  connection  with this
private placement,  and issued to the agents warrants to purchase 321,057 shares
of its common stock at an exercise  price of $0.8375 and warrants to purchase up
to 440,812  shares of its common  stock at an  exercise  prices  that range from
$0.90 per share to $1.1025 per share.

     On December 19, 2003,  the Company sold by means of a private  placement an
additional  3,583,327  shares of its common  stock at a price of $0.87 per share
for gross proceeds of approximately  $3,117,000. In addition, the Company issued
to the investors warrants to purchase 1,074,993 shares of its common stock at an
exercise  price of $0.957 per share.  The Company paid to the parties that acted
as our agents in connection  with this private  placement a total of $218,225 in
cash and issued to the agents warrants to purchase  303,608 shares of its common
stock at an exercise  price of $0.957 per share and warrants to purchase  20,689
shares of its common stock at an exercise price of $1.2375 per share.

     On March 17, 2004,  the Company  announced that all of the warrants that it
had issued on August 13, 2003,  as well as a portion of the  warrants  issued on
August 14 and 18, 2003,  had been  exercised for a total of 4,144,839  shares of
common stock.  Warrant exercise prices ranged from $0.7282 to $0.8375 per share.
The Company 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 proceed from the exercise of these warrants was $3.1 million.

     On November  24,  2004,  the Company  sold by means of a private  placement
16,465,439  shares of its common  stock at a price of $0.2733  per share for net
proceeds of approximately $4.1 million.  In addition,  the Company issued to the
investors four-year warrants to purchase 6,586,165 shares of its common stock at
an  exercise  price of  $0.4295  per share.  The  warrants  will be  exercisable
beginning  on May 24, 2005 until May 23,  2009.  The Company paid to the parties
that acted as its agents in  connection  with this private  placement a total of
$330,000 in cash, and the Company issued identical  warrants to purchase 987,926
shares  of its  common  stock at an  exercise  price of  $0.4295  as  additional
consideration for the placement agents in this transaction. Under the agreements
with  the   investors,   with  certain   limited   exceptions  the  Company  was
contractually  prohibited  from issuing  common stock or securities  convertible
into or  exercisable  for common stock before April 12, 2005 and the Company was
also  restricted  from issuing  common stock or securities  convertible  into or
exercisable  for common stock at a price per share below $0.2733 before July 12,
2005. The Company was also  restricted from issuing certain types of convertible
securities while these shares are outstanding.

     On August 28, 2005, in connection  with the $3,000,000  loan financing from
Apix International Limited (Apix), the Company provided the lender warrants with
registration rights to purchase 30,000,000 shares of capital stock with a strike
price of $0,10 per share.  Also on February 14, 2006, with the new loan facility
of $660,000 from Apix, the Company granted the lender  additional  warrants with
registration  rights to purchase  in total  31,800,000  shares of the  Company's
common  stock at an exercise  price of $0.06 per share.  Moreover  the  exercise
price for the original  30,000,000  warrant  shares was adjusted  from $0.10 per
share to $0.06 per share.


                                      F-17
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

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.

     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 one year 25% 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.


                                      F-18
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

      The following table summarizes activity under the Stock Plan:

                                                                                          Outstanding Options
                                                                    ----------------------------------------------------------------
                                                       Shares           Number of            Price              Weighted-Average
                                                     Available           Shares            Per Share             Exercise Price
                                                   ---------------  ------------------  --------------------------------------------

Shares Reserved 2003..........................         2,200,000                ---
<S>                                                     <C>                 <C>                  <C>                <C>
Options Granted...............................          (718,535)           718,535           $0.71- $1.24              $0.86
Options Cancelled.............................             3,000             (3,000)                 $1.24              $1.24
                                                  ---------------  -----------------   ---------------------------------------------
Balance as of 12/31/2003                               1,484,465            715,535            $0.71-$1.24              $0.86
Shares Reserved 2004..........................         2,000,000                ---                    ---                ---
Options Granted...............................        (1,763,000)         1,763,000          $0.38 - $1.05              $0.95
Options Cancelled.............................           432,535           (432,535)         $0.66 - $0.71              $0.71
Balance as of 12/31/2004......................         2,154,000          2,046,000          $0.37 - $1.24              $0.95
Shares Reserved 2005..........................         4,000,000                ---                    ---                ---
Options Granted...............................        (1,431,000)         1,431,000          $0.06 - $0.35              $0.06
Options Cancelled ............................           645,531           (645,531)         $0.66 - $0.71              $0.71
                                                  ---------------  -----------------   ---------------------------------------------
Balance as of 12/31/2005                               5,368,531          2,831,469          $0.06 - $1.24              $0.53
                                                  ===============  =================   =============================================
</TABLE>

     At December 31, 2005,  750,917  options were  outstanding  and  exercisable
under the Stock Plan. All options granted in 2005, 2004 and 2003 were granted at
exercise price equal to the common stock's fair value. The fair value of options
granted  under  the Stock  Plan was $ 0.05,  $0.22 and $0.20 per share for 2005,
2004 and 2003 respectively.

     The following table summarizes  information about stock options outstanding
at December 31, 2005:

<TABLE>
<CAPTION>
                                                     Options Outstanding                           Options Exercisable
                                       ------------------------------------------------    ------------------------------------
                                                        Weighted-Average
                                                          Remaining     Weighted-Average                        Weighted-Average
                                          Number of      Contractual    Exercise Price        Number of         Exercise Price
                                           shares            Life                               shares
    Range of Exercise Prices             Outstanding                                         Exercisable
----------------------------------     ---------------- --------------- ---------------    -----------------    ---------------

<S>                                        <C>                <C>           <C>                  <C>                 <C>
   $0.06 -            $1.00                  1,673,469          9.6           $0.17                 219,501              $0.84

   $1.01 -            $1.24                  1,158,000          8.2           $1.04                 531,416              $1.00
                                        ----------------                 ---------------    -----------------    ---------------

                                             2,831,469          9.0           $0.53                 750,917              $0.98
                                       ================                 ===============    =================    ===============
</TABLE>

                                      F-19
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)


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 will be
made under this plan.

     The following table summarizes activity under the 1993 stock option plan:

<TABLE>
<CAPTION>
                                                                                           Outstanding Options
                                                                    ---------------------------------------------------------------
                                                      Shares            Number of             Price              Weighted-Average
                                                     Available           Shares             Per Share             Exercise Price
                                                  ----------------  ---------------   ---------------------------------------------
<S>                                                       <C>              <C>                     <C>                 <C>
Balance at December 31, 2002..............              2,838,503        4,343,829          $0.34 - $7.00               $1.30
Options granted...........................             (2,120,998)       2,120,998          $0.71 - $1.42               $1.03
Options exercised.........................                    ---           (7,025)         $0.34 - $0.70               $0.50
Options forfeited.........................                561,824         (561,824)         $0.34 - $2.56               $1.26
Options expired due to plan termination                (1,279,329)             ---                     --                  --
                                                  ----------------  ---------------
Balance at December 31, 2003                                  ---        5,895,978          $0.34 - $7.00               $1.21
Options granted...........................                    ---              ---                    ---                 ---
Options exercised.........................                    ---          (55,953)                 $0.34               $0.34
Options forfeited..........................                   ---       (1,291,913)         $0.34 - $3.25               $1.29
                                                  ----------------  ---------------
Balance at December 31, 2004                                  ---        4,548,112          $0.34 - $7.00               $1.21
Options Granted...........................                    ---              ---                    ---                 ---
Options Exercised.........................                    ---              ---                    ---                 ---
Options Forfeited..........................                   ---         (120,546)         $0.34 - $3.25               $1.29
                                                  ----------------  ---------------
Balance at December 31, 2005                                  ---        4,427,566          $0.34 - $7.00               $1.20
                                                  ================  ===============
</TABLE>
     At December 31, 2005,  2004 and 2003,  3,972,466,  3,404,130  and 3,616,250
options were  outstanding and exercisable  under the plan,  respectively.  There
were no options  granted in 2005 and 2004. All options granted in 2003, and 2002
were granted at market value.  The fair value of options  granted under the plan
was $0.19 and $0.12 per share for 2003 and 2002, respectively.

                                      F-20
<PAGE>
<TABLE>
<CAPTION>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     The following table summarizes  information about stock options outstanding
under this plan at December 31, 2005:

                                                    Options Outstanding                           Options Exercisable
                                      ------------------------------------------------    ------------------------------------
                                                      Weighted-Average
                                         Number of       Remaining        Number of
                                          shares        Contractual   Weighted-Average       shares          Weighted-Average
    Range of Exercise Prices            Outstanding        Life         Exercise Price      Exercisable         Exercise Price
---------------------------------     ---------------- --------------- ---------------    -----------------    ---------------

<S>                  <C>                   <C>              <C>           <C>                  <C>                 <C>
   $0.34  -          $1.00                   468,500        5.3           $0.36                 464,979             $0.35

    1.01  -           1.10                 1,407,998        7.2           $1.03               1,006,123             $1.03

    1.11  -           1.20                   579,765        4.4           $1.16                 579,765             $1.16

    1.21  -           1.40                   561,629        2.5           $1.31                 561,629             $1.31

    1.41  -           1.60                 1,189,848        6.1           $1.50               1,140,144             $1.50

    1.61-             2.60                   182,979        3.6           $1.97                 182,979             $1.97

    2.61  -           7.00                    36,847        2.3           $3.55                  36,847             $3.55
                                      ---------------                                    ---------------

   $0.34  -          $7.00                 4,427,566        5.6           $1.20               3,972,466             $1.21
                                      ===============                                    ===============
</TABLE>

Re-priced Stock Options

     On March 20, 2000, the Company's  Board of Directors  approved a reduction,
effective  June 2, 2000,  in the  exercise  price of 462,576  outstanding  stock
options  held by  executive  officers  and  employees of the Company to the fair
market value of the Company's  common stock on June 2, 2000, which was $1.16 per
share.  These  options  were  granted  between July 29, 1997 and July 6, 1999 at
exercise prices ranging from $1.91 to $5.88 per share.

     Of the initial 462,576 shares that were re-priced, 432,876 shares have been
cancelled, 29,700 shares have been exercised and no shares remain outstanding as
of December 31, 2005.  The  cumulative  non-cash  compensation  expense from the
re-valuation of these re-priced  options was $25,000 from the date of re-pricing
in 2000 until  December  31,  2005.  No expense  related to the  re-pricing  was
recorded in 2005,  2004 or 2003  because the closing  prices at each  applicable
reporting date during 2005, 2004 and 2003 was below the re-priced exercise price
of $1.16 per share and therefore, no adjustment was required. Since no re-priced
options  remain  outstanding,   no  additional   compensation  expense  will  be
recognized in the future.

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 2005,  options to purchase  208,000
shares were granted with a weighted average exercise price of $0.10. In 2005, no
options were cancelled and no options were exercised.  A total of 90,000 options
are outstanding and exercisable under this plan.


                                      F-21
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)


     The following table  summarizes  activity under the 1997  Director's  Stock
Option Plan:
<TABLE>
<CAPTION>
                                                                                   Outstanding Options
                                                         -------------------------------------------------------------------
                                                            Shares           Number of      Price Per       Weighted-Average
                                                           Available         Shares         Share           Exercise Price
                                                         ----------------- --------------- --------------- -----------------
<S>                 <C> <C>                                    <C>               <C>             <C>            <C>
Balance at December 31, 2002                                   122,000           74,000    $0.88 - $1.94          $1.60
Options granted........................................         (8,000)           8,000    $0.84 - $0.84          $0.84
Balance at December 31, 2003                                   114,000           82,000    $0.84 - $1.94          $1.53
Options granted........................................         (8,000)           8,000            $0.87          $0.87
Balance at December 31, 2004                                   106,000           90,000    $0.84 - $1.94          $1.47
Options reserved.......................................        700,000              ---              ---            ---
Options granted........................................       (208,000)         208,000            $0.10          $0.10
                                                         ----------------- ---------------
Balance at December 31, 2005                                   598,000          298,000    $0.10 - $1.94          $0.51
                                                         ================= ===============
</TABLE>

On December  31, 2005,  options  covering  90,000  shares were  outstanding  and
exercisable  under the 1997  Directors  Plan.  All options  granted in 2005 were
granted at exercise  prices  equal to the common  stock's  fair value.  The fair
value of options granted under the plan was $0.05, $0.27 and $0.43 per share for
2005, 2004 and 2003.
<TABLE>
<CAPTION>
                                                  Options Outstanding                        Options Exercisable
                                                  -------------------                        -------------------
                                                     Weighted-
                                                     Average           Weighted-
                                                     Remaining         Average                           Weighted
         Range of Exercise      Number of  Shares    Contractual       Exercise       Number of Shares   Average
         Price                  Outstanding          Life (Years)      Price          Exercisable       Exercise  Price
         -----------------      -----------------   ------------      ----------      ---------------   ---------------
<S>             <C>                   <C>                 <C>             <C>              <C>                <C>
             $0.10-$0.83                208,000           9.5           $0.10                    ---            ---

             $0.84-$1.94                 90,000           5.7           $1.47                 90,000          $1.47
                                ----------------                                      ---------------
             $0.10-$1.94                298,000           8.3           $0.51                 90,000          $1.47
                                ================                                      ===============

</TABLE>
                                      F-22
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)


1997 Employee Stock Purchase Plan

     In March  1997,  the Board of  Directors  adopted the 1997  Employee  Stock
Purchase Plan, as amended, and has reserved 1,750,000 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, 2005,  1,503,204 shares of common
stock have been issued under the purchase plan. In 2005, 2004, and 2003, a total
of  286,045,   264,364,   and  253,591   shares  were  issued  under  the  plan,
respectively.

Stock Based Compensation

     On March 5,  2003,  the  Board of  Directors  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  Board of  Directors  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 Board of Directors  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.

     On February  12, 2004,  the Board of Directors  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 Board of Directors  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.

                                      F-23
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

Warrants

     The following table summarizes  information  about warrants  outstanding at
December  31,  2005 and the number of shares of common  stock that the holder is
entitled to purchase:
<TABLE>
<CAPTION>
                                                                                                                      Expiration
      Date                          In Connection With                          Price Range         Outstanding          Date
------------------ ------------------------------------------------------    ------------------    --------------- -----------------
<S>   <C>                                                                          <C>                    <C>           <C>
      06/01        Finance Consulting for Private Placement                        $1.20                  225,000       06/06
      08/02        Private Placement                                               $0.90                2,025,991       08/06
      08/02        Private Placement                                              $1.285                   58,365       08/06
      08/02        Private Placement Commission                               $0.792 - $1.13              698,287       08/06
      10/02        Finance Consulting for Public Relations                         $0.90                  160,000       10/07
      12/02        Private Placement                                              $0.825                1,932,000       12/06
      12/02        Private Placement Commission                                   $0.8245                 435,999       12/06
      01/03        Private Placement                                              $0.825                  505,332       01/07
      03/03        Private placement                                              $1.250                1,176,470       03/07
      03/03        Private Placement Commission                                   $0.935                  294,117       03/07
      04/03        Private Placement                                           $0.935-$1.25             1,758,234       04/07
      04/03        Private Placement Commission                                   $1.340                  404,440       04/07
      08/03        Private Placement Commission                               $0.779 - $0.838             721,552       08/08
      12/03        Private Placement                                              $0.957                1,074,993       12/07
      12/03        Private Placement Commission                                $0.957-$1.238              324,297       12/08
      11/04        Private Placement                                              $0.4295               6,586,165       11/09
      11/04        Private Placement Commission                                   $0.4295                 987,926       11/09
      08/05        Loan Financing                                                  $0.10               30,000,000       08/15
                                                                                                        ---------
                   Total Warrants Outstanding                                                          49,369,168
</TABLE>
     On August 5, 2002, the Company issued  warrants to purchase an aggregate of
2,036,491  shares of our common stock at an exercise price of $0.90 per share in
connection with the August 2002 private placement transaction.  The Company also
issued  warrants to purchase an aggregate of 678,832  shares of our common stock
at an exercise price of $0.792 as additional  commission for the placement agent
in  this  transaction.  The  warrant  issued  to  the  placement  agent  is  not
redeemable.  The warrants  issued to the investors are  redeemable at a purchase
price of $0.01 per warrant at the Company's option of its common stock closes at
or above $1.44 per share for fifteen  consecutive  trading  days and they remain
unexercised 30 days after the Company gives notice to holders of the warrants of
its intent to redeem.

     On August 12, 2002, the Company issued warrants to purchase an aggregate of
58,365  shares of our common  stock at an exercise  price of $1.285 per share in
connection with the August 2002 private placement transaction.  The Company also
issued warrants to purchase an aggregate of 19,455 shares of our common stock at
an exercise price of $1.131 as additional  commission for the placement agent in
this  transaction.  The warrants  issued to the investors are  redeemable by the
Company  if its common  stock  closes at or above  $2.056 per share for  fifteen
consecutive  trading days and they remain  unexercised 30 days after the Company
gives  notice to holders of the  warrants  of its intent to redeem.  The warrant
issued to the placement agent is not redeemable.

     On December 31, 2002, the Company issued  warrants to purchase an aggregate
of 1,962,000 shares of our common stock at an exercise price of $0.825 per share
in  connection  with  the  December  2002  private  placement  transaction.   In
connection with this  transaction,  the Company also issued warrants to purchase
an  aggregate  of 435,999  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.


                                      F-24
<PAGE>

                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     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.

     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.


                                      F-25
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     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 warrant will be  exercisable  beginning on August
28, 2005 for a period of ten years.

     The holders of the August and  December  2003  warrants  have  registration
rights  that  required  the  Company  to file  and  have  declared  effective  a
registration  statement  with the SEC to register the resale of the common stock
issuable upon exercise of the warrants.  Under Emerging Issues Task Force (EITF)
00-19,   "Accounting  for  Derivative  Financial  Instruments  Indexed  to,  and
Potentially Settled In, a Company's Own Stock," the ability to have an effective
registration  of  stock  is  deemed  to be  outside  of the  Company's  control.
Therefore, the August 2003 warrants were valued at inception and revalued on the
effective date of the registration  statement.  The net change in the fair value
of the August 2003  warrants on the two  valuation  dates were expensed as other
non-cash  expense of $904,000 for the year ended December 31, 2003. The December
2003  warrants  were valued at inception  and revalued at the balance sheet date
(December 31, 2003), as the registration  statement for these warrants  occurred
subsequent  to 2003  year-end.  There  was no  change  in the fair  value of the
December 2003 warrants  between the two valuation dates noted above,  and hence,
no amounts were expensed as other  non-cash  expense for the year ended December
31, 2003.  As the  registration  was not yet declared  effective by December 31,
2003,  the  $658,000  fair value of December  2003  warrants was reported on the
balance  sheet as warrant  liability at December 31, 2003. On February 12, 2004,
the registration statement for the December 2003 warrants was declared effective
with the SEC.  Accordingly,  a net increase in the fair value from  December 31,
2003 to the date of effectiveness of $33,000 was expensed as non-cash expense in
the first quarter 2004,  and the $691,000  warrants'  value on February 12, 2004
was reclassified to equity.

     The August 2005  warrants  were  valued at  inception  and  revalued at the
balance  sheet date  (December  31,  2005).  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 is reported on the balance sheet as warrant  liability at December
31, 2005.

     The Company has  reserved  49,369,168  shares of common  stock for issuance
upon exercise of all the warrants described above.

     The  investors  who  participated  in the December 31, 2002 and January 22,
2003 closings of our private placement and the warrants held by the participants
in our 1999 and 2000 private placements have anti-dilution protections that have
been triggered in certain instances.

     In addition, the purchase agreements signed in connection with the December
31,  2002 and the January 22,  2003  closings  of our recent  private  placement
provide  that  if at any  time  during  the two  year  period  beginning  on the
respective closing dates of that placement our common stock is delisted from the
Nasdaq National  SmallCap Market for any reason,  the investors shall receive an
amount in cash equal to 1.5% of the aggregate  purchase  price of all shares and
warrants purchased under those agreements for each month or portion thereof from
the date of such delisting  until our common stock is again listed on the Nasdaq
National SmallCap Market. No such penalties became due under these provisions.


                                      F-26
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

4.    Notes Receivable from Former Officers

     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  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, 2005.

     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, 2005, the balance of the loan is approximately $ 217,513  including
approximately  $25,031 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, 2005.

5.    Income Taxes

     There has been no  provision  for  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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                       2005          2004            2003
-------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>             <C>
Tax Benefit at expected federal rate                 -34.00%       -34.00%         -34.00%
-------------------------------------------------------------------------------------------
State, Net of Federal Benefit                         -5.80%         0.00%           0.00%
-------------------------------------------------------------------------------------------
Research and development credits                       0.00%        -3.50%          -1.50%
-------------------------------------------------------------------------------------------
Non-deductible derivative and other expense            0.10%         3.70%           3.20%
-------------------------------------------------------------------------------------------
Net Operating Loss not benifited                      39.90%        40.10%          26.70%
-------------------------------------------------------------------------------------------
Other, net                                            -0.20%        -6.30%           5.60%
-------------------------------------------------------------------------------------------
                                                       0.00%         0.00%           0.00%
</TABLE>
     As of December  31, 2005,  the Company had federal and state net  operating
loss carry forwards of approximately  $117,002,000 and $37,208,000 respectively.
The federal and state net operating loss carry forwards expires at various dates
beginning in 2006 through 2025, if not utilized.

     The Company also had federal and state research and  development tax credit
carry  forwards of  approximately  $1,051,000  and $986,000,  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.


                                      F-27
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     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, 2005 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                December           December
                                                                   31,                31,
                                                                  2005               2004
                                                              --------------     --------------
<S>                                                                <C>                <C>
 Net operating loss carry forwards.........................   $      42,284      $      38,565
 Research credits carry forwards (federal and state).......           1,702              1,665
 Manufacturing investment credit carry forwards............              78                 78
 Capitalized research and development......................           1,044              1,277
 Other, net................................................             597                777
                                                              --------------     --------------

 Total deferred tax assets                                           45,705             42,362
 Valuation allowance for deferred tax assets                        (45,705)           (42,362)
                                                              --------------     --------------
                                                              $           -      $           -
                                                              ==============     ==============
</TABLE>

     As of December  31, 2005 and 2004,  the Company had  deferred tax assets of
approximately  $45,705,000  and  $42,362,000,  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  $3,342,000  and  $3,906,000  during the years ended
December 31, 2005 and 2004,  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.

6. 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-28
<PAGE>
                                  CARDIMA, INC.
                  NOTES TO FINANCIAL STATEMENTS ---(Continued)

     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.

7. Subsequent Event

     On February 14, 2006,  the Company  entered into a new loan  facility  term
sheet (the "New Loan Facility")  with the lender,  Apix  International  Limited,
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,  the Company 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,  the Company has
granted the Lender a new warrant to purchase  23,800,000 shares of the Company's
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,  the
Company  will grant the lender  warrants  to purchase  an  additional  8,000,000
shares of the Company's common stock at an exercise price of $0.06 per share for
a term of ten  years;  (iii) the  Company  has  granted  the lender the right to
convert the loan principal, interest, facility fees and exit fees into shares of
the Company's  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 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.

     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,
if the  lender  ultimately  exercises  this  option,  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.  Additionally,  for the warrant shares,  any beneficial effect resulting
from the  excess of the  average  market  price of the stock  over the $0.06 per
share  conversion  price will also be charged to  non-cash  interest  during the
periods the loan is outstanding.


                                      F-29
<PAGE>
ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

On October 17, 2005,  BDO Seidman,  LLP resigned as the  independent  registered
public  accounting firm for Cardima,  Inc. In connection with its audits of each
of the two most recent  fiscal years and through  October 21, 2005,  the date of
the Form 8-K reporting this event,  there were no disagreements with BDO Seidman
LLP on any matter of accounting  principles or  practices,  financial  statement
disclosure or auditing scope or procedure.

Also on  October  17,  2005,  we engaged  Marc Lumer & Company as our  principal
independent  accountants  to audit our financial  statements.  The engagement of
Marc Lumer & Company was approved by our Board of Directors on October 18, 2005.

Neither we nor anyone  engaged  on our  behalf has  consulted  with Marc Lumer &
Company  during our two most  recent  fiscal  years nor  during  any  subsequent
interim  period  prior to its  appointment  as auditor  for the fiscal year 2005
audit  regarding (i) the  application  of  accounting  principles to a specified
transaction  either  completed  or proposed,  or the type of audit  opinion that
might be  rendered  on our  financial  statements  or (ii) any other  matters or
reportable  events  as set  forth in Items  304(a)(2)(i)  and  304(a)(2)(ii)  of
Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures

We maintain  "disclosure  controls and  procedures,"  as such term is defined in
Rules  13a-15(e) and 15d-15(e)  under the  Securities  Exchange Act of 1934 (the
"Exchange  Act"),  that are designed to ensure that  information  required to be
disclosed  by us in reports  that we file or submit  under the  Exchange  Act is
recorded, processed,  summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer,  as appropriate,  to allow timely decisions
regarding  required  disclosure.  In designing  and  evaluating  our  disclosure
controls and procedures,  management  recognized  that  disclosure  controls and
procedures,  no  matter  how well  conceived  and  operated,  can  provide  only
reasonable,  not  absolute,  assurance  that the  objectives  of the  disclosure
controls and procedures are met. Additionally,  in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the  cost-benefit  relationship of possible  disclosure  controls and
procedures.  The design of any disclosure  controls and procedures also is based
in part upon certain  assumptions  about the  likelihood of future  events,  and
there can be no assurance  that any design will succeed in achieving  its stated
goals under all potential future conditions.

As of the end of the period covered by this report,  we conducted an evaluation,
under the supervision and with the  participation of our chief executive officer
and chief  financial  officer of our  disclosure  controls  and  procedures  (as
defined in Rule 13a-15(e) and Rule  15d-15(e) of the Exchange  Act).  Based upon
this  evaluation,  our  chief  executive  officer  and chief  financial  officer
concluded  that our  disclosure  controls and  procedures  are not  effective to
ensure that  information  required to be  disclosed by us in the reports that we
file or submit under the Exchange Act is  recorded,  processed,  summarized  and
reported, within the time periods specified in the Commission's rules and forms.
This conclusion is based on the following developments:

o    The existence of comments  issued by the reviewing  staff of the Securities
     and Exchange Commission relating to disclosure and classification issues in
     the Company's  Annual and Periodic  filings,  which  comments have not been
     fully resolved; and
o    The failure to file or submit the Company's  Annual Report on Form 10-K for
     the year ending December 31, 2005 within the time periods  specified in the
     Commission's rules and forms.

Notwithstanding the foregoing,  as previously  disclosed,  the Company has taken
the following steps to improve its disclosure controls and procedures:

o    In  October,  2005,  the  Company  hired  Chris  Mak to  serve  as its  new
     Controller;
o    In October,  2005,  the Company  hired Jim Pardee to serve as a finance and
     accounting consultant.


                                      F-30
<PAGE>
While management  believes  progress had been made with respect to these issues,
it nevertheless believes that there continues to exist material weakness in this
area.  We believe  additional  progress in this area will  continue  through the
first quarter of 2006.

In addition,  the Company has adopted a procedure to ensure that new  accounting
standards  are  reviewed  and  applied  correctly.  Under  this  procedure,  the
Company's Controller will monitor the release of new accounting standards.  Once
the Controller becomes aware of a new accounting  standard,  he will present the
new  standard  to members of the Audit  Committee  and  schedule a meeting  with
members of the Audit Committee to discuss the application of the new standard to
the Company.  Thereafter,  once a determination  concerning the application of a
new standard has been made,  the Company will present its  determination  to its
auditor for review and comment.

(b) Limitations on Effectiveness of Disclosure Controls and Procedures.

Disclosure   controls  and  procedures  cannot  provide  absolute  assurance  of
achieving financial reporting objectives because of their inherent  limitations.
Disclosure  controls and procedures is a process that involves  human  diligence
and  compliance  and is subject to lapses in judgment and  breakdowns  resulting
from human failures. Disclosure controls and procedures also can be circumvented
by collusion or improper management override. Because of such limitations, there
is a risk that  material  misstatements  may not be  prevented  or detected on a
timely basis by disclosure  controls and  procedures.  However,  these  inherent
limitations are known features of the financial reporting process. Therefore, it
is  possible  to design  into the  process  safeguards  to  reduce,  though  not
eliminate, this risk.


ITEM 9B. OTHER INFORMATION

None.


                                      F-31
<PAGE>
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Directors of the Registrant

The following sets forth certain information regarding our directors as of April
28, 2006:
<TABLE>
<CAPTION>
                                                                                                     Director
         Name of Director             Age                    Principle Occupation                      Since
-----------------------------------  -------  ---------------------------------------------------   ------------
<S>                                    <C>                         <C>                                   <C>
Gabriel B. Vegh                        66     Chief Executive Officer and                               1992
                                              Chairman of our Board of Directors
Jesse D. Erickson                      74     Retired Executive of Kaiser Aluminum and                  2001
                                              Retired Director and Chairman of the Investment
                                              Committee of S.H. Cowell Foundation
Rodolfo C. Quijano, Ph.D., M.D.        70     Chief Technical Officer of 3F Therapeutics, Inc.          1999
Phillip Radlick, Ph.D.                 68     Independent Consultant                                    1994
Lawrence J. Siskind                    53     Partner, Harvey Siskind Jacobs LLP                        2001
John R. Cheney                         48     Director, Apix International Limited                      2006
Tony K. Shum                           37     Business Development Executive, HSBC                      2006
Tina Sim                               37     Independent Consultant                                    2006
Andrew K. Lee                          35     Financial Consultant, Asia Peak Holdings Limited          2006

</TABLE>

Mr. Gabriel B. Vegh,  our founder,  has been our Chief  Executive  Officer since
June 2000 and  Chairman of our Board of Directors  since May 2001.  Mr. Vegh has
been one of our directors  since November 1992, and served as our President from
June 2000 to May 2001. He was our  Executive  Vice  President  from January 1995
until June 2000,  and our Chief  Operating  Officer from  November  1994 through
January 1995.  Mr. Vegh was our President  from May 1993 through  November 1994,
and our Chief  Financial  Officer  from May 1993  through  July  1996.  Prior to
joining us, from  August 1985 until May 1993,  Mr. Vegh was the Vice  President,
Operations  of Target  Therapeutics,  Inc.,  which is now a  division  of Boston
Scientific  Corporation.  From  February  1983 until August  1985,  Mr. Vegh was
General Manager,  Pilot  Operations of Advanced  Cardiovascular  Systems,  Inc.,
which is now a division  of Guidant  Corporation.  Mr.  Vegh  received a B.S. in
Mechanical Engineering from the New Jersey Institute of Technology.

Mr. Jesse D. Erickson has been one of our directors since May 2001. Mr. Erickson
was  the  President  of  the S.  H.  Cowell  Foundation,  a  private  charitable
foundation in San  Francisco,  from 1991 to 1998. He then served as director and
chairman of the investment  committee of the S. H. Cowell  Foundation until 2001
when he retired.  Mr. Erickson worked for Kaiser Aluminum & Chemical Corporation
for 32 years,  holding various executive positions including President of Kaiser
Aluminum  International,  Chief  Administrative  Officer  and  Sheet  and  Plate
Division Manager. He retired from Kaiser in 1989 as a Senior Vice President. Mr.
Erickson  received  a  B.S.  in  Business  and  Chemical  Engineering  from  the
Massachusetts Institute of Technology.

Dr.  Rodolfo C. Quijano has been one of our directors  since  November 1999. Dr.
Quijano is a founder of VenPro,  Inc. and served as its Chief Technical  Officer
from 1997 to 2003, and has been Chief Technical Officer of 3F Therapeutics, Inc.
since  1998.  Dr.  Quijano  serves on the  Board of  Directors  of  Orqis,  Inc.
(formerly  ForeFlow,  Inc.),  of which he is also the founder.  Previously,  Dr.
Quijano was the General Manager of Hepatix,  AG, from 1993 to 1994 and from 1987
to 1993 was the Vice President of Research and Development,  Regulatory  Affairs
and Clinical Research for the Edwards  Cardiovascular Surgery Division of Baxter
Healthcare.  Dr.  Quijano  received a B.S. in Chemistry  from the  University of
Alabama and a Ph.D. from the University of Central America.

Dr.  Phillip  Radlick has been one of our directors  since  November  1994.  Dr.
Radlick is currently an independent  consultant in the healthcare industry.  Dr.
Radlick served as President and Chief Executive Officer of Lipid Sciences, Inc.,
a publicly held  biotechnology  company,  from June 2000 until October 2002. Dr.


                                      F-32
<PAGE>
Radlick was our President and Chief Executive Officer from November 1994 to June
2000.  Prior to joining us, from November 1992 until October 1994,  Dr.  Radlick
was the  President  and Chief  Executive  Officer of Hepatix,  Inc.,  a start-up
medical device company.  From November 1986 until November 1992, Dr. Radlick was
the President of Edward's  Cardiovascular Surgery Division, a division of Baxter
Healthcare   responsible   for  the   development,   manufacture   and  sale  of
cardiovascular products. Dr. Radlick received a B.S. in Chemistry and a Ph.D. in
Organic Chemistry from the University of California, Los Angeles.

Mr.  Lawrence J. Siskind has been one of our directors  since December 2001. Mr.
Siskind is currently a partner of Harvey  Siskind  Jacobs LLP, a law firm in San
Francisco,  California  where he  specializes in  litigation,  registration  and
transactional   advice   regarding   domestic  and   international   copyrights,
trademarks,  trade secrets and unfair competition.  Mr. Siskind was appointed by
President  Reagan in 1987 to serve as the  nation's  first  Special  Counsel for
Immigration Related Unfair Employment  Practices,  returning to private practice
in 1989. In 1996, former  California  Governor Pete Wilson appointed Mr. Siskind
to serve as a charter  member of the State  Commission  on Academic  Content and
Performance Standards.  In 1998, former Governor Wilson appointed Mr. Siskind to
his Advisory  Council on Electronic  Commerce.  Mr. Siskind received a B.A. from
Harvard University and a J.D. from Harvard Law School.

Mr. John R. Cheney has been one of our directors since February 2006. Mr. Cheney
is a corporate  consultant  based in Hong Kong since January 2001. Mr. Cheney is
also a director and shareholder of Apix  International  Limited.  Mr. Cheney was
previously  the  Chairman  and CEO of a Hong Kong based  telecommunications  and
Internet  Services  Company.  Prior to his  business  career,  Mr.  Cheney was a
corporate lawyer in private practice qualified in Hong Kong, Canada and Britain.

Mr. Tony K. Shum has been one of our directors  since February 2006. Mr. Shum is
a  Business  Development  Executive  for the  global  banking  group  HSBC since
February  2006.  From  February  2001 to  January  2006,  Mr.  Shum  worked as a
consultant providing business strategy and analysis services in Asia Pacific and
Europe  for  businesses   ranging  from  start-up   ventures  to  multi-national
corporations.  Also Mr.  Shum worked for Walt  Disney  Television  International
where  he  helped  to  establish  its  broadcast   television  business  in  the
Asia-Pacific  region. Mr. Shum is a Chartered Accountant and worked for Deloitte
& Touche in Canada and Price Waterhouse in Hong Kong.

Ms.  Tina Sim has been one of our  directors  since  February  2006.  Ms. Sim is
currently  semi-retired.  Ms. Sim is a  Chartered  Accountant  and a CFA Charter
holder.  From 1992 until 1995,  Ms. Sim worked for  Deloitte & Touche in Canada.
From 1997 to 1999, Ms. Sim worked for Deloitte Touche Tohmatsu in Hong Kong. Ms.
Sim's  background  includes  advisory  work  on  general  accounting,   tax  and
regulatory matters and cross-border jurisdictional issues.

Mr.  Andrew K. Lee has been one of our directors  since April 2006.  Mr. Lee has
served as the financial consultant to Asia Peak Holdings Limited since 2003. His
main   responsibilities    include   identifying   and   evaluating   investment
opportunities  around the world and conducting risk assessment,  asset valuation
and due  diligence  activities.  In 2001,  Mr.  Lee was a  valuation  manager at
Deloitte  &  Touche  in  San   Francisco,   where  he  specialized  in  advising
multinational  corporations regarding the taxation of related party transactions
and conducting  valuation of intangible  assets.  Prior to working at Deloitte &
Touche,  Mr. Lee worked for Arthur  Andersen as a senior  associate in the Tax &
Advisory Group.

Executive Officers

In addition to Mr. Vegh, our Chief Executive Officer,  whose information appears
above,  set forth below are each of our other executive  officers.  There are no
family relationships among any of our directors or executive officers.

Mr. Victor Barajas (age 42) was appointed as Senior Vice President of Operations
in October 2001 and has been  responsible  for all operations and  manufacturing
activity as our Vice President of Operations  since August 1997.  From September
1995 until August 1997,  Mr.  Barajas was our Director of  Operations,  from May
1994 until September  1995, Mr. Barajas was our Manager of Operations,  and from
June 1993 until May 1994, Mr. Barajas was one of our senior engineers.  Prior to
joining us,  from 1990 until June 1993,  Mr.  Barajas  was  Process  Development
Engineer and then Project Leader and Manager of the  Engineering  Department for
Target  Therapeutics,  Inc.,  which  is  now a  division  of  Boston  Scientific
Corporation. From 1988 until 1990, Mr. Barajas was employed by Critikon, Inc. as
a Research and  Design/Manufacturing  Engineer in the medical  disposables area.
Mr.  Barajas  received his B.S.  degree in Industrial  Technology  from San Jose
State University.

Mr. Eric Chan, Ph.D.,  F.E.S.C.  (age 48) has been our Vice President of Product
Development  since June 1998.  Prior to joining  us,  from  August 1991 to March
1993, Mr. Chan was the Director of Engineering  and from April 1993 to May 1998,


                                      F-33
<PAGE>
Vice President of Engineering at Arrhythmia Research  Technology,  Inc. where he
coordinated   and   directed   the    development   of   computerized    cardiac
electrophysiology  and catheter lab systems,  digital Holter and high-resolution
ECG systems. Mr. Chan received his B.S.E.E.  from Purdue University,  his M.S.E.
in Biomedical  Engineering from the University of Texas at Austin, and his Ph.D.
in  Biomedical  Engineering  from the  University  of Texas at Austin.  Mr. Chan
completed the Global  Bio-Executive  Program at the  University  of  California,
Berkeley, Haas School of Business, in 2005. Mr. Chan was elected a Fellow of the
European  Society  of  Cardiology  and a  Senior  Member  of  the  Institute  of
Electrical and Electronic Engineers in 2003.


Audit Committee Financial Expert

Our Board of Directors has determined  that the Audit Committee does not have an
"audit committee financial expert" as defined by the rules of the Securities and
Exchange  Commission.  We have  not been  able to  attract  an  audit  committee
financial  expert to join our Board of  Directors,  which we believe has been in
part due to Cardima's financial situation.

Audit Committee

We have a separately designated standing Audit Committee. During the fiscal year
ended December 31, 2005, Audit Committee consisted of three directors: Mr. Jesse
D. Erickson  (Chairperson),  Dr. Rodolfo C. Quijano and Mr. Lawrence J. Siskind,
all of whom meet the independence  requirements  for audit committee  membership
under Rule 10A-3 of the Securities Exchange Act of 1934.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors, executive officers and
10%  stockholders  (collectively,  "Reporting  Persons")  to file  with  the SEC
initial  reports of  ownership  and changes in  ownership  of our Common  Stock.
Reporting  Persons are required by SEC  regulations to furnish us with copies of
all Section  16(a)  reports  they file.  To our  knowledge,  based solely on our
review of the copies of such reports  received or written  representations  from
certain Reporting  Persons that no other reports were required,  we believe that
during our fiscal year ended  December 31, 2005,  all Reporting  Persons  timely
filed all such reports  other than (i) Jesse D. Erickson who filed one late Form
4 in connection  with an option granted under the 1997  Directors'  Stock Option
Plan;  (ii) Rodolfo C.  Quijano,  Ph.D.  who filed one late Form 4 in connection
with an option  granted  under the 1997  Directors'  Stock  Option  Plan;  (iii)
Phillip  Radlick,  Ph.D. who filed one late Form 4 in connection  with an option
granted under the 1997  Directors'  Stock Option Plan;  (iv) Lawrence J. Siskind
who filed one late Form 4 in  connection  with an option  granted under the 1997
Directors' Stock Option Plan; (v) Victor J. Barajas who filed one late Form 4 in
connection with an option grant under the Amended and Restated 2003 Stock Option
Plan,  (vi) Eric K. Y. Chan,  Ph.D. who filed one late Form 4 in connection with
an option  grant under the Amended and Restated  2003 Stock  Option Plan,  (vii)
Gabriel  B. Vegh who filed one late Form 4 in  connection  with an option  grant
under the Amended and Restated 2003 Stock Option Plan.

Code of Ethics

We have adopted a Code of Business  Conduct  that applies to all our  directors,
officers and  employees.  A copy of the code of ethics will be provided  free of
charge  upon  written  request  to our  Secretary  at the  address  shown on the
coverage page of this report and is  accessible,  free of charge at our Internet
website, http://www.cardima.com.  If we grant waivers from or make amendments to
this code of ethics that are required to be disclosed pursuant to the Securities
Exchange  Act of 1934 or  applicable  listing  requirements,  we will make those
disclosures  on our website within four business days following the date of such
waiver or amendment.  Our website and the information  contained in or connected
to our website are not part of this report. Item 405 of Regulation S-K calls for
disclosure  of any known  late  filing or failure by an insider to file a report
required by Section 16(a) of the Exchange Act.


                                      F-34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

<TABLE>
<CAPTION>
                                                              Annual                             Long-Term
                                                            Compensation                         Compensation
                                                                                                    Awards
                                               --------------------------------------------   -------------------

                                                                                Other             Securities
                                                                               Annual             Underlying          All Other
Name & Principle Position               Year    Salary (1)     Bonus (2)       Compensation       Options/SARs (#)   Compensation
---------------------------------------------- ------------ -------------- ----------------   ------------------------------------

<S>                                      <C>       <C>          <C>                <C>               <C>                 <C>
Gabriel B. Vegh                          2005   $ 256,361    $          -  $            -                500,000        3,136 (5)

Chief Executive Officer and              2004   $ 274,997    $          -  $            -                500,000          486 (5)

Chairman of the Board of Directors       2003   $ 285,574    $     50,000  $            -                500,000          522 (5)


William K. Wheeler (3)                   2005   $ 167,258    $          -  $            -                    ---          516 (6)

President and                            2004   $ 249,995    $          -  $            -                250,000          390 (6)

Chief Operating Officer                  2003   $ 259,610    $     25,000  $            -                250,000          390 (6)

Victor J. Barajas                        2005   $ 163,096    $          -  $            -                300,000          206 (6)

Senior Vice President, Operations        2004   $ 183,997    $          -  $            -                175,000          390 (6)

                                         2003   $ 191,074    $     30,000  $            -                175,000          390 (6)

Eric K.Y. Chan, Ph.D.                    2005   $ 160,833    $          -  $            -                250,000          305 (6)

Vice President, Product Development      2004   $ 180,003    $          -  $            -                150,000          390 (6)

                                         2003   $ 186,926    $     25,000  $            -                150,000          390 (6)

Barry D. Michaels (4)                    2005   $ 135,303    $          -  $       31,588  (7)               ---        9,540 (8)

Interim Chief Financial Officer          2004   $ 308,232    $          -  $       49,836  (9)           100,000       13,591 (8)

                                         2003   $ 143,052    $     35,000  $      $25,867 (10)           100,000       $    -
</TABLE>

(1)  Includes amounts deferred under the Company's 401(k) plan.
(2)  Amounts paid as bonuses for services  rendered are reported for the year in
     which they were earned even if they were paid in the following year.  Prior
     to 2004,  we reported  bonus amounts in the year they were paid rather than
     the year in which they were earned.
(3)  Mr. Wheeler resigned in July 2005.
(4)  Mr. Michaels joined the Company as Interim Chief Financial  Officer in July
     2003 and resigned in June 2005.
(5)  Includes amounts paid for life insurance premiums and sport club discounts.
     Prior to 2005, we reported life  insurance  premiums based on their taxable
     value rather than the actual amounts paid.
(6)  Includes  amounts  paid  for life  insurance  premiums.  Prior to 2005,  we
     reported life  insurance  premiums based on their taxable value rather than
     the actual amounts paid.
(7)  Includes $9,912 in housing expenses, $13,339 in travel expenses, and $8,337
     in payroll tax reimbursements.
(8)  Includes  amounts  reimbursed  for  medical,  dental and  vision  insurance
     premiums.
(9)  Includes  $$21,583 in housing  expenses,  $17,081 in travel  expenses,  and
     $11,172 in
(10) payroll tax reimbursements. Includes $11,210 in housing expenses, $8,967 in
     travel expenses, and $5,690 in payroll tax reimbursements.


                                      F-35
<PAGE>
Option/SAR Grants in Fiscal Year Ended December 31, 2005

The following  table  summarizes  stock option grants during fiscal year 2005 to
our Chief Executive Officer and our other Named Executive Officers.
<TABLE>
<CAPTION>
                                                                                                                Potential Realizable
                                                                                                                  Value at Assumed
                                                     Number of       Percent of                                annual Rates of Stock
                                                      Shares        Total Options    Exercise or                Price Appreciation
                                                    Underlying       Granted to      Base Price                 for Option Term (4)
                                                     Options        Employees in     per Share     Expiration  ---------------------
                                                  Granted (#)(1)   Fiscal 2005 (2)    ($/Sh) (3)    Date         5% ($)      10% ($)
--------------------------------------------      --------------   --------------  -------------  -----------  ----------   --------
<S>                                                  <C>                <C>           <C>            <C>        <C>          <C>
Gabriel B. Vegh                                      500,000            35.0%      $      0.06    11/10/15     $ 18,867     $ 47,812
William K. Wheeler                                       ---             ---%      $       ---         ---     $    ---     $    ---
Victor J. Barajas                                    300,000            21.0%      $      0.06    11/10/15     $ 11,320     $ 28,687
Eric K. Y. Chan, Ph.D.                               250,000            17.5%      $      0.06    11/10/15     $  9,433     $ 23,906
Barry D. Michaels                                        ---             ---%      $       ---         ---     $    ---     $    ---
</TABLE>

(1)  These options vest in equal monthly  installments  over a four-year  period
     commencing on the date of grant,  except that no options are exercisable or
     vested for the first 6 months after the date of grant.

(2)  We granted stock options representing  1,431,000 shares of our Common Stock
     to employees in the last fiscal year.

(3)  The  exercise  price of each  option  was equal to 100% of the fair  market
     value of the Common Stock on the date of grant.

(4)  The  potential   realizable  value  of  each  grant  of  options  has  been
     calculated,  pursuant to the regulations  promulgated by the SEC,  assuming
     that the market  price of the Common  Stock  appreciates  in value from the
     date of grant to the end of the option term at the  annualized  rates of 5%
     and 10%,  respectively.  These  values do not  represent  our  estimate  or
     projection of future Common Stock value. There can be no assurance that any
     of the value reflected in the table will be achieved.

Aggregated  Option/SAR  Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

The following table sets forth certain information with respect to stock options
exercised by our Chief Executive Officer and our other Named Executive  Officers
during the fiscal year ended  December  31, 2005.  In  addition,  the table sets
forth the number of shares  covered by stock options as of the fiscal year ended
December  31,  2005  and  the  value  of  "in-the-money"  stock  options,  which
represents the positive  spread between the exercise price of a stock option and
the market  price of the shares  subject to such option at the end of the fiscal
year ended December 31, 2005.
<TABLE>
<CAPTION>
                                                                                               Number of              Value of
                                                                                             Unexercised           Unexercised
                                                                                               Options/             In-the-Money
                                                                                             SARs at Fiscal          Options/SARs
                                                              Shares            Value        Year End (#)     at Fiscal Year End ($)
                                                             Acquired on      Realized       Exercisable/           Exercisable/
Name                                                        Exercise (#)         ($)       Unexercisable (1)     Unexercisable (2)
-----------------------------------------------            --------------   ------------  --------------------   ------------------
<S>                                                                   <C>             <C>           <C>         <C>
Gabriel B. Vegh                                                       0               0     1,729,643 / 947,9       --- / ---
William K. Wheeler                                                    0               0      957,000 /267,479       --- / ---
Victor J. Barajas                                                     0               0     547,266 / 482,006       --- / ---
Eric K. Y. Chan, Ph.D.                                                0               0     455,355 / 384,885       --- / ---
Barry D. Michaels                                                     0               0        --- /  ---           --- / ---
</TABLE>
(1)  Includes  those  options for which the fair market value of the  underlying
     securities  at  December  31,  2005 ($ 0.045  per  share)  is less than the
     exercise price.
(2)  Based on the $ 0.045 per share closing price of the Company's  Common Stock
     on the NASD's  Over-the-Counter  Bulletin Board on December 31, 2005,  less
     the exercise price of the options.


                                      F-36
<PAGE>
Compensation of Directors

Directors  currently receive no cash fees for services provided in that capacity
but  are  reimbursed  for  reasonable   expenses  incurred  in  connection  with
attendance  at meetings of the Board of  Directors.  Our 1997  Directors'  Stock
Option  Plan (the  "Directors'  Plan")  provides  that each person who becomes a
non-employee  director  of the  Company  will be granted a  non-statutory  stock
option to  purchase  20,000  shares of  Common  Stock on the date on which  such
person first  becomes our  non-employee  director.  This initial  grant  becomes
exercisable  as to 25% of the shares  subject to the grant per year  through the
fourth  anniversary  of the date of grant.  In  addition,  the  Directors'  Plan
provides that on the date of each annual  meeting of our  stockholders  at which
such director is re-elected, each such continuing non-employee director shall be
granted an  additional  option to purchase  52,000 shares of Common Stock if, on
such date,  he or she shall have served on the Board of  Directors  for at least
three  months  during the  current  fiscal  year,  and such  option  will become
exercisable in full on the first anniversary of the date of grant.

On June 16,  2005,  we granted  each of Mr. Jesse D.  Erickson,  Dr.  Rodolfo C.
Quijano,  Mr. Lawrence J. Siskind and Dr. Phillip  Radlick,  options to purchase
52,000 shares of our Common Stock.  These grants have an exercise price of $0.10
per share, were made under our 1997 Directors' Stock Option Plan and the options
would be fully vested on the first anniversary of the date of grant.

See "Summary Compensation Table" and "Option/SAR Grants in Last Fiscal Year" for
information concerning  compensation relating to Mr. Vegh's services as Chairman
and Chief Executive Officer.

Our Amended and Restated  2003 Stock Option Plan  provides  that the vesting and
exercisability  of all  outstanding  options shall be  accelerated  to twice the
number of vested shares of Common Stock  underlying any such option  immediately
prior to such  acceleration,  and the remaining  unvested options following such
acceleration  shall be assumed or  substituted  by the  surviving  entity in the
event of a change in control. In the event that such outstanding options are not
assumed or substituted,  the exercisability of all outstanding  options shall be
accelerated.  Members of our Board of Directors and our officers  currently hold
options granted under our Amended and Restated 2003 Stock Option Plan.

Our 1997 Directors' Stock Option Plan and our 1993 Stock Option Plan provide
that options shall become fully vested and exercisable as to all shares granted
under these plans in the event that a change in control of the Company occurs.
Members of our Board of Directors and our officers currently hold options
granted under both our 1997 Directors' Stock Option Plan and our 1993 Stock
Option Plan.

See "Employment  Agreements and Change in Control  Arrangements" for information
concerning  change in control  arrangements  relating to Mr. Vegh's  services as
Chairman and Chief Executive Officer.

Employment Contracts and Change in Control Arrangements

Mr. Vegh is party to an  employment  agreement  dated  November  5, 2004,  which
supersedes a prior agreement dated August 30, 2000. The agreement provides for a
salary of not less than $275,000 for Mr.  Vegh's  services as Chairman and Chief
Executive  Officer and  accelerated  vesting of all of Mr. Vegh's options issued
prior to the date of the  agreement in the event of a "Change in Control" of the
Company (as such term is defined in the agreement) and the  acceleration  of Mr.
Vegh's  options  granted  after the date of the  agreement by the same number of
months of completed months of vesting for such options. In addition, Mr. Vegh is
eligible for an annual bonus to be determined by the Board of Directors.  In the
event Mr. Vegh is terminated for other than for "Cause" (as such term is defined
in the  agreement),  Mr. Vegh will  receive  his base  salary and the  Company's
standard benefits package for an additional 36 months,  will receive a bonus for
each of the three Company fiscal years coinciding with or immediately  following
his termination  based upon the average bonus he received in the preceding three
years  prior  to his  termination,  will  have  his  stock  options  vest  on an
accelerated basis as described above, and will have ninety days from the date of
termination of his employment to exercise his vested options.

Mr. Barajas is party to an employment  agreement  dated November 5, 2004,  which
supersedes a prior agreement dated August 30, 2000. The agreement provides for a
salary  of not less than  $184,000  for Mr.  Barajas'  services  as Senior  Vice
President,  Operations,  and accelerated  vesting of all of Mr. Barajas' options
issued prior to the date of the  agreement in the event of a "Change in Control"
of the Company (as such term is defined in the agreement)  and the  acceleration
of Mr.  Barajas'  options  granted  after the date of the  agreement by the same
number of months of completed  months of vesting for such options.  In addition,
Mr.  Barajas is eligible  for an annual bonus to be  determined  by the Board of


                                      F-37
<PAGE>
Directors. In the event Mr. Barajas is terminated for other than for "Cause" (as
such term is defined in the agreement), Mr. Barajas will receive his base salary
and the Company's  standard  benefits package for an additional 12 months,  will
receive a bonus for the  Company  fiscal  year  coinciding  with or  immediately
following  his  termination  based upon the  average  bonus he  received  in the
preceding two years prior to his  termination,  will have his stock options vest
on an accelerated  basis as described  above, and will have ninety days from the
date of termination of his employment to exercise his vested options.

Dr. Chan is party to an  employment  agreement  dated  November  5, 2004,  which
supersedes a prior agreement dated August 30, 2000. The agreement provides for a
salary of not less than  $180,000  for Dr.  Chan's  services as Vice  President,
Product Development, and accelerated vesting of all of Dr. Chan's options issued
prior to the date of the  agreement in the event of a "Change in Control" of the
Company (as such term is defined in the agreement) and the  acceleration  of Dr.
Chan's  options  granted  after the date of the  agreement by the same number of
months of completed months of vesting for such options. In addition, Dr. Chan is
eligible for an annual bonus to be determined by the Board of Directors.  In the
event Dr. Chan is terminated for other than for "Cause" (as such term is defined
in the  agreement),  Dr. Chan will  receive  his base  salary and the  Company's
standard benefits package for an additional 12 months,  will receive a bonus for
the Company fiscal year coinciding with or immediately following his termination
based upon the average bonus he received in the preceding two years prior to his
termination,  will  have  his  stock  options  vest on an  accelerated  basis as
described  above,  and will have ninety days from the date of termination of his
employment to exercise his vested options.

Compensation Committee Interlocks and Insider Participation

During the fiscal year ended  December  31,  2005,  our  Compensation  Committee
consisted of two  non-employee  directors:  Dr. Phillip Radlick and Mr. Jesse D.
Erickson.  No member of the Compensation  Committee or executive  officer of the
Company has a relationship  that would  constitute an interlocking  relationship
with executive officers or directors of any other entity. Dr. Phillip Radlick, a
member of the  Compensation  Committee during the fiscal year ended December 31,
2005, was our President and Chief  Executive  Officer from November 1994 to June
2000. In December  1997, we entered into a note  receivable  agreement  with Dr.
Radlick,   which  was   subsequently   amended  in  August  2001.  See  "Certain
Transactions"   for  information   concerning  Dr.   Radlick's  note  receivable
agreement.

Compensation Committee Report on Executive Compensation

The  following  is a  report  of the  Compensation  Committee  of the  Board  of
Directors  describing  the  compensation  policies  applicable  to our executive
officers  during the fiscal  year ended  December  31,  2005.  The  Compensation
Committee  is   responsible   for   establishing   and  monitoring  our  general
compensation  policies  and our  compensation  plans,  as  well as the  specific
compensation  levels for  executive  officers.  Executive  officers who are also
directors have not participated in  deliberations  or decisions  involving their
own compensation.

General Compensation Policy

Under the  supervision  of the Board of Directors,  our  compensation  policy is
designed to attract and retain  qualified key executives  critical to our growth
and long-term  success.  It is the objective of the Board of Directors to have a
portion of each executive's compensation contingent upon our performance as well
as upon the  individual's  personal  performance.  Accordingly,  each  executive
officer's  compensation  package is comprised of two elements:  (1) base salary,
which  reflects  individual   performance  and  expertise,   and  (2)  long-term
stock-based  incentive  awards,  which are  designed  to  strengthen  the mutual
interests of the executive  officers and our  stockholders.  Additionally,  some
executives  are eligible for variable  bonus awards  payable in cash,  which are
tied to the achievement of certain performance goals that the Board of Directors
establishes from time to time for us.

The  summary  below  describes  in more detail the  factors,  which the Board of
Directors  considers in establishing each of the three primary components of the
compensation package provided to the executive officers.

Base Salary

The  level  of  base  salary  is  established  primarily  on  the  basis  of the
individual's  qualifications  and relevant  experience,  the strategic goals for
which he or she has  responsibility,  the compensation levels at companies which
compete with us for business and executive talent, and the incentives  necessary
to attract and retain  qualified  management.  Base salary may be adjusted  each


                                      F-38
<PAGE>

year to take  into  account  the  individual's  performance  and to  maintain  a
competitive  salary structure.  Our performance does not play a significant role
in the determination of base salary.

Cash-Based Incentive Compensation

Cash bonuses are awarded on a discretionary  basis to executive  officers on the
basis of their success in achieving designated  individual goals and our success
in achieving specific Company-wide goals, such as customer satisfaction, revenue
growth and earnings growth.

Long-Term Incentive Compensation

We have  utilized  our stock  option  plan to provide  executives  and other key
employees with incentives to maximize long-term stockholder values. Awards under
this plan by the Board of Directors  take the form of stock options  designed to
give the  recipient a significant  equity stake in us and thereby  closely align
his or her  interests  with those of our  stockholders.  Factors  considered  in
making such awards include the individual's position in our organization, his or
her performance and responsibilities and internal comparability considerations.

To date,  each option grant allows the  executive  officer to acquire  shares of
Common  Stock at a fixed price per share (the fair  market  value on the date of
grant) over a specified period of time (up to 10 years).  The options  typically
vest in periodic  installments  over a  four-year  period,  contingent  upon the
executive officer's continued  employment with us. Accordingly,  the option will
provide a return  to the  executive  officer  only if he or she  remains  in our
service,  and then only if the market price of our Common Stock appreciates over
the option term.

Compensation of the Chief Executive Officer

Gabriel B. Vegh has served as our Chief  Executive  Officer since June 2000. His
base salary for fiscal 2005 was $275,000.  Additional  compensation  paid to Mr.
Vegh included a stock option grant based on his performance to objectives as set
by the Board of Directors.

The  factors   discussed   above  in  "Base   Salary,"   "Cash-Based   Incentive
Compensation,"  and  "Long-Term  Incentive  Compensation"  were  applied  by the
Compensation  Committee in establishing  the amount of Mr. Vegh's salary,  stock
option grant and bonus. Mr. Vegh did not participate in any decisions related to
his compensation.  Significant factors the Compensation  Committee considered in
establishing Mr. Vegh's compensation  included his individual  performance,  the
achievement of specific  objectives,  and the  compensation  of chief  executive
officers of other companies in the medical device industry,  taking into account
relative company size and stage of development.  The Compensation Committee felt
that Mr. Vegh's performance and effort contributed to our progress over the last
year and  exercised  its  judgment in awarding the salary and bonus shown in the
Summary Compensation Table.

Deductibility of Executive Compensation

The  Compensation  Committee has  considered the impact of Section 162(m) of the
Internal  Revenue Code adopted under the Omnibus  Budget  Reconciliation  Act of
1993, which section  disallows a deduction for any publicly held corporation for
individual compensation exceeding $1 million in any taxable year for the CEO and
four other most highly compensated executive officers, respectively, unless such
compensation  meets the  requirements for the  "performance-based"  exception to
Section  162(m).  As the cash  compensation  paid by us to each of our executive
officers  is expected to be below $1 million  and the  Committee  believes  that
options  granted under our 1993 Stock Option Plan and our 2003 Stock Option Plan
to such officers will meet the requirements for qualifying as performance-based,
the Committee  believes that Section  162(m) will not affect the tax  deductions
available to us with respect to the compensation of our executive  officers.  It
is the Committee's policy to qualify,  to the extent  reasonable,  its executive
officers'  compensation for  deductibility  under  applicable tax law.  However,
Cardima may from time to time pay  compensation  to its executive  officers that
may not be deductible.

                                                  Compensation Committee

                                                  Jesse D. Erickson
                                                  Phillip Radlick, Ph.D.


                                      F-39
<PAGE>
ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following  table sets forth  information  as of the end of December 31, 2005
with  respect  to  compensation  plans  under  which our equity  securities  are
authorized for issuance.
<TABLE>
<CAPTION>
                                                       Number of Securities         Weighted-Average          Number of Securities
                                                       to be Issued upon            Exercise Price of         Remaining Available
                                                      Exercise of Outstanding      Outstanding options,           for Future
                                                       Options, Restricted         Restricted stock             Issuance Under
                                                       Stock Units and                Units and                Equity Compensation
Plan Category (1)                                    Performance Units A         Performance Units B          Compensation Plans
---------------------------------------------------- -----------------------      ---------------------       ---------------------
Equity compensation plans approved by security
<S>     <C>                                                  <C>                      <C>                                    <C>
holders (2)                                                       7,557,035       $              0.92                    5,900,531
Equity compensation plans not approved by security
holders (3)                                                              --                        --                          --

                                                      ----------------------      ---------------------       ---------------------

Total                                                             7,557,035       $              0.92                    5,900,531
</TABLE>
(1)  The table does not include  information for our employee  benefit plans and
     our subsidiaries intended to meet the qualification requirements of Section
     401(a) of the Internal  Revenue  Code and foreign  employee  benefit  plans
     which are similar to Section 401(a) plans.
(2)  Consists of four plans:  the 2003 Stock Option Plan,  the 1993 Stock Option
     Plan,  the 1997  Director's  Stock Option Plan and the 1997 Employee  Stock
     Purchase Plan.
(3)  We do not have  any  equity  compensation  plan not  approved  by  security
     holders.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain  information  known to us with respect to
the  beneficial  ownership of our common stock as of March 31, 2006 by: (1) each
person  known  by us to be a  beneficial  owner of five  percent  or more of our
Common Stock,  (2) each of our  directors,  (3) each of our  executive  officers
named in the  Summary  Compensation  Table set forth  herein and (4) all current
directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                                                                      Percent of
                                                                                                   Number               Total
                                                                                                     of                 Shares
Name and Address                                                                                   Shares        Outstanding (1) (2)
-----------------------------------------------------------------------------------------       -----------      -------------------
<S>                                                                                                 <C>                         <C>
Gabriel B. Vegh (3) (4)                                                                           1,710,44                    1.68%
Phillip Radlick, Ph.D. (3)                                                                         385,559                       *
Rodolfo C. Quijano, Ph.D., M.D. (3)                                                                120,666                       *
Jesse D. Erickson (3)                                                                              117,666                       *
Lawrence J. Siskind (3)                                                                            116,666                       *
Tina Sim (3)                                                                                            --                       *
Tony Shum (3)                                                                                           --                       *
Robert Cheney (3)                                                                                       --                       *
Victor J. Barajas (3)                                                                              675,228                       *
Eric  K.Y. Chan, Ph.D. (3)                                                                         567,886                       *
All Current directors and executive officers as a group (10 persons) (5)                         3,693,114                   3.63%
</TABLE>

----  Less than one percent.
*
(1)  Beneficial ownership is determined in accordance with the rules of the SEC.
     In determining the number of shares beneficially owned by a person, options
     or warrants to purchase common stock held by that person that are currently
     exercisable, or become exercisable within 60 days following March 31, 2006,
     are deemed outstanding; however, such shares are not deemed outstanding for
     purposes of computing  the  percentage  ownership of any other  person.  We
     believe  that all of the  persons  named in this table have sole voting and
     investment  power  with  respect  to all  shares of common  stock  shown as
     beneficially  owned by them,  subject  to  community  property  laws  where
     applicable and except as indicated in the other footnotes to this table.


                                      F-40
<PAGE>

(2)  As of March 31,  2006,  101,664,503  shares of common stock were issued and
     outstanding.
(3)  The  amounts  shown  include  shares of common  stock which may be acquired
     currently  or within 60 days of March 31,  2006  through  the  exercise  of
     options,  as follows:  Mr. Vegh,  1,581,302  shares;  Dr. Radlick,  385,559
     shares;  Dr. Quijano,  120,666 shares;  Mr. Erickson,  116,666 shares;  Mr.
     Siskind, 116,666 shares; Dr. Chan, 507,866 shares; and Mr. Barajas, 626,825
     shares.
(4)  Includes  126,141  shares of common  stock  held by Mr.  Vegh and his wife,
     Kathleen G. Vegh,  tenants in common and 3,000  shares held in a retirement
     account for the benefit of Mr. Vegh's spouse.
(5)  Includes  3,455,550  shares  of  common  stock  subject  to  stock  options
     exercisable currently or within 60 days of March 31, 2006.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In December  1997, we entered into a $300,000  note  receivable  agreement  with
Phillip  Radlick,  Ph.D.,  one of our  Directors  and then  President  and Chief
Executive  Officer,  to facilitate the purchase of a principal  residence in the
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 our Board of  Directors,  (ii) the date when Dr.  Radlick  sells  such
residence  and (iii)  December 16, 2005. As security for the note,  Dr.  Radlick
granted us a security  interest in his vested  stock  options.  At December  31,
2005, the balance of the loan is approximately $357,085, including approximately
$78,585 of accrued interest. The loan balance is fully reserved as of the end of
December 31, 2005.

In June 2000, we entered into a note receivable  agreement with William Wheeler,
our  President and Chief  Operating  Officer,  to  facilitate  the purchase of a
principal residence in the Bay Area. The note calls for an initial payment by us
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 was due and payable
in a single  lump sum 60  months  from the note  date.  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 security for the
note, Mr. Wheeler granted us a security interest in his vested stock options. At
December 31, 2005, the balance of the loan is approximately $217,531,  including
approximately $25,031 of accrued interest. The loan balance is fully reserved as
of the end of December 31, 2005.

We have entered into indemnification  agreements with our officers and directors
containing provisions which may require us, among other things, to indemnify our
officers and directors (other than liabilities  arising from willful  misconduct
of a culpable nature) and to advance their expenses  incurred as a result of any
proceeding against them as to which they could be indemnified.

We believe that the foregoing transactions were in our best interests. It is our
current  policy  that  all  transactions  by us  with  officers,  directors,  5%
stockholders or their affiliates will be entered into only if such  transactions
are  approved  by a  majority  of the  disinterested  directors  (or  the  Audit
Committee  of our Board of  Directors  as  required  under  applicable  laws and
listing  standards),  and are on terms  no less  favorable  to us than  could be
obtained from unaffiliated parties.



                                      F-41
<PAGE>
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Principal Accountant Fees and Services

The following  table sets forth a summary of the aggregate  fees billed to us by
our independent  registered public  accounting firms and principal  accountants,
for the fiscal years ended December 31, 2005 and December 31, 2004.


                                        2005                       2004
                        -----------------------------------  -----------------

                              MLC               BDO                 BDO
                        ---------------   -----------------  ----------------
Audit (1)               $       25,987    $        257,172   $       221,400
Audit Related (2)                    -                   -                 -
Tax (3)                              -                   -                 -
Miscellaneous (4)                    -                   -                 -
                        ----------------  -----------------  -----------------
Total                    $      25,987    $        257,172   $       221,400
                        ================  =================  =================

--------------------------------------------------------------------------------
(1)     Audit Fees consist of fees billed for professional services rendered for
        the audit of the Company's  consolidated annual financial statements and
        review of the  interim  consolidated  financial  statements  included in
        quarterly  reports,  as  well  as  services  normally  provided  by  our
        principal  accounting  firm in connection  with statutory and regulatory
        filings or engagements, including registration statements.
(2)     Audit-Related  Fees  consist of fees  billed for  assurance  and related
        services that are reasonably  related to the performance of the audit or
        review of the Company's  consolidated  financial  statements and are not
        reported under "Audit Fees."
(3)     Tax Fees consist of fees billed for professional  services  rendered for
        tax   compliance,   tax   advice   and  tax   planning   (domestic   and
        international).  These services include  assistance  regarding  federal,
        state and international  tax compliance,  acquisitions and international
        tax planning. None is provided by our principal accounting firm.
(4)     Includes   various   analysis  costs  including   severance,   executive
        compensation, market, equity practices as well as various consultations.

Pre-Approval Policies and Procedures

Our Audit  Committee  approves  the terms and fees of all audit and  permissible
non-audit  services by our  independent  registered  public  accounting  firm in
advance of the provision of any such services.


                                      F-42
<PAGE>
                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)    (1)  Financial Statements

Our financial statements are indexed on page F-1.

       (2)  Financial Statement Schedules

All of the information is readily  determinable  from the Notes to our financial
statements or the schedule is not applicable, therefore, the schedules have been
omitted

       (3)  Exhibits

See paragraph (b) below.

(b)    Exhibits

3.1     Amended and Restated  Certificate of Incorporation of Cardima,  Inc. (as
incorporated  by reference to the  Company's  Annual Report on Form 10-K for the
year ended December 31, 2003 filed with the  Securities and Exchange  Commission
on March 31, 2004).

3.2     Bylaws of Cardima,  Inc. (as  incorporated by reference to the Company's
Registration  Statement on Form S-1 (File No.  33-23209)  declared  effective on
June 5, 1997).

4.11    993 Stock Option Plan, as amended  (Incorporated by reference to Exhibit
10.1 filed with the Company's  Annual  Report on Form 10-K (File No.  000-22419)
filed on March 31, 2003)

4.2     1997  Directors'  Stock  Option Plan  (Incorporated  by reference to the
exhibit of the same number filed with the  Company's  Registration  Statement on
Form S-1 (File No. 33-23209) declared effective on June 5, 1997).

4.3     1997  Employee  Stock  Purchase Plan  (Incorporated  by reference to the
exhibit of the same number filed with the  Company's  Registration  Statement on
Form S-1 (File No. 33-23209) declared effective on June 5, 1997).

4.4     2003 Stock Option Plan  (Incorporated by reference to Exhibit 99.1 filed
with the  Company's  Registration  Statement  on Form S-8 (File No.  333-106922)
filed on July 10, 2003).

10.1    Loan Agreement  dated August 28, 2005 by and between Apix  International
Limited and Cardima,  Inc. (as  incorporated  by reference to the Company's Form
8-K filed with the Securities and Exchange Commission on September 1, 2005).

10.2    10%  Promissory  Note  of  Cardima,  Inc.  dated  August  26,  2005  (as
incorporated  by reference to the Company's  Form 8-K filed with the  Securities
and Exchange Commission on September 1, 2005).

10.3    Warrant  Agreement  to purchase  shares of the common  stock of Cardima,
Inc. dated as of August 28, 2005 (as  incorporated by reference to the Company's
Form 8-K filed with the  Securities  and  Exchange  Commission  on  September 1,
2005).

10.4    Security  Agreement dated August 12, 2005, by and between Cardima,  Inc.
and Apix  International  Limited (as  incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission on August 16, 2005).

10.5    Trademark  Security  Agreement  dated  August 12,  2005,  by and between
Cardima,  Inc. and Apix  International  Limited (as incorporated by reference to
the  Company's  Form 8-K filed with the  Securities  and Exchange  Commission on
August 16, 2005).

                                      F-43
<PAGE>
10.6    Patent Security Agreement dated August 12, 2005, by and between Cardima,
Inc.  and Apix  International  Limited  (as  incorporated  by  reference  to the
Company's Form 8-K filed with the  Securities and Exchange  Commission on August
16, 2005).

10.7    Patent,  Trademark and  Copyright  Security  Agreement  dated August 12,
2005,  by  and  between  Cardima,   Inc.  and  Apix  International  Limited  (as
incorporated  by reference to the Company's  Form 8-K filed with the  Securities
and Exchange Commission on August 16, 2005).

10.8    Loan Facility Term Sheet (as  incorporated by reference to the Company's
Current Report on Form 8-K filed with the Securities and Exchange  Commission on
February 21, 2006).

16.1    Letter  from  Former  Accountant  dated  as of  September  22,  2005 (as
incorporated by reference to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on October 21, 2005).

23.1    Consent of Marc Lumer & Company, Independent Auditors.

23.2    Consent of BDO Seidman, LLP, Independent Auditors.

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

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


                                      F-44
<PAGE>
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.

DATE: May 5, 2006             CARDIMA, INC.

                              /s/ Gabriel B. Vegh
                              ---------------------
                              Gabriel B. Vegh
                              Chief Executive Officer, Acting Chief Financial
                              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-K,  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.

<TABLE>
<CAPTION>

                NAME                                        TITLE                                      DATE
===================================== ========================================================== ===============
<S>                                                          <C>                                       <C>
/s/ Gabriel B. Vegh                        Chief Executive Officer, Acting Chief Financial         May 5, 2006
----------------------------
    Gabriel B. Vegh                        Officer, Acting Secretary and Chairman
                                           (Principal Executive and Financial Officer)

/s/ Jesse D. Erickson                      Director                                                May 5, 2006
----------------------------
    Jesse D. Erickson

/s/ Rudolfo C. Quijano, M.D.               Director                                                May 5, 2006
----------------------------
    Rudolfo C. Quijano, M.D.

/s/ Phillip Radlick, Ph.D.                 Director                                                May 5, 2006
----------------------------
    Phillip Radlick, Ph.D.

/s/ Lawrence J. Siskind                    Director                                                May 5, 2006
----------------------------
    Lawrence J. Siskind

/s/ John R. Cheney                         Director                                                May 5, 2006
----------------------------
    John R. Cheney

/s/ Tony K. Shum                           Director                                                May 5, 2006
----------------------------
    Tony K. Shum

/s/ Tina Sim                               Director                                                May 5, 2006
----------------------------
    Tina Sim

/s/ Andrew K. Lee                          Director                                                May 5, 2006
----------------------------
    Andrew K. Lee

</TABLE>

                                      F-45