**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-KSB** ****
 
 **[X]
        ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 For
        the
        fiscal year ended December 31, 2006
 
 **[
        ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF
        1934**
 *Commission
        file number:* 0-22419
    **CARDIMA,
        INC**.
 (Exact
          name of registrant as specified in its charter)
  DELAWARE
              94-3177883(State
                  or other jurisdiction of
                  incorporation or organization)
              (I.R.S.
                  Employer Identification
                  Number)
  47266
        BENICIA STREET
 FREMONT,
        CALIFORNIA 94538-7330
 (Address,
        Including Zip Code of Principal Executive Offices)
 
 (510)
        354-0300
 (Issuer's
        telephone number)
 
 
 Securities
        registered under Section 12(b) of the Exchange Act:
 NONE
 
 Securities
        registered under Section 12(g) of the Exchange Act:
 COMMON
        STOCK, $0.001 PAR VALUE PER SHARE
 
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes [ ] No [X]
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
        (or
        for such shorter period that the registrant was required to file such reports),
        and (2) has been subject to such filing requirements for the past 90 days.
        Yes
        [X] No [ ]
 
 Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-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]
 
 1
 State
        issuer's revenues for its most recent fiscal year. $1,541,182.
  State
        the
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which the common equity
        was
        sold, or the average bid and asked price of such common equity, as of a
        specified date within the past 60 days. (See definition of affiliate in Rule
        12b-2 of the Exchange Act.). Based on the closing sale price on the OTC Bulletin
        Board on April 10, 2007, the aggregate market value of the registrant's common
        stock held by non-affiliates was approximately $16,813,864. For purposes
        of this
        computation, all directors and executive officers of the registrant are
        considered to be affiliates of the registrant. This assumption is not to
        be
        deemed an admission by the persons that they are affiliates of the registrant.
 
 State
        the
        number of shares outstanding of each of the issuer's classes of common equity,
        as of the latest practicable date: 102,840,963 as of April 10, 2007.
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE:**
 
 **Part
        III incorporates by reference certain information from the registrant’s
        definitive proxy statement (the “Proxy Statement”) for the 2007 Annual Meeting
        of Shareholders to be filed on or before April 30,
        2007.**





2


TABLE
                OF CONTENTS




PART
                I
            
            5ITEM
                1.
            DESCRIPTION
                OF BUSINESS
            37ITEM
                2.
            DESCRIPTION
                OF PROPERTY
            38ITEM
                3.
            LEGAL
                PROCEEDINGS
            38ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            38PART
                II
            
            39ITEM
                5.
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
            39ITEM
                6.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
            39ITEM
                7.
            FINANCIAL
                STATEMENTS
            46ITEM
                8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            46ITEM
                8A.
            CONTROLS
                AND PROCEDURES
            47ITEM
                8B
            OTHER
                INFORMATION
            48PART
                III
            
            49ITEM
                9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSON AND CORPORATE GOVERNANCE;
                COMPLIANCE
                WITH SECTION 16(A) OF THE EXCHANGE ACT
            49ITEM
                10.
            EXECUTIVE
                COMPENSATION
            50ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            50ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE
            50ITEM
                13.
            EXHIBITS
            51ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            51SIGNATURES
            
            52






3
 
 **FORWARD-LOOKING
        STATEMENTS**
 
 This
        annual report on Form 10-KSB 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.
 
  4
 
 **PART
        I**
 
 **ITEM
        1. DESCRIPTION OF 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 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.”
  5
 **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.
  6
 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 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® Tx, REVELATION® T-Flex and REVELATION® 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 cardio-version 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 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.
  7
  **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
        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® 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:
  ·
            ***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.  ·
            ***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® 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.  ·
            ***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® 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.  ·
            ***Less
                tissue damage at safer power setting*****.**Because
                our REVELATION® 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® 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.  ·
            ***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.  ·
            ***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.  8
 **Curative
        Treatment for Atrial Fibrillation**
 
 Our
        REVELATION®, REVELATION® Tx and REVELATION® 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® T-Flex,
        with an atraumatic ball-tip, and available with 8 or 16 electrodes, received
        CE
        Mark approval in June 2005. Our REVELATION® Helix micro-catheter system is
        designed to diagnose and treat AF that originates from the pulmonary veins,
        located in the left atria. The REVELATION® Helix can both diagnose and treat
        focal, or localized, AF. The REVELATION® Helix makes 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® 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® 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® 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® 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® 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 the 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.
  On
        July
        19, 2006, the FDA granted a review of the scientific dispute underlying its
        refusal to approve our 2002 pre-market approval application (PMA) for the
        REVELATION® Tx micro-catheter System. The review would be conducted by the FDA's
        Medical Devices Dispute Resolution Panel (MDDRP). The MDDRP would be comprised
        of medical experts who, after hearing presentations from both the FDA and
        us and
        conducting its own review of the issues, the MDDRP would make a recommendation
        to the Director of the FDA's CDRH as to whether it believes the PMA should
        be
        approved. The Director of the FDA’s CDRH will then make his own decision on
        whether to approve the PMA .
  On
        March
        23, 2007, the FDA announced that it will convene the MDDRP on April 19, 2007
        to
        consider the approvability of our PMA for the REVELATION® Tx micro-catheter
        system for the treatment of symptoms associated with atrial fibrillation.
  We
        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 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.
  9
 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®, PATHFINDER® *mini* and
        TRACER® 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 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®, PATHFINDER® mini, and TRACER®. 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 develop innovative products that provide safer and more
        effective diagnosis and treatment of AF. Our primary goal is to commercialize
        all of our REVELATION® 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®, a RF energy management device, received 510(k) clearance for
        use in the United States in January 2003. The FDA also awarded 510(k) clearance
        in May 2006 for a longer version of the surgical probe having an integrated
        stabilization sheath. 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.
  With
        respect to the electrophysiology market, we are focusing our development
        efforts
        on obtaining regulatory approval in the United States for REVELATION® 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® 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® T-Flex and the INTELLITEMP® for
        mapping and treating AF originating in the pulmonary veins of the heart.
        In
        addition, even if REVELATION® Tx’s PMA is approved, it will take time for us to
        successfully market it. Our strategy incorporates the following key
        elements:
  ·
            ***Seek
                funding necessary to continue operations*****.**Due
                to our 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.  10
 ·
            ***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® 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.  ·
            ***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.  ·
            ***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. 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.  ·
            ***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® 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®
                micro-catheter system for mapping VT and have received regulatory
                approval
                in the United States, Europe, Japan and Australia for our REVELATION®
                micro-catheter system for mapping AF. We received CE Mark approval
                to
                market the REVELATION®, REVELATION® Tx, REVELATION® T-Flex and REVELATION®
                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® 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® 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.
  11
 The
        following table describes our major products and their intended indications
        and
        regulatory status:
  **Therapeutic
                  Products**
              
              **Description**
              
              **Indication**
              
              **U.S.
                  Regulatory Status****(1)**
              
              **International**
                **Regulatory
                  Status****(1)**REVELATION®
              
              Eight-electrode
                  micro-catheter designed to map in both right and left atria.
                
                Can
                  also be used for linear ablation in approved markets.
              
              Mapping
                
                
                
                Ablation
              
              510(k)**(2)**clearance obtained.
                
                
                N/A
              
              Approved
                  in the European Economic Area (CE Mark)**(3)**and Canada.
                
                Approved
                  in the European Economic Area (CE Mark) for ablation.REVELATION®Tx
              
              Guidewire
                  based eight-electrode micro-catheter system with tissue temperature
                  sensors designed to map and create long, thin, continuous, linear,
                  transmural lesions in the atrium.
              
              Mapping
                  and Ablation
              
              Phase
                  III IDE**(4)**clinical trial conducted from August 2000 to present; PMA**(5)**Application filed September 2002; Non-approval status determined
                  May 29,
                  2003, application resubmitted January 20, 2004. Non-approval letter
                  received from FDA May 28, 2004. MDDRP hearing scheduled on April
                  19,
                  2007.
              
              Approved
                  in the European Economic Area (CE Mark) and Canada.REVELATION®T-Flex
              
              Deflectable
                  and steerable eight-electrode micro-catheter system with temperature
                  sensors designed to map and create long, thin, continuous, linear,
                  transmural lesions in the right atrium.
              
              Mapping
                  and Ablation
              
              Supplemental
                  PMA submission to FDA planned if REVELATION®TX
                  is approved.
              
              Approved
                  in the European Economic Area (CE Mark) and Canada.REVELATION®Helix
              
              Helical
                  shaped guide-wire eight-electrode micro-catheter system with temperature
                  sensors designed to map and create circumferential, focal linear
                  lesions
                  in the pulmonary vein ostia of the left atrium.
              
              Mapping
                  and Ablation
              
              On
                  hold pending Revelation® TX approval.
              
              Approved
                  in the European Economic Area (CE Mark) and Canada. European clinical
                  trial complete.
   12
    REVELATION®Helix STX
              
              Helica
                  shaped guide-wire 16 -electrode micro-catheter system with temperature
                  sensors and designed to map and create circumferential, focal linear
                  lesions in larger pulmonary vein ostia of the left atrium.
              
              Pacing
                Mapping
                  and
                Ablation
              
              On
                  hold pending Revelation® TX approval.
              
              Approved
                  in European Economic Area (CE Mark)**Diagnostic
                  Products**PATHFINDER®
              
              Guide-wire
                  based multi-electrode micro-catheter system designed for accessing
                  coronary sinus vasculature to locate arrhythmia-causing
                  tissue.
              
              Mapping
              
              510(k)
                  clearance obtained.
              
              Approved
                  in the European Economic Area (CE Mark) Canada and
                  JapanPATHFINDER®*mini*
              
              Smallest
                  Cardima PATHFINDER® micro-catheter (1.5 French) designed to provide access
                  to more distal and smaller coronary veins
              
              Mapping
              
              510(k)
                  clearance obtained.
              
              Approved
                  in the European Economic Area (CE Mark), Japan and
                  Canada.
 
 (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-KSB.  (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).  In
        addition to the major products listed above, our other products are: (i)
        therapeutic products: NavAblatorTM, CARDIMA® Ablation System, INTELLITEMP®
Multi-Channel RF Controller; (ii) diagnostic product: TRACER®; (iii) support
        products: VENAPORT®, VUEPORT®, and NAVIPORT®; and (iv) accessories: Tx
        SELECTTM.
  13
 **Products
        Designed for Mapping and Ablating**
 
 Our
        REVELATION â 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* *â* *for
        Mapping*
 
 The
        REVELATION â micro-catheter system is designed to facilitate mapping of the atria. The
        REVELATION â is
        a
        thin, flexible, eight-electrode micro-catheter. The REVELATION â 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 â 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.
 
 *REVELATION®
        Tx for Ablation*
 
 The
        REVELATION® 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® 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® 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® Tx may have
        the ability to isolate more effectively and rapidly the arrhythmia-causing
        tissue.
 
 The
        REVELATION® Tx micro-catheter is designed with narrow coiled electrodes that are
        able to deliver ablation energy to the atrial tissue at lower power settings
        than documented with standard electrophysiology catheters. These lower power
        settings may improve the safety of the procedure. The REVELATION® Tx
        micro-catheter system was designed to be used with virtually all cardiac
        electrophysiology radio frequency generators and electrophysiology mapping
        systems.
  The
        REVELATION® 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® 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® Tx for the intended indication is to collect additional clinical
        data using a randomized clinical trial design.
  14
 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® 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 the 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.
  On
        July
        19, 2006, the FDA granted a review of the scientific dispute underlying its
        refusal to approve our 2002 pre-market approval application (PMA) for the
        REVELATION® Tx micro-catheter System. The review would be conducted by the FDA's
        Medical Devices Dispute Resolution Panel (MDDRP). The MDDRP would be comprised
        of medical experts who, after hearing presentations from both the FDA and
        us and
        conducting its own review of the issues, the MDDRP would make a recommendation
        to the Director of the FDA's CDRH as to whether it believes the PMA should
        be
        approved. The Director of the FDA’s CDRH will then make his own decision on
        whether to approve the PMA .
  On
        March
        23, 2007, the FDA announced that it will convene the MDDRP on April 19, 2007
        to
        consider the approvability of our PMA for the REVELATION® Tx micro-catheter
        system for the treatment of symptoms associated with atrial fibrillation.
  We
        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.
  Approval
        from the FDA of our PMA application will be required before the Cardima
        REVELATION® Tx can be marketed in the United States to treat AF. See “Government
        Regulation”. The REVELATION® Tx does have CE Mark approval in the European
        Economic Area and conditional approval for sale in Canada.
 
 *REVELATION®
        T-Flex for Ablation*
 
 The
        REVELATION® T-Flex has the same operational characteristics as the REVELATION®
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® 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® T-Flex
        if the PMA application for REVELATION® Tx receives FDA approval. We also plan to
        approach the FDA about a left atrial study using both the INTELLITEMP® and the
        REVELATION® T-Flex for the creation of continuous linear lesions.
 
 *REVELATION®
        Helix for ablation*
 
 The
        REVELATION® Helix is a thin, flexible, eight-electrode micro-catheter with a
        helical-shaped distal tip. The REVELATION® 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® 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.
 
 15
 Like
        the
        REVELATION®  Tx,
        the
        REVELATION® 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® 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® 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®  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® Helix in
        Europe under the CE Mark. A multi-center, 43-patient clinical investigation
        of
        the REVELATION® 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.
 
 *PATHFINDER®,
        PATHFINDER® mini and TRACER® 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® and TRACER® 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® micro-catheter systems are configured with four, eight, sixteen
        or twenty electrodes and our TRACER® 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® 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® mini micro-catheter is
        approximately one fifth the size of existing catheters used for mapping.
        The
        PATHFINDER® can safely map VT via the coronary veins. Up to four PATHFINDER®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® micro-catheter for mapping VT. We sell our
        PATHFINDER® 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.
 
 **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
        Surgical Ablation System received 510(k) clearance from the FDA in 2003.
        We then
        initiated a research and development program in the endoscopy-guided
        laparascopic/thorascopic surgery area; this resulted in the award of a special
        510(k) clearance by the FDA using the earlier Surgical Ablation System as
        our
        predicate device. This new system comprises a Surgical Ablation Probe with
        an
        integrated stabilization sheath that permits irrigated RF ablation. We do
        not
        currently plan to market our Surgical Ablation System ourselves, and are
        currently seeking a strategic partner for this system.
  16
 Pre-clinical
        programs conducted in 2005 employing the REVELATION® T-Flex deflectable linear
        ablation catheter with the INTELLITEMP® EP energy management device, led to the
        initiation of clinical studies in St. Thomas Hospital, London, UK, in the
        fourth
        quarter of 2006. 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.
 
 Research
        and development expenses for the years ended December 31, 2006 and 2005,
        were
        $1.8 million, $2.1 million, respectively.
 
 **Marketing
        and Distribution**
 
 We
        have
        no 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.
 
 As
        of
        December 31, 2006, we had a limited number of customers worldwide. Paramedic
        Co., Ltd., our distributor in Japan, accounted for 42% and 48% of our total
        net
        product sales in 2006 and 2005, respectively. In the first quarter of 2007,
        our
        Japanese distributor notified us of its failure to maintain the legal
        documentation standard required to sell our PATHFINDER® in Japan. As a result,
        we had no sales in Japan during the first quarter of 2007. We understand
        that
        the reapplication process takes approximately six months. We are currently
        exploring our options with regard to selling the PATHFINDER® in Japan. During
        the reapplication process, we may have limited or no sales in Japan. We
        anticipate resuming commercial sales before the end of 2007. However, there
        can
        be no assurance that we will be able to resume sales by that time.
 
 **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.
 
 17
 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. We successfully passed a pre PMA inspection by the FDA in January 2003.
        In
        March 2006, the FDA conducted a Quality System Inspection Technique, (or
        QSIT)
        Audit, of our Quality System, which we successfully passed. 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 United States
        and
        selected international markets, to seek protection for proprietary aspects
        of
        our technology. We own 24 issued United States patents. In addition, we have
        5
        pending United States patent applications. 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.
 
 As
        of
        March 31, 2007, we have also filed 53 patent applications in major international
        markets, of which 26 have been validated or granted. 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.
 
 18
 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
        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.
 
 19
 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.
 
 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.
 
 20
 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®, PATHFINDER®
mini and TRACER® over-the-wire micro-catheter systems for mapping VT and
        REVELATION® micro-catheter system for mapping AF. In addition, we have received
        510(k) clearance for our line of VENAPORT®, VUEPORT® and NAVIPORT® guiding
        catheters used to introduce electrophysiology catheters into the heart. We
        have
        also received 510(k) clearances for a surgical probe, based on REVELATION®
catheter technology, for the ablation of cardiac tissue during surgery, as
        well
        as for a longer version of the surgical probe with an integrated stabilization
        sheath.
 
 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.
 
 21
 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® Tx, REVELATION®
T-Flex and REVELATION® 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® Tx micro-catheter system for AF in August 2000. As of December 2003,
        98 patients had been treated with the REVELATION® 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® 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’s position that the least burdensome
        approach to demonstrate the safety and effectiveness of REVELATION® Tx for the
        intended indication is to collect additional clinical data using a randomized
        clinical trial design. We have 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® 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.
  22
 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 the 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.
  On
        July
        19, 2006, the FDA granted a review of the scientific dispute underlying its
        refusal to approve our 2002 pre-market approval application (PMA) for the
        REVELATION® Tx micro-catheter System. The review would be conducted by the FDA's
        Medical Devices Dispute Resolution Panel (MDDRP). The MDDRP would be comprised
        of medical experts who, after hearing presentations from both the FDA and
        us and
        conducting its own review of the issues, the MDDRP would make a recommendation
        to the Director of the FDA's CDRH as to whether it believes the PMA should
        be
        approved. The Director of the FDA’s CDRH will then make his own decision on
        whether to approve the PMA .
  On
        March
        23, 2007, the FDA announced that it will convene the MDDRP on April 19, 2007
        to
        consider the approvability of our PMA for the REVELATION® Tx micro-catheter
        system for the treatment of symptoms associated with atrial fibrillation.
  We
        believe that the data submitted in January 2004 in an amended PMA for the
        REVELATION Tx provides sufficient support for safety and effectiveness to
        reduce
        symptomatic AF burden and improve the quality of life of patients suffering
        from
        self-terminating but very uncomfortable AF within the least burdensome
        guidelines of the FDA. 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.
  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 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.
 
 23
 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®,
        REVELATION® Tx, REVELATION® T-Flex and REVELATION â Helix
        micro-catheters for treatment of AF as well as our PATHFINDER® 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.
 
 In
        the
        first quarter of 2007, our Japanese distributor notified us of its failure
        to
        maintain the legal documentation standard required to sell our PATHFINDER® in
        Japan. As a result, we had no sales in Japan during the first quarter of
        2007.
        We understand that the reapplication process takes approximately six months.
        We
        are currently exploring our options with regard to selling the PATHFINDER® in
        Japan. During the reapplication process, we may have limited or no sales
        in
        Japan. We anticipate resuming commercial sales before the end of 2007. However,
        there can be no assurance that we will be able to resume sales by that
        time.
 
 *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.
 
 24
 The
        U. S.
        Congress had previously enacted and we received a “pass-through reimbursement
        allowance category” in March 2001 on all U.S. approved diagnostic and guiding
        catheter products including the PATHFINDER®, REVELATION®, TRACER®, NAVIPORT®,
        VUEPORT® and VENAPORT®. Pass-through reimbursement allowed for the direct
        charging of a specific product for 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, 2006, we had 37 employees, of whom 31 were full-time employees
        and
        6 were part-time employees. Moreover, out of the 37 employees, 2 were engaged
        directly in research and new product development, 5 in regulatory affairs,
        quality assurance and clinical activities, 22 in manufacturing, 2 in sales
        and
        marketing and 6 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.
  25
 
 **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.
 
 **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, 2007 will be
        sufficient to fund planned expenditures only for a 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, 2006 of $4.5 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. Even if we raise capital
        in
        the near term, our future cash needs may, at a minimum, cause us to delay,
        scale
        back or eliminate some or all of our product research and development programs,
        to limit the marketing of our products, or to license or sell to third parties
        the rights to commercialize our products or technologies that we would otherwise
        develop and market ourselves. Our failure to raise capital when needed would
        likely cause us to cease our operations.
  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 $9.6 million for the year ended December 31, 2006
        and
        approximately $8.3 million for the year ended December 31, 2005. As of December
        31, 2006, our accumulated deficit was approximately $131.3 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
 ***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.
  ***Our
        current loan financing with Apix International Limited may have a dilutive
        effect on your investment.***
 
 We
        are in
        the process of finalizing documenting a financing arrangement for a loan
        of
        $13,560,000 of which $9,735,000 has been advanced to date, with the remaining
        balance funded at $225,000 on a bi-weekly basis.  At the option of Apix,
        all principal and accrued interest is convertible at any time into shares
        of
        common stock at $0.04 per share.  Assuming conversion of the entire
        principal and interest fee by the maturity date, December 31, 2007, we will
        be
        required to issue approximately 375,000,000 shares of our common stock.  In
        addition, in conjunction with the loan with Apix International Limited, we
        will
        be required to issue warrants to purchase up to 118,800,000 and 115,000,000
        common stocks at $0.04 and $0.03 per share, respectively.  If the lender
        elects to exercise either the warrants or the conversion feature, or exercise
        both, it may dilute the ownership of our current stockholders.
 
 ***The
        large number of shares issuable upon conversion of the Apix loan may result
        in a
        change of control.***
 
 Conversion
        into common stock of the entire principal and accrued interest may result
        in
        Apix controlling us.  It may be able to exert substantial influence over
        all matters submitted to a vote of our stockholders, including the election
        and
        removal of directors, amendments to our articles of incorporation and by-laws,
        and the approval of a merger, consolidation or sale of all or substantially
        all
        of our assets.
 
 In
        addition, under the January 2007 term sheet with Apix, we are required to
        issue
        5,000,000 preferred shares to Apix. These five million preferred shares will
        have a total of one hundred forty million votes at any shareholder meeting
        giving Apix control over the affairs of the Company. This concentration of
        ownership could inhibit the management of our business and affairs and have
        the
        effect of delaying, deferring or preventing a change in control or impeding
        a
        merger, consolidation, takeover or other business combination, which our
        stockholders may view favorably.
 
 ***The
        audit report accompanying our 2006 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
        2006 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 2005 and 2004 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.
 
 27
 ***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:
 
 ·
            Product
                design and development; ·
            Product
                testing; ·
            Product
                labeling; ·
            Product
                storage; ·
            Pre-market
                clearance and approval; ·
            Advertising
                and promotion; and ·
            Product
                sales and distribution  Before
        we
        can market any of our products in the United States or other countries, we
        must
        demonstrate that our products are safe and effective and obtain approval
        or
        clearance from the applicable governmental authorities. In the United States,
        we
        must obtain from the FDA 510(k) pre-market notification clearance for devices
        that are classified as Class II or lower, or a PMA for devices classified
        as
        Class III, such as REVELATION® Tx, in order to market a product. Currently, the
        process for 510(k) clearance requires approximately 120 days and PMA 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® 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® 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® 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® 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.
 
 28
 On
        May
        28, 2004 we received a letter, dated May 21, 2004, from the FDA, stating
        that
        our PMA application for the REVELATION® Tx linear ablation 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® 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® 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 the 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.
  On
        July
        19, 2006, the FDA granted a review of the scientific dispute underlying its
        refusal to approve our 2002 pre-market approval application (PMA) for the
        REVELATION® Tx micro-catheter System. The review would be conducted by the FDA's
        Medical Devices Dispute Resolution Panel (MDDRP). The MDDRP would be comprised
        of medical experts who, after hearing presentations from both the FDA and
        us and
        conducting its own review of the issues, the MDDRP would make a recommendation
        to the Director of the FDA's CDRH as to whether it believes the PMA should
        be
        approved. The Director of the FDA’s CDRH will then make his own decision on
        whether to approve the PMA .
  On
        March
        23, 2007, the FDA announced that it will convene the MDDRP on April 19, 2007
        to
        consider the approvability of our PMA for the REVELATION® Tx micro-catheter
        system for the treatment of symptoms associated with atrial fibrillation.
  We
        believe that the data submitted in January 2004 in an amended PMA for the
        REVELATION Tx provides sufficient support for safety and effectiveness to
        reduce
        symptomatic AF burden and improve the quality of life of patients suffering
        from
        self-terminating but very uncomfortable AF within the least burdensome
        guidelines of the FDA. 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® 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® 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® 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® 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 the 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.
  29
 On
        July
        19, 2006, the FDA granted a review of the scientific dispute underlying its
        refusal to approve our 2002 pre-market approval application (PMA) for the
        REVELATION® Tx micro-catheter System. The review would be conducted by the FDA's
        Medical Devices Dispute Resolution Panel (MDDRP). The MDDRP would be comprised
        of medical experts who, after hearing presentations from both the FDA and
        us and
        conducting its own review of the issues, the MDDRP would make a recommendation
        to the Director of the FDA's CDRH as to whether it believes the PMA should
        be
        approved. The Director of the FDA’s CDRH will then make his own decision on
        whether to approve the PMA .
  On
        March
        23, 2007, the FDA announced that it will convene the MDDRP on April 19, 2007
        to
        consider the approvability of our PMA for the REVELATION® Tx micro-catheter
        system for the treatment of symptoms associated with atrial fibrillation.
  We
        believe that the data submitted in January 2004 in an amended PMA for the
        REVELATION Tx provides sufficient support for safety and effectiveness to
        reduce
        symptomatic AF burden and improve the quality of life of patients suffering
        from
        self-terminating but very uncomfortable AF within the least burdensome
        guidelines of the FDA. 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.
  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.
  ***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 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.***
  30
 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® 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®, PATHFINDER® mini,
        REVELATION® and TRACER® 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.
  ***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.
  31
 ***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:
 
 ·
            Conventional
                catheters using the “drag and burn” or “dot to dot”
                technique; ·
            Anti-arrhythmic
                and anti-coagulant drugs; ·
            External
                electrical shock to restore normal heart rhythms and
                defibrillation; ·
            Implantable
                defibrillators; ·
            Purposeful
                destruction of the atrial-ventricular node followed by implanation
                of a
                pacemaker; and ·
            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:
 
 ·
            Fines; ·
            Injunctions; ·
            Recall
                or seizure of products; ·
            Withdrawal
                of marketing approvals or clearances; ·
            Refusal
                by the FDA to grant clearances or approvals;
                and ·
            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 will
        be
        required to find alternative manufacturers. Identifying and qualifying
        alternative manufacturers would likely be a long and difficult process. We
        also
        are required to provide information to the FDA on deaths or serious injuries
        alleged to have been associated with the use of our medical devices, as well
        as
        product malfunctions that could contribute to death or serious injury. If
        we
        fail to comply with these applicable regulations, we may incur substantial
        business disruption, expenses, penalties, fines and other liabilities and
        our
        business results and financial condition could suffer.
  ***If
        we do not comply with foreign regulatory requirements to market our products
        outside the United States, our business will be harmed.***
  Sales
        of
        medical devices outside the United States are subject to international
        regulatory requirements that vary from country to country. The time required
        for
        approval varies from country to country and may be longer or shorter than
        the
        time required in the United States. In order to market any of our products
        in
        the member countries of the European Union, we are required to obtain CE
        Mark
        certification. CE Mark certification is an international symbol of adherence
        to
        quality assurance standards and compliance with the European Medical Device
        Directives. We have received CE Mark certification to sell our PATHFINDER®,
        PATHFINDER® mini, REVELATION®, REVELATION® Tx, REVELATION® Helix, and TRACER®
micro-catheters and VENAPORT®, VUEPORT® and NAVIPORT® guiding catheters for
        mapping in the European Union, and approval to sell some of our products
        in
        Canada. We received CE Mark Clearance for the INTELLITEMP® radio frequency
        energy management devices during the first quarter of 2004.
  32
 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
        the
        first quarter of 2007, our Japanese distributor notified us of its failure
        to
        maintain the legal documentation standard required to sell our PATHFINDER® in
        Japan. As a result, we had no sales in Japan during the first quarter of
        2007.
        We understand that the reapplication process takes approximately six months.
        We
        are currently exploring our options with regard to selling the PATHFINDER® in
        Japan. During the reapplication process, we may have limited or no sales
        in
        Japan. We anticipate resuming commercial sales before the end of 2007. However,
        there can be no assurance that we will be able to resume sales by that
        time.
  ***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:
 
 ·
            Export
                license requirements for our products; ·
            Exchange
                rate fluctuations or currency controls; ·
            Changes
                in the regulation of medical products by the European Union or other
                international regulatory agencies; ·
            The
                difficulty in managing a direct sales force from
                aboard; ·
            The
                financial condition, expertise and performance of our international
                distributors and any future international
                distributors; ·
            Domestic
                or international trade restrictions; and ·
            Changes
                in tariffs  Any
        of
        these factors could damage our business results.
  ***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.
  33
 ***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 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.
  34
 ***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:
 
 ·
            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 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:
 
 ·
            Reimbursement
                for our products will be available domestically or
                internationally; ·
            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 ·
            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® micro-catheter
        products, our REVELATION® 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:
 
 35
 ·
            Capacity
                constraints; ·
            Production
                yields; ·
            Quality
                control; and ·
            Shortage
                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 January 2003 and March 2006, 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.
 
 ***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.
  36
 ***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:
 
 ·
            The
                ability of the Board of Directors to alter our bylaws without
                stockholders’ approval; ·
            The
                ability of the Board of Directors to issue, without stockholders’
                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 ·
            The
                elimination of the rights of stockholders to act by written
                consent  Each
        of
        these provisions could discourage potential takeover attempts.
  In
        May
        2002, we adopted a stockholder rights plan and declared a dividend distribution
        of one right for each outstanding share of common stock on May 21, 2002.
        Each
        right, when exercisable, entitles the registered holder to purchase from
        us one
        one-hundredth of a share of a new series of preferred stock on the terms
        stated
        in our rights plan. The rights will generally separate from the common stock
        and
        become exercisable if any person or group acquires or announces a tender
        offer
        to acquire 15% or more of our outstanding common stock without the consent
        of
        our board of directors. Because the rights may substantially dilute the stock
        ownership of a person or group attempting to take us over without the approval
        of our board of directors, our stockholder rights plan could make it more
        difficult for a third party to acquire us (or a significant percentage of
        our
        outstanding capital stock) without first negotiating with our board of
        directors. In addition, we are governed by provisions of Delaware law that
        may
        prohibit large stockholders, in particular those owning 15% or more of our
        outstanding voting stock, from merging or combining with us.
  These
        provisions in our charter, bylaws and rights plan and under Delaware law
        could
        discourage takeover attempts that our stockholders would otherwise favor,
        or
        otherwise reduce the price that investors might be willing to pay for our
        common
        stock in the future.
 
 
 **ITEM
        2. DESCRIPTION OF PROPERTY**
 
 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 31, 2007. Our existing leased facilities exceed
        our current needs and we believe that we will be able to obtain additional
        commercial space as needed.
  37
 
 **ITEM
        3. LEGAL PROCEEDINGS**
 
 We
        are
        not a party to any material legal proceedings.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 No
        matters were submitted to a vote of our security holders in the fourth quarter
        of 2006.
 
 
 38
 **PART
        II**
 
 **ITEM
        5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS AND ISSUER
        PURCHASES OF EQUITY SECURITIES**
 
 *Market
        for Common Equity*
 
 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
              LOWYEAR
                  ENDED DECEMBER 31, 2006First
                  Quarter
              $0.07
              $0.04Second
                  Quarter
              0.25
              0.03Third
                  Quarter
              0.09
              0.05Fourth
                  Quarter
              0.08
              0.04YEAR
                  ENDED DECEMBER 31, 2005First
                  Quarter
              $0.57
              $0.31Second
                  Quarter
              0.33
              0.02Third
                  Quarter
              0.13
              0.06Fourth
                  Quarter
              0.09
              0.04
 
 We
        have
        not declared or paid any cash dividends on our common stock, and we currently
        intend to retain future earnings, if any, to finance the expansion of our
        business, and we do not expect to pay any cash dividends in the foreseeable
        future. The decision whether to pay cash dividends on our common stock will
        be
        made by our board of directors, in their discretion, and will depend on our
        financial condition, operating results, capital requirements and other factors
        that the board of directors considers significant. As of December 31, 2006,
        we had approximately 275 shareholders of record, not including persons who
        hold
        their shares through a nominee.
  *Recent
        Sales of Unregistered Securities*
 
 We
        did
        not sell any unregistered securities during the quarter ended December 31,
        2006.
  **ITEM
        6.** **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
 
 The
        following discussion of our financial condition and results of operations
        should
        be read in conjunction with our financial statements and related notes, and
        the
        other financial information included in Form 10-KSB. With respect to this
        discussion, the terms “Cardima,” “Company,” “we,” “us,” and “our” refer to
        Cardima, Inc.
  **Forward
        Looking Statements**
 *The
        forward-looking comments contained in this discussion involve risks and
        uncertainties. Our actual results may differ materially from those discussed
        here due to factors such as, among others, limited operating history, difficulty
        in developing, exploiting and protecting proprietary technologies, intense
        competition and substantial regulation in the healthcare industry. Additional
        factors that could cause or contribute to such differences can be found in
        the
        following discussion, as well as the section entitled “Risk Factors” in Item 1
        of Part I of this report*
  39
 **OVERVIEW
        AND PLAN OF OPERATION**
 
 Since
        2001, our efforts have primarily focused on developing differentiated products
        that diagnose and treat AF, including our REVELATION® Tx micro-catheter for use
        in the EP market, and our SAS for use in the surgical market. Our EP products
        allow for the mapping (diagnosis) and ablation (treatment) of the two most
        common forms of cardiac arrhythmias: atrial fibrillation and ventricular
        tachycardia.
 
 We
        have
        experienced significant operating losses since inception. We expect that
        our
        operating losses will continue for the foreseeable future as we continue
        to
        invest substantial resources in product development, pre-clinical and clinical
        trials, seeking regulatory approval, sales and marketing and manufacturing.
        Because our cash resources are extremely limited, we must raise additional
        capital in the immediate future in order to continue to pursue FDA approval
        for
        our REVELATION® Tx micro-catheter system, seek to sell or otherwise consummate a
        strategic transaction involving our SAS, and otherwise continue operations.
        Our
        primary focus is to obtain FDA approval in the United States of the REVELATION®
Tx micro-catheter system for the treatment of AF.
 
 On
        July
        19, 2006, the FDA granted a review of the scientific dispute underlying its
        refusal to approve our 2002 pre-market approval application (PMA) for the
        REVELATION® Tx micro-catheter System. The review would be conducted by the FDA's
        Medical Devices Dispute Resolution Panel (MDDRP). The MDDRP would be comprised
        of medical experts who, after hearing presentations from both the FDA and
        us and
        conducting its own review of the issues, the MDDRP would make a recommendation
        to the Director of the FDA's CDRH as to whether it believes the PMA should
        be
        approved. The Director of the FDA’s CDRH will then make his own decision on
        whether to approve the PMA .
  On
        March
        23, 2007, the FDA announced that it will convene the MDDRP on April 19, 2007
        to
        consider the approvability of our PMA for the REVELATION® Tx micro-catheter
        system for the treatment of symptoms associated with atrial fibrillation.
  We
        believe that the data submitted in January 2004 in an amended PMA for the
        REVELATION Tx provides sufficient support for safety and effectiveness to
        reduce
        symptomatic AF burden and improve the quality of life of patients suffering
        from
        self-terminating but very uncomfortable AF within the least burdensome
        guidelines of the FDA.
  We
        had
        cash and cash equivalents of approximately $942,000 as of December 31, 2006
        and
        approximately $670,000 as of March 31, 2007. During 2005, we entered into
        a Loan
        Facility Term Sheet with Apix International Limited (Apix), which provided
        us a
        $3 million loan financing. On February 14, 2006, we entered into a new loan
        facility term sheet (the “New Loan Facility”) with Apix, which provided for the
        rollover of the original loan agreement and the grant of an additional loan
        facility in the amount of $660,000.
 
 On
        January 15, 2007, the Company entered into a new term sheet with Apix, which
        provides for the rollover of prior loan facilities and subsequent advances
        (Prior Facilities) and an additional loan facility between the parties (the
        "New
        Facility"). The New Facility provides for the following terms and conditions:
 
 (i)
            Additional
                loan facility - Apix has granted the Company an additional loan facility
                in the amount of $5,625,000. Advances pursuant to the additional
                facility
                shall be made on a bi-weekly basis the Company’s discretion in
                denominations of $225,000 per advance; (ii)
            New
                maturity date - the maturity date of the New Facility and Prior Facilities
                is the earlier of (a) December 31, 2007 or (b) the date that Apix
                makes a
                demand for payment; (iii)
            Facility
                fee adjustment - the aggregate facility fee for the Prior Facilities
                and
                the New Facility shall be $500,000 (the “Facility Fee”) which is payable
                through the issuance of five million shares of our preferred stock
                with
                the following minimum preferences: (a) 28 votes per share at any
                general
                or extraordinary meeting of the common shares of the company convened
                by
                the Company or its shareholders for a total of 140 million votes
                at any
                such meeting; and (b) convertible into common shares of the Company
                at any
                time at the sole and absolute discretion of the holder on the basis
                of two
                (2) common shares for each preferred share tendered for conversion
                for a
                total of ten (10) million common shares in the event all preferred
                shares
                are tendered for conversion; (iv)
            Exit
                fees - the aggregate exit fees for the Prior Facilities and the New
                Facility shall be $2,800,000 plus $80,000 for each advance
                madewhich
                shall be due and payable on the earliest to occur of: (1) the maturity
                date, (2) generally the sale of the company or substantially all
                of its
                assets, a reorganization or a new loan facility in excess of $1,000,000,
                or (3) an event of default; (v)
            Price
                adjustment to existing warrant and new warrants - pursuant to the
                Prior
                Facilities, the Company agreed to issue to Apix warrants to purchase
                118,800,000 shares of the Company's common stock at an exercise price
                of
                $0.06 per share (the “Existing Warrants”). Pursuant to the New Facility,
                the exercise price of the Existing Warrants has been adjusted to
                $0.04 per
                share. In addition, the Company has agreed to issue to Apix additional
                warrants to purchase 20,000,000 shares of the Company’s common stock at an
                exercise price of $0.03 per share (the “New Warrants”). All warrants have
                a term of ten years; (vi)
            Conversion
                price adjustment - the loan principal and exit fees are convertible
                into
                shares of the Company’s common stock at a conversion price of $0.04 per
                share; and (vii)
            Registration
                rights - the Company agrees to register a percentage of the shares
                underlying the loan principal, facility fees, and warrants on a
                registration statement at its best efforts. 
 The
        terms
        of the new term sheet are not binding on the parties. Completion of the New
        Facility is contingent upon the negotiation and execution of definitive
        agreements and other documentation.
 
 40
 Based
        on
        the above factors, Management concluded that there is substantial doubt as
        to
        our ability to continue as a going concern.
 
 
 **CRITICAL
        ACCOUNTING POLICIES**
 
 Our
        discussion and analysis of our financial condition and results of operations
        are
        based on our financial statements, which have been prepared in accordance
        with
        U.S. generally accepted accounting principles. The preparation of these
        financial statements requires us to make estimates and judgments that affect
        the
        reported amounts of assets, liabilities and expenses and related disclosure
        of
        contingent assets and liabilities. We review our estimates on an ongoing
        basis.
        We base our estimates on historical experience and on various other assumptions
        that we believe to be reasonable under the circumstances, the results of
        which
        form the basis for making judgments about the carrying values of assets and
        liabilities. Actual results may differ from these estimates under different
        assumptions or conditions. While our significant accounting policies are
        described in more detail in Note 1 to our financial statements, we believe
        the
        following accounting policies to be critical to the judgments and estimates
        used
        in the preparation of our financial statements:
 
 *Revenue
        Recognition* .
        We
        recognize revenue from two types of customers, end users and distributors.
        Revenue is recognized in accordance with Staff Accounting Bulletin 104, “Revenue
        Recognition in Financial Statements” when all of the following criteria are met:
        persuasive evidence of an arrangement exists, shipment of the product has
        occurred and title of products transferred at the point of shipment, payment
        of
        the product is reasonably assured and no substantive obligations to the customer
        remain. Revenue is presented net of discounts, allowances, and returns.
        Customers are not entitled to any rights of product return. Payment terms
        are
        either open trade credit or cash. We have distributors in Asia and Europe
        and we
        record as revenue the wholesale price we charge our distributors. The
        distributors assume the title and risk of loss at the shipping point.
  *Research
        and Development.* Research
        and development costs, which include clinical and regulatory costs, are charged
        to expense as incurred.
  *Allowance
        for Notes Receivable Loss* .
        The
        reserve for doubtful notes represents management’s estimate of principal and
        accrued interest losses as of the balance sheet date. Determination of the
        reserve is inherently subjective, as it requires significant estimates,
        including the amounts and timing of expected future cash flows. Also, specific
        reserves are established in cases where management has identified significant
        conditions or circumstances related to an individual’s credit that we believe
        indicates the note is un-collectible. Note losses are charged off against
        the
        reserve, and while recoveries of amounts previously charged off are credited
        to
        the reserve. Evaluations of the reserve balance are conducted
        quarterly.
 
 *Allowance
        for Doubtful Accounts.* We
        use
        the allowance method to account for uncollectible accounts receivable. Our
        estimate is based on historical collection experience and a review of the
        current status of accounts receivable. We review our accounts receivable
        balances by customer for accounts greater than 90 days old and make a
        determination regarding the collectibility of the accounts based on specific
        circumstances and the payment history that exists with such customers. We
        also
        take into account our prior experience, the customer’s ability to pay and an
        assessment of the current economic conditions in determining the net realizable
        value of its receivables. We also review our allowances for doubtful accounts
        in
        aggregate for adequacy following this assessment. Accordingly, we believe
        that
        our allowances for doubtful accounts fairly represent the underlying
        collectibility risks associated with its accounts receivable.
 
 *Inventories* . Inventory
        consists of raw materials, work in progress, and finished goods. Inventory
        is
        stated at the lower of cost or market using the first-in, first-out (“FIFO”)
        method. Cost includes the acquisition cost of raw materials and components,
        direct labor, and manufacturing overhead. We periodically review our inventory
        for excess, obsolescence or quality issues. Should we conclude that we have
        inventory for which we cannot recover our costs as a result of such review,
        we
        would record a charge to cost of goods sold.
  41
 *Income
        Taxes* **.** Income
        taxes are accounted for under the asset and liability method. Deferred income
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement bases and the
        respective tax bases of the assets and liabilities and operating loss and
        tax
        credit carry forwards. Deferred tax assets and liabilities are measured using
        enacted tax rates expected to apply to taxable income in the years in which
        those temporary differences are expected to be recovered or settled. The
        effect
        on deferred tax assets and liabilities of a change in tax rates is recognized
        in
        income in the period that includes the enactment date. Valuation allowances
        are
        established when necessary to reduce deferred tax assets to the amount expected
        to be realized, and have been provided for all periods presented.
 
  *Valuation
        of Derivative Financial Instruments* **.** We
        adopted Financial Accounting Standards Board (“FASB”) Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities” which establishes
        accounting and reporting standards for derivative instruments, including
        certain
        derivative instruments embedded in other contracts, (collectively referred
        to as
        derivatives) and for hedging activities. It requires that an entity recognize
        all derivatives as either assets or liabilities in the statement of financial
        position and measure those instruments at fair value. All changes in fair
        value
        are reported in other income or expense.
  
 *Stock-Based
        Compensation.* We
        adopted Financial Accounting Standards Board (“FASB”) Statement No. 123R,
“Share Based Payment,” on January 1, 2006. Prior to adoption, we disclosed such
        expenses on a pro forma basis in the notes to our financial statements.
 
 **Recent
        Accounting Pronouncements**
 
 In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 155, “Accounting for Certain Hybrid Financial Instruments,” which
        amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
        Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishment of Liabilities.” SFAS No. 155 amends
        SFAS No. 133 to narrow the scope exception for interest-only and
        principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to
        allow qualifying special-purpose entities to hold a passive derivative financial
        instrument pertaining to beneficial interests that are themselves derivative
        instruments. Management does not expect adoption of SFAS No. 155 to have a
        material impact on the Company’s financial statements.
  In
        June
        2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting
        for Uncertainty in Income Taxes, an interpretation of FASB Statement
        No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes.
        FIN 48 prescribes a recognition threshold and measurement attribute for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 requires that we recognize in
        the
        financial statements the impact of the tax position if that position will
        more
        likely than not be sustained on audit, based on the technical merits of the
        position. FIN 48 also provides guidance related to de-recognition,
        classification, interest and penalties, accounting in interim periods and
        disclosure. If there are changes in net assets as a result of application
        of FIN
        48, these will be accounted for as an adjustment to retained earnings. We
        are
        currently evaluating the accounting and disclosure requirements of FIN 48
        in
        order to determine the impact that this guidance will have on our results
        of
        operations or financial condition when we adopt FIN 48 at the beginning of
        our
        fiscal year 2007.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
which defines fair value, establishes a framework for measuring fair value,
        and
        expands disclosures about fair value measurements. SFAS No. 157 does not
        require any new fair value measurements, but rather eliminates inconsistencies
        in guidance found in various prior accounting pronouncements. We are currently
        evaluating the accounting and disclosure requirements that this guidance
        will
        have on our results of operations or financial condition when we adopt SFAS
        No. 157 at the beginning of our fiscal year 2008.
 
 42
  **Results
        of Operations - Years Ended December 31, 2006 and 2005**
 
 *Net
        Sales*
 
 For
        the
        year ended December 31, 2006, revenues decreased 17% to $1,541,000 from
        $1,859,000 in 2005, primarily due to the drop in demand from Japan. The
        reduction in demand was primarily a result of the distributor’s reduction of
        orders following our reduced capacity during the year ended December 31,
        2006 as
        a consequence of the June 2005 work furlough and the resulting reduced workforce
        in August 2005. This will result in continuing reduced sales from Japan in
        2007.
 
 North
        American sales decreased slightly by 7% to $636,000 from $682,000 in 2005
        while
        European sales also decreased slightly by 7% to $255,000 from $275,000 in
        2005.
        The decreases were directly related to the lack of salespersons in these
        regions. Sales in the Asia/Pacific market decreased by 28% to $650,000 from
        $902,000 in 2005. The decrease was primarily due to the order reduction from
        our
        distributor in Japan.
 
 *Cost
        of Goods Sold*
 
 Cost
        of
        goods sold for 2006 increased slightly to $2,023,000 from $1,999,000 for
        2005.
        Cost of goods sold as a percentage of net sales increased by 21%, from 108%
        in
        2005 to 131% in 2006. The increase in the cost of goods sold was directly
        related to the addition of manufacturing staff and related training.
 
 *Net
        Loss*
 
 Net
        loss
        increased by $1,205,000, or 15%, to $9,533,000 in 2006 from $8,328,000 in
        2005.
        The increase in net loss resulted primarily from the other expense of $395,000
        in 2006 compared with other income of $1,800,000 in 2005. These expense and
        income were mainly from the required quarterly valuation of the Apix warrants
        as
        described in EITF 00-19, “Accounting for Derivative Financial Instruments
        Indexed to, and Potentially Settled in, a Company's Own Stock”.
 
 *Research
        and Development Expenses*
 
 Research
        and development expenses decreased 14% to $1,787,000 in 2006 from $2,074,000
        in
        2005. The decrease in 2006 was primarily due to the decrease in funding and
        product sales. Additionally the headcount in the research and development
        dropped from 8 in 2005 to 7 in 2006. The costs associated with research and
        pre-clinical programs and clinical development programs were approximately
        (in
        thousands):
 
 **Year
                  ended December 31,****2006**
              
              **2005**Clinical
                  development programs
              
              $
              1,110
              
              $
              1,215Research
                  and preclinical programs
              
              
              677
              
              
              859Total
                  research and development
              
              $
              1,787
              
              $
              2,074
  *Selling,
        General and Administrative Expenses*
 
 Selling,
        general and administrative expenses for 2006 decreased 38% to $2,987,000
        from
        $4,817,000 in 2005. Selling expenses for 2006 decreased 46% to $281,000 from
        $519,000 in 2005 primarily due to the August 2005 reduction in force. Marketing
        expenses for 2006 also decreased 41% to $161,000 from $273,000 in 2005. The
        decrease in marketing expenses was due to the reduction in force and fewer
        marketing events. General and administrative expenses for 2006 decreased
        37% to
        $2,544,000 from $4,025,000 in 2005. The decrease in general and administrative
        expenses was primarily due to the August 2005 reduction in force.
  *Interest
        Expense*
 
 Interest
        expense for 2006 increased 16% to $3,899,000 from $3,350,000 in 2005. The
        increase was primarily due to the additional borrowing from Apix, the new
        loan
        fees’ amortization, and the new loan discount amortization in 2006.
 
 43
 *Other
        Income and Expense*
 
 Other
        expense for 2006 was $395,000 compared with other income of $1,800,000 in
        2005.
        These other income and expense were primarily related to the quarterly valuation
        of the Apix warrants.
 
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
  We
        had
        cash and cash equivalents of approximately $942,000 as of December 31, 2006
        and
        $670,000 as of March 31, 2007. As of December 31, 2006, we had negative working
        capital of $13.3 million, and an accumulated deficit of approximately $131
        million. These factors raise substantial doubt about our ability to continue
        as
        a going concern.
 
 During
        2005, we entered into a loan facility with Apix, which provided us a $3 million
        loan financing. On February 14, 2006, the Company entered into a new loan
        facility with Apix, which provided for the rollover of the original loan
        agreement and the grant of an additional loan facility in the amount of
        $660,000. In January 2007, we entered into another new term sheet with Apix,
        which provides for the rollover of prior loan facilities of $3,660,000 and
        subsequent advances of $4,500,000 and an additional loan facility of $5,625,000.
 
 Net
        cash
        used in operating activities was approximately $4,538,000 and $5,960,000
        for the
        years ended December 31, 2006 and 2005, respectively, resulting primarily
        from
        operating losses incurred. Net cash used in investing activities was $112,000
        in
        2006 and related to the capital expenditures of property and equipment, as
        compared to $124,000 used in 2005 for the same expenditures. Net cash provided
        by financing activities was approximately $5,468,000 and $2,354,000 for the
        years ended December 31, 2006 and 2005, respectively, resulting primarily
        from
        the Apix loan financing and advances in 2006.
 
 **Contractual
        Commitments** :
 
 Following
        is a schedule of future contractual commitments at December 31, 2006 (in
        thousands):
 
 2007
              
              2008
              
              TotalLoan
                  repayment
              
              $
              10,468
              
              $
              -
              
              $
              10,468Operating
                  leases
              
              
              115
              
              
              -
              
              
              115Capital
                  leases
              
              
              21
              
              
              22
              
              
              43Purchase
                  obligations
              
              
              52
              
              
              -
              
              
              52Total
                  minimum payments
              
              $
              10,656
              
              $
              22
              
              $
              10,678
   The
        total
        loan repayment of $10,468,000 and the total operating leases of $43,000 include
        interest payments of $603,000 and $3,000 interest payments, respectively.
        Our
        purchase obligations are guaranteed payments consisting of contracts relating
        to
        material purchasing.
  **Recent
        Financings**
  *Agility
        Capital*
 
 On
        May
        27, 2005, we entered into a $1.5 million secured loan agreement with Agility
        Capital, which funded us $300,000 of the loan on closing. Under the terms
        of the
        agreement, the lender at its sole discretion could fund the remainder in
        $200,000, $500,000 and $500,000 installments dependent on our achieving certain
        milestones. To secure its obligations under the loan agreement, we granted
        Agility Capital a security interest in substantially all of our assets,
        including our intellectual property. Also, according to the loan agreement,
        all
        amounts outstanding become due and payable the earlier of an event of default
        by
        the company or August 15, 2005. We were also required to pay Agility Capital
        an
“Exit Fee” of $450,000 upon an Event of Default.
 
 44
 On
        June
        16, 2005, Agility Capital notified us that in its view an event of default
        had
        occurred and that all amounts outstanding were then due and payable. The
        lender
        also swept our bank accounts containing approximately $456,000 and used the
        proceeds for repayment of the loan and a portion of the “Exit Fee” due under the
        loan agreement. Agility Capital also indicated that it was unwilling to fund
        further loans under the loan agreement.
 
 On
        June
        17, 2005, our cash balances were insufficient to continue operations and
        all the
        employees were placed on indefinite furlough in order to conserve cash.
 
 *Apix
        International*
 
 On
        August
        12, 2005, we entered into a Loan Facility Term Sheet with Apix, which provided
        us with up to $2 million in new financing. We received the first $500,000,
        a
        portion of which was used to retire our outstanding secured loan agreement
        with
        Agility Capital. On August 15, 2005, we re-hired certain furloughed employees
        and resumed operations.
 
 On
        August
        28, 2005, we signed a loan agreement with Apix, which increased the total
        amounts to be financed from $2 million to $3 million. The principal amount
        of
        the promissory note dated August 12, 2005 for $500,000 was rolled over into
        the
        new loan agreement. We received an additional $500,000 on this closing date.
        Per
        the funding schedule, we received $500,000 on September 8, 2005 and $500,000
        on
        October 11, 2005. The remainder of the loan was received as follows: $350,000
        on
        November 16, 2005, $350,000 on December 14, 2005 and $300,000 on January
        18,
        2006. The loan agreement was secured by a first lien on all our assets and
        intellectual property. All funds had interest at a rate of 10% per
        annum.
 
 According
        to the loan agreement, we were required to pay a facility fee of $60,000,
        a due
        diligence fee of $25,000, a document review and preparation fee of $50,000
        and
        an exit fee of $900,000 at the end of the loan agreement. All these fees
        were
        being amortized as non-cash interest expense over the life of the
        loan.
 
 Also
        the
        loan agreement has an optional conversion clause that at its sole option,
        Apix
        may elect to receive payment for all or any portion of the facility fee,
        the
        exit fee and the accrued interest due under the loan, in full or partial
        satisfaction of such amounts, that respective number of our common stock
        at a
        rate of $0.10 per share. Any additional gains or losses on the difference
        between the conversion price and the fair value of the stock at the time
        of
        conversion will be included in our earnings during that period.
 
 Additionally,
        we provided Apix warrants with registration rights to purchase 30,000,000
        shares
        of capital stock with a strike price of $0.10 per share. The warrants were
        free
        standing instruments. As of September 30, 2005, we have failed to file a
        registration statement with the SEC, as required by the loan agreement, to
        register all of the shares of Common Stock issued or issuable with respect
        to
        these warrants. Apix and we have entered into an amendment to the Loan Agreement
        to extend the date by which we are required to file a registration statement
        in
        accordance with Section 10(b)(i) of the Loan Agreement. The amendment agreement
        extends the date by which we are required to file a registration statement
        from
        September 30, 2005 to January 1, 2006.
  On
        February 14, 2006, we entered into a new loan facility with Apix, which provided
        for the rollover of the original loan agreement and the grant of an additional
        loan facility in the amount of $660,000 at an interest rate of 10% per annum.
        In
        addition, we and the lender have agreed to the following terms: (i) the maturity
        date of the original loan facility is extended from February 28, 2006 to
        May 18,
        2006; (ii) the exercise price of the original warrant has been adjusted to
        $0.06
        per share. In addition, we have granted the Lender a new warrant to purchase
        23,800,000 shares of our common stock at an exercise price of $0.06 per share
        for a term of ten years. In addition, upon completion of the full funding
        under
        the new loan facility, we will grant the lender warrants to purchase an
        additional 8,000,000 shares of our common stock at an exercise price of $0.06
        per share for a term of ten years; (iii) we have granted the lender the right
        to
        convert the loan principal, interest, facility fees and exit fees into shares
        of
        our common stock at a conversion price of $0.06 per share; (iv) the facility
        fee
        has been increased from $60,000 to $80,000. In addition, the exit fee has
        been
        increased from $900,000 to $1,300,000; (v) upon completion of the full funding
        under the new loan facility, the exit fee would be increased by $260,000;
        (vi)
        we agree to register the shares underlying the loan principal, facility fees,
        and warrants on a registration statement on Form S-1 as soon as practicable
        after the date of issuing the warrant, but in any event no later than May
        31,
        2006. We received funding under this agreement of $200,000 and $460,000 in
        February and March 2006, respectively.
 
 45
 On
        January 15, 2007, the Company entered into a new term sheet with Apix, which
        provides for the rollover of prior loan facilities and subsequent advances
        (Prior Facilities) and an additional loan facility between the parties (the
        "New
        Facility"). The New Facility provides for the following terms and conditions:
 
 (i)  Additional
        loan facility - Apix has granted the Company an additional loan facility
        in the
        amount of $5,625,000. Advances pursuant to the additional facility shall
        be made
        on a bi-weekly basis the Company’s discretion in denominations of $225,000 per
        advance;
 (ii)  New
        maturity date - the maturity date of the New Facility and Prior Facilities
        is
        the earlier of (a) December 31, 2007 or (b) the date that Apix makes a demand
        for payment;
 (iii)  Facility
        fee adjustment - the aggregate facility fee for the Prior Facilities and
        the New
        Facility shall be $500,000 (the “Facility Fee”) which is payable through the
        issuance of five million shares of our preferred stock with the following
        minimum preferences: (a) 28 votes per share at any general or extraordinary
        meeting of the common shares of the company convened by the Company or its
        shareholders for a total of 140 million votes at any such meeting; and (b)
        convertible into common shares of the Company at any time at the sole and
        absolute discretion of the holder on the basis of two (2) common shares for
        each
        preferred share tendered for conversion for a total of ten (10) million common
        shares in the event all preferred shares are tendered for conversion;
 (iv)  Exit
        fees
        - the aggregate exit fees for the Prior Facilities and the New Facility shall
        be
        $2,800,000 plus $80,000 for each advance made  which
        shall be due and payable on the earliest to occur of: (1) the maturity date,
        (2)
        generally the sale of the company or substantially all of its assets, a
        reorganization or a new loan facility in excess of $1,000,000, or (3) an
        event
        of default;
 (v)  Price
        adjustment to existing warrant and new warrants - pursuant to the Prior
        Facilities, the Company agreed to issue to Apix warrants to purchase 118,800,000
        shares of the Company's common stock at an exercise price of $0.06 per share
        (the “Existing Warrants”). Pursuant to the New Facility, the exercise price of
        the Existing Warrants has been adjusted to $0.04 per share. In addition,
        the
        Company has agreed to issue to Apix additional warrants to purchase 20,000,000
        shares of the Company’s common stock at an exercise price of $0.03 per share
        (the “New Warrants”). All warrants have a term of ten years;
 (vi)  Conversion
        price adjustment - the loan principal and exit fees are convertible into
        shares
        of the Company’s common stock at a conversion price of $0.04 per share; and
 (vii)  Registration
        rights - the Company agrees to register a percentage of the shares underlying
        the loan principal, facility fees, and warrants on a registration statement
        at
        its best effort.
 
 The
        terms
        of the new term sheet are not binding on the parties. Completion of the New
        Facility is contingent upon the negotiation and execution of definitive
        agreements and other documentation.
 
 
 **ITEM
        7. FINANCIAL STATEMENTS**
 
 Reference
        is made to the Index of Financial statements following Part III of this Report
        for a listing of the Company’s financial statements and notes
        thereto.
 
 **ITEM
        8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
 
 On
        October 17, 2005, BDO Seidman, LLP (the "Former Accountant") resigned as
        the
        independent registered public accounting firm for Cardima, Inc. (the "Company").
        The Company engaged Marc Lumer & Company (the "New Accountant"), as its new
        independent registered public accounting firm. The Company's decision to
        engage
        the New Accountant was approved by its Board of Directors on October 18,
        2005.
 
 The
        reports of the Former Accountant on the financial statements of the Company
        for
        each of the two most recent fiscal years, did not contain an adverse opinion
        or
        disclaimer of opinion and was not qualified or modified as to uncertainty,
        audit
        scope or accounting principles for the two most recent fiscal years, except
        that
        the Former Accountant's opinion in its report on the Company's financial
        statements for each of the last two fiscal years expressed substantial doubt
        with respect to the Company's ability to continue as a going concern.
 
 During
        the Company's two most recent fiscal years and the subsequent interim period
        through the date of resignation, there were no reportable events as the term
        is
        described in Item 304(a)(1)(iv) of Regulation S-B.
 
 46
 During
        the Company's two most recent fiscal years and the subsequent interim period
        through the date of resignation, there were no disagreements with the Former
        Accountant on any matters of accounting principles or practices, financial
        statement disclosure or auditing scope or procedure, which, if not resolved
        to
        the satisfaction of the Former Accountant would have caused it to make reference
        to the subject matter of the disagreements in connection with its reports
        on
        these financial statements for those periods.
 
 The
        Company did not consult with the New Accountant regarding the application
        of
        accounting principles to a specific transaction, either completed or proposed,
        or the type of audit opinion that might be rendered on the Company's financial
        statements, and no written or oral advice was provided by the New Accountant
        that was a factor considered by the Company in reaching a decision as to
        the
        accounting, auditing or financial reporting issues.
 
 **ITEM
        8A.** **CONTROLS
        AND PROCEDURES**
  **Evaluation
        and Disclosure Controls and Procedures**
 
 As
        of
        December 31, 2006, we carried out an evaluation, under the supervision and
        with
        the participation of our Chief Executive Officer and Chief Financial Officer,
        of
        the effectiveness of the design and operation of our disclosure controls
        and
        procedures. Based on this evaluation, our Chief Executive Officer and Chief
        Financial Officer concluded that our disclosure controls and procedures were
        ineffective in ensuring that information required to be disclosed by us in
        our
        periodic reports is recorded, processed, summarized and reported, within
        the
        time periods specified for each report and that such information is accumulated
        and communicated to our management, including our principal executive and
        principal financial officers, or persons performing similar functions, as
        appropriate to allow timely decisions regarding required disclosure.
        Specifically, our Chief Executive Officer and Chief Financial Officer concluded
        that:
 
 ·
            Our
                inventory cost system had not been updated for current costs as required
                under GAAP. If undetected, this could have resulted in a material
                misstatement in our financial statements. In the course of the audit
                performed by our independent auditors, the inventory cost was updated
                and
                the cost to market comparison was made as
                required; ·
            Recurring
                journal entries were not reviewed for possible discontinuation or
                adjustment of existing entries or addition of new entries. In the
                course
                of the audit performed by our independent auditors, all year-end
                recurring
                journal entries were reviewed and adjusted where required. The Company
                will schedule regular period end review of recurring journal entries; ·
            Period-end
                accruals were not reviewed for accuracy. Based on an ad hoc review
                only,
                necessary adjustments were proposed and made. The Company will re-impose
                the review function; ·
            Management
                failed to recognize departures from GAAP and has not utilized the
                resources at its disposal to review unusual or infrequent transactions
                for
                appropriate accounting reporting and disclosure. Specifically, the
                Company
                settled a dispute with its former Chief Executive Officer that resulted
                in
                the quantification of an existing contingent liability the fair value
                of
                which had been uncertain, and agreement as to repayment to us by
                that
                individual of a promissory note. The accounting treatment of this
                settlement failed to recognize the SFAS 5 Accounting for Contingencies
                and
                APB 21 Accounting for Interest on Receivables and Payables. The Company
                will regularly review material unusual or infrequent transactions
                with its
                existing financial counsel. 
 We
        believe that as a result of a lack of financial resources, we currently lack
        the
        expertise within our financial staff to manage our financial affairs. As
        our
        financial situation improves, we anticipate hiring additional personnel to
        ensure that information required to be disclosed by us in our periodic reports
        is recorded, processed, summarized and reported, within the time periods
        specified for each report.
 
 **Changes
        in Internal Controls**
 
 There
        were no changes to the internal controls, except as described in the previous
        paragraph, during the fourth quarter ended December 31, 2006, that have
        materially affected or that are reasonably likely to affect the internal
        controls.
 
 **Limitations
        on the Effectiveness of Controls**
 
 A
        control
        system, no matter how well conceived and operated, can provide only reasonable,
        not absolute, assurance that the objectives of the control system are met.
        Because of the inherent limitations in all control systems, no evaluation
        of
        controls can provide absolute assurance that all control issues and instances
        of
        fraud, if any, within a company have been detected. Our disclosure controls
        and
        procedures are designed to provide reasonable assurance of achieving its
        objectives. Our Principal Executive Officer and Principal Financial Officer
        concluded that the Company's disclosure controls and procedures are effective
        at
        that reasonable assurance level.
 
 47
 **ITEM
        8B. OTHER INFORMATION**
 
 None.
 
 
 48
  **PART
        III**
 
 **ITEM
        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
        GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
        ACT**
 
 ***Directors
        of the Registrant***
 
 The
        following sets forth certain information regarding our directors as of March
        31,
        2007:
 
 **Director****Name
                  of Director**
              
              **Age**
              
              **Title**
              
              **Since**Gabriel
                  B. Vegh
              
              67
              
              Chief
                  Executive Officer and
              
              1992Chairman
                  of our Board of DirectorsPhillip
                  Radlick, Ph.D.
              
              69
              
              Independent
                  Consultant
              
              1994John
                  R. Cheney
              
              49
              
              Director,
                  Apix International Limited
              
              2006Tony
                  K. Shum
              
              38
              
              Business
                  Development Executive, HSBC
              
              2006Tina
                  Sim
              
              38
              
              Independent
                  Consultant
              
              2006Andrew
                  K. Lee
              
              36
              
              Financial
                  Consultant, Asia Peak Holdings Limited
              
              2006
 
 **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. 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.
 
 **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. 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.
        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.
 
 49
 **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 of the Registrant***
 
 In
        addition to Mr. Vegh, our Chief Executive Officer, whose information appears
        above, set forth below is our other executive officer. There are no family
        relationships among any of our directors or executive officers.
 
 **Mr.
        Eric Chan, Ph.D., F.E.S.C.** (age 49)
        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, 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.
 
 The
        information called for by Item 9, to the extent not set forth in “Directors and
        Executive Officers of the Registrant” above, is or will be set forth in the
        definitive proxy statement relating to Cardima’s 2007 annual meeting of
        shareholders pursuant to SEC Regulation 14A (the “Proxy Statement”). The Proxy
        Statement relates to a meeting of shareholders involving the election of
        directors and the portions thereof called for by Item 9 are incorporated
        herein
        by reference pursuant to Instruction E to Form 10-KSB.
 
 **ITEM
        10. EXECUTIVE COMPENSATION**
 
 The
        information required by this item is incorporated by reference to the Proxy
        Statement.
 
 **ITEM
        11.** **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT** **AND RELATED STOCKHOLDER MATTERS**
 
 The
        information required by this item is incorporated by reference to the Proxy
        Statement.
  **ITEM
        12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE**
 
 The
        information required by this item is incorporated by reference to the Proxy
        Statement.
 
 50
 **ITEM
        13. 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. (asincorporated
                  by reference to the Company’s Registration Statement on Form S-1 (File No.
                  33-23209) declared effective on June 5,
                  1997).
 
 10.1
              1993
                  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)
 
 10.2
              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).
 
 10.3
              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).
 
 10.4
              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).
 
 10.5
              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).
 
 10.6
              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).
 
 10.7
              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).
 
 10.8
              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).
 
 10.9
              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).
 
 10.10
              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).
 
 10.11
              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).
 
 10.12
              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. 
 31.1
              Certification
                  of the Chief Executive Officer and Chief Financial Officer pursuant
                  to
                  Item 601(b)(31) of Regulation S-B, as adopted pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.
 
 32.1
              Certification
                  of the Chief Executive Officer and Chief Financial Officer pursuant
                  to 18
                  U.S.C. Section 1350 as adopted pursuant to Section 906of
                  the Sarbanes-Oxley Act of 2002.
 
 **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**  ****
 
 The
        information required by this item is incorporated by reference to the Proxy
        Statement.
 
 51
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, as amended, the Registrant has duly caused this report to be signed
        on its
        behalf by the undersigned thereunto duly authorized.
   CARDIMA,
                  INC.Date: April
                17, 2007
              By:
              /s/ Gabriel
                B. VeghGabriel
                  B. VeghChief
                Executive Officer and Chairman of the
                Board
  
 **POWER
        OF ATTORNEY**
 
 KNOW
        ALL
        PERSONS BY THESE PRESENTS, that each person whose signature appears below
        constitutes and appoints Gabriel B. Vegh, his attorney-in-fact, each with
        the
        power of substitution, for him in any and all capacities, to sign any amendments
        in this Annual Report on Form 10-KSB, and to file the same, with exhibits
        thereto and other documents in connections therewith, with the Securities
        and
        Exchange Commission, hereby ratifying and conforming all that each of said
        attorneys-in-fact, or his or her substitutes, may do or cause to be done
        by
        virtue of hereof.
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
 
 NAME
              
              TITLE
              
              DATE/s/
                  Gabriel B. Vegh
              
              Chief
                  Executive Officer, Acting Chief Financial
              
              April
                  17, 2007Gabriel
                  B. Vegh
              
              Officer,
                  Acting Secretary and Chairman(Principle
                  Executive Officer)/s/
                  Phillip Radlick, Ph.D.
              
              Director
              
              April
                  17, 2007Phillip
                  Radlick, Ph.D./s/
                  John R. Cheney
              
              Director
              
              April
                  17, 2007John
                  R. Cheney/s/
                  Tony K. Shum
              
              Director
              
              April
                  17, 2007Tony
                  K. Shum/s/
                  Tina Sim
              
              Director
              
              April
                  17, 2007Tina
                  Sim/s/
                  Andrew K. Lee
              
              Director
              
              April
                  17, 2007Andrew
                  K. Lee
 
 52
   
 CARDIMA,
        INC.
 
 INDEX
        TO
        FINANCIAL STATEMENTS
 
 
 PAGEReport
                    of Marc Lumer & Company, Independent Registered Public Accounting
                    Firm
                F-2Balance
                    Sheet at December 31, 2006
                F-3Statements
                    of Operations for the years ended December 31, 2006 and 2005
                F-4Statement
                    of Stockholders’ Equity (Deficit)
                    for
                      the years ended December 31, 2006, and 2005
                F-5Statements
                    of Cash Flows for the years ended December 31, 2006, and
                    2005
                F-6Notes
                    to Financial Statements
                F-7
                    -  F-27
 F-1
 
 
 REPORT
        OF
        MARC LUMER & COMPANY
 INDEPENDENT
        REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 
 The
        Board
        of Directors and Stockholders
 Cardima,
        Inc.
 
  We
        have
        audited the accompanying balance sheet of Cardima, Inc. as of December 31,
        2006
        and the related statements of operations, stockholders’ equity (deficit), and
        cash flows for years ended December 31, 2006 and 2005. These financial
        statements are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The
        Company has determined that it is not required to have, nor were we engaged
        to
        perform, an audit of its internal control over financial reporting. Our audit
        included consideration of internal control over financial reporting as a
        basis
        for designing audit procedures that are appropriate in the
        circumstances ,
        but not
        for the purpose of expressing an opinion on the effectiveness of the Company’s
        internal control over financial reporting. Accordingly, we express no such
        opinion. An audit also includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the financial statements, assessing the
        accounting principles used and significant estimates made by management,
        as well
        as evaluating the overall financial statement presentation. We believe that
        our
        audit provides a reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Cardima, Inc. at December 31,
        2006
        and the results of its operations and its cash flows for the years ended
        December 31, 2006 and 2005 **,** in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 1 to the financial
        statements, the Company has suffered recurring losses from operations that
        raise
        substantial doubt about its ability to continue as a going concern. Management’s
        plans in regard to these matters are also described in Note 1. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
  
  
  Marc
        Lumer & Company
  San
        Francisco, California
  April
        13,
        2007
  4
 F-2
  **CARDIMA,
        INC.**
 **BALANCE
        SHEET**
 **(In
        thousands, except per share amounts)**
 December
                  31, 2006**ASSETS**Current
                  assets:Cash
                  and cash equivalent
              
              $
              942Accounts
                  receivable, net of allowances for doubtful accounts of $14
              
              
              415Inventories
                  (Note 2)
              
              
              324Prepaid
                  expenses
              
              
              123Other
                  current assets
              
              
              62Total
                  current assets
              
              $
              1,866Property
                  and equipment, net (Note 3)
              
              
              280Other
                  assets
              
              
              71TOTAL
                  ASSETS
              
              $
              2,217**LIABILITIES
                  AND STOCKHOLDERS' DEFICIENCY**Current
                  liabilities:Accounts
                  payable
              
              $
              971Accrued
                  compensation
              
              
              402Loans
                  payable (Note 4)
              
              
              8,160Warrant
                  liabilities (Note 5)
              
              
              3,044Notes
                  payable to related parties - current portion (Note 6)
              
              
              8Capital
                  lease - current portion (Note 8)
              
              
              21Accrued
                  interest and fee (Note 7)
              
              
              2,308Other
                  current liabilities
              
              
              96Total
                  current liabilities
              
              $
              15,010Capital
                  lease - noncurrent portion (Note 8)
              
              
              22Notes
                  payable to related parties - noncurrent portion (Note 6)
              
              
              62Commitments
                  and contingencies (see note 8)Stockholders'
                  deficiency:Common
                  stock, $0.001 par value, 300,000,000 shares authorized, 102,354,679
                  shares
                  issued and outstanding at December 31, 2006
              
              
              118,418Preferred
                  stock, $0.001 par value, 5,000,000 shares authorized, none issued
                  and
                  outstanding at December 31, 2006
              
              
              -Accumulated
                  deficit
              
              
              (131,295
              )Total
                  stockholders' deficiency
              
              
              (12,877
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIENCY
              
              $
              2,217
 
  See
        accompanying notes to financial statements
 
 F-3
 
 
 
 
 **CARDIMA,
        INC.**
 **STATEMENTS
        OF OPERATIONS**
 **(In
        thousands, except per share amounts)**
 
 
 Year
                  Ended December 31, 2006
              
              Year
                  Ended December 31, 2005Net
                  sales
              
              $
              1,541
              
              $
              1,859Cost
                  of goods sold
              
              
              2,023
              
              
              1,999Gross
                  deficiencies
              
              
              (482
              )
              
              (140
              )Operating
                  expenses:Research
                  and development
              
              
              1,787
              
              
              2,074Selling,
                  general and administrative
              
              
              2,987
              
              
              4,817Total
                  operating expenses
              
              
              4,774
              
              
              6,891Operating
                  loss
              
              
              (5,256
              )
              
              (7,031
              )Interest
                  income
              
              
              1
              
              
              253Interest
                  expense
              
              
              (3,899
              )
              
              (3,350
              )Other
                  income /(expense)
              
              
              (395
              )
              
              1,800Net
                  loss
              
              $
              (9,533
              )
              $
              (8,328
              )Basic
                  and diluted net loss per share
              
              $
              (0.09
              )
              $
              (0.08
              )Shares
                  used in computing basic and diluted net loss per share
              
              
              101,696
              
              
              101,408
 
 See
        accompanying notes to financial statements
 
 
 F-4
   
 **CARDIMA,
        INC.**
 **Statements
        of Stockholders’ Equity(Deficit)**
 **(In
        thousands, except number of share and per share amounts)**
 
 
 **No.
                  of Shares**
              
              **Common
                  Stock**
              
              **Accumulated
                  Deficit**
              
              **Total
                  Stockholders’ Equity****Balance
                  at December 31, 2004**
              
              
              **101,305,613**
              
              **$**
              **117,973**
              
              **$**
              **(113,434**
              **)**
              **$**
              **4,539**Common
                  stock issued under employee stock plans
              
              
              286,045
              
              
              50
              
              
              --
              
              
              50Expense
                  for vesting of stock options granted to non-employees
              
              
              --
              
              
              1
              
              
              --
              
              
              1Common
                  stock issued to non-employees
              
              
              22,000
              
              
              2
              
              
              --
              
              
              2Expense
                  related to private placement
              
              
              --
              
              
              (27
              )
              
              --
              
              
              (27
              )Net
                  Loss
              
              
              --
              
              
              --
              
              
              (8,328
              )
              
              (8,328
              )**Balance
                  at December 31, 2005**
              
              
              **101,613,658**
              
              **$**
              **117,999**
              
              **$**
              (121,762
              )
              **$**
              (3,763
              )Common
                  stock issued under employee stock plans
              
              
              711,021
              
              
              28
              
              
              --
              
              
              28Common
                  stock issued to non-employees
              
              
              30,000
              
              
              1
              
              
              --
              
              
              1Expense
                  for vesting of stock options granted to employees
              
              
              --
              
              
              390
              
              
              --
              
              
              390Net
                  Loss
              
              
              --
              
              
              --
              
              
              (9,533
              )
              
              (9,533
              )**Balance
                  at December 31, 2006**
              
              
              **102,354,679**
              
              **$**
              **118,418**
              
              **$**
              (131,295
              )
              **$**
              (12,877
              )
 
 See
        accompanying notes to financial statements
 
 F-5
   **CARDIMA,
          INC.**
 **STATEMENTS
          OF CASH FLOWS**
 **(In
          thousands)**
  Years
                    Ended December 31,2006
                
                2005**CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    loss
                
                $
                (9,533
                )
                $
                (8,328
                )Adjustments
                    to reconcile net loss to net cash used in operating activities
                    provided by
                    operations:Depreciation
                    and amortization
                
                
                123
                
                
                201Non-cash
                    stock-based compensation
                
                
                391
                
                
                3Derivative
                    valuation
                
                
                2,806
                
                
                1,800Gain
                    on settlement
                
                
                (35
                )
                
                -Excess
                    and obsolete inventory
                
                
                (18
                )
                
                8Write-off
                    of interest income
                
                
                26
                
                
                -Write-off
                    of payroll tax refund liability
                
                
                -
                
                
                (245
                )Bad
                    debt reserve
                
                
                (12
                )
                
                -Allowance
                    for notes receivable from officers
                
                
                -
                
                
                575Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (138
                )
                
                38Inventories
                
                
                81
                
                
                483Prepaid
                    and other assets
                
                
                396
                
                
                187Accounts
                    payable, accrued compensation and other liabilities
                
                
                102
                
                
                (1,787
                )Notes
                    payable
                
                
                70
                
                
                -Accrued
                    interest & fee
                
                
                1,203
                
                
                1,105Net
                    cash used in operating activities
                
                
                (4,538
                )
                
                (5,960
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Purchase
                    of property and equipment
                
                
                (112
                )
                
                (124
                )Net
                    cash used in investing activities
                
                
                (112
                )
                
                (124
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Principal
                    payments under capital leases and credit facility
                
                
                (20
                )
                
                (369
                )Payments
                    of issuance costs
                
                
                -
                
                
                (31
                )Net
                    proceeds from loan financing
                
                
                5,460
                
                
                2,700Net
                    proceeds from sale of common stock
                
                
                28
                
                
                54Net
                    cash provided by financing activities
                
                
                5,468
                
                
                2,354Change
                    in cash and cash equivalents
                
                
                818
                
                
                (3,730
                )Beginning
                    cash and cash equivalents
                
                
                124
                
                
                3,854Ending
                    cash and equivalents
                
                $
                942
                
                $
                124**SUPPLEMENTAL
                    DISCLOSURE OF CASH FLOWS INFORMATION**Cash
                    paid for interest
                
                $
                6
                
                $
                15**SUPPLEMENTAL
                    SCHEDULE OF NON-CASH INVESTING AND FINANCING
                    ACTIVITIES**Equipment
                    acquired under capital lease arrangements
                
                $
                37
                
                $
                -Warrants
                    issued for loan financing
                
                $
                1,422
                
                $
                3,000
   See
          accompanying notes to financial statements.
  F-6
  **CARDIMA,
        INC.**
 **Notes
        to Financial Statements**
 **December
        31, 2006**
 
  **1.**  **Nature
        of Business and Summary of Significant Accounting Policies**
  ***Nature
        of Business***
  The
        Company was incorporated in the State of Delaware on November 12, 1992. The
        Company designs, develops, manufactures and markets minimally invasive,
        single-use, micro-catheter systems for the mapping and ablation of the two
        most
        common forms of cardiac arrhythmias: atrial fibrillation and ventricular
        tachycardia. The Company has licensed its micro-catheter technology for use
        in
        the treatment of electrophysiological diseases affecting areas other than
        the
        central nervous system from Target Therapeutics. The Company sells its products
        worldwide through both direct sales and distribution channels, with a
        substantial portion of its sales to international customers.
  ***Going
        Concern***
  The
        accompanying financial statements have been prepared on a going concern basis,
        which contemplates the realization of assets and the settlement of liabilities
        and commitments in the normal course of business. As reflected in the
        accompanying financial statements, as of December 31, 2006, the Company had
        cash
        on hand of $942,000, negative working capital of $13.3 million, and an
        accumulated deficit of approximately $131 million. These factors raise
        substantial doubt about its ability to continue as a going concern. In January
        2007, the Company entered into a new loan facility of $5.6 million with Apix
        International Limited (Apix) as explained in Note 17, however, the ability
        of
        the Company to continue as a going concern is dependent on the Company’s ability
        to implement its business plan and raise additional funds.
 
 ***Use
        of Estimates***
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles in the United States requires management to make estimates
        and assumptions that affect the amounts of assets and liabilities, disclosures
        of contingent assets and liabilities at the date of the financial statements
        and
        the reported amounts of revenues and expenses during the reported period.
        Actual
        results could differ from those estimates and such differences could affect
        the
        results of operations reported in future periods.
 
 ***Revenue
        Recognition***
  The
        Company recognizes revenue from two types of customers, end users and
        distributors. Revenue is recognized in accordance with Staff Accounting Bulletin
        104, “Revenue Recognition,” when all of the following criteria are met:
        persuasive evidence of an arrangement exists, shipment of the product has
        occurred and title of products transferred at the point of shipment, payment
        of
        the product is reasonably assured and no substantive obligations to the customer
        remain. Revenue is presented net of discounts, allowances, and returns.
        Customers are not entitled to any rights of product return. Payment terms
        are
        either open trade credit or cash. We have distributors in Asia and Europe
        and we
        record as revenue the wholesale price we charge our distributors. The
        distributors assume the title and the risk of loss at the shipping point.
        The
        distributors do not have any price protection or return rights.
 
 ***Cost
        of Goods Sold***
 
 Cost
        of
        goods sold primarily includes raw material costs, catheter fabrication costs,
        system assembly, shipping and handling charges, testing costs and manufacturing
        overhead.
 
 ***Research
        and Development***
  Research
        and development costs, which include clinical and regulatory costs, are charged
        to expense as incurred.
  F-7
 
 
 ***Reclassification***
 
 Certain
        reclassifications have been made to prior period amounts to conform to the
        current year presentation.
 
  ***Income
        Taxes***
  Income
        taxes are accounted for under the asset and liability method. Deferred income
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement bases and the
        respective tax bases of the assets and liabilities and operating loss and
        tax
        credit carry forwards. Deferred tax assets and liabilities are measured using
        enacted tax rates expected to apply to taxable income in the years in which
        those temporary differences are expected to be recovered or settled. The
        effect
        on deferred tax assets and liabilities of a change in tax rates is recognized
        in
        income in the period that includes the enactment date. Valuation allowances
        are
        established when necessary to reduce deferred tax assets to the amount expected
        to be realized, and have been provided for all periods presented.
 
 ***Stock
        Based Compensation***
 
 Prior
        to
        January 2006, the Company used Statement of Financial Accounting Standards
        No.
        148 "Accounting for Stock-Based Compensation - Transition and Disclosure"
        (SFAS
        No. 148) to account for our stock based compensation arrangements. This
        statement amended  the
        disclosure provision of FASB statement No. 123 to require prominent disclosure
        about the effects on reported net income of an entity's accounting policy
        decisions with respect to stock-based employee compensation. As permitted
        by
        SFAS No. 123 and amended by SFAS No. 148, the Company continued to apply
        the
        intrinsic value method under Accounting Principles Board ("APB") Opinion
        No. 25,
        "Accounting for Stock Issued to Employees," to account for its stock-based
        employee compensation arrangements.
 
 The
        following table illustrates the effect on reported net loss per share if
        the
        Company had applied the fair value recognition provisions of SFAS 123(R)
        to
        stock-based awards for the year ended December 31, 2005: (in thousands, except
        per share amounts):
  **Year
                  ended December 31, 2005**Net
                  loss applicable to common shareholders - as reported
              
              
              ($8,328
              )Add:Stock-based
                  employee compensation expense included inreported
                  net income, net of applicable tax effects
              
              
              ---Less:Total
                  stock-based employee compensation expensedetermined
                  under fair value based method for all awards,net
                  of applicable tax effects
              
              
              (778
              )Pro
                  forma net loss applicable to common shareholders
              
              
              ($9,106
              )Basic
                  and diluted net loss per share applicable to commonshareholders
                  - as reportedAs
                  reported
              
              
              ($0.08
              )Pro
                  forma
              
              
              ($0.09
              )
 
 In
        December 2004, the Financial Accounting Standards Board issued Statement
        Number 123 (“FASB 123 (R)”), Share-Based Payments, which was effective for the
        reporting period beginning on January 1, 2006. The statement required the
        Company to recognize compensation expense in an amount equal to the fair
        value
        of share-based payments such as stock options granted to employees. The Company,
        which had the option to either apply FASB 123 (R) on a modified prospective
        method or to restate previously issued financial statements, has chosen to
        utilize the modified prospective method. Under this method, the Company was
        required to record compensation expense (as previous awards continue to vest)
        for the unvested portion of previously granted awards that remain outstanding
        at
        the date of adoption.
  F-8
 In
        January 1, 2006, the Company adopted the expense recognition provisions of
        FASB
        No. 123 (R) which requires the measurement and recognition of compensation
        expense for all share-based payment awards based on estimated fair values.
        The
        total stock-based compensation expense was approximately $390,000 for the
        year
        ended December 31, 2006. The fair value of employee stock options granted
        was determined using the Black-Scholes method based on the following
        weighted-average assumptions:
 
 
 2006
              
              2005Expected
                  life (years)
              
              
              4.0
              
              
              4.0Interest
                  Rate
              
              
              4.6
              %
              
              4.4
              %Volatility
              
              
              160
              %
              
              128
              %Dividend
                  Yield
              
              
              0
              %
              
              0
              %
 
  ***Net
        Loss Per Share***
   Net
        loss
        per share is computed using the weighted average number of shares of common
        stock outstanding during the applicable period. Shares associated with stock
        options and warrants are not included because they are anti-dilutive. There
        are
        no differences between basic and diluted net loss per share for all periods
        presented.
  The
        following table presents the calculation of basic and diluted net loss per
        share: (in thousands, except per share amounts)
  2006
              
              
              2005Net
                  loss available to common shareholders
              
              $
              (9,533
              )
              $
              (8,328
              )Weighted
                  average common shares outstanding
              
              
              101,696
              
              
              101,408Basic
                  and diluted net loss per share available to common
                  shareholders
              
              $
              (0.09
              )
              $
              (0.08
              )
  The
        following historical outstanding anti-dilutive securities are not included
        in
        the calculation of diluted net loss per share attributable to common
        stockholders:
  2006
              
              2005Options
                  to purchase common stock
              
              
              5,108,628
              
              
              7,557,035Warrants
                  to purchase common stock
              
              
              75,793,526
              
              
              49,369,168Total
              
              
              80,902,154
              
              
              56,926,203
  ***Cash
        and Cash Equivalents***
  The
        Company considers all highly liquid investments with maturity of three months
        or
        less, when acquired, to be cash equivalents.
 
 ***Allowance
        for Doubtful Accounts***
 
  The
        Company uses the allowance method to account for uncollectible accounts
        receivable. The Company’s estimate is based on historical collection experience
        and a review of the current status of accounts receivable. The Company reviews
        its accounts receivable balances by customer for accounts greater than 90
        days
        old and makes a determination regarding the collectibility of the accounts
        based
        on specific circumstances and the payment history that exists with such
        customers. The Company also takes into account its prior experience, the
        customer’s ability to pay and an assessment of the current economic conditions
        in determining the net realizable value of its receivables. The Company also
        reviews its allowance for doubtful accounts in aggregate for adequacy following
        this assessment. Accordingly, the Company believes that its allowance for
        doubtful accounts fairly represent the underlying collectibility risks
        associated with its accounts receivable. For the period ended December 31,
        2006, the Company established an allowance for doubtful accounts of $14,000.
 
 F-9
 ***Allowance
        for Loan Loss***
 
 The
        allowance for loan loss represents management’s estimate of principal and
        accrued interest losses as of the balance sheet date. Determination of the
        reserve is inherently subjective, as it requires significant estimates,
        including the amounts and timing of expected future cash flows. Also specific
        reserves are established in cases where management has identified significant
        conditions or circumstances related to an individual credit that we believe
        indicates the note is un-collectible. Note losses are charged off against
        the
        reserve, and while recoveries of amounts previously charged off are credited
        to
        the reserve. Evaluations of the reserve balance are conducted
        quarterly.  Interest
        is not accrued on non-performing loan. A loan is considered non-performing
        if
        the accrued interest is not received on the due date.
  ***Property
        and Equipment***
  Property
        and equipment, including equipment under capital leases, are carried at cost
        less accumulated depreciation and amortization. Property and equipment are
        depreciated using the straight-line method over the estimated useful lives,
        generally three to five years. Leasehold improvements are amortized using
        the
        straight-line method over the shorter of the estimated useful life of the
        asset
        or the remaining term of the lease. Depreciation expense includes amortization
        of capital leases and leasehold improvements.
  ***Long-Lived
        Assets***
  The
        Company accounts for the impairment and disposition of long-lived assets
        in
        accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
        Long-Lived Assets.” In accordance with SFAS No.144, long-lived assets to be held
        are reviewed whenever events and changes in circumstances indicate that their
        carrying value may not be recoverable. The Company reviews the carrying value
        of
        long-lived assets to determine whether or not, an impairment to such value
        has
        occurred. During the year ended December 31, 2006, the Company believes that
        there has been no indicator of impairment.
   ***Income
        Taxes***
 
 Income
        taxes are accounted for under the asset and liability method. Deferred income
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement bases and the
        respective tax bases of the assets and liabilities and operating loss and
        tax
        credit carry forwards. Deferred tax assets and liabilities are measured using
        enacted tax rates expected to apply to taxable income in the years in which
        those temporary differences are expected to be recovered or settled. The
        effect
        on deferred tax assets and liabilities of a change in tax rates is recognized
        in
        income in the period that includes the enactment date. Valuation allowances
        are
        established when necessary to reduce deferred tax assets to the amount expected
        to be realized, and have been provided for all periods presented.
 
 ***Warrants***
  The
        Company accounts for warrants in accordance with FASB Statement of Financial
        Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial
        Instruments with Characteristics of both Liabilities and Equity.” At the date of
        issuance, a fair value is ascribed to the warrants based on a valuation using
        the Black-Scholes model. The value of warrants outstanding at the end of
        each
        fiscal quarter is marked to market based on a valuation using the Black-Scholes
        model.
  ***Segment
        Reporting***
  The
        Company identifies its operating segments based on how management internally
        evaluates separate financial information (if available), business activities
        and
        management responsibilities. The Company operates in a single business segment,
        the manufacturing and sale of device-based medical therapies. All of the
        Company’s revenues have been derived from this business segment.
  F-10
 ***Fair
        Value of Financial Instruments***
  The
        Company’s financials instruments at December 31, 2006 consist of cash, accounts
        receivable, notes receivable from officers, accounts payable, warrant
        liabilities, other current liabilities, loan payable and capital lease
        obligation. The carrying values of these financial instruments approximate
        their
        fair values.
  ***Off-Balance-Sheet
        Arrangements***
 
 As
        of
        December 31, 2006, the Company did not have any off-balance sheet
        arrangements.
 
 ***Recent
        Accounting Pronouncements***
  In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 155, “Accounting for Certain Hybrid Financial Instruments,” which
        amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging
        Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
        Financial Assets and Extinguishment of Liabilities.” SFAS No. 155 amends
        SFAS No. 133 to narrow the scope exception for interest-only and
        principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to
        allow qualifying special-purpose entities to hold a passive derivative financial
        instrument pertaining to beneficial interests that are themselves derivative
        instruments. Management does not expect adoption of SFAS No. 155 to have a
        material impact on the Company’s financial statements.
  In
        June
        2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting
        for Uncertainty in Income Taxes, an interpretation of FASB Statement
        No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes.
        FIN 48 prescribes a recognition threshold and measurement attribute for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. FIN 48 requires that we recognize in
        the
        financial statements the impact of the tax position if that position will
        more
        likely than not be sustained on audit, based on the technical merits of the
        position. FIN 48 also provides guidance related to de-recognition,
        classification, interest and penalties, accounting in interim periods and
        disclosure. If there are changes in net assets as a result of application
        of FIN
        48, these will be accounted for as an adjustment to retained earnings. We
        are
        currently evaluating the accounting and disclosure requirements of FIN 48
        in
        order to determine the impact that this guidance will have on our results
        of
        operations or financial condition when we adopt FIN 48 at the beginning of
        our
        fiscal year 2007.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
which defines fair value, establishes a framework for measuring fair value,
        and
        expands disclosures about fair value measurements. SFAS No. 157 does not
        require any new fair value measurements, but rather eliminates inconsistencies
        in guidance found in various prior accounting pronouncements. We are currently
        evaluating the accounting and disclosure requirements that this guidance
        will
        have on our results of operations or financial condition when we adopt SFAS
        No. 157 at the beginning of our fiscal year 2008.
 
  F-11
 
 **2.
        Inventories**
 
 Inventories
        are stated at the lower of cost or market. Cost is based on actual costs
        computed on a first-in, first-out basis. Inventories consist of the following
        (in thousands):
  December
                  31, 2006Raw
                  Materials
              
              $
              139Work-In-Process
              
              
              86Finished
                  Goods
              
              
              99$
              324
 
 Inventories
        shown above are valued using FIFO and are adjusted to the lower of cost or
        market. The Company had allowances for excess and obsolete inventory of $579,000
        at December 31, 2006. The Company recorded adjustment to the lower of cost
        or
        market of $7,000 in 2006. Moreover, as of December 31, 2006, the Company
        has
        approximately $68,000 in inventories located in foreign countries, which
        were
        held by the local distributors.
 
  **3** ***.*** **Property
        and Equipment**
  Property
        and equipment, including equipment under capital leases, are carried at cost
        less accumulated depreciation and amortization. Property and equipment are
        depreciated using the straight-line method over the estimated useful lives,
        generally three to five years. Leasehold improvements are amortized using
        the
        straight-line method over the shorter of the estimated useful life of the
        asset
        or the remaining term of the lease. Depreciation expense includes amortization
        of capital leases and leasehold improvements. Depreciation expense was $123,000
        and $201,000 for fiscal years 2006 and 2005, respectively.
  Property
        and equipment consist of the following (in thousands):
  December
                  31, 2006Equipment
              
              $
              1,888Leasehold
                  improvements
              
              
              259$
              2,147Less
                  accumulated depreciation and amortization
              
              
              (1,867
              )$
              280Idle
                  Equipment
              
              $
              1,290Less
                  accumulated depreciation and amortization
              
              
              (1,290
              )$
              -
 
 Equipment
        includes property and equipment financed under capital leases, which was
        $78,000
        at December 31, 2006. Accumulated amortization related to leased assets was
        $37,000. With the June 2005 furlough and the August 2005 reduction-in-force,
        the
        Company has fully depreciated idle equipment in the amount of $1,290,000
        as of
        December 31, 2006.
  F-12
 
 
 **4.
        Loans Payable**
 
 On
        August
        28, 2005, the Company entered into a $3,000,000 Secured Loan Agreement with
        Apix
        International Limited (Apix). The term of the loan was six months. All the
        loan-related fees were amortized over the period from August 2005 to February
        2006. On February 14, 2006, the Company entered into a new loan facility
        term
        sheet with Apix, which provided for the rollover of the original loan agreement
        and the grant of an additional loan facility in the amount of $660,000 at
        an
        interest rate of 10% per annum. The term of this new loan facility was three
        months. All the additional new facility-related fees were amortized over
        the
        period from February 2006 to May 2006. In
        addition, the Company and Apix have agreed to the following terms: (i) the
        maturity date of the original loan facility is extended from February 28,
        2006
        to May 18, 2006; (ii) the
        exercise price of the original warrant has been adjusted to $0.06 per share.
        Moreover, the Company has granted Apix a new warrant to purchase 23,800,000
        shares of our common stock at an exercise price of $0.06 per share for a
        term of
        ten years. Furthermore, upon completion of the full funding under the new
        loan
        facility, the Company has granted Apix warrants to purchase an additional
        8,000,000 shares of its common stock at an exercise price of $0.06 per share
        for
        a term of ten years; (iii) the
        Company has granted Apix the right to convert the loan principal, interest,
        facility fees and exit fees into shares of its common stock at a conversion
        price of $0.06 per share; (iv) the facility fee has been increased from $60,000
        to $80,000. In addition, the exit fee has been increased from $900,000 to
        $1,300,000; (v) upon completion of the full funding under the new loan facility,
        the exit fee would be increased by $260,000; (vi) the Company agrees to register
        the shares underlying the loan principal, facility fees, and warrants on
        a
        registration statement as soon as practicable after the date of issuing the
        warrant, but in any event no later than May 31, 2006. The Company filed a
        registration statement Form SB-2 on May 31, 2006 and it was withdrawn on
        October
        26, 2006. The Company used the interest method to amortize all the loan fees
        over the life of the loan. The Company received funding under this agreement
        of
        $200,000 and $460,000 in February and March 2006, respectively.
 
 On
        May
        18, 2006, the Company was not able to repay this Apix loan. The Company’s
        failure to repay the principle and interest by the maturity date constituted
        an
        event of default pursuant to the loan agreement. To secure the repayment
        of
        principle and interest to Apix under the loan agreement, the Company entered
        into a (i) Security Agreement, (ii) Trademark Security Agreement, (iii) Patent
        Security Agreement, and (iv) Patent, Trademark and Copyright Security Agreement
        with Apix, granting Apix a first priority security interest in all of the
        Company’s assets and intellectual property now owned or hereafter acquired.
        Apix’s remedies upon default of the loan agreement include taking procession and
        selling the collateral, the occurrence of which would cause the Company to
        cease
        its operations indefinitely.
 
 The
        Company had not received a notice of default from Apix, nor has Apix indicated
        to the Company that it intended to place the Company in default under the
        loan
        agreement. In addition to the $3,660,000 loaned to the Company by Apix through
        March 31, 2006, Apix has made advances to the Company in the amount of
        $4,500,000 through December 31, 2006. The Company’s loans payable balance as of
        December 31, 2006 and 2005 was $8,160,000 and $2,700,000,
        respectively.
 
 The
        table
        below summarizes the activities in the loans payable account:
 
 AmountAugust
                  2005 loan facility
              
              $
              3,000,000February
                  2006 loan facility
              
              
              660,000April
                  2006 to December 2006 advances
              
              
              4,500,000Total
              
              $
              8,160,000
 
 On
        January 15, 2007, the Company entered into a new term sheet with Apix, which
        provides for the rollover of prior loan facilities and subsequent advances
        (Prior Facilities) and an additional loan facility between the parties (the
        "New
        Facility"). The New Facility provides for the following terms and conditions:
 
 F-13
 (i)
            Additional
                loan facility - Apix has granted the Company an additional loan facility
                in the amount of $5,625,000. Advances pursuant to the additional
                facility
                shall be made on a bi-weekly basis the Company’s discretion in
                denominations of $225,000 per advance; (ii)
            New
                maturity date - the maturity date of the New Facility and Prior Facilities
                is the earlier of (a) December 31, 2007 or (b) the date that Apix
                makes a
                demand for payment; (iii)
            Facility
                fee adjustment - the aggregate facility fee for the Prior Facilities
                and
                the New Facility shall be $500,000 (the “Facility Fee”) which is payable
                through the issuance of five million shares of our preferred stock
                with
                the following minimum preferences: (a) 28 votes per share at any
                general
                or extraordinary meeting of the common shares of the company convened
                by
                the Company or its shareholders for a total of 140 million votes
                at any
                such meeting; and (b) convertible into common shares of the Company
                at any
                time at the sole and absolute discretion of the holder on the basis
                of two
                (2) common shares for each preferred share tendered for conversion
                for a
                total of ten (10) million common shares in the event all preferred
                shares
                are tendered for conversion; (iv)
            Exit
                fees - the aggregate exit fees for the Prior Facilities and the New
                Facility shall be $2,800,000 plus $80,000 for each advance
                madewhich
                shall be due and payable on the earliest to occur of: (1) the maturity
                date, (2) generally the sale of the company or substantially all
                of its
                assets, a reorganization or a new loan facility in excess of $1,000,000,
                or (3) an event of default; (v)
            Price
                adjustment to existing warrant and new warrants - pursuant to the
                Prior
                Facilities, the Company agreed to issue to Apix warrants to purchase
                118,800,000 shares of the Company's common stock at an exercise price
                of
                $0.06 per share (the “Existing Warrants”). Pursuant to the New Facility,
                the exercise price of the Existing Warrants has been adjusted to
                $0.04 per
                share. In addition, the Company has agreed to issue to Apix additional
                warrants to purchase 20,000,000 shares of the Company’s common stock at an
                exercise price of $0.03 per share (the “New Warrants”). All warrants have
                a term of ten years; (vi)
            Conversion
                price adjustment - the loan principal and exit fees are convertible
                into
                shares of the Company’s common stock at a conversion price of $0.04 per
                share; and (vii)
            Registration
                rights - the Company agrees to register a percentage of the shares
                underlying the loan principal, facility fees, and warrants on a
                registration statement at its best efforts. 
 The
        terms
        of the new term sheet are not binding on the parties. Completion of the New
        Facility is contingent upon the negotiation and execution of definitive
        agreements and other documentation.
 
 With
        the
        loan agreement’s optional conversion clause on all or any portion of the
        facility fee, the exit fee and the accrued interest due under the loan, any
        gains or losses on the difference between the conversion price and the fair
        value of the stock at the time of conversion will be included in the Company's
        earnings during that period.
 
 **5.
        Warrant Liabilities**
 
 The
        Company had the following warrant liabilities outstanding:
 
 Total
              
              Value
                  at
              
              Value
                  atWarrant
                  Shares
              
              Inception
              
              December
                  31, 2006August
                  2005 Loan
              
              
              30,000,000
              
              $
              3,000,000
              
              $
              1,476,000February
                  2006 Loan
              
              
              31,800,000
              
              $
              1,421,740
              
              $
              1,567,740$
              3,043,740
 
 The
        Company used the Black-Scholes valuation model to value the warrants at each
        balance sheet date and recorded the respective (income) or expense based
        on the
        following:
 
 Warrant
                  Granted
              
              FMV
              
              Strike
                  Price
              
              Remaining
                  Life ( in years)
              
              Interest
                  Rate
              
              Volatility
              
              Change
                  in ValueQ1
                  2006
              
              
              Aug-05
              
              $
              0.05
              
              $
              0.06
              
              
              9.42
              
              
              4.73
              %
              
              128
              %
              $
              47,420Feb-06
              
              
              
              
              $
              0.05
              
              $
              0.06
              
              
              9.92
              
              
              4.73
              %
              
              128
              %
              $
              177,000Q1
                  2006 Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              224,420Q2
                  2006
              
              
              Aug-05
              
              $
              0.09
              
              $
              0.06
              
              
              9.17
              
              
              5.08
              %
              
              160
              %
              $
              1,275,180Feb-06
              
              
              
              
              $
              0.09
              
              $
              0.06
              
              
              9.67
              
              
              5.08
              %
              
              160
              %
              $
              1,206,000Q2
                  2006 Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              2,481,180Q3
                  2006
              
              
              Aug-05
              
              $
              0.05
              
              $
              0.06
              
              
              8.92
              
              
              4.68
              %
              
              160
              %
              
              ($1,254,000
              )Feb-06
              
              
              
              
              $
              0.05
              
              $
              0.06
              
              
              9.42
              
              
              4.68
              %
              
              160
              %
              
              ($1,332,420
              )Q3
                  2006 Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              ($2,586,420
              )Q4
                  2006
              
              
              Aug-05
              
              $
              0.05
              
              $
              0.06
              
              
              8.67
              
              
              4.56
              %
              
              160
              %
              $
              147,000Feb-06
              
              
              
              
              $
              0.05
              
              $
              0.06
              
              
              9.17
              
              
              4.56
              %
              
              160
              %
              $
              155,820Q4
                  2006 Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              302,820FY2006
                  Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              422,000
   F-14
 
 **6.
        Note Payable to Related Parties**
 
 As
        previously disclosed, the Company’s former President and Chief Operating
        Officer, Mr. William K. Wheeler, has threatened to sue the Company for the
        recovery of $375,000 plus interest, which he has claimed that he was owed
        under
        the terms of his amended executive agreement. He made a settlement proposal,
        which would extinguish his repayment obligation on the loan that he had received
        from the Company in June 2000 and May 2001, in the total principal amount
        of
        $192,500.
 
 In
        December 2006, a settlement agreement was reached in principle, which the
        Company would pay $295,000 to Mr. Wheeler ($5,000 per month for 59 months).
        In
        accordance with the Accounting Principle Board (“APB”) No. 21, “Interest on
        Receivables and Payables”, the $295,000 note payable is discounted at 10% (same
        as the interest rate on the current loan financing) and the $192,500 note
        receivable is discounted at 6% (the original note’s interest rate). The
        discounted value of the note payable and note receivable is $232,287 and
        $162,022, respectively. The net of these two values of $70,265 is the note
        payable balance as of December 31, 2006.
 
 **7.
        Accrued Interest and Fee**
  As
        of
        December 31, 2006, the Company had accrued loan fees of $1,715,000 and loan
        interest of $593,000 in conjunction with the Apix loan financings in August
        2005
        and February 2006.
  **8.
        Commitments and Contingencies**
  *Commitments*
  The
        Company leases facilities under an operating lease, which has been extended
        through May 2007. The Company also leases certain equipment under non-cancelable
        capital leases, which bear interest at the rate of 10% per annum. Following
        is a
        schedule of future minimum lease payments under both operating and capital
        leases (in thousands):
  
  Fiscal
                  Year
              
              Operating
                  Leases
              
              Capital
                  Leases2007
              
              $
              115
              
              $
              212008
              
              
              -
              
              
              22Total
                  minimum lease payments
              
              
              115
              
              
              43Less
                  amounts representing interest
              
              
              N/A
              
              
              3Present
                  value of net minimum lease payments
              
              $
              115
              
              $
              40
   Rent
        expense was approximately $260,000 in 2006, and $385,000 in 2005.
  *Contingencies*
  F-15
 The
        Company is subject to numerous risks and uncertainties because of the nature
        and
        status of its operations and could be subject to claims and legal actions
        arising in the ordinary course of business. The Company maintains insurance
        coverage for events in amounts that it deems appropriate. Management believes
        that uninsured losses, if any, will not be materially adverse to the Company’s
        financial position or results of operations.
  **9.
        Concentrations of Risk**
  To
        date,
        product sales have been direct to customers in the United States and to
        distributors primarily in Europe and Japan. During the year ended December
        31,
        2006 and 2005, revenues to the Company’s largest customer, Paramedics Co. Ltd.
        in Japan, comprised 42% and 48% of the Company’s total net product sales
        respectively. No other single customer represented greater than 10% of net
        product sales in the years 2006 and 2005. Accounts receivable from this customer
        were $284,100 and $214,800 at the end of 2006 and 2005, respectively. The
        total
        export sales represented 59% of net sales for the year ended December 31,
        2006.
        Allowances for doubtful accounts were $14,000 and $26,000 as of December
        31,
        2006 and 2005, respectively. When necessary, estimated provisions for product
        returns are recorded. The geographic distribution of net sales was as follows
        (in thousands):
  Year
                  Ended December 31,2006
              
              2005United
                  States
              
              $
              624
              
              
              41
              %
              $
              682
              
              
              36
              %Germany
              
              
              146
              
              
              9
              %
              
              137
              
              
              8
              %Europe
                  - Other
              
              
              109
              
              
              7
              %
              
              138
              
              
              8
              %Japan
              
              
              650
              
              
              42
              %
              
              897
              
              
              48
              %Others
              
              
              12
              
              
              1
              %
              
              5
              
              
              0
              %Total
                  Net Sales
              
              $
              1,541
              
              
              
              
              $
              1,859
 
 In
        the
        first quarter of 2007, our Japanese distributor notified us of its failure
        to
        maintain the legal documentation standard required to sell our PATHFINDER® in
        Japan. As a result, we had no sales in Japan during the first quarter of
        2007.
        We understand that the reapplication process takes approximately six months.
        We
        are currently exploring our options with regard to selling the PATHFINDER® in
        Japan. During the reapplication process, we may have limited or no sales
        in
        Japan. We anticipate resuming commercial sales before the end of 2007. However,
        there can be no assurance that we will be able to resume sales by that
        time.
 
 The
        Company’s diagnostic product group, namely the Pathfinder® family of
        micro-catheter systems, accounted for 74% and 73% of net sales for the years
        ended December 31, 2006 and 2005, respectively.
 
 The
        Company purchases certain key components of its products for which there
        are
        relatively few alternative sources of supply including the hydrophilic coating
        for certain of its micro-catheters, from sole or limited source supplies.
        Establishing additional or replacement suppliers for any of the numerous
        components used in the Company’s products, if required, may not be accomplished
        quickly and could involve significant additional costs. Any supply interruption
        from vendors or failure of the Company’s products would limit the Company’s
        ability to manufacture its products and would have a material adverse effect
        on
        the Company’s business, financial condition and results of
        operations.
 
 As
        of
        December 31, 2006, the Company had loans payable in the amount of $8,160,000,
        which was financed by one single lender, Apix International
        Limited.
 
 The
        Company receives payments from its customers and deposits them in federally
        insured financial institutions during its normal course of business. From
        time
        to time, the balances with these deposit accounts may exceed the federally
        insured maximum limit, $100,000. As at the end of December 31, 2006, the
        Company
        has cash of $942,000.
 
  F-16
 
  **10.
        Stockholders’ Equity**
  The
        Company is authorized to issue two classes of stock, common stock and preferred
        stock. The total
        number of shares of common
        stock authorized to be issued is three hundred million, par value $0.001
        per
        share, and the total number of shares of preferred stock authorized to be
        issued
        is five million, par value $0.001 per share.
  *Preferred
        stock*
  The
        Company is authorized to issue 5,000,000 shares of preferred stock. The
        preferred stock may be issued from time to time in one or more series, without
        further stockholder approval. Series A preferred stock is non-redeemable,
        and
        has certain liquidation preferences. There were no shares of preferred stock
        outstanding at December 31, 2006.
  *Common
        Stock*
  The
        Company is authorized to issue 300,000,000 shares of common stock. Holders
        of
        common stock are entitled to one vote per share on all matters to be voted
        upon
        by the stockholders of the Company. No dividends have been declared to
        date.
  As
        of
        December 31, 2006, the Company had 102,354,679 outstanding shares of common
        stock, options to purchase 5,108,628 shares of common stock and warrants
        to
        purchase 75,793,526 shares of common stock.
  *Warrants*
  The
        following table summarizes information about warrants outstanding at December
        31, 2006 and the number of shares of common stock that the holders are entitled
        to purchase:
  Date
              In
                  Connection With
              
              Price
                  Range
              
              Outstanding
              Expiration
                  DateOctober-2002
              Finance
                  Consulting for Public Relations
              
              $0.90
              
              160,000
              October-2007January-2003
              Private
                  Placement
              
              $0.83
              
              505,332
              January-2007March-2003
              Private
                  placement
              
              $1.25
              
              1,176,470
              March-2007March-2003
              Private
                  Placement Commission
              
              $0.94
              
              294,117
              March-2007April-2003
              Private
                  Placement
              
              $0.935-$1.25
              
              1,758,234
              April-2007April-2003
              Private
                  Placement Commission
              
              $1.34
              
              404,440
              April-2007August-2003
              Private
                  Placement Commission
              
              $0.779
                  - $0.838
              
              721,552
              August-2008December-2003
              Private
                  Placement
              
              $0.96
              
              1,074,993
              December-2007December-2003
              Private
                  Placement Commission
              
              $0.957-$1.238
              
              324,297
              December-2008November-2004
              Private
                  Placement
              
              $0.43
              
              6,586,165
              November-2009November-2004
              Private
                  Placement Commission
              
              $0.43
              
              987,926
              November-2009February-2006
              Loan
                  Financing
              $0.06
              61,800,000
              February-2016Total
                  Warrants Outstanding
              
              75,793,526
 
  On
        January 22, 2003, the Company issued warrants to purchase an aggregate of
        438,000 shares of our common stock at an exercise price of $0.825 per share
        in
        connection with the January 2003 private placement transaction. The Company
        also
        issued warrants to purchase an aggregate of 97,332 shares of our common stock
        at
        an exercise price of $0.8245 as additional commission for the placement agent
        in
        this transaction. These warrants are not redeemable and contain “cashless
        exercise” provisions.
  On
        March
        28, 2003, the Company issued warrants to purchase an aggregate of 1,176,470
        shares of our common stock at an exercise price of $1.25 per share. The warrants
        issued to the investors are redeemable by the Company if its common stock
        closes
        at or above $1.70 per share for fifteen consecutive trading days and they
        remain
        unexercised 30 days after the Company gives notice to the holders of the
        warrants of its intent to redeem. Also the Company issued warrants to purchase
        an aggregate of 293,117 shares of our common stock at an exercise price of
        $0.935 as additional commission for the placement agents in this transaction.
        The warrants issued to the placement agents are not redeemable.
  F-17
 On
        April
        11, 2003, the Company issued warrants to purchase an aggregate of 1,758,234
        shares of our common stock at an exercise price of $1.25 per share. The warrants
        issued to the investors are redeemable by the Company if its common stock
        closes
        at or above $1.70 per share for fifteen consecutive trading days and they
        remain
        unexercised 30 days after the Company gives notice to the holders of the
        warrants of its intent to redeem. The Company also issued warrants to purchase
        an aggregate of 448,557 shares of our common stock at an exercise price of
        $0.935 as additional commission for the placement agents in this transaction.
        The warrants issued to the placement agents are not redeemable.
  In
        August
        2003, the Company issued warrants to purchase an aggregate of 3,084,840 shares
        of our common stock at an exercise price of $0.7282 per share, warrants to
        purchase an aggregate of 726,590 shares at an exercise price of $0.7788 and
        warrants to purchase an aggregate of 293,152 shares at an exercise price
        of
        $0.8338 per share. The warrants issued to the investors are redeemable by
        the
        Company if its common stock closes at or above $1.0592, $1.1328 or $1.2128,
        respectively, for fifteen consecutive trading days and they remain unexercised
        30 days after the Company gives notice to the holders of the warrants of
        its
        intent to redeem. The Company also issued warrants to purchase 321,057 shares
        of
        our common stock at an exercise price of $0.8375 and warrants to purchase
        up to
        440,812 shares of common stock at exercises prices that range for $0.90 per
        share to $1.1025 per share as commission for the placement agents in this
        transaction. In August 2003, the Company issued redeemable warrants to purchase
        an aggregate of 4,104,582 shares of our common stock at exercise prices of
        $0.7282 to $0.8338 per share. In connection with this transaction, the Company
        also issued warrants to purchase 761,869 shares of our common stock at exercise
        prices of $0.8375 to $1.1025 per share as commission for the placement agents
        in
        this transaction. The warrants issued to the investors are redeemable by
        the
        Company if its common stock closes at or above $1.0592, $1.1328 or $1.2128,
        respectively, for fifteen consecutive trading days and they remain unexercised
        30 days after the Company gives notice to the holders of the warrants of
        its
        intent to redeem.
  On
        December 19, 2003, the Company issued warrants to purchase an aggregate of
        1,074,993 shares of our common stock at an exercise price of $0.957 per share.
        The warrants became exercisable beginning June 19, 2004, subject to reduction
        on
        a share-for-share basis to the extent that an investor sold our common stock
        or
        other securities during the six-month period between the closing and June
        19,
        2004. The warrants issued to the investors are redeemable by the Company
        if its
        common stock closes at or above $1.70 per share for fifteen consecutive trading
        days and they remain unexercised 30 days after the Company gives notice to
        the
        holders of the warrants of its intent to redeem. The Company also issued
        warrants to purchase an aggregate of 303,608 shares of our common stock at
        an
        exercise price of $0.957 per share and an aggregate of 20,689 shares of our
        common stock at an exercise price of $1.2375 per share as additional commission
        for the placement agents in this transaction. The warrants issued to the
        placement agents are not redeemable.
  On March
        17,
        2004, all of the
        warrants  issued
        on
        August 13, 2003, as well
        as a portion of the warrants issued on August 14 and 18, 2003, were
        exercised for a total of 4,144,839 shares of common stock. Warrant exercise prices ranged from
        $0.7282 to $0.8375 per share. Cardima issued a notice of redemption on October
        10, 2003 in connection with its election to redeem all outstanding warrants
        issued on August 13, 2003. Total net proceeds from the exercise of these
        warrants were $3.1 million.
 
 On
        November 24, 2004, the Company issued warrants to purchase an aggregate of
        6,586,165 shares of our common stock at an exercise price of $0.4295 per
        share.
        The warrants were exercisable beginning on May 24, 2005. We also issued to
        the
        parties that acted as our placement agents in connection with this private
        placement warrants to purchase 987,926 shares of our common stock at an exercise
        price of $0.4295 per share. In addition, we adjusted certain warrants to
        purchase our common stock that were issued in the February 25, 2000 private
        placement, as required by these warrants’ anti-dilution provisions. The number
        of shares of common stock issuable upon exercise of these warrants was increased
        by 372,088.
 
 On
        August
        26, 2005, the Company issued warrants with registration rights to purchase
        an
        aggregate of 30,000,000 shares of our common stock at an exercise price of
        $0.10
        per share. The warrants would be exercisable beginning on August 28, 2005
        for a
        period of ten years. The August 2005 warrants were valued at inception and
        revalued at December 31, 2005 and the change in the fair value of the August
        2005 warrants on the two valuation dates were recorded as other income of
        $1,800,000 for the year ended December 31, 2005. As the registration was
        not yet
        declared effective by December 31, 2005, the $1,200,000 fair value of August
        2005 warrants was reported on the balance sheet as warrant liability at December
        31, 2005.
 
 F-18
 On
        February 14, 2006, pursuant to the New Loan Facility, the Company adjusted
        the
        exercise price of the August 2005’s 30,000,000 warrants to $0.06 per share. In
        addition, the Company has issued new warrants to purchase 31,800,000 shares
        of
        the Company’s common stock at an exercise price of $0.06 per share. These
        61,800,000 warrants would be exercisable beginning on February 14, 2006 for
        a
        period of ten years.
 
 As
        of
        December 31, 2006, the Company has reserved 75,793,526 shares of common stock
        for issuance upon exercise of all the warrants described above.
  On
        January 15, 2007, the Company entered into a new term sheet with Apix
        International Limited, which will require us to issue additional warrants
        to
        Apix (see Note 17).
  **11.
        Stock Based Compensation**
  The
        Company adopted Financial Accounting Standards Board (“FASB”) Statement
        No. 123R, “Share Based Payment,” on January 1, 2006. The total stock-based
        compensation expense was approximately $390,000 for the year ended
        December 31, 2006. Prior to January 1, 2006, the Company accounted for
        the stock-based compensation expense under the recognition and measurement
        provisions of APB Opinion No. 25. Accordingly, the Company did not
        typically recognize compensation expense for stock option grants, as it granted
        stock options at an exercise price equal to the fair market value of the
        Company’s common stock on the date of grant. Prior to adoption, the Company
        disclosed such expenses on a pro forma basis in the notes to its financial
        statements.
 
 The
        following table illustrates the effect on reported net loss per share if
        the
        Company had applied the fair value recognition provisions of SFAS 123(R)
        to
        stock-based awards for the year ended December 31, 2005: (in thousands, except
        per share amounts):
  **Year
                  ended December 31, 2005**Net
                  loss applicable to common shareholders - as reported
              
              
              ($8,328
              )Add:Stock-based
                  employee compensation expense included inreported
                  net income, net of applicable tax effects
              
              
              ---Less:Total
                  stock-based employee compensation expensedetermined
                  under fair value based method for all awards,net
                  of applicable tax effects
              
              
              (778
              )Pro
                  forma net loss applicable to common shareholders
              
              
              ($9,106
              )Basic
                  and diluted net loss per share applicable to commonshareholders
                  - as reportedAs
                  reported
              
              
              ($0.08
              )Pro
                  forma
              
              
              ($0.09
              )
 
 *2003
        Stock Option Plan*
  On
        April
        17, 2003 Cardima Board of Directors adopted the 2003 Stock Option Plan (the
        “Stock Plan”). The Stock Plan authorizes the Board of Directors or one or more
        of its members to grant to employees, consultants and non-employee directors
        options to purchase Common Stock of the Company. Options granted under the
        Stock
        Plan may be incentive stock options or non-statutory stock options as determined
        by the Board of Directors or its delegate.
  F-19
 Under
        the
        Stock Plan, 8,200,000 shares of Common Stock have been reserved for issuance.
        Under the plan, any optionee who owns more than 10% of the combined voting
        power
        of all classes of outstanding stock is not eligible for the grant of an
        incentive stock option unless the exercise price of the option is at least
        110%
        of the fair market value of the Common Stock on the date of the
        grant.
  Under
        the
        Stock Plan, except 10% stockholders, the exercise price of incentive stock
        option will not be less than 100% of the fair value of the Common Stock at
        the
        grant date. Each option agreement specifies the term as to when the option
        is to
        become exercisable. Standard option issuances are for grants with vesting
        periods of four years with six months 12.5% cliff vesting and ratable monthly
        vesting thereafter. However, in no event shall an incentive stock option
        granted
        under the Stock Plan be exercisable more than 10 years from the date of the
        grant, and in the case of 10% stockholders, no more than 5 years from the
        date
        of the grant.
 
 The
          following table summarizes activities under the 2003 Stock Option
          Plan:
  Outstanding
                  OptionsShares
                    Available
                
                Number
                    of Shares
                
                Exercise
                    Price Per Share
                
                Weighted-Average
                    Exercise PriceBalance
                    as of 12/31/2004
                
                
                2,154,000
                
                
                2,046,000
                
                $
                0.37
                    - $1.24
                
                $
                0.95Shares
                    Reserved in 2005
                
                
                4,000,000
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Granted in 2005
                
                
                (1,431,000
                )
                
                1,431,000
                
                $
                0.06
                    - $0.35
                
                $
                0.06Options
                    Cancelled in 2005
                
                
                645,531
                
                
                (645,531
                )
                $
                0.66
                    - $0.71
                
                $
                0.71Balance
                    as of 12/31/2005
                
                
                5,368,531
                
                
                2,831,469
                
                $
                0.06
                    - $1.24
                
                $
                0.53Shares
                    Reserved in 2006
                
                
                ---
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Granted in 2006
                
                
                (200,500
                )
                
                200,500
                
                $
                0.05
                    - $0.25
                
                $
                0.07Options
                    Cancelled in 2006
                
                
                948,198
                
                
                (948,198
                )
                $
                0.05
                    - $1.04
                
                $
                0.48Balance
                    as of 12/31/2006
                
                
                6,116,229
                
                
                2,083,771
                
                $
                0.05
                    - $1.24
                
                $
                0.45
    At
        December 31, 2006, 2,083,771 options were outstanding and exercisable under
        the
        2003 Stock Plan. All options granted in 2006 and 2005 were granted at exercise
        price equal to the common stock’s fair value. The weighted average fair value of
        options granted under the Stock Plan was $0.07 and $0.06 per share for 2006
        and
        2005 respectively.
 
  The
        following table summarizes information about stock options outstanding under
        the
        2003 Stock Plan at December 31, 2006:
  Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of Exercise Prices
              
              Number
                  of shares Outstanding
              Weighted-Average
                  Remaining Contractual Life
              Weighted-Average
                  Exercise Price
              
              Number
                  of shares Exercisable
              
              Weighted-Average
                  Exercise Price$0.06
                  - $0.07
              
              1,212,000
              9.0
              $0.06
              
              341,531
              
              $0.06$0.25
                  - $1.24
              
              871,771
              7.2
              $0.99
              
              651,406
              
              $1.012,083,771
              8.2
              $0.45
              
              992,937
              
              $0.68
 
 F-20
  *1993
        Stock Option Plan*
  During
        1993, the Board of Directors adopted the 1993 Stock Option Plan, as amended,
        and
        reserved 7,650,690 shares of common stock for issuance under the plan. The
        plan
        provides for both incentive and non-statutory stock options to be granted
        to
        employees, directors and consultants. Exercisability, option price, fair
        value
        and other terms are determined by the Board of Directors; however, the exercise
        price of each incentive stock option shall be not less than 100% of the fair
        market value of the stock issuable upon exercise of the option on the date
        the
        option is granted. The exercise price of each non-statutory stock option
        shall
        not be less than 85% of the fair market value of the stock subject to the
        option
        on the date the option is granted. All options granted prior to the initial
        public offering shares were generally exercisable upon grant, but shares
        received upon exercise prior to vesting are subject to repurchase upon the
        stockholder’s termination of service to the Company. Subsequent to the Company’s
        initial public offering, only fully vested shares are exercisable. Shares
        purchased upon exercise of options generally vest at the rate of 12.5% after
        six
        months from the date of grant, and monthly thereafter over the following
        42
        months. No option shall have a maximum term in excess of ten years from the
        grant date and no option granted to a 10% stockholder shall have a maximum
        term
        in excess of five years from the grant date.
  The
        1993
        plan expired on June 10, 2003, and no additional grants would be made under
        this
        plan.
  The
          following table summarizes activities under the 1993 Stock Option
          Plan:
  Outstanding
                    OptionsNumber
                    of Shares
                
                Exercise
                    Price Per Share
                
                Weighted-Average
                    Exercise PriceBalance
                    as of 12/31/2004
                
                
                4,116,049
                
                $
                0.34
                    - $7.00
                
                $
                1.21Options
                    Exercised in 2005
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Cancelled in 2005
                
                
                (120,546
                )
                $
                0.34
                    - $3.25
                
                $
                1.29Balance
                    as of 12/31/2005
                
                
                3,995,503
                
                $
                0.34
                    - $7.00
                
                $
                1.20Options
                    Exercised in 2006
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Cancelled in 2006
                
                
                (1,310,646
                )
                $
                0.34
                    - $7.00
                
                $
                1.21Balance
                    as of 12/31/2006
                
                
                2,684,857
                
                $
                0.34
                    - $5.25
                
                $
                1.18
  At
          December 31, 2006 and 2005, 2,684,857 and 3,972,466 options were outstanding
          and
          exercisable under the plan, respectively. There were no options granted
          in 2006
          and 2005.
  The
          following table summarizes information about stock options outstanding
          under the
          1993 Stock Option Plan at December 31, 2006:
  Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of Exercise Prices
                
                Number
                    of shares Outstanding
                
                Weighted-Average
                    Remaining Contractual Life
                
                Weighted-Average
                    Exercise Price
                
                Number
                    of shares Exercisable
                
                Weighted-Average
                    Exercise Price$0.34
                    - $1.49
                
                
                1,676,303
                
                
                4.81
                
                $
                0.92
                
                
                1,635,532
                
                $
                0.91$1.50
                    - $5.25
                
                
                1,008,554
                
                
                4.67
                
                $
                1.63
                
                
                1,008,554
                
                $
                1.632,684,857
                
                
                4.76
                
                $
                1.18
                
                
                2,644,086
                
                $
                1.19
 
  F-21
 *1997
        Directors' Stock Option Plan*
  In
        March
        1997, the Board of Directors adopted the 1997 Directors’ Stock Option Plan. A
        total of 900,000 shares of common stock have been reserved for issuance under
        this plan, which included a reservation of 700,000 shares in 2005. This plan
        provides for the grant of non-statutory stock options to non-employee directors
        of the Company. In 2006, options to purchase 340,000 shares were granted
        with a
        weighted average exercise price of $0.06. In 2006, 290,000 options were
        cancelled with a weighted average exercise price of $0.50 and no options
        were
        exercised. A total of 8,000 options are outstanding and exercisable under
        this
        plan.
  The
          following table summarizes activity under the 1997 Director’s Stock Option
          Plan:
  Outstanding
                    OptionsShares
                    Available
                
                Number
                    of Shares
                
                Exercise
                    Price Per Share
                
                Weighted-Average
                    Exercise PriceBalance
                    as of 12/31/2004
                
                
                106,000
                
                
                90,000
                
                $
                0.84
                    - $1.94
                
                $
                1.47Shares
                    Reserved in 2005
                
                
                700,000
                
                
                ---
                
                
                ---
                
                
                ---Options
                    Granted in 2005
                
                
                (208,000
                )
                
                208,000
                
                $
                0.10
                
                $
                0.10Balance
                    as of 12/31/2005
                
                
                598,000
                
                
                298,000
                
                $
                0.10
                    - $1.94
                
                $
                0.51Options
                    Granted in 2006
                
                
                (340,000
                )
                
                340,000
                
                $
                0.03
                    - $0.07
                
                $
                0.06Options
                    Cancelled in 2006
                
                
                290,000
                
                
                (290,000
                )
                $
                0.10
                    - $1.94
                
                $
                0.50Balance
                    as of 12/31/2006
                
                
                548,000
                
                
                348,000
                
                $
                0.03
                    - $1.45
                
                $
                0.09
   On
        December 31, 2006, options covering 348,000 shares were outstanding and 8,000
        shares were exercisable under the 1997 Directors’ stock Option Plan. All options
        granted in 2006 were granted at exercise prices equal to the common stock’s fair
        value. The weighted average fair value of options granted under the plan
        was
        $0.06 and $0.05 per share for 2006 and 2005, respectively.
  The
        following table summarizes information about stock options outstanding under
        the
        1997 Directors’ Stock Option Plan at December 31, 2006:
  Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of Exercise Prices
              
              Number
                  of shares Outstanding
              Weighted-Average
                  Remaining Contractual Life
              Weighted-Average
                  Exercise Price
              
              Number
                  of shares Exercisable
              
              Weighted-Average
                  Exercise Price$0.03
                  - $0.07
              
              340,000
              9.48
              $0.06
              
              -
              
              ---$0.08
                  - $1.45
              
              8,000
              5.92
              $1.01
              
              8,000
              
              $1.01348,000
              9.40
              $0.09
              
              8,000
              
              $1.01
 
 F-22
  *1997
        Employee Stock Purchase Plan*
  In
        March
        1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan,
        as
        amended, and has reserved 2,500,000 shares of common stock for issuance under
        the purchase plan. The purchase plan is intended to provide an opportunity
        for
        eligible employees of the Company and its designated subsidiaries to acquire
        common stock on a favorable basis. The purchase plan is implemented by a
        series
        of offering periods of twelve months duration, with two consecutive purchase
        periods of six months in duration. New offering periods commence on or about
        February 1 and August 1 of each year (or at such other time or times as may
        be
        determined by the Board of Directors). Through periodic payroll deductions,
        which may not exceed $25,000 per offering period or 10% of any employee’s
        compensation, eligible employees may purchase common stock at a price equal
        to
        the lower of: (i) 85% of the fair market value of the common stock on the
        offering date; or (ii) 85% of the fair market value of the common stock on
        the
        purchase date. As of December 31, 2006, 2,040,333 shares of common stock
        have
        been issued under the purchase plan. In 2006 and 2005, a total of 537,129
        and
        286,045 shares were issued under the plan, respectively.
  *Share-Based
        Compensation to Non-Employees*
  On
        March
        5, 2003, the Company granted non-statutory stock options to certain directors
        of
        the corporation to purchase 121,998 of common stock at $1.03 per share and
        with
        immediate vesting. A Black-Scholes calculation was used to record $55,000
        of
        non-cash stock compensation expense in 2004.
  On
        June
        30, 2003, the Company approved a grant of 100,000 non-qualified stock options
        to
        a consultant with an immediate vesting of one third of the shares and monthly
        vesting for the remaining portion of the grant, over a two-year term. A
        Black-Scholes calculation was used to record $600, $9,000 and $21,000 of
        non-cash stock compensation expense in 2005, 2004 and 2003,
        respectively.
  On
        July
        29, 2003, the Company agreed to issue to a physician as compensation for
        consulting services to be provided by that physician’s group, options to
        purchase 422,535 shares of our common stock at an exercise price of $0.71
        per
        share. The options become exercisable upon the achievement of specific
        milestones as defined in the related consulting and options agreements. As
        of
        December 31, 2003, the Company determined that 55,000 shares had become
        exercisable based on milestone achievements through that date. A Black-Scholes
        calculation was used to record $30,000 non-cash compensation expense during
        2003
        for outside consulting fees. No additional shares were vested in 2004 and
        no
        expense was recorded during 2004. All of these options expired by the end
        of
        2004.
  On
        October 22, 2003, the Company agreed to grant accelerated vesting and an
        extended exercise period for the stock options granted to a senior officer
        of
        the company as part of a negotiated separation agreement. All affected options
        were reclassified from Incentive Stock options to Non-Qualified options and
        a
        non-cash stock compensation expense was taken for the unvested portion of
        options with exercise prices below market value, as of the date of Board
        Approval. The non-cash stock compensation expense of $79,000 recorded in
        2003
        was based on the acceleration of vesting for 302,917 shares with exercise
        prices
        of $0.34 and $1.03.
  On
        February 12, 2004, the Company approved a grant of 100,000 non-qualified
        stock
        options to a consultant with monthly vesting of shares over a four-year term.
        A
        Black-Scholes calculation was used to record $400, $11,000 of non-cash stock
        compensation expense in 2005 and 2004, respectively.
  F-23
 On
        July
        9, 2005 and July 28, 2005, the Company approved a stock issuance in the amount
        of 10,000 and 12,000 shares of the common stock, respectively, to two
        consultants. A non-cash stock compensation expense of $2,000 was recorded
        in
        2005.
  On
        April
        21, 2006, the Company approved a stock issuance in the amount of 30,000 shares
        of the common stock to a third party for its services. A non-cash stock
        compensation expense of $1,200 was recorded in 2006.
  **12.**  **Related-Party
        Transactions**
  The
        Company has entered into employment agreements with several of its key
        employees. The agreements specify various employment-related matters, including
        confidentiality requirements, competitive restrictions, assignment of
        inventions, annual compensation, and severance benefits ranging from six
        months’
to thirty-six months’ salary in the event of termination without
        cause.
  In
        December 1997, the Company entered into a $300,000 note receivable agreement
        with Phillip Radlick, Ph.D., a Director of the Company and then President
        and
        Chief Executive Officer, to facilitate the purchase of a principal residence
        in
        the San Francisco Bay Area. The note bears interest at the minimum Applicable
        Federal Rate, and was due and payable in a single lump sum forty-eight months
        from the note date. In August, 2001, the Board of Directors amended Dr.
        Radlick’s agreement to extend this loan until the first of (i) the date that Dr.
        Radlick no longer serves as a member of the Board of Directors, (ii) the date
        when Dr. Radlick sells his house and (iii) December 16, 2005. As a security
        for
        the note, Dr. Radlick granted the Company a security interest in his vested
        stock options. At December 16, 2005, Dr. Radlick informed the Company that
        he
        was unable to repay the loan. At December 31, 2005, the balance of the loan
        is
        approximately $357,085, including approximately $78,585 of accrued interest.
        No
        interest accrual was made after December 31, 2004. The loan balance is fully
        reserved as of the end of December 31, 2006.
  In
        June
        2000, the Company entered into a note receivable agreement with William Wheeler,
        its President and Chief Operating Officer, to facilitate the purchase of
        a
        principal residence in the San Francisco Bay Area. The note called for an
        initial payment by the Company of $142,500 with an additional $5,000 per
        month
        up to a maximum of $300,000. The note bears interest at the minimum Applicable
        Federal Rate and was due and payable in a single lump sum forty-eight months
        from the note date, or June 2005. The Board of Directors amended Mr. Wheeler’s
        agreement by granting Mr. Wheeler a $75,000 bonus in May 2001 in lieu of
        further
        additional monthly payments to him. As a security for the note, Mr. Wheeler
        granted Cardima a security interest in his vested stock options. At December
        31,
        2006, the balance of the loan is approximately $ 162,000. (See Note 6, “Notes
        Payable to Related Parties”.)
 
  **13.**  **Income
        Taxes**  ****
  There
        has
        been no provision for current or deferred federal or state income taxes for
        any
        period as the Company has incurred losses in all periods.
  A
        reconciliation of income taxes at the statutory federal income tax rate to
        net
        income taxes included in the accompanying statement of operations is as
        follows:
  2006
              
              2005Tax
                  benefit at expected federal rate
              -34.00%
              
              -34.00%State,
                  net of federal benefit
              -5.80%
              
              -5.80%Research
                  and development credits
              -0.80%
              
              0.00%Non-deductible
                  derivative and other expense
              19.60%
              
              0.10%Net
                  operating loss net benefited
              21.10%
              
              39.90%Other,
                  net
              -0.10%
              
              -0.20%0.00%
              
              0.00%
 
  As
        of
        December 31, 2006, the Company had federal and state net operating loss carry
        forwards of approximately $117,908,000 and $41,731,000 respectively. The
        federal
        and state net operating loss carry forwards expires at various dates beginning
        in 2007 through 2026, if not utilized.
  F-24
 The
        Company also had federal and state research and development tax credit carry
        forwards of approximately $1,129,000 and $1,072,000, respectively. The federal
        research and development tax credits begin to expire at various dates beginning
        2008 through 2025, if not utilized. The state research and development tax
        credits carry forward indefinitely, if not utilized.
  Utilization
        of the net operating losses and credits may be subject to a substantial annual
        limitation due to the “change in ownership” provisions of the Internal Revenue
        Code of 1986, as amended, and similar state provisions. The annual limitation
        may result in the expiration of net operating losses and credits before
        utilization.
  Significant
        components of the Company's deferred tax assets for federal and state income
        taxes as of December 31, 2006 are as follows (in thousands):
  December
                  31,
              
              December
                312006
              
              2005Net
                  operating loss carry forwards
              
              $
              42,523
              
              $
              42,284Research
                  credits carry forwards (federal and state)
              
              
              1,836
              
              
              1,702Manufacturing
                  investment credit carry forwards
              
              
              78
              
              
              78Capitalized
                  research and development
              
              
              1,375
              
              
              1,044Other,
                  net
              
              
              532
              
              
              597Total
                  deferred tax assets
              
              
              46,344
              
              
              45,705Valuation
                  allowance for deferred tax assets
              
              
              (46,344
              )
              
              (45,705
              )$
              -
              
              $
              -
 
 As
        of
        December 31, 2006 and 2005, the Company had deferred tax assets of approximately
        $46,344,000 and $45,705,000, respectively. Realization of the deferred tax
        assets is dependent upon future taxable income, if any, the amount and timing
        of
        which are uncertain. Accordingly, the net deferred tax assets have been fully
        offset by a valuation allowance. The net valuation allowance increased by
        approximately $641,000 and $3,342,000 during the years ended December 31,
        2006
        and 2005, respectively. Deferred tax assets primarily relate to net operating
        loss and tax credit carry forwards.
 
 The
        Company realizes tax benefits as a result of the exercise of non-qualified
        stock
        options and the exercise and subsequent sale of certain incentive stock options
        (disqualifying dispositions). For financial reporting purposes, any reduction
        in
        income tax obligations as a result of these tax benefits will be credited
        to
        additional paid-in capital upon utilization of the NOLs including these
        benefits.
 
 **14.
        License Rights**
  In
        May
        1993, in exchange for an equity interest in the Company, Target Therapeutics,
        Inc. granted the Company an exclusive royalty-free worldwide license to use
        Target Therapeutics' technology and to make, use and sell or otherwise
        distribute products for the diagnosis and treatment of electrophysiological
        diseases in the body, other than in the central nervous system, including
        the
        brain. The exclusive license grant applied to any Target Therapeutics’
technology developed through May 1996 and will expire upon the expiration
        of the
        last of the patents relating to Target Therapeutics’ technology. Under the
        License Agreement, the Company granted back to Target Therapeutics an exclusive
        royalty-free license to use technology developed through May 1996 in the
        fields
        of neurology, interventional neuro-radiology, interventional radiology,
        reproductive disorders and vascular prostheses (the "Target Field"). Such
        license will expire upon the expiration of the last of the patents relating
        to
        Target Therapeutics’ technology. Target Therapeutics granted the Company a
        non-exclusive, royalty-free license to use Target Therapeutics’ technology to
        make, use and sell or otherwise distribute the Company's products for use
        within
        the cardiology field, provided the Company's products represent a substantial
        improvement. A substantial improvement is any modification, improvement or
        enhancement by the Company of Target Therapeutics’ technology in a particular
        product that results in a material change in the function, purpose or
        application of such product. The Company believes that the incorporation
        of
        electrodes in its micro-catheter systems, together with other modifications,
        satisfies the substantial improvement requirements. As part of the same
        agreement, the Company granted to Target Therapeutics an exclusive, royalty-free
        license to use the Company's technology to make, have made, use and sell
        or
        otherwise distribute products within the Target Field.
  F-25
 In
        addition, the Company agreed not to conduct material research and development,
        acquire corporate entities or make or sell products in the Target Field or
        to
        sell products, other than products utilizing Target Therapeutics' technology,
        for use in diagnosis or treatment of diseases related to the production of
        electrical current in tissue located in areas of the body other than the
        heart,
        without first notifying Target Therapeutics and negotiating a distribution
        agreement. The Company also agreed that it would not sell products utilizing
        Target Therapeutics' technology for use in diagnosis or treatment of diseases
        related to the production of electrical current in tissue located in areas
        of
        the body other than the heart without, if selling to a distributor, first
        notifying Target Therapeutics and offering it the right of first refusal
        with
        respect to the terms of the distribution, or if selling directly to the
        consumer, paying to Target Therapeutics an amount equal to 40% of the gross
        profit for such product.
  **15.
        Retirement Benefit Plan**
 
 The
        Company has a 401(k) plan (“the 401(k) Plan”) whereby eligible employees may
        contribute a percentage of eligible compensation but not greater than 60%
        of
        their earnings up to the maximum as required by law. Company contributions
        are
        discretionary. No such Company contributions have been made since inception
        of
        the 401(k) Plan
 
 **16.**  **Subsequent
        Event**
 
 On
        January 15, 2007, the Company entered into a new term sheet with Apix, which
        provides for the rollover of prior loan facilities and subsequent advances
        (Prior Facilities) and an additional loan facility between the parties (the
        "New
        Facility"). The New Facility provides for the following terms and conditions:
 
 (i)
              Additional
                  loan facility - Apix has granted the Company an additional loan
                  facility
                  in the amount of $5,625,000. Advances pursuant to the additional
                  facility
                  shall be made on a bi-weekly basis the Company’s discretion in
                  denominations of $225,000 per advance;
 (ii)
            New
                maturity date - the maturity date of the New Facility and Prior Facilities
                is the earlier of (a) December 31, 2007 or (b) the date that Apix
                makes a
                demand for payment; (iii)
            Facility
                fee adjustment - the aggregate facility fee for the Prior Facilities
                and
                the New Facility shall be $500,000 (the “Facility Fee”) which is payable
                through the issuance of five million shares of our preferred stock
                with
                the following minimum preferences: (a) 28 votes per share at any
                general
                or extraordinary meeting of the common shares of the company convened
                by
                the Company or its shareholders for a total of 140 million votes
                at any
                such meeting; and (b) convertible into common shares of the Company
                at any
                time at the sole and absolute discretion of the holder on the basis
                of two
                (2) common shares for each preferred share tendered for conversion
                for a
                total of ten (10) million common shares in the event all preferred
                shares
                are tendered for conversion; (iv)
            Exit
                fees - the aggregate exit fees for the Prior Facilities and the New
                Facility shall be $2,800,000 plus $80,000 for each advance
                madewhich
                shall be due and payable on the earliest to occur of: (1) the maturity
                date, (2) generally the sale of the company or substantially all
                of its
                assets, a reorganization or a new loan facility in excess of $1,000,000,
                or (3) an event of default; (v)
            Price
                adjustment to existing warrant and new warrants - pursuant to the
                Prior
                Facilities, the Company agreed to issue to Apix warrants to purchase
                118,800,000 shares of the Company's common stock at an exercise price
                of
                $0.06 per share (the “Existing Warrants”). Pursuant to the New Facility,
                the exercise price of the Existing Warrants has been adjusted to
                $0.04 per
                share. In addition, the Company has agreed to issue to Apix additional
                warrants to purchase 20,000,000 shares of the Company’s common stock at an
                exercise price of $0.03 per share (the “New Warrants”). All warrants have
                a term of ten years; (vi)
            Conversion
                price adjustment - the loan principal and exit fees are convertible
                into
                shares of the Company’s common stock at a conversion price of $0.04 per
                share; and (vii)
            Registration
                rights - the Company agrees to register a percentage of the shares
                underlying the loan principal, facility fees, and warrants on a
                registration statement at its best efforts. 
 The
        terms
        of the new term sheet are not binding on the parties. Completion of the New
        Facility is contingent upon the negotiation and execution of definitive
        agreements and other documentation.
  F-26
 In
        the
        first quarter of 2007, our Japanese distributor notified us of its failure
        to
        maintain the legal documentation standard required to sell our PATHFINDER® in
        Japan. As a result, we had no sales in Japan during the first quarter of
        2007.
        We understand that the reapplication process takes approximately six months.
        We
        are currently exploring our options with regard to selling the PATHFINDER® in
        Japan. During the reapplication process, we may have limited or no sales
        in
        Japan. We anticipate resuming commercial sales before the end of 2007. However,
        there can be no assurance that we will be able to resume sales by that
        time.
 
 F-27