Cautionary Statement Regarding Forward-Looking Statements

The information in this discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements that are not of historical fact may be deemed to be forward-looking statements. These forward-looking statements involve substantial risks and uncertainties. In some cases you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," or "continue", the negative of the terms or other comparable terminology. Unless the context otherwise requires, references in this Form 10-Q to "we," "us," "our," or the "Company" refer to Cardima, Inc. Forward-looking statements in this Report may also include references to anticipated sales volume and product margins, efforts aimed at establishing new or improving existing relationships with customers, other business development activities, anticipated financial performance, business prospects and similar matters. Actual events or results may differ materially from the anticipated results or other expectations expressed in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks included from time to time in other reports or registration statements filed with the United States Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward-looking statements. We disclaim any obligation to publicly update these statements, or disclose any difference between actual results and those reflected in these statements.

Overview

Our corporate strategy involves attaining certain key goals in three significant areas: product commercialization, regulatory strategy, and manufacturing capabilities. These areas are discussed in detail in the following sections.

Product Commercialization

We are committed to the commercialization of our surgical and electrophysiological products worldwide. In order to attain this goal, we have and shall continue to add key marketing resources and personnel in the US and will align ourselves with independent sales organizations capable of representing our products in other markets. We have filed and/or is planning to file for additional regulatory marketing product approvals in promising international markets such as the European Union, China, Japan, Thailand, India and Korea.

In the immediate term, we are focusing our US efforts on the commercialization of our FDA 510K approved Surgical Ablation System. In Europe, we are focusing in the near term on expanding the number of commercial EP centers using our EP ablation products in select markets including the United Kingdom and Germany. In late 2008 or early 2009 (dependent on CE mark approval) we shall start to market our Surgical Ablation System in the European Union. Also in late 2008 we expect to start obtaining some product market approvals in China. The Chinese market is promising for us as it has a large population of un-treated patients, a significant body of trained electrophysiologists and cardiac surgeons and several cardiac centers that routinely perform both EP and surgical ablations. In the second half of 2009 (dependent on regulatory approval) we intend to re-enter the Japanese diagnostic market and is reviewing Japanese regulatory requirements for our surgical and EP ablation products.

As we commercialize our products, we shall identify key opinion leaders to become "product champions" and will certify certain leading cardiology programs as "Cardima Centers of Excellence". We shall also continue to add leading Electrophysiologists and cardiac surgeons as consultants and advisors to improve our products and the procedure designs. We are also identifying appropriate independent distributors that will be engaged to train, support and distribute our products in key markets.

Regulatory Strategy

We are focused on attaining necessary regulatory approvals for the commercial sale of our surgical and EP products worldwide. In the near term we are focused on finalizing our discussions with the FDA for a study design leading to FDA approval for an indication to treat atrial fibrillation for our EP ablation system. In this regard we have engaged the services of Sanjeev Saksena MD, a cardiologist and trained electrophysiologist with a worldwide reputation, to advise us. In addition to Dr. Saksena the company has also engaged a Chief Medical Officer, Dr. Sung Chun and other specialist consultants such as Dr. Abraham Kocheril (University of Illinois, Chicago) to provide the Board with appropriate advice. We remain the only company to date to have completed a multi-center trial and submitted our data for review to an FDA panel for the indication of treating AF. We continue to interact with the FDA to resolve the final issues and data required to attain market approval for the EP ablation product.

In addition to the efforts with the FDA, we have filed, or are planning to file, applications for product approvals in several countries, notably the European Union, China, Thailand and Japan.

Manufacturing Capabilities

We have focused on improving our ability to manufacture, in commercial quantities, high quality reliable products. The entire organization is committed to providing the best surgical and EP products possible. This has entailed adding key individuals, improving design processes, adding test and quality control measures above those required and implementing training and support systems to ensure high levels of staff performance and product quality. Our team of professionals and our dedicated staff have made great strides in achieving new manufacturing goals and standards in 2008.

The research and development goals and achievements for the second quarter of 2008 included:

New EP Handle

One of our design policies is to constantly receive feedbacks from our end users so that we can continuously improve our products. In the second quarter of 2008, we received feedback from end-user physicians and finalized the design of a new handle design for the EP products, including the REVELATION T-Flex and the NAVIPORT. Significant progress has been achieved in this regard, including developing manufacturing processes for this new handle. We have plans to introduce the new handle design into clinical usage by the end of the year. In a parallel process, all necessary regulatory updates for these devices with the new handle will be submitted to the appropriate notified bodies. The new handle will afford significant improvements in product performance and is expected to offer patients and physicians key procedure improvements in ease of use and shorter procedure times.

Enhancement of REVELATION T-Flex 8 electrodes

Our product development engineers have been evaluating ways to improve the deflection performance of the REVELATION T-Flex with 8 electrodes, to address ablation at specific anatomic regions of the heart, such as the cavo-tricuspid isthmus. This has been a successful endeavor and clinical assessment will begin in the third quarter of 2008.

INTELLITEMP

Over the past several months, we have worked with a new strategic supplier and have been successful in transferring the INTELLITEMP Energy Management Device ("EMD") to this new supplier. During the second quarter, manufacturing verification of the Surgical version of the INTELLITEMP EMD was completed, with system validation occurring in early third quarter of 2008. After product validation, the units will be available to our marketing staff and sales representatives for commercial centers.

We continue to evaluate the INTELLITEMP design and have been developing the specifications for the next version of this product. The goal is to initiate development in the later part of 2008.

Surgical Ablation System

We have implemented a number of product improvements and design changes to improve the performance and safety of the Surgical Ablation System. In addition, earlier this year, our Product Development and Process Engineers made key contributions to the development of manufacturing processes that substantially reduce the time needed to build Surgical Ablation Probes. Many of these product and process improvements have been achieved in the first quarter and are already implemented in the commercial product.

Going forward, our product development team continues to review marketing feedback from surgeons, and will develop product enhancements to fulfill user needs based on this feedback.

Sales and Marketing Priorities/achievements in Q2 2008 included:

Resource Management

We have continued to follow our strategic sales and marketing plans as noted in our previous report on Form-10Q. Staffing for clinical site and case support for US surgical procedures has been increased. New hires have been made in marketing to advance our Web site to a state-of-the-art portal which will allow patients, doctors and investors to view a broad range of clinical and product information including company milestones. This site should be up and running by later part of the year. We plan to continue to bolster our resources and personnel in sales and marketing as well as customer support throughout 2008.

Distribution Partners

We continue to review several potential distribution partners worldwide. Progress in this area is expected throughout the balance of 2008 and we anticipate that contracts with these partners will be in place in all key world markets as soon as registration for our products is achieved through the remaining quarters of 2008 and 2009.

Surgical Ablation System

We will continue to identify higher volume surgical ablation centers whose surgeons are experienced in surgical ablations. Some of these sites will become training centers and Cardima Centers of Excellence. It is anticipated that this strategy will aid our US commercial efforts for surgical ablation, both open chest and minimally invasive, throughout 2008.

In Europe, our sales executives are evaluating appropriate marketing partners in the surgical field and are awaiting CE mark approval for the surgical probe to implement the European surgical sales strategy.

EP Ablation System

In the field of electrophysiology, we are focusing on key initial European markets including the United Kingdom and Germany. We are in the process of selecting marketing partners, training the field representatives and/or supporting key customer centers in each of these key markets.

Developments in China and Thailand

We are in discussions with potential marketing partners for the China market to cover both electrophysiology and surgical products. We have also met with key Chinese physicians and opinion leaders in the industry to prepare for an appropriate market launch in China. Furthermore, in June 2008, we received approval from China's State Food and Drug Administration to market the INTELLITEMP Energy Management Device in the People's Republic of China. We are also awaiting registration in Thailand.

Risk factors

For the period between January 1, 2008 and June 30, 2008, we do not have any material change to report from risk factors as previously disclosed in our Form 10-KSB/A for the period ended December 31, 2007.

Results of Operations

Net Sales

                                                                      (unaudited, in thousands)
                                                     Three months ended                         Six months ended
Net sales                                   June 30, 2008         June 30, 2007       June 30, 2008         June 30, 2007
 United States                             $           196        $           225     $           462       $           475
 Europe                                                 84                    120                 234                   188
 Asia/Pacific                                            -                    (85 )                 1                   (85 )
 Other                                                   -                      -                   -                     1
  Total net sales                          $           280        $           260     $           697       $           579

For three months ended June 30, 2008, sales were $280,000 as compared to $260,000 for the same period in 2007. Net sales for the six months ended June 30, 2008 were $697,000 as compared to $579,000 for the same period in 2007, due mainly to slight increase in sale to Europe of $46,000, offset by an authorized return of $85,000 from our Japanese distributor in the second quarter of 2007 due to their failure to maintain the legal documentation standard required to sell our PATHFINDER products in Japan. As the distributor no longer had the right to sell our product, the goods were taken back and returned to our inventory.

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 to Japan in the second half of 2009. However, there can be no assurance that it will be able to resume sales by that time. Furthermore, we entered into a distribution agreement with a new distributor in Japan to be our exclusive distributor in the country effective August 1, 2007 with an initial term of five (5) years. The new distributor will not be able to start importing and selling our products until the reapplication process is complete.

Cost of Sales; gross deficiency

                                                                     (unaudited, in thousands)
                                                    Three months ended                        Six months ended
                                            June 30, 2008         June 30, 2007       June 30, 2008       June 30, 2007
 Sales                                     $           280       $           260     $           697     $           579
 Cost of sales                                         860                   531               1,297                 955
  Gross deficiency                         $          (580 )     $          (271 )   $          (600 )   $          (376 )

Cost of goods sold primarily includes raw materials costs, catheter fabrication costs, system assembly and testing costs, and manufacturing labor and overhead costs for the units sold in the period. Cost of goods sold as a percentage to sales for the three months ended June 30, 2008 increased to 307%, as compared to 204% for the same period in 2007. Cost of goods sold as a percentage to sales for the six months ended June 30, 2008 increased to 186%, as compared to 165% for the same period in 2007. The increase in cost of sales in the first six months of 2008 as compared to the same period in 2007 is mainly attributed to higher headcount of $124,000 and other spending of $125,000 in the manufacturing area in anticipation of the commercialization of the surgical line of products. We expect the cost of sales percentage to improve as sales volume increases.

Research and Development Expenses

                                                                     (unaudited, in thousands)
                                                    Three months ended                        Six months ended
                                            June 30, 2008         June 30, 2007       June 30, 2008       June 30, 2007
 Research and development                  $         1,128       $           792     $         2,111     $         1,695

Research and development expenses include product development, clinical testing and regulatory expenses. Research and development expenses for the three months ended June 30, 2008 increased to $1.1 million from $792,000 for the same period in 2007. The increase was primarily related to higher compensation expenses of $129,000 due to head count increases to support the new product commercialization initiative and scrapping of $143,000 of obsolete materials. For the first six months of 2008, research and development expenses increased to $2.1 million from $1.7 million in the same period in 2007. The increase was mainly attributable to higher compensation expenses of $252,000 due to head count increase and the scrapping of obsolete materials in the second quarter of 2008 of $143,000.

Selling, Marketing, General and Administrative Expenses

Selling, marketing, general and administrative expenses for the three months ended June 30, 2008 increased to $2.5 million from $864,000 for the same period in 2007.

For the three months ended June 30, 2008, selling and marketing expenses increased by $388,000 as compared to the same period in 2007 chiefly due to higher compensation costs as headcount increased ($259,000) and higher travel and exhibit related expenses ($98,000). General and administrative expenses increased by $1.3 million for the three months ended June 30, 2008 as compared to the same period in 2007 mostly attributable to (i) a non-cash compensation cost of $868,000, accounted for under the Black-Scholes option-pricing model, for warrants granted to APIX in consideration of their services provided in the arrangement of the funding during the second quarter of 2008 of $5.1 million from accredited investors, (ii) payment of $80,000 to APIX to facilitate the funding arrangement, (iii) $45,000 non-recurring legal and accounting expenses related to the restatement of our historical financial statements included in our December 31, 2007 Annual Report on Form 10-KSB, and our response to a series of comment letters issued by the Division of Corporate Finance of the Securities and Exchange Commission which started in the later part of 2007 and (iv) non-cash stock-based compensation expenses of $280,000.

For the six months ended June 30, 2008, selling and marketing expenses increased by $690,000 as compared to the same period in 2007 largely due to higher compensation costs as headcount increased ($538,000) and higher travel and exhibit related expenses ($135,000). General and administrative expenses increased by $1.4 million for the six months ended June 30, 2008 as compared to the same period in 2007 mainly due to (i) a non-cash compensation cost of $868,000 for warrants granted to APIX in consideration of their services provided in the arrangement of the funding during the second quarter of 2008 of $5.1 million from accredited investors, (ii) payment of $80,000 to APIX to facilitate the funding arrangement, (iii) $77,000 non-recurring legal and accounting expenses related to the restatement of our historical financial statements included in our December 31, 2007 Annual Report on Form 10-KSB, and our response to a series of comment letters issued by the Division of Corporate Finance of the Securities and Exchange Commission which started in the later part of 2007 and (iv) non-cash stock-based compensation expenses of $461,000.

We expect general and administrative expenses to increase slightly in the last six months of 2008 in the area of consulting costs to help with the implementation of Sarbanes Oxley internal controls.

Interest Income and Expense, net

Interest income was $21,000 for the three months ended June 30, 2008 as compared to $292,000 for the same period in 2007 resulted from the adjustment of interest on the debt in 2007. Interest income was $84,000 and $72,000 for the first six months in 2008 and 2007, respectively.

Net Loss

Net loss for the three months ended June 30, 2008 was $4.2 million, as compared to a net loss of $16.3 million reported in the same period of 2007, which included charges from the recognition of the extinguishment of debt treatment of $15.2 million, offset in part by the adjustment of derivative liability related to the fair value of warrant liability of $505,000and a correction to interest expense of $292,000 associated with the loan.

Net loss for the six months ended June 30, 2008 was $6.5 million, as compared to a net loss of $26.2 million reported in the same period of 2007. The net loss in 2007 included the charges from the recognition of the extinguishment of debt treatment of $15.2 million and a charge of $7.7 million, recorded in the first three months of 2007, arising from shares to settle convertible debt in excess of corporate authority, offset in part by the adjustment of derivative liability related to the fair value of the warrant liability of $505,000.

We recorded a liability for the derivative instrument that resulted due to the number of potential common stock shares plus outstanding shares that exceeded the number of authorized common stock shares. At March 31, 2007, our authorized shares were less than the outstanding shares plus potential shares from the exercise of options, warrants, and convertible debt that were issued. The excess potential shares were attributed to the additional funding received starting in April 2006 from the issuance of convertible debt. We calculated the fair value of these potential shares and recorded a corresponding liability of $7.7 million based on the fair value of our common stock on March 31, 2007 and any change was processed through a charge or gain in the statement of operations. In June 2007, our shareholders voted for a reverse stock-split without a corresponding decrease in the authorized number of shares authorized. As a result of this action, we cured this liability as the authorized common shares now exceed all outstanding common shares and potential common shares.

Liquidity and Capital Resources

We had cash and cash equivalents of approximately $5.7 million as of June 30, 2008 and $4.8 million as of December 31, 2007. As of June 30, 2008, we had positive working capital of $5.8 million and an accumulated deficit of approximately $182.9 million.

Net cash used in operating activities was approximately $5.8 million and $3.8 million for the six months ended June 30, 2008 and 2007, respectively, resulting primarily from increased working capital needs and current period operating expenses. Net cash used in investing activities included $376,000 related to the capital expenditures of property and equipment, as compared to $27,000 used in 2007. We had $2.0 million cash in short term investments as of December 31, 2007, which was liquidated into to our cash accounts during the second quarter of 2008 to support our operating expenses. Net cash provided by financing activities in the first six months of 2008 was $5.0 million primarily from a private placement funding from qualified investors arranged by APIX, who also provided $3.0 million loan financing in the same period of 2007.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements