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 these significant areas: product commercialization, manufacturing capabilities, research and development and marketing strategies. 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 will continue to add key marketing resources and personnel in the US and align ourselves with sales organizations capable of representing our products in other markets. In the second quarter of 2008, we received product registration approval from the State Food and Drug Administration in China for the INTELLITEMP product. In the third quarter of 2008, we received product registration approval in Thailand for all of our products. In the first quarter of 2009, we received CE Mark approval for our Surgical Ablation System with Stabilization Sheath. All components of our Surgical Ablation System are now approved for marketing in European countries recognizing CE Mark approval.

In the immediate term, domestically, we are focusing our efforts on the commercialization of our FDA 510K cleared Surgical Ablation System. In the European Union, we will start to develop Surgical Centers of Excellence, which specialize in special procedures and programs, in the second quarter of 2009. The Chinese market is promising for us as it has a large population of untreated 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 are 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.

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. We have made great strides in achieving new manufacturing goals and standards in 2009 and beyond.

Research and Development

We continued to evaluate the present INTELLITEMP design, and have also been developing improvements for its use in cardiac electrophysiology applications, based on in vitro and in vivo testing results. We are also in the process of developing and formalizing hardware and software specifications for this next generation Energy Management Device, and focusing resources to engage in this project launch.

We are in the process of implementing a number of product improvements to improve the quality, robustness and user-friendliness of the Surgical Ablation Probe. Other probe improvements will be slated for the product pipeline, in answer to user needs that we are learning from the field, as our customer base increases.

We have continued to follow our strategic sales and marketing plans as previously reported. Staffing for clinical site and case support for US surgical procedures has been increased. Our marketing team has redesigned our Web site to a state-of-the-art portal which allows patients, doctors and investors to view a broad range of clinical and product information including company milestones that have been met. We are continuing to bolster our resources and personnel in sales and marketing as well as customer training/support throughout 2009.

We will continue to identify higher volume surgical ablation centers whose surgeons are experienced in the techniques of ablation. Some of these sites will become Cardima Centers of Excellence and conduct peer-to peer physician training. It is anticipated that this strategy will aid our U.S. commercial efforts for surgical ablation, both open chest and minimally invasive, throughout 2009 and beyond.

We continue to appoint distribution partners worldwide. We have engaged distributors covering major markets in the United Kingdom, Europe, Japan, and Thailand. We anticipate strategic contracts will be in place prior to registration approvals of products in all key world markets throughout 2009. In Europe, Dot Medical and other strategic regional sales agents have been engaged to partner with us in developing centers of excellence. These centers will also serve as training sites for other surgeons in the EU.

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 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 received product registration in Thailand and selected a key distribution partner to start Centers of Excellence in Thailand. Dr. Li Poa has completed surgeon training at the Ramathibodi Hospital in Bangkok. This center will serve as a teaching institution for other surgeons. We are also working with the Thai ministry of health to achieve implementation of the Cardima surgical ablation procedure into their healthcare system.

In the field of electrophysiology, we are focusing developing next generation technologies of our probes and energy management device, with the goal of attaining an effective EP ablation procedure completed in less than 2 hours. In the meantime, we will be working with a few key European EP centers using our current system to develop procedures and protocols. We hope to receive CE Mark approval in late 2009 or early 2010. We are in the process of selecting marketing partners, training the field representatives and supporting customer centers that will develop into EP Centers of Excellence. These Centers of Excellence will also conduct peer-to peer physician training; aiding Cardima in EP sales and marketing efforts.

Results of Operations

Net Sales

                                        (unaudited, in thousands)
                                      Three months ended March 31,
                Net sales               2009                 2008
                 United States      $        301         $        258
                 Europe                       58                  155
                 Asia/Pacific                  2                    1
                 Other                         -                    3
                  Total net sales   $        361         $        417

Sales for the three months ended March 31, 2009 were $361,000 as compared to $417,000 for the same period in 2008. Domestic sales of $301,000, which represents 83% of total sales, increased slightly over sales to the same region in the first three months of 2008 of $258,000, or 62% of total sales, due to higher shipments of our surgical ablation products. The higher sales to domestic channels were offset in part by lower shipments of our diagnostic products to our European customers.

We had no sales to Japan during 2008 and in the first three months of 2009, as our former Japanese distributor failed to maintain the legal documentation standard required to sell our PATHFINDER products in Japan. Together with our new Japanese distributor, we have filed a "Shonin Application" to obtain the necessary regulatory approval to re-start PATHFINDER sales in the Japanese market. We anticipate resuming commercial sales in Japan sometime in early third quarter of 2009.

                                            (unaudited, in thousands)
                                          Three months ended March 31,
                                              2009                 2008
             Sales                      $             361         $   417
             Cost of goods sold                       866             456
              Gross margin deficiency   $            (505 )       $   (39 )

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 for the three months ended March 31, 2009 were $866,000, or 240% of sales, as compared to $456,000, or 109% of sales, for the same period in 2008. The higher cost of goods sold in 2009 included a provision for potential obsolete inventory of certain products pending further clinical trials of $151,000, a one-time adjustment of cost related to our INTELLITEMP products of $118,000 and higher share-based compensation expense of $35,000. Compensation expenses were also higher in the three months of 2009 by $254,000 as compared to the same period in 2008 as we prepared for the commercialization of the surgical line of products as well as the positioning of our PATHFINDER line of products in anticipation of shipments to Japan as soon as the Shonin Application is approved. We expect cost of sales as a percentage to sales to improve as sales volume increases.

Research and Development Expenses

                                            (unaudited, in thousands)
                                          Three months ended March 31,
                                             2009                2008
             Research and development   $        1,705       $      1,071

Research and development expenses include product development, clinical testing and regulatory expenses. Research and development expenses for the three months ended March 31, 2009 were $1.7 million, or 472% of sales, as compared to $1.1 million, or 257% of sales, for the same period in 2008. The increase was primarily related to higher compensation expenses of $319,000 due to headcount increase of 10 employees to support the new product commercialization initiative, higher cost of supplies of $77,000, and outside services and patent fees of $120,000.

Selling, Marketing, General and Administrative Expenses

Selling, marketing, general and administrative expenses for the three months ended March 31, 2009 were $2.0 million, or 564% of sales, as compared to $1.3 million, or 303% of sales, for the same period in 2008.

Selling and marketing expenses for the three months ended March 31, 2009 increased slightly over the same period in 2008. General and administrative expenses for the three months ended March 31, 2009 increased by $682,000 over the same period in 2008. The increase was primarily due to higher compensation, due to headcount increase of 2 employees, and consulting expenses of $283,000, higher legal expenses of $207,000 and share-based compensation expenses of $147,000.

Total Other Income/( Expense)

Total other income/expense for the three months ended March 31, 2009 was $57,000 as compared to an interest income of $60,000 for the same period in 2008 mainly due to $100,000 of interest expense recorded in the first quarter of 2009 on the $6 million loan executed in November 2008. The loan was converted to equity in February 2009.

Liquidity and Capital Resources

We had cash and cash equivalents of approximately $467,000 and $5.3 million as of March 31, 2009 and December 31, 2008, respectively. We also had $15.2 million in short-term investments as of March 31, 2009. Our working capital was $15.7 million as of March 31, 2009 as compared to a negative working capital of $338,000 as of December 31, 2008 due to a $6.0 million note payable, which was executed in November 2008 and converted to equity in February 2009.

The cash used in operating activities in the three months ended March 31, 2009 was $3.3 million, which reflected primarily a net loss of $4.3 million and non-cash charges of $527,000 consisting primarily of depreciation expense and stock-based compensation, offset partially by an increase in accounts payable and accrued liabilities of $418,000 due to the timing of payments. The cash used in operating activities in the three months ended March 31, 2008 was $2.7 million, which was essentially due to a net loss of $2.3 million, non-cash charges of $274,000 consisting primarily of depreciation expense and stock-based compensation, an increase in inventory of $341,000 and prepaid expenses of $595,000, offset in part by an increase in accounts payable and accrued liabilities of $385,000 due to timing of payments.

Net cash used in investing activities of $15.5 million in the three months ended March 31, 2009 was primarily for the purchase of short-term investments of $15.1 million consisting of certificates of deposit and our investment in capital expenditures of $366,000. This compares to capital expenditures of $290,000 in the same period of 2008. We continue to invest in capital expenditures chiefly to acquire lab equipment, computer hardware and software to support the growth of our business.

Net cash provided by financing activities was $13.9 million in the three months ended March 31, 2009. We have funded our operations primarily with proceeds from issuances of common stock, debt financing, and lease financing. In November 2008, we obtained approximately $6 million in debt financing. In February 2009, we obtained an additional $14 million in equity capital financing. The note holder of the $6 million we obtained in November 2008 converted the principal into equity in February 2009.

We believe our existing cash and cash equivalents and the additional capital raised in 2009 will be sufficient to meet our anticipated cash needs for at least nine to twelve months. Our future working capital requirements will depend on many factors, including the rates of our revenue growth, our introduction of new features and complementary services for our products and services, and our expansion of research and development and sales and marketing activities. To the extent our cash and cash equivalents and cash flow from operating activities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financings. If additional funding is required, there can be no assurance what we may be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.