**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

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**FORM10-Q**

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**(Mark One)**

**x****   QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

**For the quarterly period ended September 30, 2007**

**or**

**o****   TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from           to               **

**Commission File Number 001-33282**

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** **

**XTENT,INC.**

(Exact Name of Registrant asSpecified in Its Charter)

| **Delaware**                     | **41-2047573**      |
|----------------------------------|---------------------|
| (State or Other  Jurisdiction of | (I.R.S. Employer    |
| Incorporation or  Organization)  | Identification No.) |

 

**125Constitution Drive**

**MenloPark, California 94025-1118**

(Address of principalexecutive offices, including Zip Code)

**(650)475-9400**

(Registrant’s telephonenumber, including area code)

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Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days.     YES  x    NO  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (check one):

Large accelerated filer  o    Accelerated filer  o    Non-acceleratedfiler  x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).     Yes  o    No  x

As of October 31, 2007,there were 22,924,374 shares of XTENT, Inc. common stock outstanding.

 

 

 

 

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**XTENT,INC.**

**FORM10-Q**

**TABLE OF CONTENTS**

** **
|                                          | **Page** |
|-----------------------------------------------|----------|
| **Part  I:  Financial Information** |     |
|                                          |     |
| Item 1.                                  |     | Condensed Financial Statements (unaudited): |   |
|                                          |     |   |   |
|                                          |     | Condensed Balance Sheets | 2 |
|                                          |     |   |   |
|                                          |     | Condensed  Statements of Operations | 3 |
|                                          |     |   |   |
|                                          |     | Condensed Statements of Cash Flows | 4 |
|                                          |     |   |   |
|                                          |     | Notes to Condensed Financial Statements | 5 |
|                                          |     |   |   |
| Item 2.                                  |     | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 11 |
|                                          |     |   |   |
| Item 3.                                  |     | Quantitative and Qualitative Disclosures About Market  Risk | 19 |
|                                          |     |   |   |
| Item 4T.                                 |     | Controls and Procedures | 19 |
|                                          |     |   |   |
| **Part  II:  Other Information**    |     |
|                                          |     |   |   |
| Item 1.                                  |     | Legal  Proceedings | 19 |
|                                          |     |   |   |
| Item 1A.                                 |     | Risk Factors | 19 |
|                                          |     |   |   |
| Item 2.                                  |     | Unregistered Sales of Equity Securities and Use of  Proceeds | 41 |
|                                          |     |   |   |
| Item 3.                                  |     | Defaults Upon Senior Securities | 41 |
|                                          |     |   |   |
| Item 4.                                  |     | Submission of Matters to a Vote of Security Holders | 41 |
|                                          |     |   |   |
| Item 5.                                  |     | Other  Information | 41 |
|                                          |     |   |   |
| Item 6.                                  |     | Exhibits | 41 |
|                                          |     |   |   |
| Signatures                                    | 43       |
|                                          |     |
| Certifications                                |     |

 

 

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**PART I: FINANCIAL INFORMATION**

**ITEM 1.CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

**XTENT, INC.(a development stage company)CONDENSED BALANCE SHEETS**

**(unaudited; in thousands, exceptper share amounts)**

 

 
| ** **                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                     | ** ** | **2007**          | ** ** | **2006 (1)**     | ** ** |
| **ASSETS**                                                                                     |       |              |       |             |       |
| Current assets:                                                                                |       |              |       |             |       |
| Cash and cash  equivalents                                                                     |       | $                 | 23,799     |             | $          | 23,105 |   |
| Short-term  investments                                                                        |       | 44,296            |       | —           |       |
| Prepaid expenses  and other current assets                                                     |       | 483               |       | 269              |       |
| Total current  assets                                                                          |       | 68,578            |       | 23,374           |       |
|                                                                                           |       |              |       |             |       |
| Property and  equipment, net                                                                   |       | 3,611             |       | 2,634            |       |
| Deferred IPO  related costs                                                                    |       | —            |       | 990              |       |
| Other  non-current assets                                                                      |       | 149               |       | 123              |       |
| Total assets                                                                                   |       | $                 | 72,338     |             | $          | 27,121 |   |
|                                                                                           |       |              |       |             |       |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)**    |       |              |       |             |       |
| Current liabilities:                                                                           |       |              |       |             |       |
| Accounts payable                                                                               |       | $                 | 1,786      |             | $          | 860 |   |
| Accrued  liabilities                                                                           |       | 1,881             |       | 1,448            |       |
| Total current  liabilities                                                                     |       | 3,667             |       | 2,308            |       |
|                                                                                           |       |              |       |             |       |
| Commitments and  contingencies (notes 6 and 8)                                                 |       |              |       |             |       |
|                                                                                           |       |              |       |             |       |
| Redeemable  convertible preferred stock:                                                       |       |              |       |             |       |
| $0.001 par  value; 10,000 and 14,874 shares authorized                                         |       |              |       |             |       |
| at September 30,  2007 and December 31, 2006, respectively;                                    |       |              |       |             |       |
| zero and 14,744  shares issued and outstanding at                                              |       |              |       |             |       |
| September 30,  2007 and December 31, 2006, respectively                                        |       |              |       |             |       |
| (Liquidation  preference: $75,899 at December 31, 2006)                                        |       | —            |       | 75,593           |       |
|                                                                                           |       |              |       |             |       |
| Stockholders'  Equity (Deficit):                                                               |       |              |       |             |       |
| Common stock:  $0.001 par value;                                                               |       |              |       |             |       |
| 100,000 and  26,000 authorized at September 30, 2007                                           |       |              |       |             |       |
| and December 31,  2006, respectively;                                                          |       |              |       |             |       |
| 22,912 and 3,352  shares issued and outstanding at                                             |       |              |       |             |       |
| September 30,  2007 and December 31, 2006, respectively                                        |       | 23                |       | 3                |       |
| Additional  paid-in capital                                                                    |       | 150,020           |       | 3,956            |       |
| Deferred  stock-based compensation                                                             |       | (436              | )          | (673             | )          |
| Other  comprehensive income                                                                    |       | 60                |       | —           |       |
| Deficit  accumulated during development stage                                                  |       | (80,996           | )          | (54,066          | )          |
| Total  stockholders' equity (deficit)                                                          |       | 68,671            |       | (50,780          | )          |
|                                                                                           |       |              |       |             |       |
| Total  liabilities, redeemable convertible preferred stock and stockholders' equity  (deficit) |       | $                 | 72,338     |             | $          | 27,121 |   |

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(1)   The condensed balance sheet at December 31,2006 has been derived from the audited financial statements at that date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements.

 

The accompanying notes are an integral part of thesecondensed financial statements.

 

 

**2**

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** **

**XTENT, INC.**

**(a development stage company)**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(unaudited; in thousands, exceptper share amounts)**

 

 
| ** **                                                                                           | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | **Cumulative**    | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                                           | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | **Period from**   | ** ** |
| ** **                                                                                           | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | **June 13, 2002** | ** ** |
| ** **                                                                                           | ** ** | ** **             | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | **(Date of**      | ** ** |
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** | **Inception to)**      | ** ** |
| ** **                                                                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                           | ** ** | **2007**               | ** ** | **2006**               | ** ** | **2007**               | ** ** | **2006**   | ** ** | **2007**          | ** ** |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Operating  expenses:                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Research and  development (1)                                                                        |       | $                      | 7,767      |                   | $          | 5,844                  |       | $          | 21,694     |              | $          | 13,403 |   | $ | 65,220 |   |
| General and  administrative (1)                                                                      |       | 2,632                  |       | 2,594                  |       | 7,894                  |       | 5,277      |       | 20,168            |       |
| Total operating  expenses                                                                            |       | 10,399                 |       | 8,438                  |       | 29,588                 |       | 18,680     |       | 85,388            |       |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Loss from  operations                                                                                |       | (10,399                | )          | (8,438                 | )          | (29,588                | )          | (18,680    | )          | (85,388           | )          |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Other income  (expense):                                                                             |       |                   |       |                   |       |                   |       |       |       |              |       |
| Interest and  other income, net                                                                      |       | 860                    |       | 396                    |       | 2,658                  |       | 801        |       | 4,392             |       |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Net loss                                                                                             |       | (9,539                 | )          | (8,042                 | )          | (26,930                | )          | (17,879    | )          | (80,996           | )          |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Deemed dividend  related to beneficial conversion feature of redeemable convertible preferred  stock |       | —                 |       | —                 |       | —                 |       | (13,095    | )          | (13,095           | )          |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Net loss  attributable to common stockholders                                                        |       | $                      | (9,539     | )                      | $          | (8,042                 | )          | $          | (26,930    | )                 | $          | (30,974 | ) | $ | (94,091 | ) |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Net loss per  share attributable to common stockholders - basic and diluted                          |       | $                      | (0.42      | )                      | $          | (2.84                  | )          | $          | (1.35      | )                 | $          | (11.65 | ) |   |   |
|                                                                                                 |       |                   |       |                   |       |                   |       |       |       |              |       |
| Weighted-average  common shares outstanding - basic and diluted                                      |       | 22,656                 |       | 2,830                  |       | 19,999                 |       | 2,658      |       |              |       |
|                                                                                                      |            |                        |            |                        |            |                        |            |            |            |                   |            |  |  |  |  |  |  |  |

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| (1)  Includes  the following stock-based compensation charges: |   |   |   |   |   |   |   |   |   |   |   |
|--------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Research and  development                                                |   | $      | 294    |   | $      | 524    |   | $      | 1,030  |   | $      | 850 |   | $ | 2,602 |   |
| General and  administrative                                              |   | $      | 490    |   | $      | 362    |   | $      | 1,322  |   | $      | 578 |   | $ | 2,387 |   |

 

 

 

**The accompanying notes are an integral part of thesecondensed financial statements.**

** **

**3**

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** **

**XTENT, INC.**

**(a development stage company)**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(unaudited; in thousands)**

 

 
| ** **                                                                                   | ** ** | ** **             | ** ** | ** **             | ** ** | **Cumulative**         | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | ** **             | ** ** | ** **             | ** ** | **Period from**        | ** ** |
| ** **                                                                                   | ** ** | ** **             | ** ** | ** **             | ** ** | **June 13, 2002** | ** ** |
| ** **                                                                                   | ** ** | ** **             | ** ** | ** **             | ** ** | **(Date of**           | ** ** |
| ** **                                                                                   | ** ** | **Nine Months Ended**  | ** ** | **Inception) to**      | ** ** |
| ** **                                                                                   | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                   | ** ** | **2007**               | ** ** | **2006**               | ** ** | **2007**               | ** ** |
|                                                                                         |       |                   |       |                   |       |                   |       |
| **Cash  flows from operating activities:**                                                   |       |                   |       |                   |       |                   |       |
| Net loss                                                                                     |       | $                      | (26,930    | )                      | $          | (17,879                | )          | $ | (80,996 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                 |       |                   |       |                   |       |                   |       |
| Depreciation and  amortization                                                               |       | 821                    |       | 540                    |       | 2,401                  |       |
| Stock based  compensation expense                                                            |       | 2,352                  |       | 1,428                  |       | 4,989                  |       |
| Stock issued in  exchange for services                                                       |       | —                 |       | —                 |       | 230                    |       |
| Amortization of  securities discount                                                         |       | (1,319                 | )          | —                 |       | (1,319                 | )          |
| Loss on sale of  investments                                                                 |       | 20                     |       | —                 |       | 20                     |       |
| Loss on disposal  of property and equipment                                                  |       | 9                      |       | 10                     |       | 91                     |       |
| Prepaid expenses  and other current assets                                                   |       | (98                    | )          | (29                    | )          | (490                   | )          |
| Accrued interest  receivable on securities                                                   |       | (142                   | )          | —                 |       | (142                   | )          |
| Accounts payable                                                                             |       | 926                    |       | 488                    |       | 1,671                  |       |
| Accrued  liabilities                                                                         |       | 626                    |       | 529                    |       | 1,907                  |       |
| Net cash used in  operating activities                                                       |       | (23,735                | )          | (14,913                | )          | (71,638                | )          |
|                                                                                         |       |                   |       |                   |       |                   |       |
| **Cash  flows from investing activities:**                                                   |       |                   |       |                   |       |                   |       |
| Purchase of  investments                                                                     |       | (92,073                | )          | —                 |       | (92,073                | )          |
| Proceeds from  maturities of investments                                                     |       | 45,150                 |       | —                 |       | 45,150                 |       |
| Proceeds from  sale of investments                                                           |       | 3,986                  |       | —                 |       | 3,986                  |       |
| Purchase of  property and equipment                                                          |       | (1,808                 | )          | (946                   | )          | (6,099                 | )          |
| Proceeds from  sale of property and equipment                                                |       | —                 |       | 3                      |       | 18                     |       |
| Net cash used in  investing activities                                                       |       | (44,745                | )          | (943                   | )          | (49,018                | )          |
|                                                                                         |       |                   |       |                   |       |                   |       |
| **Cash  flows from financing activities:**                                                   |       |                   |       |                   |       |                   |       |
| Proceeds from  initial public offering, net of offering costs                                |       | 69,112                 |       | —                 |       | 68,237                 |       |
| Proceeds from  issuance of redeemable convertible preferred stock, net of issuance costs     |       | —                 |       | 39,692                 |       | 75,593                 |       |
| Deferred IPO  related costs                                                                  |       |                   |       | (556                   | )     | —                 |       |
| Principal  payments on capital lease obligations                                             |       | —                 |       | —                 |       | (23                    | )          |
| Proceeds from  issuance of common stock and exercise of stock options                        |       | 62                     |       | 451                    |       | 648                    |       |
| Net cash  provided by financing activities                                                   |       | 69,174                 |       | 39,587                 |       | 144,455                |       |
|                                                                                         |       |                   |       |                   |       |                   |       |
| Net increase in  cash and cash equivalents                                                   |       | 694                    |       | 23,731                 |       | 23,799                 |       |
|                                                                                         |       |                   |       |                   |       |                   |       |
| Cash and cash  equivalents at beginning of period                                            |       | 23,105                 |       | 6,564                  |       | —                 |       |
|                                                                                         |       |                   |       |                   |       |                   |       |
| Cash and cash  equivalents at end of period                                                  |       | $                      | 23,799     |                   | $          | 30,295                 |       | $ | 23,799 |   |
|                                                                                         |       |                   |       |                   |       |                   |       |
| **Supplemental  disclosure of noncash investing and financing activities:**                  |       |                   |       |                   |       |                   |       |
| Deferred stock  based compensation                                                           |       | $                      | —     |                   | $          | —                 |       | $ | 1,272 |   |
| Reversal of deferred  stock-based compensation                                               |       | $                      | (22        | )                      | $          | (71                    | )          | $ | (93 | ) |
| Conversion of  redeemable convertible preferred stock to common stock                        |       | $                      | 75,593     |                   | $          | —                 |       | $ | 75,593 |   |
| Deferred initial  public offering costs                                                      |       | $                      | 875        |                   | $          | —                 |       | $ | — |   |
| Dividend related  to beneficial conversion feature of redeemable convertible preferred stock |       | $                      | —     |                   | $          | (13,095                | )          | $ | (13,095 | ) |
| Equipment  acquired under capital leases                                                     |       | $                      | —     |                   | $          | —                 |       | $ | (23 | ) |
| Vesting of  restricted common stock from early exercises                                     |       | $                      | 78         |                   | $          | 92                     |       | $ | 352 |   |
| Changes in net  unrealized gains (losses on investments                                      |       | $                      | 60         |                   | $          | —                 |       | $ | 60 |   |
|                                                                                              |            |                        |            |                        |            |                        |            |  |  |  |  |  |

 

 

 

The accompanying notesare an integral part of these condensed financial statements.

 

 

4

 

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**XTENT, INC.**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

 

**NOTE 1****- Organization and Basis of Presentation**

**Organization**

XTENT, Inc.(the “Company”) was incorporated in the state of Delaware on June 13, 2002(“Inception”), and is focused on developing and commercializing innovative drugeluting stent systems for the treatment of coronary artery disease. The Companyis in the development stage and since Inception has devoted substantially allof its time and efforts to developing products, raising capital and recruitingpersonnel.

TheCompany has incurred net operating losses each year since Inception.  At September 30, 2007, the Company had anaccumulated deficit of approximately $81.0 million.  The Company has not achieved positive cashflows from operations for any year since Inception.  In May and June 2006, the Company completed aSeries D redeemable convertible preferred stock financing raising approximately$30.0 million in cash and on February 1, 2007 completed its Initial PublicOffering raising net proceeds of approximately $68.2 million. As of September30, 2007, the Company had cash and cash equivalents and short-term investmentsof approximately $68.1 million.  Based onits current expectations of operating costs, research, development and clinicalstudies, existing capital resources will not enable the Company to maintaincurrent and planned operations beyond the third quarter of 2008.  In order to continue its operations, theCompany must obtain debt financing or sell additional shares of itsequity.  There can be no assurance thatthe Company will be able to obtain debt or equity financing on terms acceptableto the Company, or at all. The failure of the Company to obtain sufficientfunds on acceptable terms when needed could have a material adverse effect onthe Company’s business, results of operations and financial condition.

Managementis currently working toward its objective of realizing profitability bysuccessfully obtaining regulatory approval of its products in the United Statesand Europe.  The failure of the Companyto obtain approval of its products by regulatory authorities could have amaterial adverse effect on the Company’s business, results of operations,future cash flows and financial condition.

**Basis of Presentation**

The accompanying unaudited condensed financialstatements have been prepared by the Company in accordance with the accountingprinciples generally accepted in the United States of America for interimfinancial information and pursuant to the instructions to Form 10-Q and Article10 of Regulation S-X of the Securities and Exchange Commission.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting only of normal recurringadjustments) considered necessary for a fair statement have been included.  The results for the three and nine monthperiods ended September 30, 2007 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2007, or for any futureperiod.  These unaudited condensedfinancial statements and notes should be read in conjunction with the auditedfinancial statements and the notes thereto included in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2006, filed with theSecurities and Exchange Commission on April 2, 2007.

**NOTE 2 -Summary of Significant Accounting Policies**

***Investments***

Investmentsconsist primarily of fixed income securities. The Company classifies their  investments as available-for-sale inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, *Accounting for Certain Investments in Debt and Equity Securities*and they are recorded at fair value. The fair value of investments is based onquoted market prices. Unrealized gains and losses are reported as a separatecomponent of stockholders’ equity until realized. Premiums (discounts) oninvestments are amortized (accreted) to interest income over the life of theinvestment.

5

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***Comprehensive Income (Loss)***

Comprehensiveincome (loss) is defined as the change in equity from transactions and otherevents and circumstances other than those resulting from investments by ownersand distributions to owners. The Company’s unrealized gains (losses) onavailable-for-sale securities represent the only component of othercomprehensive loss that was excluded from the Company’s net loss and wasreflected as a component of stockholders’ equity (deficit).

Total comprehensiveloss during the three and nine months ended September 30, 2007 and 2006consisted of:
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
|                                               |       | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                               |       | **(in thousands)**     | ** ** | **(in thousands)**    | ** ** |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Net loss  attributable to common stockholders      |       | $                      | (9,539     | )                     | $          | (8,042 | ) | $ | (26,930 | ) | $ | (30,974 | ) |
| Unrealized gains  on available-for-sale securities |       | 90                     |       | —                |       | 60 |   | — |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Comprehensive  loss                                |       | $                      | (9,449     | )                     | $          | (8,042 | ) | $ | (26,870 | ) | $ | (30,974 | ) |
|                                                    |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |

 

***Net Loss per Common Share***

Basicand diluted net loss per common share is computed using the weighted-averagenumber of shares of common stock outstanding during the period. Potentiallydilutive securities consisting of stock options, common stock subject torepurchase and redeemable convertible preferred stock were not included in thediluted net loss per common share calculations for all periods presentedbecause the inclusion of such shares would have had an antidilutive effect.

Areconciliation of the numerator and denominator used in the calculation ofbasic and diluted net loss per common share is as follows:

 
| ** **                                                                                                           | ** ** | **Three Months Ended September 30,**    | ** ** | **Nine Months Ended September 30,**     | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2007**                                     | ** ** | **2006**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                           | ** ** | **(in thousands, except per share amounts)** | ** ** | **(in thousands, except per share amounts)** | ** ** |
|                                                                                                                 |       |                                         |       |                                         |       |   |   |   |   |
| Numerator:                                                                                                           |       |                                         |       |                                         |       |   |   |   |   |
| Net loss  attributable to common stockholders                                                                        |       | $                                            | (9,539     | )                                            | $          | (8,042 | ) | $ | (26,930 | ) | $ | (30,974 | ) |
|                                                                                                                 |       |                                         |       |                                         |       |   |   |   |   |
| Denominator:                                                                                                         |       |                                         |       |                                         |       |   |   |   |   |
| Weighted-average  common shares outstanding                                                                          |       | 22,900                                       |       | 3,340                                        |       | 20,307 |   | 3,235 |   |
| Weighted-average  unvested common shares subject to repurchase                                                       |       | (244                                         | )          | (510                                         | )          | (308 | ) | (577 | ) |
| Weighted-average  number of common shares outstanding used in computing basic and diluted net  loss per common share |       | 22,656                                       |       | 2,830                                        |       | 19,999 |   | 2,658 |   |
|                                                                                                                 |       |                                         |       |                                         |       |   |   |   |   |
| Basic and  diluted net loss per common share                                                                         |       | $                                            | (0.42      | )                                            | $          | (2.84 | ) | $ | (1.35 | ) | $ | (11.65 | ) |

 

 

6

 

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Thefollowing redeemable convertible preferred stock and stock options wereexcluded from the computation of diluted net loss per common share becauseincluding them would have an antidilutive effect:

| ** **                                            | ** ** | **As of**          | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|
| ** **                                            | ** ** | **September 30,**  | ** ** |
|                                                  |       | **2007**           | ** ** | **2006** | ** ** |
|                                                  |       | **(in thousands)** | ** ** |
|                                                  |       |               |       |   |   |
| Redeemable  convertible preferred stock               |       | —             |       | 14,744 |   |
| Options to  purchase common stock                     |       | 1,977              |       | 1,839 |   |
| Common stock  subject to repurchase                   |       | 222                |       | 483 |   |
| Shares issuable  through Employee Stock Purchase Plan |       | 50                 |       | — |   |

 

***Recent Accounting Pronouncements***

InJune 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.07-3, *Accounting for Nonrefundable Advance Payments forGoods or Services to Be Used in Future Research and Development Activities*(“EITF No. 07-3”). EITF No. 07-3 requires nonrefundable advance payments forgoods and services that will be used or rendered for future research anddevelopment activities be deferred and capitalized. Such amounts should berecognized as an expense as the goods are delivered or the related services areperformed. EITF No. 07-3 is effective for fiscal years beginning after December15, 2007. The Company is currently evaluating the potential impact, if any,EITF No. 07-3 may have on its financial position and operating results.

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 159, *The FairValue Option for Financial Assets and Financial Liabilities—including anamendment of FAS115* (“SFAS No. 159”). SFAS No. 159 allowscompanies to choose, at specified election dates, to measure eligible financialassets and liabilities at fair value that are not otherwise required to bemeasured at fair value. Unrealized gains and losses shall be reported on itemsfor which the fair value option has been elected in earnings at each subsequentreporting date. SFAS No. 159 also establishes presentation and disclosurerequirements. SFAS No. 159 is effective for the Company in fiscal year2008 and will be applied prospectively. The Company is currently evaluating theimpact of adopting SFAS No. 159 on its financial position and operatingresults.

InSeptember 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS157”). This standard defines fair value, establishes the framework formeasuring fair value in accounting principles generally accepted in the UnitedStates and expands disclosure about fair value measurements. This pronouncementapplies under other accounting standards that require or permit fair valuemeasurements. Accordingly, this statement does not require any new fair valuemeasurement. This statement is effective for fiscal years beginning afterNovember 15, 2007 and interim periods within those fiscal years. The Company iscurrently evaluating the requirements of SFAS No. 157 on its financial positionand operating results.

**NOTE 3 -Investments**

Thefair value of investments as of September 30, 2007 is summarized below:
| ***Maturities  less than one year*** |   | **Amortized Cost** | ** ** | **Unrealized Gains** | ** ** | **Unrealized Losses** | ** ** | **Fair Value** | ** ** |
|--------------------------------------|--------|--------------------|------------|----------------------|------------|-----------------------|------------|----------------|------------|
|                                 |   | **(in thousands)** | ** ** |
|                                 |   |               |       |                 |       |                  |       |           |       |
| Commercial paper                     |   | $                  | 10,842     |                 | $          | 33                    |       | $              | —     |   | $ | 10,875 |   |
| US Government  securities            |   | 29,413             |       | 33                   |       | (1                    | )     | 29,445         |       |
| Corporate bonds                      |   | 3,981              |       | —               |       | (5                    | )          | 3,976          |       |
| Total                                |   | $                  | 44,236     |                 | $          | 66                    |       | $              | (6         | ) | $ | 44,296 |   |
|                                      |        |                    |            |                      |            |                       |            |                |            |  |  |  |  |  |

 

7

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**NOTE 4 -Common Stock**

OnJanuary 22, 2007, the Company effected a 1-for-2 reverse stock split ofits common stock and redeemable convertible preferred stock pursuant to thefiling of an Amended and Restated Certificate of Incorporation. Such Amendedand Restated Certificate of Incorporation also provided for the automaticconversion of the then outstanding shares of redeemable convertible preferredstock into shares of common stock. All share and per share amounts included inthe Company’s condensed financial statements have been adjusted to reflect thisreverse stock split for all periods presented.

OnFebruary 1, 2007, the Company sold 4,700,000 shares of its common stock ata public offering price of $16.00 per share. Net cash proceeds from the InitialPublic Offering were approximately $68.2 million, after deducting underwritingdiscounts and commissions and other offering costs.  In connection with the closing of the InitialPublic Offering, all of the Company’s shares of Series A, B, C and Dredeemable convertible preferred stock outstanding at the time of the offeringwere automatically converted into 14,744,196 shares of common stock.

Eachshare of common stock has the right to one vote.  The holders of common stock are entitled todividends when funds are legally available and when declared by the Board ofDirectors.

***Restricted common stock***

Certaincommon stock option holders have the right to exercise unvested options,subject to a repurchase right held by the Company to repurchase the stock, atthe original exercise price, in the event of voluntary or involuntarytermination of employment of the stockholder. In accordance with EmergingIssues Task Force Issue No. 00-23, *IssuesRelated to the Accounting for Stock Compensation* under APB 25and FASB Interpretation No. 44, *Accountingfor Certain Transactions Involving Stock Compensation*, the Companyaccounts for the cash received in consideration for the early exercised optionsas a liability. As of September 30, 2007 and December 31, 2006, there wereapproximately 222,000 and 417,000 shares of common stock, respectively, subjectto repurchase, and a related liability of $89,000 and $167,000, respectively.

**NOTE 5 -Stock Option Plans**

***Stock-based compensation and valuation assumptions***

The Company calculates the fair value of each optionaward on the date of grant using the Black-Scholes option pricing model. Thefollowing assumptions were used for each respective period:
| ** **                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Stock  options:**       | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected  volatility      |       | 50.8%                                               |       | 70%                                                |       | 50.8% - 54.1% |   | 70% |   |
| Risk free rate            |       | 4.03% - 5.10%                                       |       | 4.49% - 4.93%                                      |       | 4.03% - 5.10% |   | 4.49% - 4.95% |   |
| Dividend yield            |       | 0%                                                  |       | 0%                                                 |       | 0% |   | 0% |   |
| Expected term  (in years) |       | 4.65                                                |       | 6.25                                               |       | 4.65 |   | 6.25 |   |
|                      |       |                                                |       |                                               |       |   |   |   |   |
| **ESPP:**                 | ** ** | ** **                                          | ** ** |                                               | ** ** |   | ** ** |   | ** ** |
| Expected  volatility      |       | 42.1% - 50%                                         |       | NA                                                 |       | 42.1% - 50% |   | NA |   |
| Risk free rate            |       | 4.91% - 5.13%                                       |       | NA                                                 |       | 4.91% - 5.13% |   | NA |   |
| Dividend yield            |       | 0%                                                  |       | NA                                                 |       | 0% |   | NA |   |
| Expected term  (in years) |       | .50 to 0.79                                         |       | NA                                                 |       | .50 to 0.79 |   | NA |   |

The expected term of stock options represents theweighted-average period the stock options are expected to remain outstandingand is based on the option vesting term, contractual terms and industry peersas the Company does not have sufficient historical information to developreasonable expectations about future exercise patterns and post-vestingemployment termination behavior.  ESPPterms are for the purchase periods starting February 1, 2007 (Initial PublicOffering) and May 15, 2007, both of which will end on November 15, 2007.

The expected stock price volatility assumptions forthe Company’s stock options and ESPP for the three and nine month periods endedSeptember 30, 2007 were determined by examining the historical volatilities forindustry peers in combination 

8

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with the historical volatility of the Company sinceits Initial Public Offering on February 1, 2007.  The Company will continue to analyze thehistorical stock price volatility and expected term assumptions as morehistorical data for the Company’s common stock becomes available.

The risk-free interest rate assumption at the date ofgrant is based on the U.S Treasury instruments whose term is consistent withthe expected term of the Company’s stock options and employee stock purchaseplan.

Stock option activity for the nine month period endedSeptember 30, 2007 was as follows:

 

| ** **                            | ** ** | ** **                                                  | ** ** | **Options Outstanding** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | ** **                                                  | ** ** | ** **              | ** ** | **Weighted** | ** ** |
| ** **                            | ** ** | **Shares**                                                  | ** ** | **Number**              | ** ** | **Average** | ** ** |
| ** **                            | ** ** | **Available**                                               | ** ** | **of**                  | ** ** | **Exercise** | ** ** |
| ** **                            | ** ** | **for Grant**                                               | ** ** | **Shares**              | ** ** | **Price** | ** ** |
|                                  |       | **(in  thousands, except weighted average exercise price)** |       |
|                                  |       | ** **                                                  |       |
| **Balance  as of December 31, 2006**  |       | 132                                                         |       | 1,894                   |       | $ | 3.09 |   |
|                                  |       |                                                        |       |                    |       |   |   |
| Additional  shares reserved           |       | 400                                                         |       | —                  |       | — |   |
| Options granted                       |       | (287                                                        | )          | 287                     |       | 10.94 |   |
| Options  exercised                    |       | —                                                      |       | (116                    | )          | 0.55 |   |
| Options  forfeited/expired            |       | 88                                                          |       | (88                     | )          | 4.25 |   |
|                                  |       |                                                        |       |                    |       |   |   |
| **Balance  as of September 30, 2007** |       | 333                                                         |       | 1,977                   |       | $ | 4.33 |   |

 

***2006 Employee Stock Purchase Plan***

In August 2006, the Company adopted the 2006Employee Stock Purchase Plan (“ESPP”), which became effective upon the Company’sInitial Public Offering on February 1, 2007. A total of 500,000 shares ofcommon stock have been reserved for issuance pursuant to the ESPP.  In addition, the ESPP provides for annualincreases in the number of shares available for issuance under the ESPP on thefirst day of each fiscal year, beginning with the Company’s fiscal year 2008,equal to the lesser of: 3% of the outstanding shares of the Company’s commonstock on the first day of the fiscal year; 1,000,000 shares; or such otheramount as the Company’s Board of Directors may determine.  All of the Company’s employees are eligibleto participate if they are customarily employed by the Company for at least 20hours per week and more than five months in any calendar year.  However, an employee may not be granted anoption to purchase stock under the ESPP if such employee, immediately aftergrant, owns stock possessing 5% or more of the total combined voting power orvalue of all classes of the Company’s capital stock, or whose rights topurchase stock under all of the Company’s employee stock purchase plans accruesat a rate that exceeds $25,000 worth of stock for each calendar year.

Offering periods are scheduled to start on the firsttrading day on or after May 15 and November 15 of each year, except for thefirst such offering period, which commenced on February 1, 2007, uponcompletion of the Company’s Initial Public Offering, and will end on the firsttrading day on or after November 15, 2007. The ESPP permits participants to purchase common stock through payrolldeductions of up to 15% of their eligible compensation which includes aparticipant’s base salary, wages, overtime and shift premium, commissions, butexclusive of payments for incentive compensation, bonuses and othercompensation.  A Participant may purchasea maximum of 1,250 shares during a six-month purchase period.

Amounts deducted and accumulated by the participantare used to purchase shares of the Company’s common stock at the end of eachsix-month purchase period.  The purchaseprice of the shares will be 85% of the lower of the fair market value of theCompany’s common stock on the first trading day of each offering period or onthe exercise date.  Participants may endtheir participation at any time during an offering period, and will be paidtheir accrued payroll deductions that have not yet been used to purchase sharesof common stock.  Participation endsautomatically upon termination of employment with the Company.  The ESPP will automatically terminate in2026, unless the Company terminates it sooner. Through September 30, 2007, no shares have been issued in connectionwith the ESPP.

9

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**NOTE 6 - Commitmentsand Contingencies**

In April 2007, the Company entered into a supplyagreement with Fortimedix B.V., a company organized under the laws of theNetherlands, under which Fortimedix agreed to manufacture and deliver stentsfor use in the Company’s products.  Theterms of the agreement require minimum purchases over the next two years atcontractual prices set in Euros.  As of September 30, 2007, $1.9 million hasbeen paid or accrued for the purchase of stents under this supply agreement,and a future obligation of approximately $4.8 million will be payable throughthe end of 2008, calculated using the exchange rate on September 30, 2007.The Company does not believe this presents a material financial exposure, anddoes not plan to hedge against foreign currency fluctuations.

***Operating Lease***

In May 2007, the Company entered into an amendment tothe lease agreement pursuant to which it leases its offices and manufacturingfacilities.  The lease amendment extendsthe term of the lease through May 31, 2012. The Company may terminate the lease for any reason on or after May 1,2009, and the landlord may terminate the lease on or after that date providedit has obtained certain redevelopment rights with respect to the leasedpremises.

Future minimum payments under the amended lease as of September30, 2007 are as follows:

 
| ** **                 | ** ** | **Total**          | ** ** | **Remainder of 2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
|----------------------------|------------|--------------------|------------|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                 | ** ** | **(in thousands)** | ** ** |
| Minimum lease  commitments |       | $                  | 2,177      |                       | $          | 74       |       | $        | 416        |     | $          | 477      |       | $        | 491        |   | $ | 506 |   | $ | 213 |   |
|                            |            |                    |            |                            |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |  |

 

**NOTE7****-****Income Taxes**

Effective January 1, 2007, the Company adopted theprovisions of FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes: An Interpretation of FASB StatementNo. 109* (“FIN  No. 48”). As of January 1, 2007, the Company has no unrecognized tax benefit.  The adoption of FIN No. 48 resulted in nochange to the reserve for unrecognized tax benefits that existed at January 1,2007, and there is no change recorded to the beginning retained earnings as aresult of the adoption of FIN No. 48.

The Company’s practice is to recognize interest and/orpenalties related to income tax matters in income tax expense.  The Company had no accrual for interest orpenalties at September 30, 2007.

The Company files U.S. Federal and California statetax returns. The Company is currently not subject to income tax examinationsand, in general, all tax years remain open due to net operating losses.

**NOTE 8****- Subsequent Event**

On October 17, 2007, the Company and Bailer Research,Inc. entered into a Contract Research Organization Agreement (the “Bailer Agreement”)pursuant to which Bailer agreed to provide certain monitoring and monitoringmanagement services with respect to the Company’s planned CUSTOM IV clinicaltrial for its Custom NX drug eluting stent systems. The Company estimates thatit will pay a total of $11 to $13 million to Bailer over a period ofapproximately 79 months under the terms of the agreement.  Payments willbe made in installments as certain trial related milestones are reachedcommencing when the Company obtains an Investigational Device Exemption fromthe Food and Drug Administration permitting it to initiate its CUSTOM IV trial.As of September 30, 2007, no expenses have been incurred or accrued related tothe Bailer Agreement.

10

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**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**INTRODUCTION**

The followingdiscussion should be read in conjunction with the financial statements and therelated notes included in this Form 10-Q, in our Form 10-K for the yearended December 31, 2006 and in our other filings with the Securities andExchange Commission (“SEC”). ThisQuarterly Report on Form 10-Q contains forward-looking statements withinthe meaning of the federal securities laws. These statements include, but arenot limited to, those concerning the following: futureevents, our future financial performance, business strategy, productintroductions and plans and objectives of management for future operations,regulatory approvals and clinical timelines. Forward-looking statements are subject to risks and uncertaintiesthat could cause actual results and events to differ materially. For a detaileddiscussion of these risks and uncertainties, see Part II, Item 1A “Risk Factors”below. We undertake no obligation to update forward-looking statements toreflect events or circumstances occurring after the date of thisForm 10-Q.

**BUSINESS OVERVIEW**

We are a development stage medical device companyfocused on developing and commercializing our proprietary Custom NX® drugeluting stent (“DES”) systems to treat coronary artery disease (“CAD”). Sinceour Inception on June 13, 2002 we have devoted substantially all ofour resources to start-up activities, raising capital and research anddevelopment, including product design, testing, manufacturing and clinicaltrials. We have focused our development efforts on creating our Custom NX DESSystems, which allow a physician to deploy single or multiple stents ofcustomizable lengths with a single device. Our stent systems, the Custom NX 36and the Custom NX 60, incorporate a modular cobalt chromium stent design aswell as a proprietary delivery system. In addition, our stents have a drugcoating that is made up of Biolimus A9® an anti-inflammatory drug and PolyLacticAcid, a biodegradable polymer, which in combination are intended to reduce theincidence of restenosis, or renarrowing of the previously treated artery overtime.  We have not yet received anygovernment regulatory approvals necessary to commercialize any of our products.

We are developing 36mm and 60mm stent systems based onour proprietary technology platform. Our stent design is modular in that itconsists of multiple 6mm segments in which the ends of each segment interleavewith the ends of the adjacent segments, or are interdigitated. Thisinterdigitated modular stent design allows the physician to customize the stentlength while the device is in the artery. Our delivery system incorporates aprotective sheath and a proprietary mechanism to control the number of stentsegments deployed. Our first two stent systems in development are the 36mmCustom NX 36 and the 60mm Custom NX 60. We believe these two systemswill enable physicians to provide a therapeutic solution for the majority ofCAD patients treated with currently marketed drug eluting stents. OurCustom NX 36 and Custom NX 60 stent systems are designed to givephysicians a suitable length stent to treat one long lesion or multiple smallerlesions with the use of one device, reducing the need for multiple catheterexchanges and related device costs. We believe the ability to customize ourstent and potentially treat multiple lesions and long lesions with one cathetermay improve procedural efficacy and efficiency and lower costs.

We are conducting clinical trials to evaluate ourCustom NX 36 and Custom NX 60 stent and stent delivery systems.In October 2007, the two year clinical data from our CUSTOM Iclinical trial and one year clinical data from our CUSTOM II clinical trialwere presented at the 2007 Transcatheter Cardiovascular Therapeutics conferencein Washington D.C. We believe the data from these clinical trials providedpreliminary evidence of safety and efficacy and supports further development ofour in-situ customization approach. In July 2007 we completed enrollment of ourCUSTOM III clinical trial which is designed to further evaluate the safetyand efficacy of in-situ customization with our stents, particularly in patientswith long lesions and multiple lesions. We believe the data from ourCUSTOM I, II and III clinical trials will be sufficient to supportour submission to our designated Notified Body in the European Union for CEMark. We expect to submit our application for CE Mark in late 2007. We willneed premarket approval (“PMA”) from the U.S. Food and Drug Administration(“FDA”) before we can market our products in the United States, which weexpect will require data from large clinical trials of up to 2,500 patients. Weexpect to obtain this data through our planned CUSTOM IV and CUSTOM Vclinical trials, but to initiate these trials we must first obtain aninvestigational device exemption (“IDE”) approval from the FDA.  In September 2007, we filed an IDEapplication with the FDA to begin our CUSTOM IV pivotal trial.  In October 2007, we received questions backfrom the FDA regarding our IDE application. We are currently working to address the FDA’s questions and will not beable to obtain IDE approval or initiate our CUSTOM IV trial until we do so.

11

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In anticipation of approval of our products, we planto increase our manufacturing capacity and personnel to enable us to producecommercial quantities of our products. We anticipate that it will take time toincrease our capacity and, as a result, expansion will be initiated prior tothe anticipated approval of our products. Prior to obtaining regulatoryapproval, we may also begin to hire sales and marketing personnel. Following CEMark approval in the European Union, we intend to commercialize ourCustom NX DES Systems in key markets in both Europe and Asia Pacific.We expect to rely on third-party distributors, with our sales and clinicalsupport, in select markets in Europe, all of Asia Pacific and the rest of theworld. Following FDA approval, we expect to market our products in theUnited States through a direct sales force.

To date, we have not generated any revenue and willnot be able to generate revenue until one of our products is approved, if ever.We have incurred net losses in each year since our Inception in June 2002.As of September 30, 2007, we had an accumulated deficit of approximately $81.0million. We expect our losses to continue to increase as we expand our clinicaltrial activities and initiate commercialization activities. Since our Inceptionwe have financed our operations primarily through private placements of equitysecurities, and on February 1, 2007 we completed the Initial PublicOffering of our common stock which raised net proceeds of approximately$68.2 million.  As of September 30,2007, we have approximately $68.1 million in cash, cash equivalents andshort-term investments.  Based on ourcurrent expectations of operating costs, research, development and clinicalstudy costs, existing capital resources will not enable us to maintain currentand planned operations beyond the end of the third quarter of 2008.  In order to continue operations, we plan tosell additional shares of equity or obtain debt financing.

In May 2004, we entered into a license agreementwith Biosensors International Group Ltd. (formerly Sun Biomedical Ltd.) andBiosensors Europe S.A. (formerly Occam International B.V.). Pursuant to theagreement, we obtained worldwide non-exclusive rights to use Biosensors’ drugcoating on our products, and agreed to pay specified minimum royalties androyalties based on net sales of our products.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

We base the discussion and analysis of our financialcondition and results of operations upon our unaudited condensed financialstatements, which we prepare in accordance with U.S. generally acceptedaccounting principles. In preparing these financial statements, we must makeestimates and judgments that affect the reported amounts of assets,liabilities, and expenses. We evaluate our estimates based on historicalexperience and various other assumptions we believe are reasonable under thecircumstances. Our actual results could differ materially from these estimatesunder different assumptions or conditions.

There have been no significant changes in our critical accountingestimates during the three and nine months ended September 30, 2007 ascompared to the critical accounting estimates disclosed in Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in our Annual Report on Form 10-K for the year endedDecember 31, 2006.

**FINANCIAL OPERATIONS**

***Revenue***

To date, we have not generated any revenue from thesale of our stent systems. We do not expect to generate revenue until 2008 atthe earliest, subject to obtaining CE Mark.

***Research andDevelopment***

Our research and development expenses consistprimarily of product development, pre-clinical trials, clinical trials andregulatory expenses as well as the cost of manufacturing products for clinicaltrials. Research and development expenses include employee compensationincluding stock-based compensation, supplies and materials, consultingexpenses, license payments for acquired technology, travel and facilities. Wealso incur significant expenses to operate our clinical trials including trialdesign, clinical site reimbursement, data management and travel expenses. Fromour Inception through September 30, 2007, we incurred $65.2 million in researchand development expenses.

12

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***General andAdministrative***

General and administrative expenses consist primarilyof compensation for executive, finance, marketing and administrative personnelincluding stock-based compensation. Other significant expenses includeprofessional fees for accounting and legal services associated with our effortsto obtain and maintain protection for intellectual property related to ourCustom NX DES Systems. From our Inception through September 30, 2007, weincurred $20.2 million in general and administrative expenses.

**RESULTS OF OPERATIONS**

**COMPARISONOF THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

***Revenue***

We did not generate any revenue during the threemonths ended September 30, 2007 or 2006.

***Research andDevelopment***

| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|------------|------------|
| *(Dollars in thousands)*           | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development expenses | ** ** | $                                     | 7,767      |       | $          | 5,844 |   | $ | 1,923 | ** ** |
|                                    |            |                                       |            |            |            |  |  |  |  |  |

The $1.9 million increase in research and developmentexpenses for the three months ended September 30, 2007, compared to the threemonths ended September 30, 2006, was primarily attributable to (i) an increaseof $1.0 million in personnel costs related to the hiring of additionalemployees in our research and development and manufacturing departments, (ii)an increase of $1.0 million for prototype parts, supplies, and outside servicesrelated to product development for our Custom NX DES systems, (iii) anincrease of $0.3 million in depreciation on equipment and facilities costs aswe expanded our manufacturing capacity , and (iv) an increase of $0.1 millionin expenses related to the support of our clinical research studies. Theseincreases were partially offset by a $0.5 million decrease in patent andlicensing fees in the three months ended September 30, 2007, compared to thethree months ended September 30, 2006, due to a $0.5 million license payment toa certain licensor in September 2006. We did not make a license payment to thatlicensor during the three months ended September 30, 2007.

We expect ourresearch and development expenses to increase significantly as we continue thedevelopment of our Custom NX DES Systems and conduct additional clinicaltrials.

***General and Administrative***

| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|------------|------------|
| *(Dollars in thousands)*             | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                           | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative  expenses | ** ** | $                                     | 2,632      |       | $          | 2,594 |   | $ | 38 | ** ** |
|                                      |            |                                       |            |            |            |  |  |  |  |  |

The slight increase in general and administrativeexpenses for the three months ended September 30, 2007, compared to the threemonths ended September 30, 2006, was primarily attributable to (i) an increaseof $0.2 million in personnel costs related to the hiring of additionalemployees in our finance and administration department, (ii) an increase of$0.1 million in employee stock-based compensation expense, (iii) an increase of$0.1 million in consulting and professional services associated with operatingas a public company, and (iv) an increase of $0.1 million in insurance andother administrative expenses associated with operating a public company. Theseincreases were partially offset by a $0.4 million decrease in accounting feesin the three months ended September 30, 2007, compared to the three monthsended September 30, 2006, due 

13

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to ahigher level of accounting fees incurred during the three months endedSeptember 30, 2006 in preparation of our Initial Public Offering in February2007.

We expect our general and administrative expenses toincrease significantly due to the costs associated with the commercializationof our products.

***Interest and Other Income, Net***

| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|----------------------------|------------|---------------------------------------|------------|------------|------------|
| *(Dollars in thousands)*   | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and  other income | ** ** | $                                     | 860        |       | $          | 396 |   | $ | 464 | ** ** |
|                            |            |                                       |            |            |            |  |  |  |  |  |

The $0.5 million increase in interest and other incomefor the three months ended September 30, 2007, compared to the three monthsended September 30, 2006, was primarily attributable to****an increase inthe levels of cash, cash equivalents and short-term investments as a result ofour Initial Public Offering in February 2007.

**COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007AND 2006**

***Revenue***

We did not generate any revenue during the nine monthsended September 30, 2007 or 2006.

***Research and Development***

| ** **                         | ** ** | **Nine Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------|------------|
| *(Dollars in thousands)*           | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development expenses | ** ** | $                                    | 21,694     |       | $          | 13,403 |   | $ | 8,291 | ** ** |
|                                    |            |                                      |            |            |            |  |  |  |  |  |

The $8.3 million increase in research and developmentexpenses for the nine months ended September 30, 2007, compared to the ninemonths ended September 30, 2006, was primarily attributable to (i) an increaseof $3.6 million for prototype parts, supplies, and outside services related toproduct development for our Custom NX DES systems, (ii) an increase of$3.3 million in personnel costs related to the hiring of additional employeesin our research and development and manufacturing departments, (iii) anincrease of $0.9 million in expenses related to the support of our clinicalresearch studies, (iv) an increase of $0.6 million in depreciation on equipmentand facilities costs as we expanded our manufacturing capacity, and (v) anincrease of $0.4 million in employee stock-based compensation expense. Theseincreases were partially offset by a $0.5 million decrease in patent andlicensing fees in the nine months ended September 30, 2007, compared to thenine months ended September 30, 2006, due to a $0.5 million license payment toa certain licensor in September 2006. We did not make a license payment to thatlicensor during the nine months ended September 30, 2007.

We expect our research and development expenses toincrease significantly as we continue the development of our Custom NX DESSystems and conduct additional clinical trials.

***General and Administrative***

| ** **                           | ** ** | **Nine Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|
| *(Dollars in thousands)*             | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                           | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative  expenses | ** ** | $                                    | 7,894      |       | $          | 5,277 |   | $ | 2,617 | ** ** |
|                                      |            |                                      |            |            |            |  |  |  |  |  |

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The $2.6 million increase in general andadministrative expenses for the nine months ended September 30, 2007, comparedto the nine months ended September 30, 2006, was primarily attributable to (i)an increase of $1.0 million in consulting, legal and professional servicesassociated with operating as a public company, (ii) an increase of $0.8 millionin personnel costs related to the hiring of additional employees in our financeand administration and marketing departments, (iii) an increase of $0.7 millionin employee stock-based compensation expense, (iv)  an increase of $0.4 million due to spendingfor trade shows, travel and marketing materials, and (v) an increase of $0.3million in insurance and other administrative expenses associated withoperating a public company. These increases were partially offset by a $0.4million decrease in accounting fees in the nine months ended September 30,2007, compared to the nine months ended September 30, 2006, due to a higher levelof accounting fees incurred during the nine months ended September 30, 2006 inpreparation of our Initial Public Offering in February 2007. These increaseswere also partially offset by a $0.2 million decrease in compensation costs inthe nine months ended September 30, 2007, compared to the nine months endedSeptember 30, 2006, due to a $0.2 million relocation bonus paid to our ChiefFinancial Officer in April 2006.

We expect our general and administrative expenses toincrease significantly due to the costs associated with the commercializationof our products.

***Interest and Other Income, Net***

| ** **                 | ** ** | **Nine Months Ended  September 30,** | ** ** | **Dollar** | ** ** |
|----------------------------|------------|--------------------------------------|------------|------------|------------|
| *(Dollars in thousands)*   | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                 | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and  other income | ** ** | $                                    | 2,658      |       | $          | 801 |   | $ | 1,857 | ** ** |
|                            |            |                                      |            |            |            |  |  |  |  |  |

The $1.9 million increase in interest and other incomefor the nine months ended September 30, 2007, compared to the nine months endedSeptember 30, 2006, was primarily attributable to an increase in the levels ofcash, cash equivalents and short-term investments as a result of our InitialPublic Offering in February 2007.

***Beneficial Conversion Feature***

In January 2006, we completed the issuance andsale of 4,684,892 shares of Series C convertible preferred stock at $5.42per share, which price was determined by our board of directors pursuant tonegotiations with the investors in that round of financing. In June 2006, wecompleted the issuance and sale of 3,370,758 shares of Series D convertiblepreferred stock at $8.90 per share, which price was determined by our board ofdirectors pursuant to negotiations with a new investor and existing investorsin that round of financing. In connection with our preparation of the financialstatements necessary for our public offering, we reassessed the fair value ofour common stock for financial accounting purposes.  Based on this reassessment, we determined thefair value of our common stock in January 2006 to be $8.56 per share, inMay 2006 to be $11.08 per share and in June 2006 to be $11.70 per share. Whenwe issue equity securities that are convertible into common stock at a discountfrom the common fair value at the commitment date, the difference between thefair value of the common stock and the conversion price multiplied by thenumber of shares issuable upon conversion is recognized as a beneficialconversion feature. The beneficial conversion feature is presented as a deemeddividend to the related security holders with an offsetting amount toadditional paid in capital and will be amortized over the period from the issuedate to the first conversion date. Since the equity securities are immediatelyconvertible into common stock by the holder at any time, we recorded andimmediately amortized a beneficial conversion charge, or deemed dividend, ofapproximately $5.7 million in connection with our Series Cconvertible preferred stock financing in January 2006, and approximately$7.4 million in connection with our Series D convertible preferred stockfinancing in May and June 2006.  Nobeneficial conversion charge has been recognized in the three or nine monthperiods ending September 30, 2007.

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***LIQUIDITY AND CAPITAL RESOURCES***

Our cash and cash equivalents, and short-terminvestments balances as of September 30, 2007 and December 31, 2006 aresummarized as follows: 

| *(Dollars in thousands)*                                    | ** ** | **As of  September 30,  2007** | ** ** | **As of  December 31,  2006** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
|                                                        |       |                                |       |                               |       |
| Cash and cash  equivalents                                  |       | $                                   | 23,799     |                               | $          | 23,105 |   |
| Short-term  investments                                     |       | 44,296                              |       | —                             |       |
|                                                        |       |                                |       |                               |       |
| Total cash and  cash equivalents and short-term investments |       | $                                   | 68,095     |                               | $          | 23,105 |   |

***Sources ofLiquidity***

We are in the development stage and have incurredlosses since our Inception in June 2002. As of September 30, 2007, we hadan accumulated deficit of $81.0 million. Prior to our Initial Public Offering,we funded our operations from the private placements of our convertiblepreferred stock resulting in aggregate net proceeds of $75.6 million throughDecember 31, 2006. On February 1, 2007, we completed our InitialPublic Offering, raising $68.2 million in net proceeds. The process ofdeveloping our products will continue to require significant research anddevelopment, clinical trials and regulatory approvals.  These activities, together with increases inselling, general and administrative expenses, as we prepare for a commercial launchof our products in Europe, are expected to result  in substantial operating losses for the nextseveral years.

As of September 30, 2007, we did not have anyoutstanding or available debt financing arrangements, we had working capital of$64.9 million, and our primary source of liquidity was $68.1 million in cashand cash equivalents and short-term investments.

***Cash Flows***

Our operating, investing and financing activities forthe nine months ended September 30, 2007 and September 30, 2006 are summarizedas follows:

| ** **                                 | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| *(Dollars in thousands)*                   | ** ** | **2007**                             | ** ** | **2006** | ** ** |
|                                       |       |                                 |       |   |   |
| Net cash used in  operating activities     |       | $                                    | (23,735    | ) | $ | (14,913 | ) |
| Net cash used in  investing activities     |       | (44,745                              | )          | (943 | ) |
| Net cash  provided by financing activities |       | 69,174                               |       | 39,587 |   |
|                                       |       |                                 |       |   |   |
| Net increase in  cash and cash equivalents |       | $                                    | 694        |   | $ | 23,731 |   |
|                                            |            |                                      |            |  |  |  |  |  |

***Operating Activities***

Net cash used in operating activities was$23.7 million for the nine months ended September 30, 2007, compared to$14.9 million for the nine months ended September 30, 2006. The net cash usedin operating activities for the nine months ended September 30, 2007 andSeptember 30, 2006 primarily reflects expenses related to product developmentand clinical trials. These expenses were offset in part by depreciation andamortization, non-cash stock-based compensation and non-cash changes inoperating assets and liabilities.

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***Investing Activities***

Net cash used in investing activities was$44.8 million for the nine months ended September 30, 2007, compared to$1.0 million for the nine months ended September 30, 2006. Net cash used ininvesting activities for the nine months ended September 30, 2007 wasattributable to the purchase of short-term investments of $92.1 million and thepurchase of property and equipment of $1.8 million, which were partially offsetby the proceeds from the maturities of investments of $45.1 million and theproceeds from the sale of investments of $4.0 million. The net cash used topurchase investments during the nine months ended September 30, 2007 wasderived from the cash raised by our Initial Public Offering in February 2007.During the nine months ended September 30, 2006, we purchased property andequipment totaling $1.0 million and we did not have any investments.

***Financing Activities***

Net cash provided by financing activities for the ninemonths ended September 30, 2007 was $69.2 million, compared with $39.6million for the nine months ended September 30, 2006. Net cash provided byfinancing activities for the nine months ended September 30, 2007 was primarilyattributable to our Initial Public Offering in February 2007.  Net cash provided by financing activities forthe nine months ended September 30, 2006 was primarily attributable to theissuance of convertible preferred stock.

***Operating Capital and Capital ExpenditureRequirements***

To date, we have not commercialized any products. Wedo not anticipate generating any revenue unless and until we successfullyobtain CE Mark or FDA marketing approval for, and begin selling, our Custom NXDES Systems. We anticipate that we will continue to incur substantial netlosses for the next several years as we develop our products, conduct andcomplete clinical trials, pursue additional applications for our technologyplatform, expand our clinical development team and corporate infrastructure,and prepare for the potential commercial launch of our products.

We believe our cash and cash equivalents andshort-term investments and interest income we earn on these balances, will besufficient to meet our anticipated cash requirements for at least the next11 months. We plan to sell additional equity or debt securities or obtaina credit facility by the end of the first half of 2008. Any such requiredadditional capital may not be available on reasonable terms, if at all. Thesale of additional equity and debt securities may result in additional dilutionto our stockholders. If we raise additional funds through the issuance of debtsecurities, these securities could have rights senior to those of our commonstock and could contain covenants that would restrict our operations. We mayrequire additional capital beyond our currently forecasted amounts. Forexample, we will need to raise additional funds in order to build our salesforce and commercialize our products. Any such required additional capital maynot be available on reasonable terms, if at all. If we are unable to obtainadditional financing, we may be required to reduce the scope of, delay, oreliminate some or all of, our planned clinical trials, research, developmentand commercialization activities, which could materially harm our business.

We anticipate spending approximately$45.0 million to complete our CUSTOM IV and V clinical trials. Inaddition, we will spend additional funds for regulatory approvals and foractivities to commercialize our Custom NX DES Systems, if approved. Thedevelopment of any new applications of our custom length stent technology andnew products will also require the expenditure of significant financialresources and take several years to complete.

Our forecasts for the period of time through which ourfinancial resources will be adequate to support our operations and the costs tocomplete development of products are forward-looking statements and involverisks and uncertainties, and actual results could vary materially andnegatively as a result of a number of factors, including the factors discussedin the “Risk Factors” contained in Item 1A of Part II of this report. Wehave based these estimates on assumptions that may prove to be wrong, and wecould utilize our available capital resources sooner than we currently expect.

Because of the numerous risks and uncertaintiesassociated with the development of medical devices, such as our Custom NX DESSystems, we are unable to estimate the exact amounts of capital outlays andoperating expenditures necessary to complete ongoing clinical trials andsuccessfully deliver a commercial product to market. Our future fundingrequirements will depend on many factors, including but not limited to:

•       the scope, rate of progress and cost ofour clinical trials and other research and development activities;

 

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•       the cost of filing and prosecuting patentapplications and defending and enforcing our patent and other intellectualproperty rights;

•       the cost of defending, in litigation orotherwise, any claims that we infringe third-party patent or other intellectualproperty rights;

•       the terms and timing of anycollaborative, licensing and other arrangements that we may establish;

•       the cost and timing of regulatoryapprovals;

•       the cost and timing of establishingsales, marketing and distribution capabilities;

•       the cost of establishing clinical andcommercial supplies of our products and any products that we may develop;

•       the effect of competing technological andmarket developments; and

•       licensing technologies for futuredevelopment.

Future capital requirements will also depend on theextent to which we acquire or invest in businesses, products and technologies,although we currently have no commitments or agreements relating to any ofthese types of transactions.

***ContractualObligations***

Our principalcommitments as of September 30, 2007 consist of obligations underoperating leases and purchase obligations that we enter into through the normalcourse of business. See Notes 6 and 8of our Notes to Condensed Financial Statements for more detailed information.

***Off-BalanceSheet Arrangements***

Since Inception, we have not engaged in anyoff-balance sheet activities as defined in Regulation S-KItem 303(a)(4).

***RecentAccounting Pronouncements***

InJune 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.07-3, *Accounting for Nonrefundable Advance Payments forGoods or Services to Be Used in Future Research and Development Activities*(“EITF No. 07-3”). EITF No. 07-3 requires nonrefundable advance payments forgoods and services that will be used or rendered for future research anddevelopment activities be deferred and capitalized. Such amounts should berecognized as an expense as the goods are delivered or the related services areperformed. EITF No. 07-3 is effective for fiscal years beginning after December15, 2007. We are currently evaluating the potential impact, if any, EITF No.07-3 may have on our financial position and operating results.

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, *The Fair Value Option for Financial Assetsand Financial Liabilities—including an amendment of FAS115*, (“SFASNo. 159”). SFAS No. 159 allows companies to choose, at specifiedelection dates, to measure eligible financial assets and liabilities at fairvalue that are not otherwise required to be measured at fair value. Unrealizedgains and losses shall be reported on items for which the fair value option hasbeen elected in earnings at each subsequent reporting date. SFAS No. 159also establishes presentation and disclosure requirements. SFAS No. 159 iseffective for us in fiscal year 2008 and will be applied prospectively. We arecurrently evaluating the impact of adopting SFAS No. 159 on our financialposition and operating results.

InSeptember 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS157”). This standard defines fair value, establishes the framework formeasuring fair value in accounting principles generally accepted in the UnitedStates and expands disclosure about fair value measurements. This pronouncementapplies under other accounting standards that require or permit fair valuemeasurements. Accordingly, this statement does not require any new fair valuemeasurement. This statement is effective for fiscal years beginning after November15, 2007 and interim periods within those fiscal years. We are currentlyevaluating the requirements of SFAS No. 157 on our financial position andoperating results.

 

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**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our exposure to interest rate risk at September 30,2007 is related primarily to our investment portfolio. Our investment portfolioincludes a variety of marketable securities, including commercial paper andU.S. government securities.  Achange in prevailing interest rates may cause the fair value of our investmentsto fluctuate.  For example, if we hold asecurity that was issued with a fixed interest rate at the then-prevailing rateand the prevailing rate rises, the fair value of the principal amount of ourinvestment will probably decline.  Tominimize this risk, investments are generally held until their maturity, and webalance portfolio maturities to both meet cash flow requirements and limitpossible long term interest rate risks.

We have entered into a supply agreement withFortimedix B.V. which requires that we purchase certain minimum volumes ofstents at contractual prices set in Euros. We estimate that our total remaining minimum obligation under thisagreement will be at least $4.8 million through the end of the calendar year2008, and this could increase based on foreign currency rate fluctuations.  For the purposes of the foregoing estimate,we have used the Euro to dollar exchange rate as of September 30, 2007. Wedo not believe this presents a material financial exposure, and do not plan tohedge against foreign currency fluctuations.

**ITEM 4T. CONTROLS AND PROCEDURES**

**DisclosureControls and Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

We carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Exchange Act). Basedupon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2007.

There were no changes in our internal control overfinancial reporting that occurred during our most recent fiscal quarter thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II:OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

None

**ITEM 1A. RISK FACTORS**

**Risks Related to Our Business**

**We are adevelopment stage company with a history of losses, and we expect to incur netlosses for the foreseeable future.**

We have incurred netlosses since our Inception in June 2002. For the years endedDecember 31, 2004, 2005, and 2006, we had net losses of $8.9 million,$14.0 million and $25.0 million, respectively. For the nine monthsended September 30, 2007, we had net losses of $26.9 million. As of September30, 2007, we had an accumulated deficit of $81.0 million. To date, we havefinanced our operations primarily through private placements of our equitysecurities and our Initial Public Offering, completed on February 1, 2007, andhave devoted substantially all of our resources to research and development ofour Custom NX DES Systems, which consist of the Custom NX 36 and the Custom NX60. Since we have not received a CE

 

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Mark or approvalfrom the U.S. Food and Drug Administration (“FDA”) or any other regulatoryauthority for our products, we are unable to market our current products andhave not generated any revenue since our Inception. We expect our research anddevelopment expenses to increase significantly in connection with our clinicaltrials and other product development activities. If we receive CE Mark or FDAapproval of our Custom NX DES Systems, we expect to incur significant sales andmarketing expenses and manufacturing expenses as we commercialize our products.As a result, we expect to continue to incur significant and increasingoperating losses for the foreseeable future. These losses will continue to havean adverse effect on our stockholders’ equity.

**We arewholly dependent on a third party for the development of the drug coatingplaced on our drug eluting stents and any delay or failure by such third partyto successfully develop the drug coating or to submit acceptable MAFs toregulatory authorities could delay our clinical trials or prevent or delaycommercialization of our Custom NX DES Systems.**

In May 2004, weentered into a license agreement with Biosensors. Pursuant to the agreement, weobtained non-exclusive rights to use Biosensors’s drug coating on our stentplatform. The drug coating consists of Biolimus A9®, an anti-inflammatory drugthat is a derivative of rapamycin, and PolyLactic Acid (“PLA”), a biodegradablepolymer used to release the drug over time. The drug coating has not beenapproved for any use in the European Union, the United States or any otherjurisdiction. In April 2005, Biosensors submitted its first module for themaster file (“MAF”), for the Biolimus A9 and PLA formulation with itsdesignated Notified Body, an independent third party appointed by regulatoryauthorities to conduct the requisite conformity assessment, in conjunction withBiosensors’ application for CE Mark of its BioMatrix drug eluting stent. Biosensorsdoes not have any prior experience in developing or manufacturing drugs orobtaining regulatory approval for drugs or drugs used in combination with amedical device in any jurisdiction.

In May 2006,Biosensors publicly disclosed that it had responded to all requests foradditional information received from its designated Notified Body or therelevant drug authority; however, there can be no assurance that the NotifiedBody will accept Biosensors’ MAF in its filed form, even with the inclusion ofthe additional requested data. We have not had access to any of Biosensors’filings with its designated Notified Body or the relevant regulatoryauthorities in the European Union. There is a significant chance that thedesignated Notified Body, after continued deliberations, may request additionaldata or tests that could be time consuming for Biosensors to provide. To date,Biosensors has made only limited public disclosures regarding filings it hasmade with the FDA in connection with the MAF for its BioMatrix drug elutingstent.  In order to obtain CE Mark andIDE approval for our Custom NX DES Systems, we require Biosensors, acting onour behalf, to submit MAFs related to our drug coating to our Notified Body andthe FDA.  Although the MAFs thatBiosensors is required to file with its Notified Body and with the FDA for itsown products are not exactly the same as the MAFs we require Biosensors toprovide in connection with our CE Mark and IDE approvals, any deficiencies inBiosensor’s MAFs may be indicative of problems that could also impact the MAFsBiosensors submits for our CE Mark and IDE applications.

In order to obtain CEMark approval for our Custom NX DES Systems, we need Biosensors to submit a MAFrelated to our drug coating to the designated Notified Body who will review ourCE Mark application. We will have to obtain a favorable opinion on this MAFfrom the relevant drug authority before our designated Notified Body canprovide us with CE Mark approval. Any delays Biosensors experiences or problemsit has in developing an acceptable MAF for our CE Mark application in theEuropean Union may substantially delay the commercialization of our Custom NXDES systems in Europe as well as certain non-European countries that recognizethe European Union’s CE Mark.

In order to obtain IDEapproval from the FDA allowing us to initiate our CUSTOM IV or V clinicaltrials and in order to obtain the PMA allowing us to commercialize our CustomNX DES Systems, we need Biosensors to submit acceptable MAFs related to our drugcoating to the FDA on our behalf.  Anydelays Biosensors experiences or problems it has in developing these acceptableMAFs for our regulatory filings may substantially delay our currently plannedclinical trials and the development of our products and we may be required torestart clinical programs with an alternative drug coating.

In the event weexperience these delays or need to restart clinical programs, our regulatoryand U.S. commercialization timelines will need to be extended and we may experiencea significant decline in our stock price.

 

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**Wecurrently do not have, and may never have, any products available for sale andour efforts to obtain product approvals and commercialize our products may notsucceed or may result in delays for many reasons.**

We are a developmentstage medical device company with a limited history of operations and wecurrently do not have any products available for sale or other sources ofrevenue. Our ability to generate revenue depends entirely upon the successfulclinical development, regulatory approval and commercialization of our CustomNX DES Systems. Our products under development and any other products that wedevelop will require extensive additional clinical testing, regulatory approvaland significant marketing efforts before they can be sold and generate anyrevenue. Our efforts to commercialize our products may not succeed for a numberof reasons including:

•       our products may not demonstrate safety andefficacy in our clinical trials;

•       we are wholly dependent on the effortsundertaken by the supplier of the drug coating for our products, and may besignificantly impacted by any regulatory delays or barriers that our suppliermay encounter in submitting an adequate or acceptable MAF for the drug coatingto the regulatory authorities on our behalf;

•       we may not be able to obtain regulatoryapprovals for our products, or the approved indications for our products may benarrower than we seek;

•       we may experience delays in our developmentprogram, including initiation and completion of our clinical trials;

•       any products that are approved may not beaccepted in the marketplace by physicians and patients;

•       physicians may not receive adequate coverage andreimbursement for procedures using our products;

•       any rapid technological change may make ourtechnology and products obsolete;

•       we may not be able to manufacture our Custom NXDES Systems in commercial quantities or at an acceptable cost;

•       we may not have adequate financial or otherresources to complete the development and commercialization of our Custom NXDES Systems; and

•       we may be sued for infringement of intellectualproperty rights and could be enjoined from manufacturing or selling ourproducts.

We cannot market ourproducts in the European Union until we receive a CE Mark or in the UnitedStates until we receive PMA. The earliest we expect to commercialize ourproducts in the European Union is the second half of 2008, if at all. If we arenot successful in the initiation and completion of clinical trials for thedevelopment, approval and commercialization of our Custom NX DES Systems forthe treatment of coronary artery disease (“CAD”), we may never generate anyrevenue and may be forced to cease operations.

**We havenot received, and may never receive, FDA or other regulatory approvals tomarket our Custom NX DES Systems.**

Our Custom NX DES Systemsare combination products, incorporating both a drug element and a medicaldevice, and the combination device will be regulated as a Class IIImedical device in the United States. Information regarding the drugcoating for our stents will be reviewed by the FDA’s Center for Drug Evaluationand Research (“CDER”) based on the MAF submitted by Biosensors on our behalf,and the device will be reviewed by the FDA’s Center for Devices andRadiological Health (“CDRH”), with the overall product subject to approval byCDRH as a medical device. We believe that no separate approval for the drugindependent of the device is required.

 

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We do notcurrently have the necessary regulatory approvals to market our Custom NX DESSystems or any other products in the United States or in any foreignmarket, including the European Union. If we obtain the necessary regulatoryapprovals, we plan initially to launch our products in the European Union andlater in the United States. Regulatory approval in the European Union forour products will require us to successfully obtain CE Mark from a designatedNotified Body. In March 2007, the European Medicines Agency released new guidelinesit is proposing for the approval of drug eluting stents.  These proposed guidelines are more rigorousthan existing standards.  Although theproposed guidelines have only been published for comment and are not final, weexpect that in order to obtain CE Mark we will need to take the proposedguidelines into consideration.

The regulatory approvalprocess in the United States for our products involves, among otherthings, successfully receiving authorization from the FDA to conduct clinicaltrials under an investigational device exemption (“IDE”), completingpre-clinical and clinical trials, and applying for and obtaining PMA from theFDA. The PMA process requires us to demonstrate the safety and efficacy of ourproducts to the FDA’s satisfaction. This process is expensive and uncertain andrequires detailed and comprehensive scientific and human clinical data. Whilethe FDA review process generally takes one to three years after filing the PMAapplication, our PMA application review could take much longer and may neverresult in the FDA granting PMA. The FDA could delay, limit or deny approval ofour PMA application for many reasons, including:

•       our stent systems may not be safe or effectiveor may not otherwise meet the FDA’s requirements;

•       the data from our pre-clinical studies andclinical trials may be insufficient to support approval;

•       the manufacturing process or facilities we orour suppliers use may not meet stringent regulatory requirements;

•       the information provided by the supplier of thedrug coating in the MAF it submits to the FDA on our behalf may be inadequate;and

•       changes in FDA approval policies or adoption ofnew regulations may require us to provide additional data.

Wewill also have to obtain similar, and in some cases more stringent, foreignregulatory approval in order to commercialize our products outside of theUnited States. Even if approved, our Custom NX DES Systems may not be approvedfor the indications that are necessary or desirable for successfulcommercialization. We may not obtain the necessary regulatory approvals tomarket our products in the European Union, United States or in other markets.Any delay in, or failure to receive or maintain, approval for our productscould prevent us from generating revenue or achieving profitability.

**Preliminarythird-party data has raised concerns that drug eluting stents may causean increase in late-stent thrombosis. In the event that regulatory authoritiesdetermine that such concerns are valid or otherwise require additional studyand analysis, we may experience a delay in obtaining or we may be unable toobtain regulatory clearances for our products and, even if approved, the marketacceptance of our products may be significantly impaired.**

OnSeptember 14, 2006, the FDA issued a *Statementon Coronary Drug-Eluting Stents*, which discusses recent clinicaldata presented at the March 2006 American College of Cardiology ScientificSessions in Atlanta, Georgia and at the September 2006 European Society ofCardiology Annual Meeting/World Congress of Cardiology Meeting in Barcelona,Spain. This data suggested a small but significant increase in the rate ofdeath and myocardial infarction, or heart attack, potentially due to late-stentthrombosis, in patients treated with drug eluting stents at 18 months tothree years after stent implantation. The FDA stated that, while these studieshave raised important questions regarding the safety and efficacy of drugeluting stents, it is not possible to fully characterize the mechanisms, risksand incidence rates of late-stent thrombosis following implantation of drugeluting stents based on currently available data. The FDA convened a publicmeeting of its Circulatory System Devices Advisory Panel on December 7 and8, 2006 with the intention of obtaining additional information on the risks,timing and incidence rates of late-stent thrombosis. The Panel made thefollowing statements in response to the FDA’s questions:

•       The Panel was in generalagreement that drug eluting stents, when used in accordance with their FDAapproved labeled indications, are associated with a clinically importantnumerical excess of late-stent thromboses (after one yearpost-implantation) compared to bare metal stents; however, the magnitude ofthis excess is uncertain and additional data is needed.

 

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•       Based on the analysespresented by the two manufacturers of currently marketed drug eluting stents inthe United States, the Panel concluded that drug eluting stents were notassociated with an increased risk of death or heart attacks compared to baremetal stents despite an apparent increase in late-stent thrombosis rates afterone year following implantation of the devices.

•       The Panel requested longer-term follow-up and anincreased number of patients in future drug eluting stent clinical trials.

•       The Panel reached consensus that the drugeluting stent safety concerns do not outweigh their benefits compared to baremetal stents when used within the limits of the currently approved FDAindications.

•       The Panel discussed different options formodifying the labeling of drug eluting stents, and was in consensus that labelsshould include a reference to the current PCI Practice Guidelines for theduration of antiplatelet therapy following the implantation of a drug elutingstent.

The Panel’s opinion isadvisory and the FDA has not issued final conclusions or recommendations fromthis meeting. We cannot assure you that any long-term data produced inresponse to the Panel’s request will support its current conclusions and theFDA may alter or change its determinations regarding the safety and efficacy ofdrug eluting stents. Any adverse determination by the FDA regarding the safetyand efficacy of drug eluting stents would have a significant adverse impact onour business.

**IfBiosensors fails to supply us with sufficient quantities of our drug coating,development and commercialization of our Custom NX DES Systems may be preventedor delayed as a result.**

We obtain our entiresupply of the drug coating for our stents from Biosensors and we are unaware ofany alternative source for this drug coating. We do not have the right to usealternate suppliers for this drug coating that we obtain from Biosensors. Inaddition, there is no other source for the drug coating and we arecontractually restricted from obtaining Biolimus A9 from any other source andwe have not in-licensed an alternative drug for use in the event we are unableto obtain a sufficient supply of Biolimus A9. Currently, Biosensors relieson a sole-source, Nippon Kayaku, a third-party Japanese pharmaceuticalcompany, to manufacture and supply them with Biolimus A9, which Biosensorsmixes with the PLA. We have no relationship with, control over, or contact withthis pharmaceutical company and cannot contract directly with it to obtain BiolimusA9 if we are unable to obtain Biolimus A9 from Biosensors. In addition, thepharmaceutical company is subject to significant legal and regulatoryrequirements with regard to the production of Biolimus A9, including onerouscurrent Good Manufacturing Practices regulations (“GMP”), which are strictlyenforced by the FDA, and the Ministry of Health, Labor, and Welfare in Japanand any failure on the part of the pharmaceutical company to comply with theserequirements may interrupt Biosensors’ supply of Biolimus A9 andultimately, our supply of the drug coating. Biosensors has also entered into,and may continue to enter into, agreements to supply the drug coating to otherlicensees.  Our clinical trials and thedevelopment and commercialization of our Custom NX DES Systems could beprevented or delayed if:

•       the supplier of our drug coating is unable orrefuses to meet our demand;

•       our license agreement with Biosensors terminatesfor any reason, including insolvency or our failure to obtain CE Mark or commercializeour products before May 2008; or

•       the supplier of our drug coating does not meetregulatory quality requirements and other specifications.

 

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To date, our drugcoating requirements have been limited to small quantities that we need to conductour development and pre-clinical and clinical trials. If we obtain marketapproval for our products, we anticipate that we will require substantiallylarger quantities of the drug coating. Biosensors may not provide us withsufficient quantities of the drug coating and such supply may not meet ourquality requirements or other specifications. For example, we have experiencedinterruptions in the supply of adequate quantities of acceptable drugcoating.  In the event we do not receiveadequate supplies of acceptable drug coating, we will likely be unable tolocate an alternative supplier of the drug coating, or any alternative drug, ina timely manner or on commercially reasonable terms, if at all. Any additionalnew source for Biolimus A9, the PLA or the drug coating will require theconsent of Biosensors and prior FDA approval, which will require significanttime and effort to obtain and there can be no assurance that we will obtainsuch regulatory approval. The inability to obtain sufficient quantities of thedrug coating or any delay in obtaining such supply could delay our clinicaltrials or affect the commercialization of our Custom NX DES Systems, whichcould have a significant adverse affect on our future operations.

**Werely on third parties to test the drug coating for our stents, and these thirdparties may use test methods that others may claim as their own. If we mustobtain a license to use these methods or develop new testing methods, we mayexperience delays in our ability to initiate clinical trials or to obtainregulatory approvals for our products as a result.**

Certain tests related tothe drug coating on our stents must be performed before the stents can be usedin U.S. clinical trials or approved for commercial sale. We have agreed withBiosensors that we will be responsible for performing some of these tests. Wehave not developed the technology or methods to perform all this testingin-house, and plan to rely on third parties to conduct some of the testing. Wehave identified certain third parties who we believe have the capability toconduct this testing using methods that do not violate the proprietary rightsof others. We can provide no assurance, however, that these testing methodswill not violate such rights. If others assert rights to these testing methods,we may need to obtain a license giving us the right to use the testing methodsor identify or develop other methods for performing the required testing. Wecannot assure you that a license will be available to us or that it will beavailable on terms that are agreeable to us. If we are unable to obtain alicense, we cannot assure you that we will be able to identify or developalternate testing methods that meet our needs without delaying our regulatorysubmissions or approvals. This may result in a delay in the release of, or aninability to release, our stents for use in U.S. clinical trials or commercialproducts and our ability to generate revenue would be adversely affected as aresult.

**Wedo not have long-term data regarding the safety and efficacy of our Custom NXDES Systems. Any long-term data that is generated may not be consistent withour limited short-term data, which could affect the regulatory approval of ourproducts or the rate at which our products are adopted.**

An important factor inour clinical trials, upon which the safety and efficacy of our Custom NX DESSystems may be measured, is the rate of restenosis, or the renarrowing of thetreated artery over time, and the rate of reintervention, or retreatmentfollowing the procedures using the Custom NX DES Systems. We believe thatphysicians and regulators will compare the rates of long-term restenosis andreintervention for our Custom NX DES Systems against other drug eluting or baremetal stent procedures and other alternative procedures.

If, in our planned large-scalecomparative pivotal clinical trial, we fail to demonstrate restenosis andreintervention rates, as well as other clinical trial end-points andperformance, comparable to other drug eluting and bare metal stents that havebeen approved by the FDA, our ability to successfully market our Custom NX DESSystems may be significantly limited. If the long-term rates of restenosis andreintervention do not meet regulators’ or physicians’ expectations, our CustomNX DES Systems may not receive regulatory approval or, if approved, may notbecome widely adopted and physicians may recommend that patients receivealternative drug eluting stents, such as the Cypher® stent and the Taxus®Express2TM stent, the two drug eluting stents currently marketed inthe United States. Another important factor upon which the safety and efficacyof our Custom NX DES Systems will be measured is the incidence of late-stentthrombosis following procedures using our drug eluting stents. Some clinicaldata suggests a small but significant increase in the rate of death and heartattack associated with drug eluting stents when compared to bare metal stents,possibly due to late-stent thrombosis. The FDA convened a public meetingof its Circulatory System Devices Advisory Panel on December 7 and 8, 2006with the intention of obtaining additional information on the risks, timing andincidence rates of late-stent thrombosis. See “Preliminary third-partydata has raised concerns that drug eluting stents may cause an increase in late-stentthrombosis.”  We cannot assure you thatour long-term data, once obtained, will be different than that suggestedin the recent studies regarding late-stent thrombosis.

 

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Additionally, otherefficacy factors may influence a physician’s decision over what stents todeploy. Our Custom NX DES Systems’ stent segments may separate at the time ofdeployment in the artery or over time. Any such separation may lead torestenosis occurring between the segments or other adverse events. If theresults obtained from our clinical trials indicate that our products are not assafe or effective as other treatment options or as current short-term datawould suggest, our products may not be approved, adoption of our products maysuffer and our business would be harmed.

**Ifour pre-clinical studies or clinical trials do not meet safety or efficacyendpoints, or if we experience significant delays in completing these studiesor trials, our ability to commercialize our Custom NX DES Systems or otherproducts and our financial position will be impaired.**

Before marketing andselling our Custom NX DES Systems or any other products, we must successfullycomplete pre-clinical studies and clinical trials that demonstrate that ourproducts are safe and effective. We currently have a very limited amount ofclinical data regarding the safety and efficacy of our Custom NX DES Systems,and no published data beyond twenty four months. The results from our limitedshort-term clinical experience for our Custom NX DES Systems do not necessarilypredict long-term clinical benefit and may not be replicated in subsequentclinical trials. Furthermore, all of our existing data has been produced instudies that involve relatively small patient groups, and the data may not bereproduced in wider patient populations. We plan to conduct additional large-scaleclinical trials to determine whether our products are safe and effective and tosupport our applications for regulatory approval in the European Union and theUnited States. We expect that one or more of these additional clinical studieswill be a comparative study comparing the safety and efficacy of our stents tothe Cypher stent or the Taxus Express2 stent, the two drug eluting stentsmarketed in the United States, or to other stents that may become approved formarketing in the United States, and that these studies will involve largepatient populations of approximately 2,500 patients.

The commencement orcompletion of any of our clinical trials may be delayed or halted for numerousreasons, including, but not limited to, the following:

•         Biosensorsfails to submit on our behalf and in a timely fashion, if at all, a MAF for thedrug coating with the FDA, or such filing fails to meet regulatoryrequirements;

•         theFDA or other regulatory authorities do not approve our clinical trial protocolsor our clinical trials, or suspend or place a clinical trial on hold;

•         patientsdo not enroll in clinical trials at the rate we expect;

•         third-partyclinical investigators do not conduct follow-up visits with patients orpatients drop out of the clinical trial at rates we do not expect;

•         patientsexperience adverse events, which may or may not be related to our products;

•         patientsdie during a clinical trial for a variety of reasons, including the advancedstage of their disease and medical problems, which may or may not be related toour products;

•         third-partyclinical investigators do not perform our clinical trials on our anticipatedschedule or consistent with the clinical trial protocol, good clinicalpractices or other regulatory requirements, or other third-partyorganizations do not perform data collection and analysis in a timely oraccurate manner;

•       regulatory inspections of our clinical trials ormanufacturing facilities, which may, among other things, require us toundertake corrective action or suspend or terminate our clinical trials ifinvestigators find us or our suppliers not in compliance with regulatory requirements;

•         changesin governmental regulations or administrative actions;

•         theinterim results of our clinical trials are inconclusive or negative; or

•         ourclinical trial designs, although approved, are inadequate to demonstrate safetyand/or efficacy.

 

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Before we can commenceour planned pivotal clinical trial in the United States for our Custom NX DESSystems, we must receive the FDA’s approval of our IDE application.  In September 2007, we submitted an IDEapplication to the FDA to begin our CUSTOM IV pivotal trial.  In October 2007, we received questions backfrom the FDA regarding our IDE application. Although we are currently working to address the FDA’s questions, wecannot guarantee that we will be able to resolve them in a timely manner, if atall.  Until we address the FDA’squestions, we will not be able to obtain IDE approval to initiate our CUSTOM IVtrial.

Product development,including pre-clinical studies and clinical testing, is a long, expensive anduncertain process and is subject to delays. It may take us several years tocomplete our testing, if we complete it at all, and a clinical trial may failat any stage. Furthermore, data obtained from any clinical trial may beinadequate to support a PMA application or any foreign regulatory applications.Additionally, pre-clinical and clinical data can also be interpreted indifferent ways, which could delay, limit or prevent regulatory approval for ourproducts.

**Clinicaltrials necessary to support a PMA application will be expensive and will requirethe enrollment of large numbers of patients, and suitable patients may bedifficult to identify and recruit.**

Clinical trials necessaryto support a PMA application for our Custom NX DES Systems will be expensiveand will require the enrollment of large numbers of patients, and suitablepatients may be difficult to identify and recruit. The clinical trialssupporting the PMA applications for the Cypher stent and the Taxus Express2stent, which are approved by the FDA and currently marketed, involved patientpopulations of approximately 1,000 and 1,300, respectively. We expect that wewill provide the FDA with data on approximately 2,500 patients with 12-monthfollow-up to support our PMA application. The FDA may require us tosubmit data on a greater number of patients or a longer follow-up period.Patient enrollment in clinical trials and completion of patient follow-updepend on many factors, including the size of the patient population, thenature of the trial protocol, the proximity of patients to clinical sites andthe eligibility criteria for the clinical trial and patient compliance. Forexample, patients may be discouraged from enrolling in our clinical trials ifthe trial protocol requires them to undergo extensive post-treatment proceduresor follow-up to assess the safety and efficacy of our products, or they may bepersuaded to participate in contemporaneous clinical trials of competitiveproducts. In addition, patients participating in our clinical trials may diebefore completion of the trial or suffer adverse medical events unrelated toour products. Delays in patient enrollment or failure of patients to continueto participate in a clinical trial may cause an increase in costs and delays orresult in the failure of the clinical trial.

**Physiciansmay not widely adopt our Custom NX DES Systems unless they determine, based onexperience, long-term clinical data and published peer reviewed journalarticles, that the use of our Custom NX DES Systems provides a safe andeffective alternative to other existing treatments for coronary artery disease.**

Physicians tend to beslow to change their medical treatment practices because of perceived liabilityrisks arising from the use of new products and the uncertainty of third-partycoverages and reimbursement. We believe that physicians will not widely adoptour Custom NX DES Systems unless they determine, based on experience, long-termclinical data and published peer reviewed journal articles, that the use of ourCustom NX DES Systems provides a safe and effective alternative to otherexisting treatments for coronary artery disease, including coronary arterybypass grafting (“CABG”), balloon angioplasty, bare metal stents and other drugeluting stents, such as Johnson & Johnson’s Cypher stent and Boston Scientific’sTaxus Express2 stent. In particular, the use of bare metal stents hasreportedly increased, and the use of drug eluting stents has reportedlydecreased, at certain hospitals in the United States and elsewhere as a resultof recent clinical data indicating a higher incidence rate of late stentthrombosis. We cannot predict the effect that this or other data questioningthe safety of drug eluting stents will have on the drug eluting stent market.

We cannot provide anyassurance that the data collected from our current and planned clinical trialswill be sufficient to demonstrate that our Custom NX DES Systems are anattractive alternative to other drug eluting stent procedures. If we fail todemonstrate safety and efficacy that is at least comparable to other drugeluting or bare metal stents that have received regulatory approval and thatare available on the market, our ability to successfully market our Custom NXDES Systems will be significantly limited. Even if the data collected fromclinical studies or clinical experience indicate positive results, eachphysician’s actual experience with our Custom NX DES Systems will vary.Clinical trials conducted with our Custom NX DES Systems have involvedprocedures performed by physicians who are technically proficient and arehigh-volume users of drug eluting stents. Consequently, both short- andlong-term results reported in these clinical trials may be significantly morefavorable than typical results of practicing physicians, which could negativelyimpact rates of adoption of our products. We also believe that publishedpeer-reviewed journal articles and recommendations and support by influentialphysicians 

 

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regarding our Custom NXDES Systems will be important for market acceptance and adoption, and we cannotassure you that we will receive these recommendations and support, or thatsupportive articles will be published.

**Problemswith the stent to be used in the control group during our planned U.S. pivotalclinical trial could adversely affect its outcome.**

We expect our pivotalclinical trial in the United States to compare the performance, includingsafety and efficacy, of our products against that of a currently marketed drugeluting stent, or a drug eluting stent that becomes approved for marketing inthe near future. Our planned pivotal clinical trial could be significantlydelayed or harmed if the stent we use for the control group experiencesproblems. We may use one of the two currently marketed drug eluting stents, theCypher stent or the Taxus Express2 stent, or a drug eluting stent that becomesapproved for marketing in the near future, as the control stent in our plannedpivotal clinical trial. In July 2004, Boston Scientific announced therecall of approximately 85,000 Taxus stent systems and approximately 11,000Express2 stent systems due to characteristics in the delivery catheters thathad the potential to impede balloon deflation during a balloon angioplastyprocedure. In August 2004, Boston Scientific announced that it wouldrecall an additional 3,000 Taxus stents. If prior to or during the enrollmentand treatment period for our planned pivotal clinical trial, there is a recallof the control stent or the control stent is removed from the market, our trialwould likely be substantially delayed. The FDA could also require us toredesign the clinical trial based on an alternative control stent. Anysignificant delay or redesign could impair our ability to commercialize ourCustom NX DES Systems.

**Ourproducts are based on a new technology, and we have only limited experience inregulatory affairs, which may affect our ability or the time required to obtainnecessary regulatory approvals, if at all.**

Drug eluting stents wereintroduced in the United States in 2003. To date, the FDA has approved only theTaxus Express2 and the Cypher drug eluting stents for commercial sale. Becausedrug eluting stents are relatively new and long-term success measures have notbeen completely validated, regulatory agencies, including the FDA, may takesignificantly more time in evaluating product approval applications for thosetypes of products. For example, there are currently several methods ofmeasuring restenosis and we do not know which of these metrics, or combinationof these metrics, will be considered appropriate by the FDA for evaluating theclinical efficacy of stents. Treatments may exhibit a favorable measure usingone of these metrics and an unfavorable measure using another metric. Anychange in the accepted metrics may result in reconfiguration of, and delays in,our clinical trials. Furthermore, the result of recent studies suggesting acorrelation between drug eluting stents and incidents of late-stentthrombosis may further delay and complicate the regulatory pathway for ourproducts. Additionally, we have limited experience in filing and prosecutingthe applications necessary to gain regulatory approvals, and we have limitedpersonnel and resources to dedicate to the filing and prosecution of theseapplications. As a result, we may experience a long regulatory process inconnection with obtaining regulatory approvals for our products.

**Ifthe third parties on which we rely to conduct our clinical trials and to assistus with pre-clinical development do not perform as contractually required or expected,we may not be able to obtain regulatory approval for or commercialize ourproducts.**

We do not have theability to independently conduct clinical trials for our products, and we mustrely on third parties, such as contract research organizations, medicalinstitutions, clinical investigators and contract laboratories to conduct ourclinical trials. In addition, we rely on third parties to assist with thepre-clinical development of our products. If these third parties do notsuccessfully carry out their contractual duties or regulatory obligations ormeet expected deadlines, if these third parties need to be replaced, or if thequality or accuracy of the data they obtain is compromised due to the failureto adhere to our clinical protocols or regulatory requirements or for otherreasons, our pre-clinical development activities or clinical trials may beextended, delayed, suspended or terminated, and we may not be able to obtainregulatory approval for or successfully commercialize our products on a timelybasis, if at all. Furthermore, our third-party clinical trialinvestigators may be delayed in conducting our clinical trials for reasonsoutside of their control.

 

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**Evenif our products are approved by regulatory authorities, if we or our suppliersfail to comply with ongoing regulatory requirements, or if we experienceunanticipated problems with our products, these products could be subject torestrictions or withdrawal from the market.**

Any product for which weobtain marketing approval, along with the manufacturing processes,post-approval clinical data and promotional activities for such product, willbe subject to continual review and periodic inspections by the FDA and otherregulatory bodies. In particular we and our suppliers are required to complywith the Quality System Regulation (“QSR”), for the manufacture of our CustomNX DES Systems and GMP for the manufacture of our drug coating and otherregulations, which cover the methods and documentation of the design, testing,production, control, quality assurance, labeling, packaging, storage andshipping of any product for which we obtain marketing approval. The FDAenforces the GMP and QSR through unannounced inspections. We and our third-partymanufacturers and suppliers have not yet been inspected by the FDA and willhave to successfully complete such inspections before we receive regulatoryapprovals for our products. Failure by us or one of our suppliers, includingthe supplier of our drug coating, to comply with statutes and regulations administeredby the FDA and other regulatory bodies, or failure to take adequate response toany observations, could result in, among other things, any of the followingenforcement actions:

•         warningletters or untitled letters;

•         finesand civil penalties;

•         unanticipatedexpenditures;

•         delaysin approving, or refusal to approve, our products;

•         withdrawalor suspension of approval by the FDA or other regulatory bodies;

•         productrecall or seizure;

•         ordersfor physician notification or device repair, replacement or refund;

•         interruptionof production;

•         operatingrestrictions;

•         injunctions;and

•         criminalprosecution.

If any of these actionswere to occur it would harm our reputation and cause our product sales andprofitability to suffer. Furthermore, our key component suppliers may notcurrently be or may not continue to be in compliance with applicable regulatoryrequirements.

Even if regulatoryapproval of a product is granted, the approval may be subject to limitations onthe indicated uses for which the product may be marketed. If the FDA determinesthat our promotional materials, training or other activities constitutepromotion of an unapproved use, it could request that we cease or modify ourtraining or promotional materials or subject us to regulatory enforcementactions. It is also possible that other federal, state or foreign enforcementauthorities might take action if they consider our training or otherpromotional materials to constitute promotion of an unapproved use, which couldresult in significant fines or penalties under other statutory authorities,such as laws prohibiting false claims for reimbursement.

Moreover, anymodification to a device that has received FDA approval that couldsignificantly affect its safety or effectiveness, or that would constitute amajor change in its intended use, design or manufacture, requires a newapproval from the FDA. If the FDA disagrees with any determination by us thatnew approval is not required, we may be required to cease marketing or to recallthe modified product until we obtain approval. In addition, we could also besubject to significant regulatory fines or penalties.

 

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In addition, we may berequired to conduct costly post-market testing and surveillance to monitor thesafety or efficacy of our products, and we will be required to report adverseevents and malfunctions related to our products. Later discovery of previouslyunknown problems with our products, including unanticipated adverse events oradverse events of unanticipated severity or frequency, manufacturing problems,or failure to comply with regulatory requirements such as QSR or GMP, mayresult in restrictions on such products or manufacturing processes, withdrawalof the products from the market, voluntary or mandatory recalls, fines,suspension of regulatory approvals, product seizures, injunctions or theimposition of civil or criminal penalties. For example, Boston Scientific hasinitiated significant recalls of its stent products due to manufacturing andother quality issues associated with the products.

Further, healthcare lawsand regulations may change significantly in the future. Any new healthcare lawsor regulations may adversely affect our business. A review of our business bycourts or regulatory authorities may result in a determination that couldadversely affect our operations. Also, the healthcare regulatory environmentmay change in a way that restricts our operations.

**Failureto obtain regulatory approval in foreign jurisdictions will prevent us frommarketing our products abroad.**

We intend to market ourproducts in international markets. In order to market our products in theEuropean Union and many other foreign jurisdictions, we must obtain separateregulatory approvals. The approval procedure varies among countries and caninvolve additional testing, and the time required to obtain approval may differfrom that required to obtain FDA approval. The foreign regulatory approvalprocess may include all of the risks associated with obtaining FDA approval inaddition to other risks. We may not obtain foreign regulatory approvals on atimely basis, if at all. Approval by the FDA does not ensure approval byregulatory authorities in other countries, and approval by one foreignregulatory authority does not ensure approval by regulatory authorities inother foreign countries or by the FDA. We may not be able to file forregulatory approvals and may not receive necessary approvals to commercializeour products in any market.

**Risks Related to Our Intellectual Property**

**Thirdparties hold a large number of patents related to stents and we do not haverights to many of these patents.**

Intellectual propertyrights, including in particular patent rights, play a critical role in themedical device industry, and therefore in our business. We face significantrisks relating to patents, both as to our own patent position as well as topatents held by third parties. If any third-party intellectual propertyclaim against us is successful, we could be prevented from commercializing our CustomNX DES Systems or other products.

There are numerous U.S.and foreign issued patents and pending patent applications owned by thirdparties with patent claims in areas that are the focus of our productdevelopment efforts. We are aware of patents owned by third parties, to whichwe do not have licenses, that relate to, among other things:

•         useof rapamycin or its analogs to treat restenosis;

•         stentstructures and materials;

•         cathetersused to deliver stents; and

•         stentmanufacturing and coating processes.

Cordis, a subsidiary ofJohnson & Johnson, is the owner of a number of patents and patentapplications directed to the use and delivery of rapamycin or its analogs as astand-alone therapy or as part of a drug eluting stent for the treatmentof restenosis as well as stents incorporating such materials. These include,without limitation, the “Morris” family of patents, the “Wright” family ofpatents and the “Falotico” family of patents.

Boston Scientific holdsrights to the “Grainger” family of patents directed to methods of inhibitingsmooth muscle cell proliferation, or growth, using certain compounds and to the“Kunz” family of patents directed to methods for maintaining vessel luminalarea with a stent that includes a cytostatic, or cell division inhibiting,agent.

Various patents owned bythird parties are directed to stent structures and materials. These patentsinclude a group of “Lau” patents that were owned by Guidant Corporation, anewly acquired subsidiary of Boston Scientific whose stent 

 

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technology has beenacquired by Abbott Vascular subject to certain rights retained by BostonScientific, which are directed to flexible stent structures. The “Boneau”family of patents, owned by Medtronic, are directed to stents comprisingmultiple closed-loop elements. The “Fariabi” family of patents, formerly ownedby Guidant, are directed to stents comprising cobalt-chromium alloys. The“Israel” and “Pinchasik” families of patents, owned by Medinol, are directed tostents with meandering strut patterns. A patent owned by Wall is directed to aradially collapsible mesh sleeve.

Other third-partypatents are directed to stent delivery catheter technology. There are also anumber of patents that were held by Guidant Corporation directed to rapidexchange catheters for angioplasty and stent delivery. These include, withoutlimitation, the “Yock” and “Horzewski” families of patents, directed to rapidexchange angioplasty catheters, and the “Lau” family of patents directed torapid exchange stent catheters. Boston Scientific owns other patents directedto rapid exchange angioplasty catheters, including, the “Bonzel” family ofpatents. Medtronic owns certain patents directed to guidewire handlingtechnology in stent delivery catheters, including certain patents issued toCrittenden and Kramer. A patent issued to Fischell is directed to a sheathedstent delivery catheter. Guidant Corporation also held a patent issued to Cox,directed to a stent delivery catheter having an adjustable-lengthballoon. Certain patents owned by Boston Scientific or its subsidiaries arealso directed to stent delivery catheters having adjustable-lengthballoons. Certain patents owned by third parties relate to methods for coatingstents. For example, the “Hossainy” family of patents that were held by GuidantCorporation are directed to methods of coating stents with a primer layer and areservoir layer.

The patents describedabove could be found to cover our technology and may materially and adverselyaffect our business. In addition, these patents are given only as examples andthere may be other patents in addition to those described above that maymaterially and adversely affect our business. Moreover, because patentapplications can take many years to issue, there may be currently pendingapplications, unknown to us, which may later result in issued patents that posea material risk to us.

**Manyof our competitors are much larger than we are, with significant resources andincentives to initiate litigation against us.**

Based on the prolificlitigation that has occurred in the stent industry and the fact that we maypose a competitive threat to some large and well-capitalized companies that ownor control patents relating to stents and their use, manufacture and delivery,we believe that it is possible that one or more third parties will assert apatent infringement claim against the manufacture, use or sale of our Custom NXDES Systems based on one or more of these patents. It is also possible that alawsuit asserting patent infringement and related claims will be filed againstus and it is possible that a lawsuit may have already been filed against us ofwhich we are not aware. A number of these patents are owned by very large andwell-capitalized companies that are active participants in the stent market. Asthe number of competitors in the drug eluting stent market grows, thepossibility of inadvertent patent infringement by us or a patent infringementclaim against us increases.

These companies havemaintained their position in the market by, among other things, establishingintellectual property rights relating to their products and enforcing theserights aggressively against their competitors and new entrants into the market.All of the major companies in the stent and related markets, including AbbottVascular (which acquired Guidant’s stent technology), Boston Scientific,Johnson & Johnson and Medtronic, have been repeatedly involved inpatent litigation relating to stents since at least 1997. The stent and relatedmarkets have experienced rapid technological change and obsolescence in thepast, and our competitors have strong incentives to stop or delay theintroduction of new products and technologies. We may pose a competitive threatto many of the companies in the stent and related markets. Accordingly, many ofthese companies will have a strong incentive to take steps, through patentlitigation or otherwise, to prevent us from commercializing our products.

**Anylawsuit, whether initiated by us to enforce our intellectual property rights orby a third party against us alleging infringement, may cause us to expendsignificant financial and other resources, and may divert our attention fromour business.**

In any infringementlawsuit, a third party could seek to enjoin, or prevent, us fromcommercializing our Custom NX DES Systems or any future products, may seekdamages from us and any such lawsuit would likely be expensive for us to defendagainst. Our involvement in intellectual property litigation could result insignificant expense. Some of our competitors, such as Boston Scientific,Johnson & Johnson, Abbott Vascular and Medtronic, have considerableresources available to them and a strong economic incentive to undertakesubstantial efforts to stop or delay us from bringing our Custom NX DES Systemsto market and achieving market acceptance. We, on the other hand, are adevelopment stage 

 

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company withcomparatively few resources available to us to engage in costly and protractedlitigation. A court may determine that patents held by third parties are validand infringed by us and we may be required to:

•         paydamages, including up to treble damages and the other party’s attorneys’ fees,which may be substantial;

•         ceasethe development, manufacture, use and sale of products that infringe the patentrights of others, including our Custom NX DES Systems, through a court-imposedsanction called an injunction;

•         expendsignificant resources to redesign our technology so that it does not infringeothers’ patent rights, or to develop or acquire non-infringing intellectualproperty, which may not be possible;

•         discontinuemanufacturing or other processes incorporating infringing technology; or

•         obtainlicenses to the infringed intellectual property, which may not be available tous on acceptable terms, or at all.

Any development oracquisition of non-infringing products or technology or licenses could requirethe expenditure of substantial time and other resources and could have amaterial adverse effect on our business and financial results. If we arerequired to, but cannot, obtain a license to valid patent rights held by athird party, we would likely be prevented from commercializing the relevantproduct. We believe that it is unlikely that we would be able to obtain alicense to any necessary patent rights controlled by companies against which wewould compete directly. If we need to redesign products to avoid third-partypatents, we may suffer significant regulatory delays associated with conductingadditional studies or submitting technical, manufacturing or other informationrelated to the redesigned product and, ultimately, in obtaining regulatoryapproval.

While our products are inclinical trials, and prior to commercialization, we believe our activities inthe United States related to the submission of data to the FDA could fallwithin the scope of the statutory infringement exemption that covers activitiesrelated to developing information for submission to the FDA. However, thisstatutory exemption would not cover our stent manufacturing or other activitiesin the United States that support overseas clinical trials or commercial salesif those activities are not also reasonably related to developing informationfor submission to the FDA. Currently available drug eluting stents aremanufactured outside of the United States, which may insulate manufacturersfrom adverse rulings on U.S. patent infringement claims. In an adverse ruling,a court may order an injunction requiring a company to stop its U.S. domesticmanufacturing operations. We currently do not have any plans to manufacture ourstents outside of the United States and any finding of patent infringementagainst us in the United States could result in our being enjoined frommanufacturing our products in the United States and could affect our ability tosell our products in the European Union. In any event, the fact that no thirdparty has asserted a patent infringement claim against us to date should not betaken as an indication, or provide any level of comfort, that a patentinfringement claim will not be asserted against us prior to or uponcommercialization.

In addition, some of ouragreements, including our agreement with Biosensors for the supply of the drugcoating, our agreement with SurModics for the supply of the lubricious coatingon our catheter and our agreement with Millimed for the license of patentsrelated to segmented stent designs require us to indemnify the other party incertain circumstances where our products have been found to infringe a patentor other proprietary rights of others. An indemnification claim against us mayrequire us to pay substantial sums to our licensor or supplier, including itsattorneys’ fees.

**Ifwe are unable to obtain and maintain intellectual property protection coveringour products, others may be able to make, use or sell our products, which wouldadversely affect our revenue.**

Our ability to protectour products from unauthorized or infringing use by third parties dependssubstantially on our ability to obtain and maintain valid and enforceablepatents. As of September 30, 2007 we have four issued U.S. patents, one ofwhich is under exclusive license, covering certain aspects of the technologythat we intend to commercialize and a number of other issued patents andpending patent applications in the United States and abroad. Due to evolvinglegal standards relating to the patentability, validity and enforceability ofpatents covering medical devices and pharmaceutical inventions and the scope ofclaims made under these patents, our ability to obtain and enforce patents isuncertain and involves complex legal and factual questions. Accordingly, rightsunder any of our issued patents may not provide us with commercially meaningfulprotection for our products or afford us a commercial advantage against ourcompetitors or their competitive products or processes. In addition, patentsmay not issue from any pending or future patent applications owned by orlicensed to us, and moreover, patents that have issued to us or may issue inthe future may not be valid or enforceable. Further, even if 

 

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valid and enforceable,our patents may not be sufficiently broad to prevent others from marketingproducts like ours, despite our patent rights.

The validity of ourpatent claims depends, in part, on whether prior art references exist thatdescribe or render obvious our inventions as of the filing date of our patentapplications. We may not have identified all prior art, such as U.S. andforeign patents or published applications or published scientific literature,that could adversely affect the validity of our issued patents or thepatentability of our pending patent applications. For example, patentapplications in the United States are maintained in confidence for up to 18months after their filing. In some cases, however, patent applications remainconfidential in the United States Patent and Trademark Office (“USPTO”), forthe entire time prior to issuance as a U.S. patent. Patent applications filedin countries outside the United States are not typically published until atleast 18 months from their first filing date. Similarly, publication ofdiscoveries in the scientific or patent literature often lags behind actualdiscoveries. Therefore, we cannot be certain that we were the first to invent,or the first to file patent applications relating to, our stent technologies.In the event that a third party has also filed a U.S. patent applicationcovering our stents or a similar invention, we may have to participate in anadversarial proceeding, known as an interference, declared by the USPTO todetermine priority of invention in the United States. It is possible that wemay be unsuccessful in the interference, resulting in a loss of some portion orall of our position in the United States. The laws of some foreignjurisdictions do not protect intellectual property rights to the same extent asin the United States, and many companies have encountered significantdifficulties in protecting and defending such rights in foreign jurisdictions.If we encounter such difficulties or we are otherwise precluded fromeffectively protecting our intellectual property rights in foreignjurisdictions, our business prospects could be substantially harmed.

We may initiatelitigation to enforce our patent rights, which may prompt our adversaries insuch litigation to challenge the validity, scope or enforceability of ourpatents. If a court decides that our patents are not valid, not enforceable orof a limited scope, we will not have the right to stop others from using ourtechnology.

We also rely on tradesecret protection to protect our interests in proprietary know-how and forprocesses for which patents are difficult to obtain or enforce. We may not beable to protect our trade secrets adequately. In addition, we rely onnon-disclosure and confidentiality agreements with employees, consultants andother parties to protect, in part, trade secrets and other proprietarytechnology. These agreements may be breached and we may not have adequateremedies for any breach. Moreover, others may independently develop equivalentproprietary information, and third parties may otherwise gain access to ourtrade secrets and proprietary knowledge. Any disclosure of confidential datainto the public domain or to third parties could allow our competitors to learnour trade secrets and use the information in competition against us.

We are aware that anothermedical business that holds patents to certain stent designs has used the nameXTENT for limited purposes in the past. If it turns out that the other businesshas superior trademark rights in the name, and if the other business were tochallenge our use of the XTENT name, we would then need to convince a courtthat there is no likelihood of consumer confusion. If we were unsuccessful incourt, then we could be held liable for trademark infringement and we mightthen have to change our name as well as pay monetary damages. If we were forcedto change our name, we may suffer from a loss of brand recognition, we may berequired to retrieve product and interrupt supply, and may have to devotesubstantial resources advertising and marketing our products under a new brandname.

**Risks Related to Commercialization**

**Themedical device industry is highly competitive and subject to rapid technologicalchange. If our competitors are better able to develop and market products thatare safer, more effective, less costly or otherwise more attractive than anyproducts that we may develop, our commercial opportunity will be reduced oreliminated.**

The medical deviceindustry is highly competitive and subject to rapid and profound technologicalchange. Our success depends, in part, upon our ability to maintain acompetitive position in the development of technologies and products for use inthe treatment of CAD.

We face competition fromestablished pharmaceutical and biotechnology companies, as well as fromacademic institutions, government agencies and private and public researchinstitutions in the United States and abroad. Most of the companies developingor marketing competing products are publicly traded or divisions of publicly-tradedcompanies, and these companies enjoy several competitive advantages, including:

•         greater financial andhuman resources for product development, sales and marketing, and patentlitigation;

 

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•         significantly greatername recognition;

•         established relationswith healthcare professionals, customers and third-party payors;

•         additional lines ofproducts, and the ability to offer rebates or bundle products to offer higher discountsor incentives to gain a competitive advantage;

•         established distributionnetworks; and

•         greater experience inconducting research and development, manufacturing, clinical trials, obtainingregulatory approval for products and marketing approved products.

For example,Johnson & Johnson and Boston Scientific, two companies with fargreater financial and marketing resources than we possess, have both developed,and are actively marketing, drug eluting stents that have been approved by theFDA. We may be unable to demonstrate that our Custom NX DES Systems offer anyadvantages over Johnson & Johnson’s Cypher stent or Boston Scientific’sTaxus Express2 stent. Other large companies, including Medtronic andAbbott Laboratories, are developing and commercializing drug eluting stents.Smaller or early-stage companies may also prove to be significantcompetitors, particularly through collaborative arrangements with, or mergerswith or acquisitions by, large and established companies or through thedevelopment of novel products and technologies.

The industry in which weoperate has undergone, and is expected to continue to undergo, rapid andsignificant technological change, and we expect competition to intensify astechnical advances are made. Our competitors may develop and patent processesor products earlier than us, obtain regulatory approvals for competing productsmore rapidly than us, and develop more effective or less expensive products ortechnologies that render our technology or products obsolete ornon-competitive. For example, we are aware of companies that are developingvarious other less-invasive technologies for treating CAD, which could make ourstent platform obsolete. We also compete with our competitors in recruiting andretaining qualified scientific and management personnel, establishing clinicaltrial sites and patient registration for clinical trials, as well as inacquiring technologies and technology licenses complementary to our programs oradvantageous to our business. If our competitors are more successful than us inthese matters, our business may be harmed.

**Ifwe are unable to establish sales and marketing capabilities or enter into andmaintain arrangements with third parties to sell and market our Custom NX DESSystems, our business may be harmed.**

We do not have a salesorganization and have no experience as a company in the sales, marketing anddistribution of stent systems or other medical devices. To be successful incommercializing our products we must either develop a sales and marketinginfrastructure or enter into distribution arrangements with others to marketand sell our products. We have not yet hired any European sales people orentered into any third-party distribution agreements other than withBiosensors for certain Pacific Rim countries.

After establishing ourEuropean sales channels, if our Custom NX DES Systems are approved forcommercial sale in the United States, we currently plan to establish our owndirect U.S. sales force. If we develop our own marketing and salescapabilities, our sales force will be competing with the experienced andwell-funded marketing and sales operations of our more established competitors.Developing a sales force is expensive and time consuming and could delay orlimit the success of any product launch. We may not be able to develop thiscapacity on a timely basis or at all. If we are unable to establish sales andmarketing capabilities, we will need to contract with third parties to marketand sell our products in the United States. To the extent that we enter intoarrangements with third parties to perform sales, marketing and distributionservices in the United States or internationally, our product revenue could belower than if we directly marketed and sold our products, or any other stentsystem or related device that we may develop. Furthermore, to the extent thatwe enter into co-promotion or other marketing and sales arrangements with othercompanies, any revenue received will depend on the skills and efforts ofothers, and we do not know whether these efforts will be successful. Some ofour future distributors may market their own products or distribute othercompanies’ products that compete with ours, and they may have an incentive notto devote sufficient efforts to marketing our products. If we are unable toestablish and maintain adequate sales, marketing and distribution capabilities,independently or with others, we may not be able to generate product revenueand may not become profitable.

 

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**Wehave limited device manufacturing and drug coating capabilities andmanufacturing personnel, and if our device manufacturing and drug coatingfacilities or our suppliers are unable to provide an adequate supply ofproducts, our growth could be limited and our business could be harmed.**

We currently have limitedresources, facilities and experience to commercially manufacture the devicecomponent of our products and apply the drug coating to the stents. In order toproduce our Custom NX DES Systems in the quantities that we anticipate will berequired to meet anticipated market demand, we will need to increase, orscale-up, the production process by a significant factor over our current levelof production. There are technical challenges to scaling-up manufacturingcapacity and developing commercial-scale manufacturing facilities thatwill require the investment of substantial additional funds and hiring andretaining additional management and technical personnel who have the necessarymanufacturing experience. We may not successfully complete any requiredscale-up in a timely manner or at all. If we are unable to do so, we may not beable to produce products in sufficient quantities to meet the requirements forthe launch of the product or to meet future demand, if at all. During a routineaudit, we discovered that our new device configuration required revisedsterilization procedures, which were successfully validated in March 2007. Inthe event that we encounter similar challenges in the future, we may experienceinterruptions in the supply of our devices and as a result may be unable tomeet demand. If we develop and obtain regulatory approval for our products andare unable to manufacture a sufficient supply of our products, our revenue,business and financial prospects would be adversely affected. In addition, ifthe scaled-up production process is not efficient or produces stents that donot meet quality and other standards, our future gross margins may decline.

We currently assemble ourCustom NX DES Systems and apply the drug coating at our facilities in MenloPark, California. Under the terms of our lease agreement for these facilities,our landlord may terminate our lease at any time on or after May 1, 2009 if ithas obtained certain redevelopment rights with respect to the leased premises.Prior to the commercial launch of our product our leased premises will have tobe inspected and approved by the FDA, and will likely require additionalcertifications by the State of California Department of Health Services (“CDHS”),and International Standardisation Organization (“ISO”). If there were adisruption to our existing manufacturing facility, or if our landlord electedto terminate our lease on or after May 1, 2009, we would have no other means ofmanufacturing our products until we were able to restore the manufacturingcapability at our facility or lease alternative manufacturing facilities andobtain regulatory approval for these facilities. Because our Menlo Parkfacilities are located in a seismic zone, we face the risk that an earthquakemay damage our facilities and disrupt our operations. Finally, based on averbal agreement with Biosensors, we currently apply the drug coating to ourstents in our Menlo Park facilities. Our license agreement with Biosensors doesnot expressly permit us to apply the drug coating to our stents except undercertain limited conditions and we do not have any other written agreement thatwould allow this to continue to occur. If we are unable to produce sufficientquantities of our products for use in our current and planned clinical trials,if we obtain regulatory approval of our products and are unable to producesufficient quantities of our products to support our planned commercialactivities or if our manufacturing process yields substandard products, ourdevelopment and commercialization efforts would be delayed.

**Ifthe cost of our drug coating or other components of our stent systems increasesignificantly, our business and our results of operations may be harmed.**

Under the terms of ourlicense agreement with Biosensors, the price we pay for our drug coating mayincrease as Biosensors’ cost of manufacturing and supplying the drug coatingincreases. We have experienced one price increase in the past and we mayexperience additional increases in the future. If we experience significantincreases in the cost of our drug coating or other key components of our stentsystems, our business and our results of operations may be harmed.

 

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**Ourmanufacturing facilities and the manufacturing facilities of our suppliers mustcomply with strictly enforced regulatory requirements. If we fail to achieveregulatory approval for these manufacturing facilities, our business and ourresults of operations would be harmed.**

Completion of ourclinical trials and commercialization of our products require access to, or thedevelopment of, manufacturing facilities that comply with QSR and GMP. We mayestablish a manufacturing facility outside of the United States and can provideno assurance that our manufacturing facility would meet applicable foreignregulatory requirements or standards at acceptable cost, on a timely basis, orat all. In addition, the FDA must approve facilities that manufacture ourproducts for domestic commercial purposes, as well as the manufacturingprocesses and specifications for the product. Biosensors and suppliers ofcomponents of, and products used to manufacture, our products must also complywith FDA and foreign regulatory requirements, which often require significanttime, money and record-keeping and quality assurance efforts and subjectus and our suppliers to potential regulatory inspections and stoppages. We,Biosensors, or our other suppliers may not satisfy these regulatoryrequirements. If we or our suppliers do not achieve required regulatoryapproval for our manufacturing operations, our commercialization efforts couldbe delayed, which would harm our business and our results of operations.

**Wedepend on single-source suppliers for some of the components in ourCustom NX DES Systems. The loss of these suppliers could delay our clinicaltrials or prevent or delay commercialization of our Custom NX DES Systems.**

Although we haveidentified several vendors for the components of our products, some of ourcomponents are currently provided by only one vendor, or a single-sourcesupplier. In addition to our reliance on Biosensors as the only source for thesupply of our drug coating, we also depend on SurModics, which provides theslippery coating on our sheath. We do not have long-term contracts with some ofour third-party suppliers of components used in the manufacture of ourstent delivery catheters or the cobalt chromium tubing and laser-precisioncutting process required to produce the stent segments included in our device.In addition, we do not have long-term contracts with our third-partysuppliers of some of the equipment and components that are used in ourmanufacturing process and we do not carry a significant inventory of mostcomponents used in our products. Establishing additional or replacementsuppliers for these components, and obtaining any additional regulatoryapprovals that may result from adding or replacing suppliers, will take asubstantial amount of time. We may also have difficulty obtaining similarcomponents from other suppliers that are acceptable to the FDA or foreignregulatory authorities. Furthermore, since some of these suppliers are locatedoutside of the United States, we are subject to foreign export laws and U.S.import and customs regulations, which complicate and could delay shipments tous. Some of our suppliers are also our competitors and may be reluctant tosupply components to us on favorable terms, if at all.

If we have to switch toreplacement suppliers, we will face additional regulatory delays and themanufacture and delivery of our Custom NX DES Systems would be interrupted foran extended period of time, which would delay completion of our clinical trialsor commercialization of our products. In addition, we will be required toobtain prior regulatory approval from the FDA or foreign regulatory authoritiesto use different suppliers or components that may not be as safe or aseffective. As a result, regulatory approval of our products may not be receivedon a timely basis or at all.

**Ifwe do not achieve our projected development goals in the time frames weannounce and expect, the commercialization of our products may be delayed and,as a result, our stock price may decline.**

From time to time, we mayestimate and publicly announce the anticipated timing of the accomplishment ofvarious clinical, regulatory and other product development goals, which wesometimes refer to as milestones. These milestones could include obtaining CEMark approval in the European Union, the initiation of our pivotal U.S.clinical trial for our Custom NX DES Systems, the enrollment of patients in ourclinical trials, the release of data from our clinical trials and otherclinical and regulatory events. The actual timing of these milestones couldvary dramatically compared to our estimates, in some cases for reasons beyondour control. We cannot assure you that we will meet our projected milestonesand if we do not meet these milestones as publicly announced, thecommercialization of our products may be delayed and, as a result, our stockprice may decline.

**Wemay not be successful in our efforts to expand our portfolio of products anddevelop additional technologies.**

A key element of ourstrategy is to discover, develop and commercialize a portfolio of new productsin addition to our Custom NX DES Systems. We are seeking to do so through ourinternal research programs and intend to explore strategic collaborations forthe development of new products utilizing our stent technology. Researchprograms to identify new disease targets, products and delivery techniquesrequire substantial technical, financial and human resources, whether or notany 

 

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products are ultimatelyidentified. We may determine that one or more of our pre-clinical programs donot have sufficient potential to warrant the allocation of resources, such asthe potential development of our stent technology for the treatment ofperipheral artery disease (“PAD”). Our research programs may initially showpromise in identifying potential products, yet fail to yield products forclinical development for many reasons, including the following:

•         the research methodologyused may not be successful in identifying potential products;

•         competitors may developalternatives that render our products obsolete;

•         our products may not bedeployed safely or effectively;

•         products may on furtherstudy be shown to have harmful side effects or other characteristics thatindicate they are unlikely to be effective;

•         our clinical trials maynot be successful; and

•         we may not receiveregulatory approval.

**Wedepend on our officers, and if we are not able to retain them or recruitadditional qualified personnel, our business will suffer.**

We are highly dependenton our President and Chief Executive Officer, Gregory D. Casciaro and our otherofficers. Due to the specialized knowledge each of our officers possesses withrespect to interventional cardiology and our operations, the loss of service ofany of our officers could delay or prevent the successful completion of ourclinical trials and the commercialization of our Custom NX DES Systems. Each ofour officers may terminate their employment without notice and without cause orgood reason. We carry key person life insurance on Mr. Casciaro but not onour other officers.

Upon receiving regulatoryapproval for our products, we expect to rapidly expand our operations and growour research and development, product development and administrativeoperations. Our growth will require hiring a significant number of qualified clinical,scientific, commercial and administrative personnel. Accordingly, recruitingand retaining such personnel in the future will be critical to our success.There is intense competition from other companies and research and academicinstitutions for qualified personnel in the areas of our activities. Ouroffices are located in the San Francisco Bay Area, where competition forpersonnel with healthcare industry skills is intense. If we fail to identify,attract, retain and motivate these highly skilled personnel, we may be unableto continue our development and commercialization activities.

**Wewill need substantial additional funding and may be unable to raise capitalwhen needed, which would force us to delay, reduce or eliminate our productdevelopment programs or commercialization efforts.**

We will need to raisesubstantial additional capital to:

•         fund our operations andclinical trials;

•         continue our research anddevelopment;

•         scale-up ourmanufacturing operations;

•         defend, in litigation orotherwise, any claims that we infringe third-party patent or otherintellectual property rights;

•         commercialize ourproducts, if any such products receive regulatory approval for commercial sale;and

•         acquire or in-licensecompanies, products or intellectual property.

We believe our existingcash and cash equivalent balances and interest we earn on these balances, willbe sufficient to meet our anticipated cash requirements for at least the next11 months.  However, our future fundingrequirements will depend on many factors, including:

 

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•         the scope, rate ofprogress and cost of our clinical trials and other research and developmentactivities;

•         the cost of filing andprosecuting patent applications and defending and enforcing our patent andother intellectual property rights;

•         the cost of defending, inlitigation or otherwise, any claims that we infringe third-party patentor other intellectual property rights;

•         the terms and timing ofany collaborative, licensing and other arrangements that we may establish;

•         the cost and timing ofregulatory approvals;

•         the cost and timing ofestablishing sales, marketing and distribution capabilities;

•         the cost of establishingclinical and commercial supplies of our products and any products that we maydevelop;

•         the effect of competingtechnological and market developments;

•         licensing technologiesfor future development; and

•         the extent to which weacquire or invest in businesses, products and technologies, although wecurrently have no commitments or agreements relating to any of these types oftransactions.

If we raise additionalfunds by issuing equity securities, our stockholders may experience dilution.Debt financing, if available, may involve restrictive covenants. Any debtfinancing or additional equity that we raise may contain terms that are notfavorable to us or our stockholders. If we raise additional funds throughcollaboration and licensing arrangements with third parties, it may benecessary to relinquish some rights to our technologies or our products, orgrant licenses on terms that are not favorable to us. If we are unable to raiseadequate funds, we may have to liquidate some or all of our assets or delay,reduce the scope of or eliminate some or all of our development programs.

If adequate funds are notavailable, we may have to delay development or commercialization of ourproducts or license to third parties the rights to commercialize products ortechnologies that we would otherwise seek to commercialize. We also may have toreduce marketing, customer supports or other resources devoted to our products.Any of these factors could harm our financial condition.

**Ifwe are unable to manage our expected growth, we may not be able tocommercialize our products, including our Custom NX DES Systems.**

If we obtain CE Mark andFDA approval for our products, we intend to continue to rapidly expand ouroperations and grow our research and development, product development andadministrative operations and invest substantially in our manufacturingfacilities. This expansion has and is expected to continue to place asignificant strain on our management and operational and financial resources.In particular, the commencement of our planned pivotal clinical trial in theUnited States will consume a significant portion of management’s time and ourfinancial resources. To manage any expected growth and to commercialize ourCustom NX DES Systems, we will be required to improve existing, and implementnew, operational and financial systems, procedures and controls and expand,train and manage our growing employee base. Our current and planned personnel,systems, procedures and controls may not be adequate to support our anticipatedgrowth. If we are unable to manage our growth effectively, our business couldbe harmed.

**Risks Related to Our Industry**

**Ifwe fail to obtain an adequate level of reimbursement for our products fromthird-party payors, there may be no commercially viable markets for ourproducts or the markets may be much smaller than expected.**

Our failure to receiveadequate reimbursement or pricing approvals in the United States orinternationally would negatively impact market acceptance of our products inthe markets in which those approvals are sought. The efficacy, safety,performance and cost-effectiveness of our products under development and of anycompeting products are some of the

 

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factors that willdetermine the availability of coverage and level of reimbursement. In theUnited States, a preliminary threshold for coverage and payment of medical devicesand drugs generally includes approvals or clearances from the FDA. In addition,there is significant uncertainty concerning third-party coverage andreimbursement of newly approved medical products and drugs. Future legislation,regulation or coverage and reimbursement policies of third-party payorsmay adversely affect the demand for our products currently under developmentand limit our ability to profitably sell our products. Third-party payorscontinually attempt to contain or reduce healthcare costs by challenging theprices charged for healthcare products and services, resulting in a downwardpressure of reimbursement rates generally. Under recent regulatory changes tothe methodology for calculating payments for current inpatient procedures in certainhospitals, Medicare payment rates for surgical and cardiac procedures have beendecreased, including approximately 10% to 14% reductions for those proceduresusing drug eluting stents. The reductions are to be transitioned over the nextthree years, beginning in fiscal year 2007. The Centers for Medicare andMedicaid Services (“CMS”), responsible for administering the Medicare program,also indicated it will begin to move forward with developing revisedreimbursement codes that better reflect the severity of the patient’s conditionin the hospital inpatient prospective payment system for fiscal year 2008. Ifcoverage and reimbursement for our products is unavailable, insufficient orlimited in scope or amount, or if pricing is set at unsatisfactory levels,market acceptance of our products would be impaired and our future revenues, ifany, would be adversely affected.

**Legislativeor regulatory reform of the healthcare system may affect our ability to sellour products profitably.**

In the United States andin certain foreign jurisdictions, there have been a number of legislative andregulatory proposals to change the regulatory and healthcare systems in waysthat could impact our ability to sell our products profitably, if at all. Inthe United States in recent years, new legislation has been proposed at thefederal and state levels that would effect major changes in the healthcaresystem. In addition, new regulations and interpretations of existing healthcarestatutes and regulations are frequently adopted. Post-payment reviews of claimsalso are conducted. For example, in 2005 the Office of Inspector General of theU.S. Department of Health and Human Services (“OIG”) audited certain sampleclaims paid by Medicare contracts for in-patient and out-patient claimsinvolving arterial stent implantation to determine whether Medicare paymentsfor these services were appropriate. The OIG found that 20 of 72 reviewedclaims did not meet Medicare reimbursement requirements. Findings of ongoing orwidespread inappropriate billing of arterial stents could lead to increasedscrutiny in this area, which in turn, could affect our ability to raisecapital, obtain additional collaborators and market our products. We alsoexpect to experience pricing pressures in connection with the future sale ofour products due to the trend toward managed health care, the increasinginfluence of health maintenance organizations and additional legislativeproposals. Our results of operations could be adversely affected by these andother future healthcare reforms.

**Weface the risk of product liability claims and may not be able to obtaininsurance.**

Our business exposes usto the risk of product liability claims that is inherent in the testing,manufacturing and marketing of medical devices. We may be subject to productliability claims if our stents cause, or merely appear to have caused, aninjury. Claims may be made by patients, consumers, healthcare providers, third-partystrategic collaborators or others selling our products. Although we haveproduct liability and clinical trial liability insurance that we believe isappropriate, this insurance is subject to deductibles and coverage limitations.Our current product liability insurance may not continue to be available to uson acceptable terms, if at all, and, if available, the coverages may not beadequate to protect us against any future product liability claims. Inaddition, if any of our products are approved for marketing, we may seekadditional insurance coverage. If we are unable to obtain insurance atacceptable cost or on acceptable terms with adequate coverage or otherwiseprotect against potential product liability claims, we will be exposed tosignificant liabilities, which may harm our business. A product liabilityclaim, recall or other claim with respect to uninsured liabilities or foramounts in excess of insured liabilities could have a material adverse effecton our business, financial condition and results of operations.

We may be subject toclaims against us even if the apparent injury is due to the actions of others.For example, we rely on the expertise of physicians, nurses and otherassociated medical personnel to perform the medical procedure and relatedprocesses to implant our coronary stents into patients. If these medicalpersonnel are not properly trained or are negligent, the therapeutic effect ofour stents may be diminished or the patient may suffer critical injury, whichmay subject us to liability. In addition, an injury that is caused by theactivities of our suppliers, such as those who provide us with cobalt chromiumtubing for our stents, those that laser cut our stents or the supplier of ourdrug coating, may be the basis for a claim against us.

These liabilities couldprevent or interfere with our product commercialization efforts. Defending asuit, regardless of merit, could be costly, could divert management’s attentionfrom our business and might result in adverse publicity, which could result inthe withdrawal of, or inability to recruit, clinical trial patient participantsor result in reduced acceptance of our products in the market.

 

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**Risks Related to Our Operations**

**Ouroperations involve hazardous materials, and we must comply with environmentallaws and regulations, which can be expensive.**

We are subject to avariety of federal, state and local regulations relating to the use, handling,storage, disposal, and human exposure to hazardous and toxic materials. Wecould incur costs, fines, and civil and criminal sanctions, third-partyproperty damage or personal injury claims, or could be required to incursubstantial investigation or remediation costs, if we were to violate or becomeliable under environmental laws. We do not have insurance for environmentalliabilities and liability under environmental laws can be joint and several andwithout regard to comparative fault. Environmental laws could become morestringent over time, imposing greater compliance costs and increasing risks andpenalties associated with violations, which could harm our business. Compliancewith current or future environmental and safety laws and regulations could restrictour ability to expand our facilities, impair our research, development orproduction efforts, or require us to incur other significant expenses. Therecan be no assurance that violations of environmental laws or regulations willnot occur in the future as a result of the inability to obtain permits, humanerror, accident, equipment failure or other causes. For example, we had achemical spill at our Menlo Park facility in February 2006, and althoughwe believe that we took all appropriate actions to respond to the accident andthat there is no remaining liability, we can provide no assurance that theseactions were sufficient to prevent future chemical spills.

**Wehave limited experience complying with public company obligations, includingrecently enacted changes in securities laws and regulations. Compliance withthese requirements will increase our costs and require additional managementresources, and we still may fail to comply.**

We operated as a privatecompany until February 2007 and prior to that, we were not subject to many ofthe requirements applicable to public companies. Recently enacted and proposedchanges in the laws and regulations affecting public companies, including theprovisions of the Sarbanes-Oxley Act of 2002 and rules related tocorporate governance and other matters subsequently adopted by the SEC andNASDAQ Global Market, will result in increased administrative costs to us andincreased legal and accounting fees. The impact of these events and heightenedcorporate governance standards could also make it more difficult for us toattract and retain qualified persons to serve on our board of directors, ourboard committees or as executive officers.

As directed bySection 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiringus to include a report of management on our internal control over financialreporting in our annual reports on Form 10-K. In addition, in our2008 report on Form 10-K, the independent registered public accountingfirm auditing our financial statements must attest to and report on ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting. We may be unable to comply with these requirements by theapplicable deadlines beginning with our Form 10-K for the periodending December 31, 2007. We will be testing our internal control overfinancial reporting in connection with Section 404 requirements and could,as part of that documentation and testing, identify material weaknesses,significant deficiencies or other areas requiring further attention orimprovement.

**Changesin, or interpretations of, accounting rules and regulations, such asexpensing of stock options, could result in unfavorable accounting charges orrequire us to change our compensation policies.**

The Financial AccountingStandards Board has adopted a new accounting pronouncement requiring therecording of expense for the fair value of stock options granted to employees.The impact of the adoption of SFAS No. 123(R) for the nine monthsended September 30, 2007 was $2.0 million and $1.4 million for the year endedDecember 31, 2006. We rely heavily on stock options to motivate currentemployees and to attract new employees. As a result of the requirement toexpense stock options, we may choose to reduce our reliance on stock options asa motivational tool. If we reduce our use of stock options, it may be moredifficult for us to attract and retain qualified employees. However, if we donot reduce our reliance on stock options, our reported net losses may increase,which may have an adverse effect on our reported results of operations.

**We expect that the price of our common stock willfluctuate substantially.**

There has been a publicmarket for our common stock for a limited amount of time. The market price forour common stock will be affected by a number of factors, including:

•         the results of ourclinical trials;

 

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•         the timing of ourregulatory approvals;

•         announcements related tolitigation;

•         statements made byBiosensors relating to regulation or supply of the drug coating;

•         the announcement of newproducts or service enhancements by us or our competitors;

•         quarterly variations inour or our competitors’ results of operations;

•         changes in earningsestimates, investors’ perceptions, recommendations by securities analysts orour failure to achieve analysts’ earning estimates;

•         developments in ourindustry, including changes in third-party reimbursement; and

•         general market conditionsand other factors unrelated to our operating performance or the operatingperformance of our competitors.

These factors maymaterially and adversely affect the market price of our common stock.

**Ourdirectors, officers and principal stockholders have significant voting powerand may take actions that may not be in the best interests of our otherstockholders.**

As of October 31, 2007,our officers, directors and principal stockholders each holding more than 5% ofour common stock collectively will control approximately 67.8% of ouroutstanding common stock. As a result, these stockholders, if they acttogether, will be able to control the management and affairs of our company andmost matters requiring stockholder approval, including the election ofdirectors and approval of significant corporate transactions. This concentrationof ownership may have the effect of delaying or preventing a change in controland might adversely affect the market price of our common stock. Thisconcentration of ownership may not be in the best interests of our otherstockholders.

**Volatilityin the stock price of other companies may contribute to volatility in our stockprice.**

The NASDAQ Global Market,particularly in recent years, has experienced significant volatility withrespect to medical technology, pharmaceutical, biotechnology and other lifescience company stocks. The volatility of medical technology, pharmaceutical,biotechnology and other life science company stocks often does not relate tothe operating performance of the companies represented by the stock. Further,there has been particular volatility in the market price of securities of earlystage and development stage life science companies. These broad market andindustry factors may seriously harm the market price of our common stock,regardless of our operating performance. In the past, following periods ofvolatility in the market price of a company’s securities, securities classaction litigation has often been instituted. A securities class action suitagainst us could result in substantial costs, potential liabilities and the diversionof management’s attention and resources.

**Anti-takeoverprovisions in our amended and restated certificate of incorporation and amendedand restated bylaws, and Delaware law, contain provisions that could discouragea takeover.**

Anti-takeover provisionsof our amended and restated certificate of incorporation and amended andrestated bylaws and Delaware law may have the effect of deterring or delayingattempts by our stockholders to remove or replace management, engage in proxycontests and effect changes in control. The provisions of our charter documentsinclude:

•         a classified board sothat only one of the three classes of directors on our board of directors iselected each year;

•         elimination of cumulativevoting in the election of directors;

•         procedures for advancenotification of stockholder nominations and proposals;

•         the ability of our boardof directors to amend our bylaws without stockholder approval;

 

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•         a supermajoritystockholder vote requirement for amending certain provisions of our amended andrestated certificate of incorporation and our amended and restated bylaws; and

•         the ability of our boardof directors to issue up to 10,000,000 shares of preferred stock withoutstockholder approval upon the terms and conditions and with the rights,privileges and preferences as our board of directors may determine.

In addition, as aDelaware corporation, we are subject to Delaware law, includingSection 203 of the Delaware General Corporation Law. In general,Section 203 prohibits a Delaware corporation from engaging in any businesscombination with any interested stockholder for a period of three yearsfollowing the date that the stockholder became an interested stockholder unlesscertain specific requirements are met as set forth in Section 203. Theseprovisions, alone or together, could have the effect of deterring or delayingchanges in incumbent management, proxy contests or changes in control.

**Wehave not paid dividends in the past and do not expect to pay dividends in thefuture, and any return on investment may be limited to the value of our stock.**

We have never paid cashdividends on our common stock and do not anticipate paying cash dividends onour common stock in the foreseeable future. The payment of dividends on ourcommon stock will depend on our earnings, financial condition and otherbusiness and economic factors affecting us at such time as our board ofdirectors may consider relevant. If we do not pay dividends, our stock may beless valuable because a return on your investment will only occur if our stockprice appreciates.

**ITEM 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

We registered the Initial Public Offering of ourcommon stock, par value $0.001 per share, on a Registration Statement on FormS-1, as amended, (Registration No. 333-136371), which was declaredeffective on January 31, 2007. On February 1, 2007, we completed theInitial Public Offering of our common stock by selling 4.7 million sharesat $16.00 per share. Net cash proceeds from the Initial Public Offering wereapproximately $68.2 million, after deducting underwriting discounts andcommissions and other offering costs.

Of the $68.2 million in net proceeds, throughSeptember 30, 2007, we have spent approximately $29.0 million including: $2.1million for sales and marketing initiatives, $20.1 million for research anddevelopment activities, $5.2 million for operating and general corporatepurposes and $1.6 million for property and equipment in order to expand ourmanufacturing capability to complete our CUSTOM III, IV and V clinicaltrials.

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

None.

**ITEM 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

None.

**ITEM 5. OTHER INFORMATION**

None.

**ITEM 6. EXHIBITS**
| **Exhibit Number** |   | **Description**                                                               |
|--------------------|--------|-------------------------------------------------------------------------------|
| 3.2(1)             |   | Amended and Restated Certificate of Incorporation.                            |
| 3.4(1)             |   | Amended and Restated Bylaws.                                                  |
| 4.1(1)             |   | Specimen Common Stock certificate of the Registrant.                          |
| 10.1(1)            |   | Form of Indemnification Agreement for directors  and executive officers. |
| 10.2(1)            |   | 2002 Stock Plan and form of stock option agreements  used thereunder.         |

 

 

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| 10.3(1)        |   | 2006 Equity Incentive Plan and form of stock option  agreement used thereunder.                                                                                                                                                                                          |
|----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4(1)        |   | 2006 Employee Stock Purchase Plan.                                                                                                                                                                                                                                       |
| 10.5(1)        |   | Amended and Restated Investor Rights Agreement dated  May 5, 2006 by and among the Registrant and certain stockholders.                                                                                                                                             |
| 10.6(1)        |   | Business Park Lease dated September 15, 2003,  as amended November 22, 2005, by and between the Registrant  and 125 Constitution Associates, L.P. for office space located at  125 Constitution Drive, Menlo Park, California, 94025-1118. |
| 10.7(1)†  |   | License Agreement dated May 4, 2004 as amended  February 9, 2005, by and between the Registrant, Biosensors  International Group, Ltd. (formerly Sun Biomedical, Ltd.), and  Biosensors Europe SA (an affiliate of Occam International, B.V.)             |
| 10.8(1)†  |   | Master License Agreement dated December 30,  2002, as amended June 30, 2006, by and between the Registrant and  SurModics, Inc.                                                                                                                           |
| 10.9(1)        |   | License Agreement dated July 10, 2006 by and  between the Registrant and Millimed A/S.                                                                                                                                                                              |
| 10.10(2)† |   | Supply Agreement dated April 2, 2007 by and between  Registrant and Fortimedix B.V.                                                                                                                                                                                      |
| 10.11(3)       |   | Second Amendment to Lease dated May 17, 2007 by and  between the Registrant and 125 Constitution Associates, L.P.                                                                                                                                                        |
| 31.1           |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                |
| 31.2           |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                |
| 32.1           |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                           |
| 32.2           |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                           |

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(1)             Incorporated by reference from ourRegistration Statement on Form S-1 (Registration No. 333-136371),which was declared effective on January 31, 2007.

(2)             Incorporated by reference from ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2007, filedMay 14, 2007.

(3)             Incorporated by reference from our Quarterly Report onForm 10-Q for the quarter ended June 30, 2007, filed August 13, 2007.

†                     Portions of the exhibit have been omittedpursuant to a request for confidential treatment. The confidential portionshave been filed with the SEC.

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                                   | **XTENT, Inc.** |
|----------------------------------------|-----------------|
|                                   |            |   |
| Date:  November 2, 2007 | By:        | /s/ GREGORY D.  CASCIARO |
|                                   |            | **GREGORY  D. CASCIARO** |
|                                   |            | **President  and Chief Executive Officer** |
|                                   |            | **(Principal  Executive Officer)** |
|                                   |            |   |
|                                   |            |   |
| Date:  November 2, 2007 | By:        | /s/ TIMOTHY D.  KAHLENBERG |
|                                   |            | **TIMOTHY  D. KAHLENBERG** |
|                                   |            | **Chief  Financial Officer** |
|                                   |            | **(Principal  Accounting and Financial Officer)** |

 

 

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