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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2007

or



| ̈ | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to
.

Commission File Number 000-50998



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FOXHOLLOW TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3252085                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

740 Bay Road

Redwood City, California 94063-2469

(Address of principal executive offices, including Zip Code)

(650) 421-8400

(Registrants telephone number, 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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    YES  x    NO ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated
filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x



|                               |  |                                     
|------------------------------ |  | ------------------------------------
|Class                          |  | Shares Outstanding at August 1, 2007
|Common Stock, $0.001 par value |  | 29,695,856                          



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

FORM 10-Q

TABLE OF CONTENTS



|                              |  |                                                                                                           |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                           |  | Page
|Part I: Financial Information
|                              |  |                                                                                                          
|Item 1.                       |  | Condensed Consolidated Financial Statements (unaudited):                                                  |  |     
|                              |  |                                                                                                          
|                              |  | Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006                              |  | 3   
|                              |  |                                                                                                          
|                              |  | Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006 |  | 4   
|                              |  |                                                                                                          
|                              |  | Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006           |  | 5   
|                              |  |                                                                                                          
|                              |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|                              |  |                                                                                                          
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 13  
|                              |  |                                                                                                          
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 22  
|                              |  |                                                                                                          
|Item 4.                       |  | Controls and Procedures                                                                                   |  | 22  
|                             
|Part II: Other Information   
|                              |  |                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                         |  | 22  
|                              |  |                                                                                                          
|Item 1A.                      |  | Risk Factors                                                                                              |  | 23  
|                              |  |                                                                                                          
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                                 |  | 34  
|                              |  |                                                                                                          
|Item 3.                       |  | Defaults Upon Senior Securities                                                                           |  | 34  
|                              |  |                                                                                                          
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                       |  | 34  
|                              |  |                                                                                                          
|Item 5.                       |  | Other Information                                                                                         |  | 34  
|                              |  |                                                                                                          
|Item 6.                       |  | Exhibits                                                                                                  |  | 35  
|                              | 
|Signatures                    |  | 37                                                                                                       
|                              | 
|Certifications                |  |                                                                                                          



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##### Table of Contents

PART I: FINANCIAL INFORMATION



|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|------- | -------------------------------------------------------

FOXHOLLOW TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)



|                                                                                                                       |  |               |         |   |                   |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                       |  | June 30, 2007 |         |   | December 31, 2006 |  
|Assets                                                                                                                 |  |               |         |   |                   |   |         |  
|Current assets:                                                                                                        |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                              |  | $             | 38,682  |   |                   | $ | 59,546  |  
|Short-term investments                                                                                                 |  |               | 130,982 |   |                   |   | 107,369 |  
|Accounts receivable, net of allowance for doubtful accounts of $1,329 at June 30, 2007 and $1,128 at December 31, 2006 |  |               | 19,977  |   |                   |   | 19,450  |  
|Research collaboration receivable                                                                                      |  |               |        |   |                   |   | 2,826   |  
|Inventories                                                                                                            |  |               | 15,546  |   |                   |   | 14,346  |  
|Prepaid expenses and other current assets                                                                              |  |               | 1,830   |   |                   |   | 2,826   |  
|                                                                                                                       |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                   |  |               | 207,017 |   |                   |   | 206,363 |  
|                                                                                                                       |  |              
|Property and equipment, net                                                                                            |  |               | 10,825  |   |                   |   | 8,328   |  
|Intangibles, net                                                                                                       |  |               | 11,326  |   |                   |   | 12,116  |  
|Goodwill                                                                                                               |  |               | 19,251  |   |                   |   | 19,186  |  
|Other assets                                                                                                           |  |               | 1,127   |   |                   |   | 1,119   |  
|                                                                                                                       |  |               |         |   |                   |   |         |  
|Total assets                                                                                                           |  | $             | 249,546 |   |                   | $ | 247,112 |  
|                                                                                                                       |  |               |         |   |                   |   |         |  
|                                                                                                                       |  |              
|Liabilities and Stockholders Equity                                                                                   |  |               |         |   |                   |   |         |  
|Current liabilities:                                                                                                   |  |               |         |   |                   |   |         |  
|Accounts payable                                                                                                       |  | $             | 7,905   |   |                   | $ | 9,385   |  
|Accrued liabilities                                                                                                    |  |               | 12,495  |   |                   |   | 12,000  |  
|Deferred revenue, current                                                                                              |  |               | 32,189  |   |                   |   | 32,444  |  
|                                                                                                                       |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                              |  |               | 52,589  |   |                   |   | 53,829  |  
|                                                                                                                       |  |              
|Deferred revenue                                                                                                       |  |               |        |   |                   |   | 5,968   |  
|Other liabilities                                                                                                      |  |               | 1,972   |   |                   |   | 1,166   |  
|                                                                                                                       |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                      |  |               | 54,561  |   |                   |   | 60,963  |  
|                                                                                                                       |  |               |         |   |                   |   |         |  
|                                                                                                                       |  |              
|Commitments and contingencies (Note 13)                                                                                |  |               |         |   |                   |   |         |  
|                                                                                                                       |  |              
|Stockholders equity:                                                                                                  |  |               |         |   |                   |   |         |  
|Common stock: $0.001 par value per share                                                                               |  |               | 30      |   |                   |   | 29      |  
|Additional paid-in capital                                                                                             |  |               | 293,885 |   |                   |   | 285,283 |  
|Deferred stock-based compensation                                                                                      |  |               | (982    | ) |                   |   | (1,866  | )
|Other comprehensive income                                                                                             |  |               | 24      |   |                   |   | 38      |  
|Accumulated deficit                                                                                                    |  |               | (97,972 | ) |                   |   | (97,335 | )
|                                                                                                                       |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                             |  |               | 194,985 |   |                   |   | 186,149 |  
|                                                                                                                       |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                             |  | $             | 249,546 |   |                   | $ | 247,112 |  
|                                                                                                                       |  |               |         |   |                   |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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FOXHOLLOW TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ---------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Three Months Ended, June 30, |        |   | Six Months Ended, June 30, |  
|                                                                         |  | 2007                         |        |   | 2006                       |   |        | 2007 |  |   | 2006    |  
|Revenue:                                                                 |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Product                                                                  |  | $                            | 42,509 |   |                            | $ | 47,951 |      |  | $ | 83,615  |   |  | $ | 92,534  |  
|Research collaboration                                                   |  |                              | 8,111  |   |                            |   | 216    |      |  |   | 16,222  |   |  |   | 2,280   |  
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Net revenue                                                              |  |                              | 50,620 |   |                            |   | 48,167 |      |  |   | 99,837  |   |  |   | 94,814  |  
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|                                                                         |  |                              |        |  
|Costs and expenses:                                                      |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Product                                                                  |  |                              | 11,829 |   |                            |   | 10,578 |      |  |   | 20,948  |   |  |   | 21,735  |  
|Research collaboration                                                   |  |                              | 2,175  |   |                            |   | 708    |      |  |   | 4,277   |   |  |   | 1,828   |  
|Research and development                                                 |  |                              | 7,967  |   |                            |   | 4,818  |      |  |   | 14,906  |   |  |   | 8,909   |  
|Selling, general and administrative                                      |  |                              | 30,419 |   |                            |   | 32,222 |      |  |   | 64,035  |   |  |   | 77,738  |  
|Amortization of purchased intangible assets                              |  |                              | 395    |   |                            |   |       |      |  |   | 790     |   |  |   |        |  
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Total costs and expenses                                                 |  |                              | 52,785 |   |                            |   | 48,326 |      |  |   | 104,956 |   |  |   | 110,210 |  
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|                                                                         |  |                              |        |  
|Loss from operations                                                     |  |                              | (2,165 | ) |                            |   | (159   | )    |  |   | (5,119  | ) |  |   | (15,396 | )
|Interest and other income and expense, net                               |  |                              | 2,241  |   |                            |   | 691    |      |  |   | 4,482   |   |  |   | 1,290   |  
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                        |  | $                            | 76     |   |                            | $ | 532    |      |  | $ | (637    | ) |  | $ | (14,106 | )
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|                                                                         |  |                              |        |  
|Net income (loss) per common share:                                      |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                    |  | $                            | 0.00   |   |                            | $ | 0.02   |      |  | $ | (0.02   | ) |  | $ | (0.57   | )
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                  |  | $                            | 0.00   |   |                            | $ | 0.02   |      |  | $ | (0.02   | ) |  | $ | (0.57   | )
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|                                                                         |  |                              |        |  
|Weighted-average number of shares used in per common share calculations: |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Basic                                                                    |  |                              | 29,546 |   |                            |   | 24,847 |      |  |   | 29,433  |   |  |   | 24,581  |  
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  
|Diluted                                                                  |  |                              | 29,853 |   |                            |   | 25,807 |      |  |   | 29,433  |   |  |   | 24,581  |  
|                                                                         |  |                              |        |   |                            |   |        |      |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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FOXHOLLOW TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                |  |                           |          |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                |  | Six months ended June 30, |         
|                                                                                |  | 2007                      |          |   | 2006 |  
|Cash flows from operating activities:                                           |  |                           |          |   |      |   |         |  
|Net loss                                                                        |  | $                         | (637     | ) |      | $ | (14,106 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                           |          |   |      |   |         |  
|Loss on disposal of property and equipment                                      |  |                           | 2        |   |      |   | 3       |  
|Allowance for doubtful accounts                                                 |  |                           | 242      |   |      |   | 356     |  
|Depreciation and amortization                                                   |  |                           | 3,248    |   |      |   | 2,211   |  
|Amortization of deferred stock-based compensation                               |  |                           | 749      |   |      |   | 1,315   |  
|Stock-based compensation expense                                                |  |                           | 5,890    |   |      |   | 16,368  |  
|Provision for excess and obsolete inventories                                   |  |                           | 468      |   |      |   | 983     |  
|Changes in operating assets and liabilities, net of the effect of acquisition:  |  |                           |          |   |      |   |         |  
|Accounts receivable                                                             |  |                           | (769     | ) |      |   | (3,598  | )
|Research collaboration receivable                                               |  |                           | 2,826    |   |      |   |        |  
|Inventories                                                                     |  |                           | (1,668   | ) |      |   | 1,161   |  
|Prepaid expenses and other current assets                                       |  |                           | 998      |   |      |   | 263     |  
|Other assets                                                                    |  |                           | (8       | ) |      |   | (4      | )
|Accounts payable                                                                |  |                           | (1,524   | ) |      |   | (462    | )
|Accrued liabilities                                                             |  |                           | 1,465    |   |      |   | 1,012   |  
|Deferred revenue                                                                |  |                           | (6,223   | ) |      |   | (2,280  | )
|Other liabilities                                                               |  |                           | 806      |   |      |   | 68      |  
|                                                                                |  |                           |          |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                           | 5,865    |   |      |   | 3,290   |  
|                                                                                |  |                           |          |   |      |   |         |  
|                                                                                |  |                          
|Cash flows from investing activities:                                           |  |                           |          |   |      |   |         |  
|Acquisition of property and equipment                                           |  |                           | (4,940   | ) |      |   | (2,474  | )
|Proceeds from disposal of property and equipment                                |  |                           | 1        |   |      |   | 2       |  
|Sales or maturities of investments                                              |  |                           | 105,849  |   |      |   | 21,630  |  
|Purchases of investments                                                        |  |                           | (129,476 | ) |      |   | (27,557 | )
|Acquisition of business, net of cash acquired                                   |  |                           | (976     | ) |      |   |        |  
|                                                                                |  |                           |          |   |      |   |         |  
|Net cash used in investing activities                                           |  |                           | (29,542  | ) |      |   | (8,399  | )
|                                                                                |  |                           |          |   |      |   |         |  
|                                                                                |  |                          
|Cash flows from financing activities:                                           |  |                           |          |   |      |   |         |  
|Proceeds from exercise of options to purchase common stock                      |  |                           | 408      |   |      |   | 1,381   |  
|Proceeds from issuance of common stock under the Employee Stock Purchase Plan   |  |                           | 2,405    |   |      |   | 3,619   |  
|                                                                                |  |                           |          |   |      |   |         |  
|Net cash provided by financing activities                                       |  |                           | 2,813    |   |      |   | 5,000   |  
|                                                                                |  |                           |          |   |      |   |         |  
|Net decrease in cash and cash equivalents                                       |  |                           | (20,864  | ) |      |   | (109    | )
|                                                                                |  |                          
|Cash and cash equivalents, beginning of period                                  |  |                           | 59,546   |   |      |   | 24,249  |  
|                                                                                |  |                           |          |   |      |   |         |  
|Cash and cash equivalents, end of period                                        |  | $                         | 38,682   |   |      | $ | 24,140  |  
|                                                                                |  |                           |          |   |      |   |         |  
|                                                                                |  |                          
|Supplemental disclosure of noncash investing and financing activities:          |  |                           |          |   |      |   |         |  
|Changes in net unrealized gains/(losses) on investments                         |  | $                         | (14      | ) |      | $ | 68      |  
|Reversal of deferred stock-based compensation                                   |  |                           | (135     | ) |      |   | (4,282  | )
|Vesting of restricted stock                                                     |  |                           | 33       |   |      |   | 118     |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1ORGANIZATION AND BASIS OF
PRESENTATION:

Organization

FoxHollow Technologies,
Inc. (the Company) designs, develops, manufactures and sells medical devices for the treatment of peripheral artery disease, or PAD, and other cardiovascular disease. The Company is also engaged in a research collaboration with
Merck & Co., Inc. (Merck) for the analysis of atherosclerotic plaque removed from patient arteries with the goal of identifying new biomarkers for atherosclerotic disease progression and new therapies for atherosclerotic
disease.

Basis of Presentation

The accompanying
condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q
and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results for the three-month and six-month period ended June 30, 2007 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2007, or for any future period. These condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and
the notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on March 13, 2007. Certain items in the prior periods financial
statements have been reclassified to conform to the current periods format.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been
eliminated.

NOTE 2RESTRICTED STOCK UNITS:

In
April 2007, the Company granted 193,525 restricted stock units (RSUs) to certain employees. Of the total RSUs granted, 60,525 vest 25% at the end of each one-year anniversary and the remaining 133,000 vest based on achieving certain
performance metrics which are outlined in the RSU agreements. RSUs represent a contingent right to receive a number of shares of our common stock at a future date based on continued service as an employee and in some cases achieving corporate
performance targets. RSUs provide a long-term incentive for employees to continue providing services to the Company for a period of time and, in the case of executives, tie the performance of the Company directly to a portion of their compensation.

Employees below the level of vice president are eligible to receive RSU grants based on their performance and position with the Company. Recipients of
these time-based RSUs will vest in 25% of the shares of common stock underlying the RSU at the end of each one-year anniversary of the date of grant, provided that the recipient continues to provide services to the Company. The total grant date fair
value of the RSUs granted to employees below the level of vice president was $1.1 million after estimated forfeitures. The Company also grants RSUs to the executives of the Company which vest based on the achievement of certain corporate financial
metrics and the performance of Company stock in comparison to the NASDAQ Medical Equipment Index. Recipients of these performance-based RSUs vest in the shares of common stock underlying the RSUs if these corporate metrics are achieved. Recipients
will vest in the shares of common stock underlying their RSU grants based on the achievement of certain performance metrics for fiscal years 2008 and 2009, with half of the shares underlying the RSUs subject to vesting based on the 2008 metrics and
the remaining half of the shares underlying the RSUs subject to vesting based on the 2009 metrics.

The Company, in accordance with SFAS No. 123 (R),
Share-Based Payment (revised 2004), conducts a probability assessment as to the achievement of the potential targets and records compensation expense, if any.

The Company recognized compensation expense related to these RSUs of $147,000 for the three and six months ended June 30, 2007.

NOTE 3KERBEROS ACQUISITION:

The Company accounts for business combinations using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. Purchase accounting requires extensive accounting estimates and judgments to allocate the purchase price
between in-process research and development, other identifiable intangible assets, tangible assets and liabilities, and goodwill. To assist in determining the value of any in-process research and development and certain other intangibles, a third
party valuation is typically obtained as of the acquisition date. The amount of the purchase price allocated to purchased in-process research and development and other intangible assets is determined by estimating the future cash flows of each
project or technology and discounting the net cash flows back to their present values. The discount rate used is determined at the time of the acquisition in accordance with standard valuation methods.



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FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



In September 2006, we acquired Kerberos Proximal
Solutions, Inc., a developer of innovative medical devices for the removal of thrombi, or blood clots, from occluded arteries. The Kerberos acquisition was accounted for as a purchase business combination. Under the purchase method of accounting,
the assets acquired and liabilities assumed are recorded at the date of acquisition at their respective fair values.

The results of operations of Kerberos
have been included in the accompanying condensed consolidated financial statements from the date of the acquisition through December 31, 2006, and all intercompany balances have been eliminated upon consolidation. On January 1, 2007
Kerberos was merged with and into the Company.

The following pro forma information assumes the Kerberos acquisition was effective as of the beginning of
the six-month period ending June 30, 2006. These pro forma results have been prepared for informational purposes only and do not purport to represent what the results of operations would have been had the Kerberos acquisition occurred as of the
date indicated, nor of future results of operations. The pro forma results for the three and six months ended June 30, 2006 are as follows (in thousands, except per share amounts):



|                           |  |                                  |        |   |                                |   |         |  
|-------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------- | -
|                           |  | Three Months Ended June 30, 2006 |        |   | Six Months Ended June 30, 2006 |  
|Net revenue                |  | $                                | 48,787 |   |                                | $ | 95,977  |  
|                           |  |                                  |        |   |                                |   |         |  
|                           |  |                                 
|Net loss                   |  | $                                | (2,245 | ) |                                | $ | (19,357 | )
|                           |  |                                  |        |   |                                |   |         |  
|                           |  |                                 
|Net loss per common share: |  |                                  |        |   |                                |   |         |  
|Basic and diluted          |  | $                                | (0.09  | ) |                                | $ | (0.78   | )
|                           |  |                                  |        |   |                                |   |         |  

The pro forma information for the three and six months ended June 30, 2006 reflects $395,000 and $790,000,
respectively, in amortization of the purchased intangible assets. Purchased intangible assets are being amortized over a six to eight year period.

The pro
forma weighted-average number of shares outstanding used for the computation of pro forma basic and diluted earnings per share for the three and six months ended June 30, 2006 includes 389,653 shares issued to Kerberos stockholders in
conjunction with the acquisition.

NOTE 4NET INCOME (LOSS) PER COMMON SHARE:

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding, excluding common shares subject to repurchase, during the period. Diluted
net income (loss) per common share is computed by giving effect to all potential dilutive common shares, including stock options, common stock subject to repurchase, and common stock issued under the employee stock purchase plan, unless they are
antidilutive.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



A reconciliation of the numerator and denominator
used in the calculation of basic and diluted net income (loss) per common share is as follows (in thousands):



|                                                                                                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                                                                                |  | 2007                        |        |   | 2006                      |   |        | 2007 |  |   | 2006   |  
|Numerator:                                                                                                      |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Net income (loss)                                                                                               |  | $                           | 76     |   |                           | $ | 532    |      |  | $ | (637   | ) |  | $ | (14,106 | )
|                                                                                                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|                                                                                                                |  |                             |        |  
|Denominator:                                                                                                    |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Weighted-average common shares outstanding                                                                      |  |                             | 29,593 |   |                           |   | 25,108 |      |  |   | 29,492 |   |  |   | 24,864  |  
|Less: Weighted-average unvested common shares subject to repurchase                                             |  |                             | (47    | ) |                           |   | (261   | )    |  |   | (59    | ) |  |   | (283    | )
|                                                                                                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|                                                                                                                |  |                             |        |  
|Weighted-average number of common shares outstanding used in computing basic net income (loss) per common share |  |                             | 29,546 |   |                           |   | 24,847 |      |  |   | 29,433 |   |  |   | 24,581  |  
|                                                                                                                |  |                             |        |  
|Net effect of dilutive stock options based on the treasury stock method using average market price              |  |                             | 307    |   |                           |   | 960    |      |  |   |       |   |  |   |        |  
|                                                                                                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  
|Diluted weighted-average common shares outstanding                                                              |  |                             | 29,853 |   |                           |   | 25,807 |      |  |   | 29,433 |   |  |   | 24,581  |  
|                                                                                                                |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |         |  

The following outstanding stock options, common stock subject to repurchase, and common stock to be issued under
the employee stock purchase plan were excluded from the computation of diluted net loss per common share for the periods presented because including them would have had an antidilutive effect (in thousands):



|                                                                                                      |  |                             |  |                           |  |       |  |      
|----------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ------------------------- |  | ----- |  | -----
|                                                                                                      |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                                                                                      |  | 2007                        |  | 2006                      |  | 2007  |  | 2006 
|Options to purchase common stock and common stock to be issued under the employee stock purchase plan |  | 3,613                       |  | 1,935                     |  | 4,096 |  | 3,540
|                                                                                                      |  |                             |  |                           |  |       |  |      

NOTE 5COMPREHENSIVE INCOME:

Comprehensive income generally represents all changes in stockholders equity except those resulting from investments or contributions by stockholders. The Companys unrealized gains on investments represent
the only component of other comprehensive income that is excluded from the Companys net income (loss).

NOTE 6INVESTMENTS:

Investments consisted of the following (in thousands):



|                         |  |            |         |            |   |        |  |   |            |   |  |   |        
|------------------------ |  | ---------- | ------- | ---------- | - | ------ |  | - | ---------- | - |  | - | -------
|                         |  |            |         | Unrealized |   |        | 
|                         |  | Cost Basis |         | Gains      |   | Losses |  |   | Fair Value
|At June 30, 2007         |  |            |         |            |   |        |  |   |            |   |  |   |        
|US Government securities |  | $          | 101,740 |            | $ | 8      |  | $ | (6         | ) |  | $ | 101,742
|Corporate bonds          |  |            | 29,218  |            |   | 22     |  |   |           |   |  |   | 29,240 
|                         |  |            |         |            |   |        |  |   |            |   |  |   |        
|Total                    |  | $          | 130,958 |            | $ | 30     |  | $ | (6         | ) |  | $ | 130,982
|                         |  |            |         |            |   |        |  |   |            |   |  |   |        
|                         |  |            |         |           
|At December 31, 2006     |  |            |         |            |   |        |  |   |            |   |  |   |        
|US Government securities |  | $          | 94,009  |            | $ | 31     |  | $ |           |   |  | $ | 94,040 
|Corporate bonds          |  |            | 13,322  |            |   | 7      |  |   |           |   |  |   | 13,329 
|                         |  |            |         |            |   |        |  |   |            |   |  |   |        
|Total                    |  | $          | 107,331 |            | $ | 38     |  | $ |           |   |  | $ | 107,369
|                         |  |            |         |            |   |        |  |   |            |   |  |   |        

The Company has not experienced any significant realized gains or losses on its investments in the periods
presented in the condensed consolidated statements of operations. All investment held at June 30, 2007 and December 31, 2006 had maturities of less than a year.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



NOTE 7 INVENTORIES:

Inventories consisted of the following (in thousands):



|                |  |               |        |                   |   |       
|--------------- |  | ------------- | ------ | ----------------- | - | ------
|                |  | June 30, 2007 |        | December 31, 2006
|Raw materials   |  | $             | 9,107  |                   | $ | 9,776 
|Work in process |  |               | 1,577  |                   |   | 1,644 
|Finished goods  |  |               | 4,862  |                   |   | 2,926 
|                |  |               |        |                   |   |       
|Total           |  | $             | 15,546 |                   | $ | 14,346
|                |  |               |        |                   |   |       

NOTE 8WARRANTIES:

The Company maintains a warranty allowance for the estimated amount of replacement cost of all products which are found to be defective. The amount of allowance is based upon analyses of historical replacements as
well as changes in design and reliability. Warranty costs are reflected in the condensed consolidated statements of operations as a component of product costs and expenses. A reconciliation of the changes in the Companys warranty liability for
the six months ended June 30, 2007 and 2006 is as follows (in thousands):



|                             |  |      |      |   |      |   |      |  
|---------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                             |  | 2007 |      |   | 2006 |  
|Balance at January 1         |  | $    | 240  |   |      | $ | 217  |  
|Add: Accruals for warranties |  |      | 195  |   |      |   | 567  |  
|Less: Cost of replacements   |  |      | (198 | ) |      |   | (486 | )
|                             |  |      |      |   |      |   |      |  
|Balance at June 30           |  | $    | 237  |   |      | $ | 298  |  
|                             |  |      |      |   |      |   |      |  

NOTE 9GOODWILL AND INTANGIBLE ASSETS:

The Company recorded approximately $19.3 million of goodwill and approximately $12.6 million of intangible assets in connection with the acquisition of Kerberos. The carrying amount of goodwill was adjusted by $65,000
during the six months ended June 30, 2007 as a result of updating our estimates used in the purchase accounting. Additional adjustments may occur, but no later than one year from the acquisition date in accordance with GAAP.

The components of the Companys intangible assets are as follows (in thousands):



|                        |  |                       |        |                          |   |        |     |  |                     |        |  |        
|----------------------- |  | --------------------- | ------ | ------------------------ | - | ------ | --- |  | ------------------- | ------ |  | -------
|                        |  | June 30, 2007         |        |                         
|                        |  | Gross Carrying Amount |        | Accumulated Amortization |   |        | Net |  | Amortization Period
|Acquired technology     |  | $                     | 12,400 |                          | $ | (1,239 | )   |  | $                   | 11,161 |  | 8 years
|Customer relationships  |  |                       | 190    |                          |   | (25    | )   |  |                     | 165    |  | 6 years
|                        |  |                       |        |                          |   |        |     |  |                     |        |  |        
|Total intangible assets |  | $                     | 12,590 |                          | $ | (1,264 | )   |  | $                   | 11,326 |  |        
|                        |  |                       |        |                          |   |        |     |  |                     |        |  |        

Amortization expense for intangible assets for the three and six months ended June 30, 2007 was $395,000 and
$790,000, respectively. Based on the intangible asset balances at June 30, 2007, the Company expects to recognize amortization expense of $791,000 in the remaining six months of 2007, approximately $1.6 million for each year from 2008 to 2013,
and approximately $1.1 million in 2014.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



NOTE 10ACCOUNTING AND REPORTING OF
UNCERTAIN INCOME TAX POSITIONS:

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income TaxesAn Interpretation of FASB Statement No. 109 effective for years beginning after December 15, 2006. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109, Accounting for Income Taxes(SFAS 109). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate
settlement.

The Company adopted FIN 48 effective January 1, 2007. As a result of the adoption of FIN 48, the company did not recognize an increase or
a decrease in the liability for net unrecognized tax benefits, which would be accounted for through retained earnings. The total amount of gross unrecognized tax benefits as of the date of adoption was $2.1 million. The Company historically accrued
for uncertain tax positions in deferred tax assets as it has been in a net operating loss position since inception and any adjustments to tax positions would result in an adjustment of its net operating loss or tax credit carryforwards rather than a
cash outlay. If the Company is eventually able to recognize these uncertain positions, $2.1 million of the unrecognized benefit would reduce its effective tax rate. The Company currently has a full valuation allowance against its net deferred tax
asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.

The
companys policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the consolidated condensed statements of operations under the provisions of FIN 48. As of the date of adoption of FIN
48, the Company has not accrued any material amounts for the payment of interest and penalties relating to unrecognized tax benefits.

The company files
U.S. federal and U.S. state tax returns. The Company is currently not subject to income tax examinations and, in general, all tax years remain open due to net operating losses.

Although timing of initiation, resolution and closure on audits is highly uncertain, we do not believe it is reasonably possible that our unrecognized tax benefits would materially change in the succeeding 12 months.

NOTE 11DEFERRED REVENUE:

Upon execution of the
Merck Collaboration Agreement in September 2005, the Company received an initial cash payment of $9.0 million to cover costs associated with the Companys responsibilities and for the rights granted to Merck during the initial year of the
research collaboration. The Company classified the initial cash payment as deferred revenue and recognized revenue on a proportional performance model as it delivered tissue samples and completed its obligations. On September 26,
2006, the Company entered into the Amended Merck Collaboration Agreement with Merck which became effective on November 9, 2006. In connection with the Amended Merck Collaboration Agreement, the Company received $109.1 million in cash in
exchange for services, exclusivity and shares of the Companys common stock subject to certain restrictions. The Company obtained a third-party valuation of the common stock issued to Merck which valued the stock at $68.9 million. The
total cash received and amounts billed, less amounts attributable to common stock, were classified as deferred revenue. The Company recognizes revenue under the Amended Merck Collaboration Agreement on a pro rata basis over the estimated four-year
term of the collaboration.

NOTE 12RECENT ACCOUNTING PRONOUNCEMENTS:

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in
the United States of America, and expands disclosure about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair
value measurement. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008.
The Company is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact on its consolidated financial statements.

In June 2006, the FASB reached consensus on Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (EITF 06-3). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and
excise taxes. EITF 06-3 provides that a company may adopt a policy of presenting taxes in the consolidated statement of operations on either a gross or net basis. If such taxes are significant, and are presented on a gross basis, the amounts of
those taxes should be disclosed. The consensus on EITF 06-3 is effective for the interim and annual reporting periods beginning after December 15, 2006. The Company adopted EITF 06-3 on January 1, 2007. The Company records taxes collected
from its customers and remitted to governmental authorities on a net basis in the condensed consolidated statement of operations and the adoption had no effect on the condensed consolidated financial statements.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115(SFAS 159). This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Boards long-term measurement objectives for accounting for
financial instruments. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS 159 in the first quarter of fiscal year 2008. The
Company is currently evaluating the requirements of SFAS 159 and has not yet determined the impact on its consolidated financial statements.

In June 2007,
the EITF issued EITF No. 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, (EITF 7-03) that provides guidance for upfront payments related to
goods and services of research and development costs. EITF 07-03 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact of EITF 7-03 on its financial statements upon adoption, it does not
anticipate a material impact on operating results or financial position.

NOTE 13COMMITMENTS AND CONTINGENCIES:

In July 2006, August 2006 and February 2007, three separate shareholder class action complaints were filed against the Company and two of its officers in the U.S.
District Court for the Northern District of California. The plaintiffs are seeking to represent a class of purchasers of the Companys common stock from May 13, 2005 to January 26, 2006. The complaints generally allege that false
or misleading statements were made concerning the Companys management and seek unspecified monetary damages. Because the outcome of this litigation is undetermined and the Company cannot reasonably estimate the possible loss or range of loss
which may arise from the litigation, the Company has not recorded an accrual for possible damages.

In July 2006, a shareholder derivative complaint was
filed against the Companys directors and certain of its officers in the Superior Court of the State of California, San Mateo County. The complaint is based on substantially similar facts and circumstances as the class action complaints and
generally alleges that the named individuals breached their fiduciary duties to the Company. The complaint seeks unspecified monetary damages. Any recovery in this derivative suit would be to the benefit of the company.

In August 2006, a shareholder derivative complaint was filed against the Companys directors and certain of its officers in the U.S. District Court for the Northern
District of California, San Jose division. In January 2007, the plaintiffs filed an amended complaint adding a former executive and directors as defendants. The complaint is based on substantially similar facts and circumstances as the class action
complaints and generally alleges that the named individuals breached their fiduciary duties to the company. The complaint seeks unspecified monetary damages. Similar to the derivative litigation in the Superior Court, any recovery in this derivative
suit would be to the benefit of the company.

In February 2007, David Martin, our former chief operating officer, filed a wrongful termination and
defamation suit against the Company and one of its officers in the Superior Court of the State of California, San Mateo County. In March 2007, the Superior Court granted Martins petition to compel arbitration of his claims and arbitration is
currently in its initial stages. The complaint is based on substantially similar facts and circumstances as the class action complaints and derivative actions. The complaint generally alleges that Martin was terminated from his employment in
violation of the covenant of good faith and fair dealing and in retaliation for actions he had the legal right to take. The complaint seeks unspecified damages. Because the outcome of this litigation is undetermined and the Company cannot reasonably
estimate the possible loss or range of loss which may arise from the litigation, the Company has not recorded an accrual for possible damages.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



NOTE 14SUBSEQUENT EVENTS:

On July 21, 2007, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with ev3 Inc. (ev3), and Foreigner Merger
Sub, Inc., a direct wholly owned subsidiary of ev3 (Merger Sub). Under the terms of the merger agreement, the Companys stockholders will receive 1.45 shares of ev3 common stock plus $2.75 in cash for each share of the
Companys common stock they own. Alternatively, the Companys stockholders may elect to receive either $25.92 in cash or 1.62 shares of our common stock for each share of the Companys common stock by making an all-cash or an
all-stock election, respectively. Cash and stock elections are subject to pro-ration to preserve an overall mix of 1.45 shares of ev3 common stock and $2.75 in cash for all of the outstanding shares of the Companys common stock in the
aggregate. The Company expects that ev3 will issue in the aggregate approximately 43.7 million shares of ev3 common stock and pay approximately $82.8 million in cash to the Companys stockholders in the Merger. Upon completion of the
transaction, the Companys stockholders would own approximately 41 percent of the combined company, and ev3s stockholders would own approximately 59 percent.

The transaction is subject to approval by the Companys stockholders, the effectiveness of a Form S-4 registration statement to be filed with the Securities and Exchange Commission, the expiration or termination
of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and clearance under any applicable foreign antitrust laws, and other customary closing conditions. The transaction is intended to qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. The transaction is expected to be completed in the fourth quarter of 2007. See Part IIOther InformationItem 1A Risk Factors for a
discussion of the risk factors related to the merger.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Introduction

Managements discussion and analysis of financial condition and results of operations, or
MD&A, is provided as a supplement to the accompanying condensed consolidated financial statements and footnotes contained in Item 1 of this report to provide an understanding of our results of operations, financial condition, and changes in
financial condition. These statements may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance, plans for growth and future
operations, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited
to, those listed under Factors Affecting Future Operating Results. In some cases, you can identify forward-looking statements by terminology such as may, will, should, could,
expect, plan, anticipate, believe, estimate, predict, intend, potential, continue or the negative of these terms or other comparable
terminology. These statements are only predictions. Actual events or results may differ materially. MD&A is organized as follows:



| |  |  | Company description. This section provides a general description and history of our business, including details regarding our organization and customer
base and capsule financial information regarding our results of operations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recent Developments. This section provides discussion of recent developments related to the Agreement and Plan of Merger we entered into with ev3, Inc. on
July 21, 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Results of operations. This section provides our analysis and outlook for the significant line items on our condensed consolidated statements of
operations. Forward looking statements contained within this document may be affected by our planned merger with ev3.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stock-based compensation.This section provides the method and financial reporting of our accounting for stock options granted to employees and to
non-employees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Liquidity and capital resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that
existed as of June 30, 2007.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recent accounting pronouncements. This section describes the issuance and effects of new accounting pronouncements.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Critical accounting policies and estimates. This section discusses those accounting policies that both are considered important to our financial
condition and results of operations and require us to exercise subjective or complex judgments in their application.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Company
Description

We design, develop, manufacture and sell medical devices primarily for the treatment of peripheral artery disease and for the removal of
thrombus. PAD results from the accumulation of plaque in arteries, most commonly occurring in the pelvis and legs. Plaque accumulation, known as atherosclerosis, causes the narrowing of arteries, thereby reducing the flow of oxygenated blood to
tissue and organs. Left untreated, PAD increases the risk of heart attack, stroke, amputation or death. Thrombus is a clot in the vascular system formed from constituents of blood. Thrombus can block an artery or be attached to the vessel or heart
wall without obstructing the flow of blood through the artery.

Our primary product, the SilverHawk Plaque Excision System, is a minimally-invasive
catheter system that treats PAD by removing plaque in order to reopen narrowed or blocked arteries. The SilverHawk consists of two primary components, a low profile catheter connected to a battery-driven control unit, both of which are disposable.
In June 2003, the U.S. Food and Drug Administration, or FDA, granted us 510(k) clearance to market the SilverHawk in the United States for treatment of atherosclerosis in the peripheral vasculature, which includes arteries outside the heart and
brain. The Rinspirator, is a minimally-invasive catheter system that treats thrombus by removing the clotting material in order to reopen narrowed or blocked arteries.

From our inception in 1996 until July 2003, our operations consisted primarily of start-up activities, including developing the SilverHawk, recruiting personnel and raising capital. We received clearance from the FDA
to market the SilverHawk for treatment of atherosclerosis in the peripheral vasculature in June 2003. In July 2003, we began to build our U.S. direct sales organization and initiated sales of the SilverHawk to several large medical centers in the
United States. In January 2004, we commenced full commercial introduction of the SilverHawk in the United States.



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##### Table of Contents

The SilverHawk is not approved in the United States for use in the coronary or carotid arteries. We received our CE Mark to market the SilverHawk for
coronary applications in October 2002 and for peripheral applications in May 2003. We began commercial sales in Europe in November 2002. To date, our sales outside of the United States have been limited and we expect for the foreseeable future to
rely on third-party distributors to sell our products internationally.

We market the SilverHawk through our direct sales force in the United States
primarily to interventional cardiologists and vascular surgeons, as well as to interventional radiologists. We sell the SilverHawk to approximately 1,100 current hospital customers in the United States. No single customer accounted for more than 10%
of our net revenue from product sales in the three- and six-month period ended June 30, 2007. Reimbursement claims for the SilverHawk procedure are typically submitted by the hospital and physician to Medicare or other third-party payors using
established billing codes for atherectomy procedures. We are engaged in several research and development activities to create modifications to our SilverHawk device, including: a method for addressing calcified lesions, improvements in the capacity
of the nosecone to collect plaque, and on-board real-time imaging. We can provide no assurance that we will bring these product modifications to market and may choose to discontinue any of these projects at any time.

We manufacture the SilverHawk with parts manufactured in-house and components supplied by vendors, which we then assemble, test and package. We offer ten different
SilverHawk catheters of various diameters and tip lengths to accommodate differing artery sizes and amounts of plaque.

In September 2005, we entered into
a collaboration agreement with Merck (the Merck Collaboration Agreement) through which we collaborated with Merck on the analysis of atherosclerotic plaque removed from patient arteries with the goal of identifying new biomarkers for
atherosclerotic disease progression. In September 2006, the Merck Collaboration agreement terminated at the end of its one-year term, and we entered into an Amended and Restated Collaboration and License Agreement (the Amended Merck
Collaboration Agreement) as well as a Stock Purchase Agreement and a Registration Rights Agreement with Merck which became effective on November 9, 2006.

In September 2006, we acquired Kerberos Proximal Solutions, Inc., a developer of innovative medical devices for the removal of thrombi, or blood clots, from occluded arteries.

For the six months ended June 30, 2007, we generated net revenue of $99.8 million and a net loss of $637,000. As of June 30, 2007, our accumulated deficit was
$98.0 million. As of June 30, 2007, our cash, cash equivalents and investments balances totaled $169.7 million.

Recent Developments

On July 21, 2007, FoxHollow entered into an Agreement and Plan of Merger (the Merger Agreement) with ev3 Inc., a Delaware corporation
(ev3), and Foreigner Merger Sub, Inc., a Delaware corporation and direct wholly owned subsidiary of ev3 (Merger Sub). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger
Agreement, Merger Sub will merge with and into FoxHollow (the Merger), with FoxHollow continuing as the surviving company and a direct wholly owned subsidiary of ev3 following the transaction.

Consummation of the Merger is subject to a number of customary conditions, including, but not limited to (i) the approval of the Merger Agreement by the stockholders of
FoxHollow, (ii) the effectiveness of a Form S-4 registration statement to be filed by ev3 with the Securities and Exchange Commission to register the shares of ev3 common stock to be issued in connection with the Merger, which will contain an
information/proxy statement-prospectus and (iii) expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The Merger is intended to qualify as a reorganization for U.S. federal income tax purposes.

Subject to the terms and conditions of the Merger Agreement, at the effective time of and as a result of the Merger, each share of common stock of
FoxHollow issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive 1.45 shares of ev3 common stock and $2.75 in cash. Alternatively, FoxHollow stockholders may elect to receive either
$25.92 in cash or 1.62 shares of ev3 common stock for each share of FoxHollow common stock by making an all-cash or an all-stock election, respectively. Cash and stock elections are subject to pro-ration to preserve an overall mix of 1.45 shares of
ev3 common stock and $2.75 in cash for all of the outstanding shares of FoxHollow common stock in the aggregate. As a result, a FoxHollow stockholder making an all-cash or all-stock election may receive a prorated amount of cash and ev3 common
stock.

If the Merger Agreement is terminated due to certain triggering events specified in the Merger Agreement, FoxHollow will be required to pay ev3 a
termination fee of $31 million. The Merger Agreement also provides that under specified circumstances where the termination fee is not otherwise payable, FoxHollow may be required to reimburse ev3 $5 million for its expenses in connection with the
transaction.

The Boards of Directors of FoxHollow and ev3 have approved the Merger and the Merger Agreement.

Concurrently and in connection with the execution of the Merger Agreement, Merck & Co, Inc. (Merck), FoxHollow and ev3 entered into an Amendment, Waiver,
Consent and Assumption Agreement (the Amendment, Waiver, Consent and Assumption Agreement). Under the terms of the agreement, Merck waived certain rights to terminate the Amended and Restated Collaboration and License Agreement dated
September 26, 2006 between FoxHollow and Merck (the Amended Merck Collaboration Agreement), amended the Amended Merck Collaboration Agreement, consented to the Merger Agreement and Merger and amended the Registration Rights Agreement and
Stock Purchase Agreement both dated September 26, 2006 between Merck and FoxHollow (respectively, the Registration Rights Agreement and Stock Purchase Agreement) and ev3 agreed to cause FoxHollow to continue to perform under
the Amended Merck Collaboration Agreement and assumed certain of FoxHollows obligations under the Amended Merck Collaboration Agreement and Stock Purchase Agreement. The Amendment, Waiver, Consent and Assumption Agreement is generally
effective only upon the closing of the merger.

The foregoing description of the Merger Agreement and the Amendment, Waiver, Consent and Assumption
Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement and the Amendment, Waiver, Consent and Assumption Agreement, which are attached as Exhibit 2.1 and Exhibit 10.1,
respectively, to our Current Report on Form 8-K filed with the SEC on July 23, 2007 and are incorporated herein by reference. The Merger Agreement and related description are intended to provide you with information regarding the terms of the Merger
Agreement and are not intended to modify or supplement any factual disclosures about FoxHollow or ev3 in their respective public reports filed with the SEC. In particular, the Merger Agreement and related description are not intended to be, and
should not be relied upon as, disclosures regarding any facts and circumstances relating to FoxHollow or ev3. The representations and warranties have been negotiated with the principal purpose of not establishing matters of fact, but rather as a
risk allocation method establishing the circumstances in which a party may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise. The
representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable under the securities laws. See Part IIOther InformationItem 1A Risk Factors for a
discussion of the risk factors related to the merger.

Unless otherwise indicated, references to FoxHollow in this filing relate to FoxHollow as a
stand-alone entity and do not reflect the impact of the potential business combination with ev3.



14



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##### Table of Contents

Results of Operations

Three Months Ended June 30, 2007 and June 30, 2006

The following table sets forth, for the periods indicated, our results
of operations expressed as dollar amounts (in thousands) and comparative percentages:



|                                                                                                                                                                     |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | --- | - | ------ | - | ------ | --- |  | --- | -
|                                                                                                                                                                     |  | Three Months Ended June 30, |       
|                                                                                                                                                                     |  | 2007                        |        |   | 2006 |    
|                                                                                                                                                                     |  | Amount                      |        |   | % 1  |     |   | Amount |   |        | % 1 | 
|Revenue:                                                                                                                                                             |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|Product                                                                                                                                                              |  | $                           | 42,509 |   |      | 84  | % |        | $ | 47,951 |     |  | 100 | %
|Research collaboration                                                                                                                                               |  |                             | 8,111  |   |      | 16  | % |        |   | 216    |     |  | 0   | %
|                                                                                                                                                                     |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|Net revenue                                                                                                                                                          |  |                             | 50,620 |   |      | 100 | % |        |   | 48,167 |     |  | 100 | %
|                                                                                                                                                                     |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|                                                                                                                                                                     |  |                             |        |  
|Costs and expenses:                                                                                                                                                  |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|Product (includes $188 and $312 in stock-based compensation expense for the three months ended June 30, 2007 and 2006,
respectively)                                 |  |                             | 11,829 |   |      | 28  | % |        |   | 10,578 |     |  | 22  | %
|Research collaboration (includes $64 and $0 in stock-based compensation expense for the three months ended June 30, 2007 and 2006,
respectively)                     |  |                             | 2,175  |   |      | 27  | % |        |   | 708    |     |  | 328 | %
|Research and development (includes $804 and $547 in stock-based compensation expense for the three months ended June 30, 2007 and 2006,
respectively)                |  |                             | 7,967  |   |      | 16  | % |        |   | 4,818  |     |  | 10  | %
|Selling, general and administrative (includes $2,031 and $2,031 in stock-based compensation expense for the three months ended June 30,
2007 and 2006, respectively) |  |                             | 30,419 |   |      | 60  | % |        |   | 32,222 |     |  | 67  | %
|Amortization of purchased intangible assets                                                                                                                          |  |                             | 395    |   |      | 1   | % |        |   |       |     |  | 0   | %
|                                                                                                                                                                     |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|Total costs and expenses                                                                                                                                             |  |                             | 52,785 |   |      | 104 | % |        |   | 48,326 |     |  | 100 | %
|                                                                                                                                                                     |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|                                                                                                                                                                     |  |                             |        |  
|Loss from operations                                                                                                                                                 |  |                             | (2,165 | ) |      | -4  | % |        |   | (159   | )   |  | 0   | %
|Interest and other income and expense, net                                                                                                                           |  |                             | 2,241  |   |      | 4   | % |        |   | 691    |     |  | 1   | %
|                                                                                                                                                                     |  |                             |        |   |      |     |   |        |   |        |     |  |     |  
|Net income                                                                                                                                                           |  | $                           | 76     |   |      | 0   | % |        | $ | 532    |     |  | 1   | %
|                                                                                                                                                                     |  |                             |        |   |      |     |   |        |   |        |     |  |     |  

---

|1 | Percentage of net revenue, except for product and research collaboration costs and expenses which are shown as a percentage of product revenue and research collaboration
revenue, respectively.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue:

Our revenue consists of two components: product and research collaboration.

Product. Product revenue is primarily derived from
sales of the SilverHawk Plaque Excision System. Product revenue was $42.5 million for the three months ended June 30, 2007 as compared to $48.0 million for the three months ended June 30, 2006. The decrease of $5.5 million was attributable
to a decrease in the number of SilverHawk devices sold. The decrease in the number of devices sold was primarily attributable to a decrease in the size of our direct sales force and a decrease in the average number of devices purchased per hospital
customer. We expect our product revenue to increase as we continue to penetrate existing customer accounts, develop new customer accounts, increase sales of the Rinspirator, offer additional products, and enter new international markets.

Research Collaboration.Research collaboration revenue is derived from the Merck Collaboration Agreement and the Amended Merck Collaboration Agreement.
Research collaboration revenue was $8.1 million for the three months ended June 30, 2007 as compared to $216,000 for the three months ended June 30, 2006. For the three months ended June 30, 2007, all revenue was recognized under the
Amended Merck Collaboration Agreement. For the three months ended June 30, 2006, all revenue was recognized in connection with the delivery of tissue samples under the Merck Collaboration Agreement. The increase of $7.9 million was due to the
amortization of up front payments received from Merck. We expect our research collaboration revenue to remain constant as we continue to recognize revenue under the Amended Merck Collaboration Agreement on a pro rata basis over the estimated
four-year term of the collaboration.



15



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##### Table of Contents

Costs and Expenses:

Our costs and expenses consist of five components: product; research collaboration; research and development; selling, general and administrative; and amortization of purchased intangible assets.

Product.Product costs consist primarily of material, labor and overhead costs. Product costs were $11.8 million for the three months ended June 30,
2007 as compared to $10.6 million for the three months ended June 30, 2006. The increase was primarily attributable a $1.2 million charge resulting from an inventory commitment loss, a $611,000 idle capacity charge, and a $200,000 facility
impairment charge due to the exit out of our Cupertino building. Partially offsetting the increase was a decrease in the number of SilverHawk devices sold. As a percentage of product revenue, product costs were 28% for the three months ended
June 30, 2007 as compared to 22% for the three months ended June 30, 2006. We expect product costs will increase in absolute dollars but will remain relatively constant as a percentage of product revenue.

Research Collaboration. Research collaboration expenses consist primarily of costs associated with procurement and delivery of tissue samples and costs of
research activities conducted by us under the Merck agreements. Research collaboration expenses were $2.2 million for the three months ended June 30, 2007 as compared to $708,000 for the three months ended June 30, 2006. The increase was
primarily attributable to a $933,000 increase in personnel-related costs resulting from additional hiring of research and clinical personnel, and a $557,000 increase in clinical study expense as we expanded our activities under the Amended Merck
Collaboration Agreement. We expect that research collaboration expenses will fluctuate in absolute dollars and as a percentage of research collaboration revenue as the amount of services performed under the Amended Merck Collaboration Agreement
varies from period to period.

Research and Development. Research and development expenses consist primarily of costs associated with
personnel, materials, and clinical studies within our product development, regulatory and clinical organizations. Research and development expenses were $8.0 million for the three months ended June 30, 2007 as compared to $4.8 million for the
three months ended June 30, 2006. The increase was primarily attributable to a $1.8 million increase in cost of materials and services used in product development, a $378,000 increase in personnel related costs resulting from additional hiring
of research and development, regulatory and clinical personnel associated with the development of new devices and additional clinical studies, and a $257,000 increase in stock-based compensation. As a percentage of net revenue, research and
development expenses were 16% for the three months ended June 30, 2007 as compared to 10% for the three months ended June 30, 2006. We expect research and development expenses to increase as a percentage of revenue as we explore new
technologies and we continue existing clinical studies and commence new ones.

Selling, General and Administrative. Selling, general and
administrative expenses consist primarily of costs for sales, marketing and administrative personnel, and costs associated with participation in medical conferences, physician symposia and promotional activities. Selling, general and administrative
expenses were $30.4 million for the three months ended June 30, 2007 as compared to $32.2 million for the three months ended June 30, 2006. The decrease was primarily attributable to a $1.8 million decrease in personnel costs related to a
decrease in the size of our direct sales force and a decrease in commission payouts, and a $399,000 decrease in marketing costs. Partially offsetting the decrease was an increase of $300,000 in legal costs. As a percentage of net revenue, selling,
general and administrative expenses were 60% for the three months ended June 30, 2007 as compared to 67% for the three months ended June 30, 2006. We expect selling, general and administrative expenses to decrease as a percentage of net
revenue as we leverage our existing selling, general and administrative infrastructure.

Amortization of purchased intangible assets.
Amortization of purchased intangible assets was $395,000 for the three months ended June 30, 2007 as compared to $0 for the three months ended June 30, 2006. The increase in amortization was attributable to the intangible assets purchased
as part of the Kerberos acquisition in September 2006. We expect amortization of purchased intangibles of $791,000 in the remaining six months of 2007, approximately $1.6 million for each year from 2008 to 2013, and approximately $1.1 million in
2014.



16



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##### Table of Contents

Interest and Other Income and Expense, net. Interest and other income and expense was $2.2 million for the
three months ended June 30, 2007 as compared to $691,000 for the three months ended June 30, 2006. The increase of $1.6 million was primarily attributable to higher interest rates and higher average cash, cash equivalents and investment
balances that increased primarily as a result of cash received from Merck in exchange for services, exclusivity and for the purchase of approximately 3.2 million shares of our companys stock.

Six Months Ended June 30, 2007 and June 30, 2006

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts (in thousands) and comparative percentages:



|                                                                                                                                                                    |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | --- | - | ------ | - | ------- | --- |  | --- | -
|                                                                                                                                                                    |  | Six Months Ended June 30, |        
|                                                                                                                                                                    |  | 2007                      |         |   | 2006 |    
|                                                                                                                                                                    |  | Amount                    |         |   | % 1  |     |   | Amount |   |         | % 1 | 
|Revenue:                                                                                                                                                            |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|Product                                                                                                                                                             |  | $                         | 83,615  |   |      | 84  | % |        | $ | 92,534  |     |  | 98  | %
|Research collaboration                                                                                                                                              |  |                           | 16,222  |   |      | 16  | % |        |   | 2,280   |     |  | 2   | %
|                                                                                                                                                                    |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|Net revenue                                                                                                                                                         |  |                           | 99,837  |   |      | 100 | % |        |   | 94,814  |     |  | 100 | %
|                                                                                                                                                                    |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|Costs and expenses:                                                                                                                                                 |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|Product (includes $660 and $644 in stock-based compensation expense for the six months ended June 30, 2007 and 2006,
respectively)                                  |  |                           | 20,948  |   |      | 25  | % |        |   | 21,735  |     |  | 23  | %
|Research collaboration (includes $64 and $0 in stock-based compensation expense for the six months ended June 30, 2007 and 2006,
respectively)                      |  |                           | 4,277   |   |      | 26  | % |        |   | 1,828   |     |  | 80  | %
|Research and development (includes $1,554 and $1,074 in stock-based compensation expense for the six months ended June 30, 2007 and 2006,
respectively)             |  |                           | 14,906  |   |      | 15  | % |        |   | 8,909   |     |  | 9   | %
|Selling, general and administrative (includes $4,361 and $15,965 in stock-based compensation expense for the six months ended June 30,
2007 and 2006, respectively) |  |                           | 64,035  |   |      | 64  | % |        |   | 77,738  |     |  | 82  | %
|Amortization of purchased intangible assets                                                                                                                         |  |                           | 790     |   |      | 1   | % |        |   |        |     |  | 0   | %
|                                                                                                                                                                    |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|Total costs and expenses                                                                                                                                            |  |                           | 104,956 |   |      | 105 | % |        |   | 110,210 |     |  | 116 | %
|                                                                                                                                                                    |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|Loss from operations                                                                                                                                                |  |                           | (5,119  | ) |      | -5  | % |        |   | (15,396 | )   |  | -16 | %
|Interest and other income and expense, net                                                                                                                          |  |                           | 4,482   |   |      | 4   | % |        |   | 1,290   |     |  | 1   | %
|                                                                                                                                                                    |  |                           |         |   |      |     |   |        |   |         |     |  |     |  
|Net loss                                                                                                                                                            |  | $                         | (637    | ) |      | -1  | % |        | $ | (14,106 | )   |  | -15 | %
|                                                                                                                                                                    |  |                           |         |   |      |     |   |        |   |         |     |  |     |  

---

|1 | Percentage of net revenue, except for product and research collaboration costs and expenses which are shown as a percentage of product revenue and research collaboration
revenue, respectively.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue:

Our revenue consists of two components: product and research collaboration.

Product. Product revenue was $83.6 million for the six
months ended June 30, 2007 as compared to $92.5 million for the six months ended June 30, 2006. The decrease of $8.9 million was primarily attributable to a decrease in the number of SilverHawk devices sold. The decrease in the number of
devices sold was primarily attributable to a decrease in the size of our direct sales force and a decrease in the average number of devices purchased per hospital customer.

Research collaboration.Research collaboration revenue was $16.2 million for the six months ended June 30, 2007 as compared to $2.3 million for the six months ended June 30, 2006. For the six
months ended June 30, 2007, all revenue was recognized under the Amended Merck Collaboration Agreement. For the six months ended June 30, 2006, all revenue was recognized in connection with the delivery of tissue samples under the Merck
Collaboration Agreement. The increase of $13.9 million was due to the expansion of our collaboration under the Amended Merck Collaboration Agreement.



17



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##### Table of Contents

Costs and Expenses:

Our costs and expenses consist of five components: product, research collaboration, research and development, selling, general and administrative; and amortization of purchased intangible assets.

Product. Product costs were $20.9 million for the six months ended June 30, 2007 as compared to $21.7 million for the six months ended June 30,
2006. The decrease was primarily attributable to a decrease in the number of SilverHawk devices sold. Partially offsetting the decrease was a $1.2 million charge resulting from an inventory commitment loss, a $611,000 idle capacity charge, and a
$200,000 facility impairment charge due to the exit out of our Cupertino building. As a percentage of product revenue, product costs were 25% for the six months ended June 30, 2007 as compared to 23% for the six months ended June 30, 2006.

Research Collaboration. Research collaboration expenses were $4.3 million for the six months ended June 30, 2007 as compared to $1.8
million for the six months ended June 30, 2006. The increase was primarily attributable to a $1.6 million increase in personnel-related costs resulting from additional hiring of research and clinical personnel, and a $693,000 increase in
clinical study expense as we expanded our activities under the Amended Merck Collaboration Agreement.

Research and Development. Research and
development expenses were $14.9 million for the six months ended June 30, 2007 as compared to $8.9 million for the six months ended June 30, 2006. The increase was primarily attributable to a $3.2 million increase in cost of materials and
services used in product development, a $1.2 million increase in personnel related costs resulting from additional hiring of research and development, regulatory and clinical personnel associated with the development of new devices and additional
clinical studies, a $480,000 increase in stock-based compensation, and an increase of $399,000 in depreciation resulting from the additions of machinery and equipment. As a percentage of net revenue, research and development expenses were 15% for
the six months ended June 30, 2007 as compared to 9% for the six months ended June 30, 2006.

Selling, General and Administrative.
Selling, general and administrative expenses were $64.0 million for the six months ended June 30, 2007 as compared to $77.7 million for the six months ended June 30, 2006. The decrease was primarily attributable to a $11.6 million decrease
in stock-based compensation, of which $11.4 million relates to the retirement of our former chief executive officer, a $3.5 million decrease in personnel costs related to a decrease in the size of our direct sales force and a decrease in commission
payouts. The decrease was partially offset by a $1.6 million increase in legal, accounting and consulting expenses, and a $478,000 increase in travel and related expenses. As a percentage of net revenue, selling, general and administrative expenses
were 64% for the six months ended June 30, 2007 as compared to 82% for the six months ended June 30, 2006.

Amortization of purchased
intangible assets. Amortization of purchased intangible assets was $790,000 for the six months ended June 30, 2007 as compared to $0 for the six months ended June 30, 2006. The increase in amortization was attributable to the
intangible assets purchased as part of the Kerberos acquisition in September 2006.

Interest and Other Income and Expense, net. Interest and
other income and expense was $4.5 million for the six months ended June 30, 2007 as compared to $1.3 million for the six months ended June 30, 2006. The increase of $3.2 million was primarily attributable to higher interest rates and
higher average cash, cash equivalents and investment balances that increased primarily as a result of cash received from Merck in exchange for services, exclusivity and for the purchase of approximately 3.2 million shares of our companys
stock.

Stock-Based Compensation

Effective
January 1, 2006, we adopted SFAS 123(R) Share-Based Payment (SFAS 123(R)), a revision to SFAS 123 Accounting for Stock-Based Compensation which establishes accounting for share-based payment awards made to employees.
Under the provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the calculated fair value of the award and is expensed over the vesting period of the option. For the six months ended June 30, 2007 we
recorded $5.8 million in stock-based compensation expense for employees, excluding deferred stock-based compensation. As of June 30, 2007, the total unamortized compensation cost related to unvested stock-based awards granted to employees under
our stock option plans and stock purchase plan, subsequent to the initial public offering, was approximately $28.8 million, net of forfeitures. The remaining weighted-average requisite service period of these options is approximately three years.



18



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##### Table of Contents

We amortize deferred stock-based compensation recorded prior to the adoption of SFAS 123(R) for stock options granted
prior to our initial public offering. Fair value for these awards has been calculated at grant date using the intrinsic value method as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Deferred stock-based compensation is amortized on a straight-line basis to product costs, research and development expenses and selling, general and administrative expenses. Deferred stock-based compensation recorded through June 30, 2007 was
$14.8 million, net of stock option cancellations, with accumulated amortization of $13.8 million. The remaining $982,000 will be amortized over the vesting periods of the stock options, generally four years from the date of grant (assuming no
additional cancellations). We currently expect to record amortization expense for deferred stock-based compensation as follows (in thousands):



|                             |  |        |    
|---------------------------- |  | ------ | ---
|Period                       |  | Amount
|Remaining six months of 2007 |  | $      | 628
|2008                         |  | $      | 354

Stock-based compensation expense related to stock options granted to non-employees is recognized as the stock
options are earned. The amount of stock-based compensation expense to be recorded in future periods may decrease if unvested stock options are cancelled. Our stock-based compensation expenses will fluctuate as the fair market value of our common
stock fluctuates. We recorded $84,000 and $394,000 in stock-based compensation expense for non-employees in the six months ended June 30, 2007 and 2006, respectively.

Liquidity and Capital Resources

As of June 30, 2007, we had $38.7 million of cash and cash equivalents, $131.0
million of investments, and $154.4 million of working capital.

Contractual Obligations. The following table discloses aggregate information
about our contractual obligations and the periods in which payments are due as of June 30, 2007 (in thousands):



|                    |  |       |        |                           |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      
|------------------- |  | ----- | ------ | ------------------------- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | -----
|                    |  | Total |        | 2007 (remaining 6
months) |   | 2008  |  | 2009 |       | 2010 |   | 2011  |  | Thereafter
|Operating leases    |  | $     | 18,070 |                           | $ | 1,214 |  | $    | 2,205 |      | $ | 2,262 |  | $          | 2,347 |  | $ | 2,103 |  | $ | 7,939
|Supplier agreement  |  |       | 2,659  |                           |   | 1,289 |  |      | 1,370 |      |   |      |  |            |      |  |   |      |  |   |     
|Supplier settlement |  |       | 1,200  |                           |   | 580   |  |      | 620   |      |   |      |  |            |      |  |   |      |  |   |     
|Royalty obligation  |  |       | 43     |                           |   | 43    |  |      |      |      |   |      |  |            |      |  |   |      |  |   |     
|                    |  |       |        |                           |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      
|Total               |  | $     | 21,972 |                           | $ | 3,126 |  | $    | 4,195 |      | $ | 2,262 |  | $          | 2,347 |  | $ | 2,103 |  | $ | 7,939
|                    |  |       |        |                           |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      

The long-term commitments under operating leases shown above consist of payments related to our real estate lease
in Redwood City, California expiring August 2011, our real estate lease in Redwood City, California expiring November 2016, our real estate lease in Cupertino, California expiring January 2008, and our real estate lease in Menlo Park, California
expiring January 2012.

In March 2005, we entered into a purchase agreement with one of our suppliers for certain manufacturing components used in our
devices. In September 2006, we entered into an amended purchase agreement with the supplier under which we are required to make minimum purchases of $11.4 million to the supplier over an eighteen month term, of which $2.7 million remains at
June 30, 2007. This target spending will not be realized through the agreement period, and as a result the Company entered into a $1.2 million dollar settlement to be paid through August 2008.

The $1.2 million settlement has been recorded in accrued liabilities as of June 30, 2007 and is included in product costs for the three and six month periods ended
June 30, 2007.

For 2006 and each year thereafter, the quarterly minimum patent royalty obligation, related to an agreement with a supplier, equals
the prior years minimum royalty adjusted by a percentage equal to the percentage change in the consumer price index for the prior calendar year as reported by the U.S. Department of Labor. Unless terminated earlier, the term of the royalty
obligation will continue until the expiration of the last to expire patent that covers that licensed product in such country or for a period of 15 years following commercial sales, whichever is longer. Since the company cannot predict future changes
in the consumer price index, only one year of future minimum royalty payments is disclosed.



19



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##### Table of Contents

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $5.9 million for
the six months ended June 30, 2007 as compared to $3.3 million for the six months ended June 30, 2006. For the six months ended June 30, 2007, net cash provided by operating activities was primarily attributable to a net loss of
$637,000 off-set by non-cash charges of $6.6 million related to stock-based compensation and depreciation and amortization of $3.2 million. Net cash provided by operating activities was also due to a $2.8 million decrease in research collaboration
receivable related to payments received from Merck, offset by a $6.2 million decrease in deferred revenue related to amortization of research collaboration revenue and a $1.7 million increase in inventory balances as we purchased raw materials and
produced new products. For the six months ended June 30, 2006, net cash provided by operating activities was primarily attributable to a net loss of $14.1 million offset by non-cash charges of $17.7 million related to stock-based compensation,
which included an $11.4 million charge related to the retirement of our former chief executive officer, depreciation and amortization of $2.2 million, and an increase in inventory reserves of $1.0 million. Net cash provided by operating activities
was also due to an increase in accrued liabilities of $1.1 million due to our increased operating expenses, and a decrease in inventories of $1.2 million due to the increase in the number of units shipped. Net cash provided by operating activities
was partially offset by an increase in accounts receivable of $3.6 million as we increased our net revenue and a decrease in deferred revenue of $2.3 million as we delivered tissue samples under the Merck Collaboration Agreement.

Net Cash Used in Investing Activities. Net cash used in investing activities was $29.5 million for the six months ended June 30, 2007 as compared to
$8.4 used in investing activities for the six months ended June 30, 2006. For the six months ended June 30, 2007, net cash used in investing activities was primarily attributable to net purchases of investments of $23.6 million, $4.9
million in purchases of property and equipment, and $976,000 used to pay direct costs associated with the Kerberos acquisition. For the six months ended June 30, 2006, net cash used in investing activities was primarily attributable to net
purchases of investments of $5.9 million and $2.5 million in purchases of property and equipment.

Net Cash Provided by Financing Activities.
Net cash provided by financing activities was $2.8 million for the six months ended June 30, 2007 as compared to $5.0 million for the six months ended June 30, 2006. For each of the six month periods ended June 30, 2007 and 2006, net
cash provided by financing activities was attributable to proceeds from the exercise of options to purchase common stock and issuance of common stock under the Employee Stock Purchase Plan.

Our future capital requirements depend on numerous factors. These factors include but are not limited to the following:



| |  |  | revenue generated by sales of the SilverHawk and Rinspirator products;
| | - |  | ----------------------------------------------------------------------



| |  |  | revenue generated by the Amended Merck Collaboration Agreement and its possible renewal beyond the initial four year term;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | costs associated with our sales and marketing initiatives and manufacturing activities;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | costs associated with performing against our obligations under the Amended Merck Collaboration Agreement;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | rate of progress and cost of our research and development activities;
| | - |  | ---------------------------------------------------------------------



| |  |  | costs of obtaining and maintaining FDA and other regulatory clearances for our products;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | effects of competing technological and market developments; and
| | - |  | ---------------------------------------------------------------



| |  |  | size, number and timing of acquisitions and other strategic transactions.
| | - |  | -------------------------------------------------------------------------

Off-Balance-Sheet Arrangements.As of June 30, 2007, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Summary.We believe that our current cash, cash equivalents and investments, along with the cash we expect to generate from operations, will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If these sources of cash are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have
rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to generate
sufficient cash from operations or obtain additional financing, we may be required to reduce the scope of our planned research and development and selling and marketing efforts.



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We expect to increase capital expenditures consistent with our anticipated growth in manufacturing, infrastructure and
personnel. We also may increase our capital expenditures as we expand our product lines or invest to address new markets. In the event that we acquire complementary businesses, products, or technologies, we may have to issue equity or debt.

Recent Accounting Pronouncements

In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosure
about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS
No. 157 and have not yet determined the impact on our consolidated financial statements.

In June 2006, the FASB reached consensus on EITF Issue
No. 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (EITF 06-3). The scope of EITF 06-3 includes any tax assessed by a governmental authority that
is directly imposed on a revenue-producing transaction between a seller and a customer, including sales, use, value added and excise taxes. EITF 06-3 provides that a company may adopt a policy of presenting taxes in the consolidated statement of
operations on either a gross or net basis. If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The consensus on EITF 06-3 is effective for the interim and annual reporting periods
beginning after December 15, 2006. We adopted EITF 06-3 on January 1, 2007. We record taxes collected from our customers and remitted to governmental authorities on a net basis in our consolidated statement of operations and our adoption
had no effect on our condensed consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115(SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Boards long-term measurement objectives for accounting for financial instruments. This statement is effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will be required to adopt SFAS 159 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS 159 and
have not yet determined the impact on our consolidated financial statements.

In June 2007, the EITF issued EITF No. 07-3,Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, (EITF 7-03) that provides guidance for upfront payments related to goods and services of research and development costs.
EITF 07-03 is effective for fiscal years beginning after December 15, 2007. We are currently evaluating the impact of EITF 7-03 on our financial statements upon adoption, and do not anticipate a material impact on operating results or financial
position.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and disclosures of
contingent assets and liabilities at the date of the financial statements. On a periodic basis, we evaluate our estimates, including those related to accounts receivable, inventories, warranty reserve, income taxes and stock-based compensation. We
use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from those estimates under different assumptions or conditions. For further information on our critical
accounting policies, see the discussion of critical accounting policies and estimates included in the Companys Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission on
March 13, 2007.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Our
exposure to interest rate risk at June 30, 2007 is related primarily to our investment portfolio. Our investment portfolio includes fixed rate debt instruments of high-quality U.S. government and corporate issuers. A change in prevailing
interest rates may cause the fair value of our investments to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing rate rises, the fair value of the principal amount
of our investment will probably decline. To minimize this risk, investments are generally held to maturity and the weighted-average duration of our investments is six months or less. Due to the short-term nature of these investments, we believe we
have no material exposure to interest rate risk arising from our investments.

We have operated mainly in the United States, and all sales for the six
months ended June 30, 2007 and 2006 were made in U.S. dollars. To date, we have not had any material exposure to foreign currency rate fluctuations.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------



|(a) | Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our principal executive officer and principal financial officer have concluded that
as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports
is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PART II: OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

In July 2006, August 2006 and February
2007, three separate shareholder class action complaints were filed against us and two of our officers in the U.S. District Court for the Northern District of California. The plaintiffs are seeking to represent a class of purchasers of our common
stock from May 13, 2005 to January 26, 2006. The complaints generally allege that false or misleading statements were made concerning our management and seeks unspecified monetary damages. Because the outcome of this litigation is
undetermined and we cannot reasonably estimate the possible loss or range of loss which may arise from the litigation, we have not recorded an accrual for possible damages.

In July 2006, a shareholder derivative complaint was filed against our directors and certain of our officers in the Superior Court of the State of California, San Mateo County. The complaint is based on substantially
similar facts and circumstances as the class action complaints and generally alleges that the named individuals breached their fiduciary duties to the company. The complaint seeks unspecified monetary damages. Any recovery in this derivative suit
would be to the benefit of the company.

In August 2006, a shareholder derivative complaint was filed against our directors and certain of our officers in
the U.S. District Court for the Northern District of California, San Jose division. In January 2007, the plaintiffs filed an amended complaint, adding a former executive and directors as defendants. The complaint is based on substantially similar
facts and circumstances as the class action complaints and generally alleges that the named individuals breached their fiduciary duties to the company. The complaint seeks unspecified monetary damages. Similar to the derivative litigation in the
Superior Court, any recovery in this derivative suit would be to the benefit of the company.

In February 2007, David Martin, our former chief operating
officer, filed a wrongful termination and defamation suit against us and one of our officers in the Superior Court of the State of California, San Mateo County. In March 2007, the Superior Court granted Martins petition to compel arbitration
of his claims and arbitration is currently in its initial stages. The complaint is based on substantially similar facts and circumstances as the class action complaints and derivative actions. The



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complaint generally alleges that Martin was terminated from his employment in violation of the covenant of good faith and fair dealing and in retaliation for
actions he had the legal right to take. The complaint seeks unspecified damages. Because the outcome of this litigation is undetermined and we cannot reasonably estimate the possible loss or range of loss which may arise from the litigation, we have
not recorded an accrual for possible damages.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Factors Affecting Future Operating Results

Our merger with ev3 Inc. is subject to certain conditions to closing that could result in the merger not being consummated or being delayed, either of
which could negatively impact our stock price and future business and results of operations.

Consummation of the merger is subject to a number of
customary conditions, including, but not limited to, the effectiveness of a Form S-4 registration statement to be filed by us with the Securities and Exchange Commission to register the shares of our common stock to be issued in connection with the
merger and expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. There is no assurance that we will receive the necessary approvals or satisfy the other conditions necessary for completion of the
merger. If any of the conditions to the merger are not satisfied or, where waiver is permissible, not waived, the merger will not be consummated. Failure to complete the merger would prevent us from realizing the anticipated benefits of the merger.
We have already and expect to continue to incur significant costs associated with transaction fees, professional services, taxes and other costs related to the merger. In the event that the merger is not completed, we will remain liable for these
costs and expenses. In addition, the current market price of our common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a negative perception by the market of us generally and a
resulting decline in the market price of our common stock. Any delay in the consummation of the merger or any uncertainty about the consummation of the merger could also negatively impact our stock price and future business and results of
operations. We cannot assure you that the merger will be consummated, that there will be no delay in the consummation of the merger or that the merger will be consummated on the terms contemplated by the merger agreement.

Whether or not the merger is completed, the announcement and pendency of the merger could impact or cause disruptions in our business, which could have an adverse
effect on our business and results of operations.

Whether or not the merger is consummated, the announcement and pendency of the merger could cause
disruptions in or otherwise negatively impact our business and results of operations. Among others:



| |  |  | our employees may experience uncertainty about their future roles with the combined company, which might adversely affect our ability to retain and hire key
personnel and other employees;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the attention of our management may be directed toward the completion of the merger and transaction-related considerations and may be diverted from the day-to-day
operations and pursuit of other opportunities that could have been beneficial to our business; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | distributors or other vendors or suppliers may seek to modify or terminate their business relationships with us.
| | - |  | ----------------------------------------------------------------------------------------------------------------

These disruptions could be exacerbated by a delay in the completion of the merger or termination of the merger agreement and could have an adverse effect on our
business, results of operations or prospects if the merger is not completed or the business, results of operations or prospects of the combined company if the merger is completed.

We may be unable to successfully integrate our operations with ev3s operations or to realize the anticipated cost savings and other potential benefits of the merger in a timely manner or at all. As a result,
the value of our common stock may be adversely affected.

We entered into the merger agreement with ev3 because we believe that the merger will be
beneficial to us and our stockholders. Achieving the anticipated potential benefits of the merger will depend in part upon whether we are able to integrate ev3s business with our business in an efficient and effective manner. We may not be
able to accomplish this integration process smoothly or successfully. The necessity of coordinating geographically separated organizations, systems and facilities and addressing possible differences in business backgrounds, corporate cultures and
management philosophies may increase the difficulties of integration. We and ev3 operate numerous systems, including those involving management



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information, purchasing, accounting and finance, sales, billing, payroll, employee benefits and regulatory compliance. We and ev3 may also have
inconsistencies in standards, controls, procedures or policies that could affect our ability to maintain relationships with customers and employees after the merger or to achieve the anticipated benefits of the merger. The integration of certain
operations following the merger will require the dedication of significant management resources, which may temporarily distract managements attention from our day-to-day business. Employee uncertainty and lack of focus during the integration
process may also disrupt our business. Any inability of management to integrate successfully the operations of the two companies or to do so within a longer time frame than what we expect could have a material adverse effect on our business and
results of operations. We may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of the merger. An inability to realize the full extent of, or any of, the anticipated benefits of the merger, as well
as any delays encountered in the integration process, could have an adverse effect on our business and results of operations, which may affect the value of the shares of our common stock after the completion of the merger.

The success of the combined company after the merger will depend in part upon the ability of us and ev3 to retain key employees of both companies. Competition for
qualified personnel can be very intense. In addition, key employees may depart because of issues relating to the uncertainty or difficulty of integration or a desire not to remain with the combined company. Accordingly, no assurance can be given
that key employees will be retained.

We have been able to conduct only limited planning regarding the integration of the two companies following the
merger and have not yet determined the exact nature of how the businesses and operations of the two companies will be combined after the merger. The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of
the integration plan may not be realized.

We depend substantially on a single product, the SilverHawk, which we commercially launched in the United
States at the beginning of 2004. If the SilverHawk fails to further penetrate the market or loses market acceptance, our business will suffer.

The
SilverHawk is our main product, and we are largely dependent on it. We expect that sales of the SilverHawk in the United States will account for a substantial portion of our revenue for the foreseeable future. Growth in demand for the SilverHawk has
slowed and our failure to generate additional demand may negatively impact our operating revenue. We do not know if the SilverHawk will be successful over the long-term and it is possible that demand for the SilverHawk may decline over time. Market
acceptance of the SilverHawk may be hindered if physicians are not presented with compelling data from long-term studies of the safety and efficacy of the SilverHawk compared against alternative procedures, such as angioplasty, stenting or bypass
grafting. We recently initiated enrollment for PROOF, a study comparing treatment with the SilverHawk to bypass grafting, but it will be more than a year before initial data is available from that study and several years until the study is concluded
and final data is available. Other reasons that may influence the rate of SilverHawk adoption include the time required to perform the procedure and the lack of on-board visualization capability. If we are unable to make certain design improvements
to the SilverHawk, we may be unable to generate new customers or retain our existing customers. Failure of the SilverHawk to significantly penetrate current or new markets would negatively impact our business, financial condition and results of
operations.

There exist limited long-term data regarding the safety and efficacy of the SilverHawk. Future long-term data may not be positive or
consistent with data currently available, which would affect the rate at which our device is adopted.

Our success depends heavily on acceptance of the
SilverHawk by the medical community as safe and effective. Important factors upon which the efficacy of the SilverHawk will be measured are long-term data on the rate of restenosis, or plaque regrowth following our procedure, and the corresponding
duration of patency, or openness of the artery. Another important factor that physicians will consider is the rate of reintervention, or retreatment, following the SilverHawk procedure. Because our technology is relatively new in the treatment of
PAD, to date there have been a limited number of single-center, clinical experiences with limited patient populations that have measured short and mid-term restenosis and patency rates up to one year following treatment. None of these studies were
conducted by us. We are and will be conducting studies designed to measure restenosis rates or patency rates after treatment with the SilverHawk and compare outcomes in a randomized manner to alternative procedures. These studies may be expensive
and time consuming and the results may not prove favorable for the SilverHawk device.



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While subset data from the TALON registry regarding restenosis and patency rates were recently published, we cannot
provide any assurance that the published data will be compelling to the medical community, because it may not be scientifically meaningful. In addition, the long-term effects of the SilverHawk procedure are not known.

The results of limited long-term data and of short-term clinical experience of the SilverHawk do not necessarily predict long-term clinical benefit. Restenosis rates
usually increase over time, and typically two-year restenosis rates are substantially higher than one-year results. We believe that physicians will compare the rates of long-term restenosis and reintervention for the SilverHawk procedure against
alternative procedures, such as angioplasty, stenting and bypass grafting. If long-term rates of restenosis and reintervention do not meet physicians expectations, the SilverHawk may not become widely adopted and physicians may recommend
alternative treatments for their patients. Other significant factors that physicians will consider include acute safety data on complications that occur during the SilverHawk procedure. If the results obtained from any future clinical studies or
clinical or commercial experience indicate that the SilverHawk is not as safe or effective as other treatment options or as prior short-term or long-term data would suggest, adoption of our product may suffer and our business would be harmed.

Even if we believe the data collected from clinical studies or clinical experience indicate positive results, each physicians actual experience with
our device will vary. Clinical studies conducted with the SilverHawk, as well as clinical experience recorded in the TALON registry, have involved procedures performed by physicians who are technically-proficient and high-volume users of the
SilverHawk. Consequently, both short and long-term results reported in these studies and the TALON registry may be significantly more favorable than typical results of practicing physicians, which could negatively impact rates of adoption of the
SilverHawk.

We depend on skilled and experienced personnel to operate our business effectively. If we are unable to recruit, hire and retain these
employees, our ability to manage and expand our business will be harmed, which would impair our future revenue and profitability.

Our success largely
depends on the skills, experience and efforts of our officers and other key employees. Any of our officers and other key employees may terminate their employment at any time. The loss of any of our senior management team could harm our business. Our
ability to retain our skilled labor force and our success in attracting and hiring new skilled employees will be a critical factor in determining whether we will be successful in the future. We may not be able to meet our future hiring needs or
retain existing personnel. We will face particularly significant challenges and risks in hiring, training, managing and retaining engineering and sales and marketing employees. Failure to attract and retain personnel, particularly technical and
sales and marketing personnel, would harm our ability to compete effectively and grow our business. The announcement of the loss of one of our key employees could further negatively affect our stock price.

We have a limited history of operations and a history of net losses that may prevent us from sustaining profitability.

We have a limited history of operations upon which you can evaluate our business. In particular, we incurred net losses of $637,000 for the six months ended June 30,
2007 and $12.2 million for the year ended December 31, 2006. As of June 30, 2007, we had an accumulated deficit of $98.0 million. We commenced full commercial sales of the SilverHawk in January 2004, and our short commercialization
experience makes it difficult for us to predict future performance. Our failure to accurately predict financial performance may lead to volatility in our stock price. For example, the levels of inventory of our products held by our customers can
fluctuate significantly and we believe have fluctuated in the past making it difficult to forecast product revenue. In addition, we expect our operating expenses will increase as we expand our business to meet anticipated growing demand for the
SilverHawk and the Rinspirator and devote resources to our sales and marketing programs and research and development activities. Our failure to achieve profitability could negatively impact the market price of our common stock.



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Our future growth depends on physician adoption of the SilverHawk and the Rinspirator, which requires physicians to
change their screening and referral practices.

Although there is a significant correlation between PAD and coronary artery disease, many physicians do
not routinely screen for PAD while screening for coronary artery disease. We target our sales efforts to interventional cardiologists and vascular surgeons because they are often the primary care physicians diagnosing and treating PAD. However, the
initial point of contact for many patients may be general practitioners, podiatrists, nephrologists or endocrinologists, each of whom commonly treats patients experiencing complications resulting from PAD. If we do not educate referring physicians
about PAD in general and the existence of the SilverHawk and Rinspirator in particular, they may not refer patients to interventional cardiologists, vascular surgeons or interventional radiologists for the SilverHawk and Rinspirator procedures, and
those patients may instead be surgically treated or treated with an alternative interventional procedure. If we are not successful in educating physicians about screening for PAD or about referral opportunities, our ability to increase our revenue
may be impaired.

Our ability to market the SilverHawk in the United States is limited to use in peripheral vessels and our ability to market the
Rinspirator in the United States is limited to use in peripheral and coronary vessels. If we want to expand our marketing claims, we will need to file for additional FDA clearances or approvals and conduct further clinical trials, which would be
expensive and time-consuming and may not be successful.

For the SilverHawk we have FDA approval in the United States for treatment of atherosclerosis
in the peripheral vasculature. This general clearance restricts our ability to market or advertise the SilverHawk for any specific indication within the peripheral arteries, which limits our ability to market the SilverHawk and could affect our
growth. Off-label use of the SilverHawk outside the peripheral vasculature, in coronary and carotid arteries, has occurred and is likely to continue. In addition, off-label use for treatment of in-stent restenosis has occurred and is likely to
continue. For the Rinspirator we have FDA clearance in the United States for treatment of thrombi in the peripheral and coronary vasculature. This general clearance restricts our ability to market or advertise the Rinspirator for any specific
indication within the peripheral and coronary arteries, which limits our ability to market the Rinspirator and could affect our growth. While off-label uses of medical devices are common and the FDA does not regulate physicians choice of
treatments, the FDA does restrict a manufacturers communications regarding such off-label use. We may not actively promote or advertise the SilverHawk or the Rinspirator for off-label uses. In addition, we cannot make comparative claims
regarding the use of the SilverHawk or the Rinspirator against any alternative treatments without conducting head-to-head comparative clinical studies, which would be expensive and time consuming. If our promotional activities fail to comply with
the FDAs regulations or guidelines, we may be subject to FDA warnings or enforcement action.

If we want to market the SilverHawk in the United
States for use in coronary or carotid arteries, we will need to conduct further clinical trials and obtain premarket approval from the FDA. We previously began a clinical trial in support of FDA approval for use of the SilverHawk in the coronary
arteries. Based on 172 patients treated in this trial, we experienced 37 serious adverse events in treating 28 patients, including 10 perforations, two cases of emergency bypass surgery, three cases of stroke, 14 cases of heart attack and eight
patient deaths. We voluntarily halted enrollment so that we could incorporate safety and design improvements into our coronary product. We believe that these serious adverse events resulted from a number of factors, including the patients
overall poor health, the complexity of treating the bifurcated lesions called for under the trial protocol, and the application of our device in the coronary arteries, which are extremely small and constantly move as the heart beats. We have made
several design modifications to the coronary versions of our devices, and we have submitted an application to the FDA for a new Investigational Device Exemption, or IDE. The FDA has responded to our IDE application, and we now expect that further
modifications to our devices will be necessary before the new trial can be started in the U.S. to evaluate the safety and efficacy of the SilverHawk in the coronary arteries. We cannot predict when the trial will be initiated, the outcome of such a
trial or whether the results will adequately demonstrate the safety and efficacy of the SilverHawk for use in coronary arteries.

If we are unable to
manage the anticipated growth of our business, our future revenue and operating results may be adversely affected.

The growth that we have experienced,
and in the future may experience, presents challenges to our company requiring us to expand our organization. For example, we will need to hire a significant number of people to meet the requirements of the Amended Merck Collaboration Agreement. If
we do not deliver the product and data required by this agreement our relationship with Merck may be harmed. Expansion in our organization may result in less experienced people producing and selling our product, which could result in unanticipated
costs and disruptions to our operations. If we cannot scale and manage our business appropriately, our anticipated growth may be impaired and our financial results will suffer.



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We depend on third-party vendors in our manufacturing operations, making us vulnerable to supply shortages and price
fluctuations that could harm our business.

We currently rely on third-party vendors for the manufacture of most of the components used in the
SilverHawk and the Rinspirator. Our reliance on these vendors subjects us to a number of risks that could impact our ability to manufacture our product and harm our business, including:



| |  |  | interruption of supply resulting from modifications to, or discontinuation of, a suppliers operations;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | delays in product shipments resulting from uncorrected defects, reliability issues or a suppliers variation in a component;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to obtain adequate supply in a timely manner or on commercially reasonable terms;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | difficulty identifying and qualifying alternative suppliers for components in a timely manner;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in delivery by our suppliers due to changes in demand from us or their other customers.
| | - |  | ----------------------------------------------------------------------------------------------



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Any significant delay or interruption in the supply of components, or our inability to obtain substitute components or
materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and harm our business.

We depend on single and limited source suppliers for some of the components of the SilverHawk and the Rinspirator, and if any of those suppliers are unable or unwilling to produce these components or supply them in the quantities that we
need, we would experience manufacturing delays as a result.

We rely on single and limited source suppliers for several of the components of the
SilverHawk and the Rinspirator. For example, for the SilverHawk, we rely on one vendor for our cutting blade motor, one vendor for our cutter assembly, and one vendor for our tip housing. For the Rinspirator, we rely on one vendor for the hub and
one vendor for the dual lumen extrusions. These components are critical to the SilverHawk and the Rinspirator and there are few alternative sources of supply for them. We do not carry a significant inventory of these components. Identifying and
qualifying additional or replacement suppliers for any of the components used in the SilverHawk and the Rinspirator, if required, may not be accomplished quickly or at all and could involve significant additional costs. Any supply interruption from
our vendors or failure to obtain additional vendors for any of the components used to manufacture the SilverHawk and the Rinspirator would limit our ability to manufacture our product and could therefore have a material adverse effect on our
business, financial condition and results of operations.

We have limited experience manufacturing the SilverHawk and the Rinspirator in commercial
quantities which could adversely impact our business.

Because we have only limited experience in manufacturing the SilverHawk and Rinspirator in
commercial quantities, we may encounter unforeseen situations that would result in delays or shortfalls. For example, in June 2004, we initiated a voluntary recall of two lots of the SilverHawk due to the possibility of improper sterilization at one
of two approved sterilization facilities. We may encounter difficulties and delays in manufacturing our products for the following additional reasons:



| |  |  | we have significantly expanded our manufacturing operations, and our production processes may have to change to accommodate this growth;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | key components of our products are currently provided by a single supplier or limited number of suppliers, and we do not maintain large inventory levels of these
components;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to increase our manufacturing output significantly, we will have to attract and retain qualified employees, who are in short supply, for the assembly and testing
operations; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all of our manufacturing occurs in facilities located in the San Francisco bay area and if we were to lose availability of these facilities due to earthquake, fire,
natural disaster or other disruptions, our operations would be significantly impaired.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, during 2007 we plan to consolidate
the production of our Rinspirator product into our Redwood City manufacturing facility which will allow us to leverage our existing manufacturing infrastructure to increase production of the Rinspirator. However, during this transition we may
experience difficulties that could impact our ability to meet the demand for both products. Manufacturers often experience difficulties in increasing production, including problems with production yields and quality control and assurance. If
our manufacturing operations are unable to meet demand for our products, our revenue could be impaired, market acceptance for our products could be adversely affected, and our customers might instead purchase our competitors products.
Additionally, although we maintain business interruption insurance, there can be no assurance that the proceeds of such insurance would be sufficient to offset any loss that we might incur or that we would be able to retain our customer base if
operations were disrupted.

The use, misuse or off-label use of the SilverHawk and Rinspirator may result in injuries that lead to product liability
suits, which could be costly to our business.

We neither provide training for physicians nor require that physicians be trained in the use of the
SilverHawk and the Rinspirator devices by a third party because we market primarily to physicians who are skilled in the interventional techniques required to use our device. Although the SilverHawk is cleared by the FDA for the treatment of
atherosclerosis in the peripheral vasculature, we have indicated through our marketing efforts that certain treatment locations, such as arteries below the knee or above the leg, are not suited for physicians with limited experience using the
device. There may be increased risk of injury if such physicians attempt SilverHawk procedures in peripheral arteries in these areas of the body. Not requiring training specific to the use of our device in various parts of the body may expose us to
greater risk of product liability if injuries occur during the SilverHawk procedure. If demand for the SilverHawk continues to grow, less skilled surgeons will likely use the device, potentially leading to more injury and an increased risk of
product liability.

The use or misuse of the SilverHawk in the peripheral and coronary arteries has in the past resulted, and may in the future result, in
complications, including damage to the treated artery, internal bleeding, limb loss and death, potentially leading to a product liability claim. The SilverHawk is not FDA-cleared or approved for treatment of carotid arteries, which are arteries
leading to the brain, coronary arteries, iliac or renal vasculature or in-stent restenosis in the United States. Our sales force does not promote the product for off-label uses, and our U.S. instructions for use specify that the SilverHawk is not
intended for use in the coronary arteries, carotid arteries or iliac or renal vasculature. However, we cannot prevent a physician from using the SilverHawk for these off-label applications. The application of the SilverHawk to coronary arteries, as
opposed to peripheral arteries, is more likely to result in complications that have serious consequences. For example, if excised plaque were not captured properly in our device, it could be carried by the bloodstream to a narrower location,
blocking a coronary artery, leading to a heart attack, or blocking an artery to the brain, leading to a stroke. We have had three reported incidents of stroke in our halted coronary trial, which may have been caused by excised arterial plaque
entering the bloodstream. If the SilverHawk is defectively designed, manufactured or labeled, contains defective components or is misused, we may become subject to costly litigation by our customers or their patients. Product liability claims could
divert managements attention from our core business, be expensive to defend and result in sizable damage awards against us.

The use or misuse of
the Rinspirator in the peripheral and coronary arteries may in the future result in complications, including damage to the treated artery, internal bleeding, limb loss and death, potentially leading to a product liability claim.
The Rinspirator is not FDA-cleared or approved for treatment of carotid arteries, which are arteries leading to the brain, in the United States. Our sales force does not promote the product for off-label uses, and our U.S. instructions for use
specify that the Rinspirator is intended for use in the coronary and peripheral arteries. However, we cannot prevent a physician from using the Rinspirator for off-label applications. The application of
the Rinspirator to carotid arteries, as opposed to coronary or peripheral arteries, may result in complications that have serious consequences. For example, if the thrombi removed were not captured properly in our device, debris
could be carried by the bloodstream to a narrower location, blocking a carotid artery, leading to a stroke. If the Rinspirator is defectively designed, manufactured or labeled, contains defective components or is misused, we may
become subject to costly litigation by our customers or their patients. Product liability claims could divert managements attention from our core business, be expensive to defend and result in sizable damage awards against us.



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We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and regulations and,
if we are unable to fully comply with such laws, could face substantial penalties.

Our operations may be directly or indirectly affected by various
broad state and federal healthcare fraud and abuse laws, including the federal Anti-Kickback Statute, which prohibit any person from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, to induce or
reward either the referral of an individual, or the furnishing or arranging for an item or service, for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. If our past or present operations,
including our consulting arrangements with physicians who use our product, are found to be in violation of these laws, we or our officers may be subject to civil or criminal penalties, including large monetary penalties, damages, fines, imprisonment
and exclusion from Medicare and Medicaid program participation. If enforcement action were to occur, our business and financial condition would be harmed.

We compete against companies that have longer operating histories, more established products and greater resources, which may prevent us from achieving significant market penetration or improved operating results.

With regard to the SilverHawk, we compete against very large and well-known stent and angioplasty device manufacturers, including Abbott Laboratories, Boston Scientific,
Cook, Johnson & Johnson and Medtronic. We also compete against smaller manufacturers, including, among others: ev3, a manufacturer of peripheral vascular stents and angioplasty devices; Spectranetics, a manufacturer of excimer lasers for
the treatment of coronary artery disease and PAD; W. L. Gore, (Medical Products Division), a manufacturer of endoprostheses stent-grafts, and Angioscore, a manufacturer of angioplasty devices. There are also several other companies that provide
products used by surgeons in peripheral bypass procedures. Other competitors include pharmaceutical companies that manufacture drugs for the treatment of mild to moderate PAD. With regard to the Rinspirator, we compete against Possis Medical, ev3,
Vascular Solutions, and several other manufacturers of aspiration catheters. Many of our competitors have significantly greater financial and human capital resources than we do and have established reputations, as well as worldwide distribution
channels that are more effective than ours. Competition with these companies could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.

Our ability to compete effectively depends on our ability to distinguish our company and our products from our competitors and their products, and
includes such factors as:



| |  | the ability of our products to treat patients safely and effectively;
| | - | ---------------------------------------------------------------------



| |  | predictable clinical performance;
| | - | ---------------------------------



| |  | ease of use;
| | - | ------------



| |  | price;
| | - | ------



| |  | adequate third-party reimbursement; and
| | - | ---------------------------------------



| |  | brand and name recognition.
| | - | ---------------------------

Our competitors with greater financial
resources could acquire other companies to gain enhanced name recognition and market share, as well as new technologies or products that could effectively compete with our existing product, which may cause our revenue to decline and would harm our
business.

Our ability to compete also depends on our ability to innovate successfully. If our competitors can compete directly against us or
demonstrate the safety and efficacy of other methods of treatment, our revenue may decline.

The market for medical devices is highly-competitive,
dynamic, and marked by rapid and substantial technological development and product innovations. There are few barriers that would prevent new entrants or existing competitors from developing products that compete directly with ours. Demand for our
products could be diminished by equivalent or superior products and technologies offered by competitors. For example, drug-eluting stents have been developed for treating coronary artery disease and have been rapidly adopted.



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Cook Group is currently conducting clinical trials for the use of drug-eluting stents and Edwards Lifesciences is conducting clinical trials for the use of
non-drug-eluting stents in the peripheral vasculature, each of which, if successful, may impact future SilverHawk sales. We are also aware of at least two other companies, Cardiovascular Systems, Inc. and Pathway Medical, developing plaque-removal
devices intended for the treatment of PAD. If we are unable to innovate successfully or if new competitors emerge, our products could become obsolete, and our revenue would decline as our customers purchase our competitors products.

We rely significantly on our chief executive officer for guidance and direction regarding the development of new products and improvements to existing
products. We may choose to acquire complementary products and technologies to augment the number of our product offerings and add to the diversity of the SilverHawk system. Any acquisitions that we make may divert managements attention from
our core programs and may consume necessary resources without generating significant additional revenue.

We may in the future be a party to patent
litigation and administrative proceedings that could be costly and could interfere with our ability to sell our products.

The medical device industry
has been characterized by extensive litigation regarding patents and other intellectual property rights, and companies in the industry have used intellectual property litigation to gain a competitive advantage. We may become a party to patent
infringement claims with our competitors or others and litigation or interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions. The defense and prosecution of these matters are both costly and
time consuming. Additionally, we may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These
proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel.

An adverse
determination in litigation or interference proceedings to which we may become a party could subject us to significant liabilities or injunctions which would require us to seek licenses. In addition, if we are found to willfully infringe third-party
patents, we could be required to pay treble damages in addition to other penalties. Although patent and intellectual property disputes in the medical device area have often been settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and could include ongoing royalties. We may be unable to obtain necessary licenses on satisfactory terms, if at all. If we do not obtain necessary licenses, we may not be able to redesign our products to
avoid infringement. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products, which would have a significant adverse impact on our
business.

We are aware of patents held by Abbott Laboratories that may be asserted against us in litigation that could be costly and could limit our
ability to sell the SilverHawk or other products.

We are aware of patent families related to catheter positioning and atherectomy, or plaque removal,
owned or licensed by Abbott Laboratories. With regard to atherectomy patents, one of our founders, Dr. John Simpson, founded a company prior to founding our company that developed an atherectomy device that is currently sold by Abbott, and he
is a listed inventor on several patents covering that device. Abbotts device is currently marketed and sold for use in coronary arteries. We are not currently aware of any claims Abbott has made or intends to make against us. Because of a
doctrine known as assignor estoppel, if any of Dr. Simpsons earlier patents are asserted against us by Abbott, we may be prevented from asserting an invalidity defense regarding those patents, and our defense may be
compromised. Abbott Laboratories has significantly greater financial resources than we do to pursue patent litigation and can assert these patent families against us at any time. Adverse determinations in such litigation could prevent us from
manufacturing or selling the SilverHawk or other products, which would have a significant adverse impact on our business.

Intellectual property rights
may not provide adequate protection, which may permit third parties to compete against us more effectively.

We rely on patents, trade secret laws and
confidentiality agreements to protect our technology and products. Our pending patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Any patents we have obtained or will obtain in the
future might be invalidated or circumvented by third parties. Should such challenges be successful, competitors might be able to market products and use manufacturing processes that are substantially similar to ours. We may not be able to prevent
the unauthorized disclosure or use of our technical knowledge or other trade secrets by consultants, vendors or former or current employees, despite the existence generally of confidentiality agreements and other contractual restrictions.



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Monitoring unauthorized use and disclosure of our intellectual property is difficult, and we do not know whether the steps we have taken to protect our
intellectual property will be adequate. In addition, the laws of many foreign countries will not protect our intellectual property rights to the same extent as the laws of the United States. To the extent our intellectual property protection is
incomplete, we are exposed to a greater risk of direct competition. In addition, competitors could purchase our products and attempt to replicate some or all of the competitive advantages we derive from our development efforts or design around our
protected technology. If our intellectual property is not adequately protected against competitors products and methods, our competitive position could be adversely affected, as could our business.

If we fail to obtain and maintain necessary regulatory clearances or approvals for the SilverHawk and the Rinspirator, or if clearances or approvals for future
products and indications are delayed or not issued, our commercial operations would be harmed.

The SilverHawk and the Rinspirator are medical devices
that are subject to extensive regulation by the FDA in the United States and by regulatory agencies in other countries where we do business. Government regulations specific to medical devices are wide-ranging and govern, among other things:



| |  | product design, development and manufacture;
| | - | --------------------------------------------



| |  | product safety, testing, labeling and storage;
| | - | ----------------------------------------------



| |  | premarketing clearance or approval;
| | - | -----------------------------------



| |  | record keeping procedures;
| | - | --------------------------



| |  | product marketing, sales and distribution; and
| | - | ----------------------------------------------



| |  | post-marketing surveillance, reporting of deaths or serious injuries and medical device reporting.
| | - | --------------------------------------------------------------------------------------------------

Before a new medical device or a new use of, or claim for, an existing product can be marketed in the United States, a company must first apply for and receive either 510(k) clearance or premarket approval from the
FDA, unless an exemption applies. Either process can be expensive, lengthy and unpredictable. Although we have obtained 510(k) clearance to market the SilverHawk for treatment of atherosclerosis in the peripheral vasculature, our clearance can be
revoked if safety or efficacy problems develop. We voluntarily suspended our U.S. clinical trial for the use of the SilverHawk in coronary arteries. To market the SilverHawk in the United States for this use, we must successfully complete a clinical
trial, submit a premarket approval application to the FDA and obtain premarket approval. Therefore, even once we believe we have successfully developed the SilverHawk for use in the coronary arteries, we may not be permitted to market our device for
this indication in the United States for a number of years, if at all. Delays in obtaining approval could adversely affect our future growth. Although we have obtained 510(k) clearance to market the Rinspirator for infusing physician specified fluid
and remove/aspirate fluid, fresh, soft emboli and thrombi from the coronary and peripheral vasculature, our clearance can be revoked if safety or efficacy problems develop. This could adversely affect our future growth.

We are also subject to medical device reporting regulations that require us to report to the FDA if our product causes or contributes to a death or serious injury or if
a malfunction, were it to occur, might cause or contribute to a death or serious injury. For the second quarter of 2007, the FDA has received four medical device reports associated with procedures where the SilverHawk was used and one associated
procedure where the Rinspirator was used.

The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory
requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:



| |  | warning letters, fines, injunctions, consent decrees and civil penalties;
| | - | -------------------------------------------------------------------------



| |  | repair, replacement, refunds, recall or seizure of our products;
| | - | ----------------------------------------------------------------



| |  | operating restrictions, partial suspension or total shutdown of production;
| | - | ---------------------------------------------------------------------------



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| |  | refusing our requests for 510(k) clearance or premarket approval of new products; new intended uses of, or modifications to, existing products;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | withdrawing 510(k) clearance or premarket approvals that have already been granted; and
| | - | ---------------------------------------------------------------------------------------



| |  | criminal prosecution.
| | - | ---------------------

If any of these events were to occur, our business
and financial condition would be harmed.

Modifications to the SilverHawk and the Rinspirator may require new 510(k) clearances or premarket approvals
or may require us to recall or cease marketing the SilverHawk and the Rinspirator until clearances are obtained.

Modifications to the SilverHawk and
the Rinspirator may require new 510(k) clearances or premarket approvals or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA requires device manufacturers to initially make and
document a determination of whether or not a modification requires a new approval, supplement or clearance; however, the FDA can review and disagree with a manufacturers decision. Any modification to an FDA-cleared device that would
significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new 510(k) clearance or possibly a premarket approval. We may not be able to obtain additional 510(k) clearances or premarket
approvals for new products or for modifications to, or additional indications for, our products in a timely fashion, or at all. Delays in obtaining required future clearances would adversely affect our ability to introduce new or enhanced products
in a timely manner, which in turn would harm our future growth. We have made modifications to the SilverHawk in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or
approvals. If the FDA disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the SilverHawk and/or the Rinspirator as modified, which could harm our operating results and require
us to redesign the SilverHawk. In these circumstances, we may be subject to significant enforcement actions.

If we or our suppliers fail to comply with
the FDAs Quality System Regulation, our manufacturing operations could be delayed and our sales could suffer.

Our manufacturing processes and
those of our suppliers are required to comply with the FDAs Quality System Regulation, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of
our products. We are also subject to similar state requirements and licenses. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic inspections by
governmental agencies, including the FDA, state authorities and comparable agencies in other countries. Our Redwood City facility was inspected by the FDA in June 2006 and four minor observations were noted. We corrected the observations and they
were submitted to the FDA. An FDA audit was completed in August 2006 and no observations were noted. Our Cupertino facility was inspected by the FDA in July 2006 with no observations noted. Our Redwood City facility was inspected by the CDHS (FDB)
in May 2006 and one minor observation was noted. Our response to this observation has been accepted by the CDHR (FDB) and we believe that we are in substantial compliance with the QSR. In the event these corrective actions are not accepted or if we
fail a Quality System inspection, our operations could be disrupted and our manufacturing interrupted. Failure to take adequate corrective action in response to an adverse Quality System inspection could result in, among other things, a shut-down of
our manufacturing operations, significant fines, suspension of marketing clearances and approvals, seizures or recalls of our device, operating restrictions and criminal prosecutions, any of which would cause our business to suffer. Furthermore, our
key component suppliers may not currently be or may not continue to be in compliance with applicable regulatory requirements, which may result in manufacturing delays for our product and cause our revenue to decline.

Our products may in the future be subject to product recalls that could harm our reputation.

The FDA and similar governmental authorities in other countries have the authority to require the recall of commercialized products in the event of material regulatory deficiencies or defects in design or manufacture.
A government mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design or labeling defects. In June 2004, we initiated a voluntary recall of two lots of the SilverHawk due to the possibility of
improper sterilization. We continue to use both the testing facility and sterilization facility involved in the recall. In October 2004, we received a formal closure notice from the FDA regarding the recall. Additional recalls of the SilverHawk
would divert managerial and financial resources, harm our reputation with customers and have an adverse effect on our financial condition and results of operations. A recall announcement would negatively affect our stock price.



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Costs and expenses incurred due to our involvement in arbitration or litigation may depress the price of our
stock.

We are the subject of litigation by stockholders who have suffered losses in the value of our stock during periods of management transition in
2006. In addition, we are currently in arbitration with one of our former employees. In any arbitration or litigation proceeding involving former employees we intend to defend ourselves vigorously which may be expensive. We retain employment
practices liability and director and officer liability insurance but there can be no guarantee that such insurance will cover the claims that are made or will insure us fully for all losses on covered claims. Any such arbitration or litigation may
distract our management and consume resources that would otherwise have been directed toward achieving our operating plan and generating increased revenue, which may further cause a decline in our stock price.

Changes in coverage and reimbursement for procedures using our products could affect the adoption of our products and our future revenue.

Currently, the SilverHawk procedure is typically reimbursed by third-party payors, including Medicare, Medicaid, and private healthcare insurance companies, under
existing atherectomy procedure codes, and the Rinspirator is typically reimbursed by third-party payors, including Medicare, Medicaid, and private healthcare insurance companies, under existing secondary and coronary thrombectomy codes. These payors
may adversely change their coverage and reimbursement policies, as well as payment amounts. In September 2006, the Centers for Medicare & Medicaid Services, or CMS, released 2007 increases for the three in-patient reimbursement codes most
frequently used with the SilverHawk procedure. DRGs 479, 554 and 553, increased by 2.8%, 4.0% and 1.0%, respectively. CMS also released for 2007 an increase of 5.0% for the reimbursement code APC 0081 which is the out-patient code that is used for
the SilverHawk procedure. Also, healthcare reform legislation or regulation may be proposed or enacted in the future, which may adversely affect such policies and amounts. We cannot predict whether and to what extent existing coverage and
reimbursement will continue to be available. If physicians, hospitals and other providers are unable to obtain adequate coverage and reimbursement for procedures using our products, they are less likely to use them and our business would be
adversely impacted.

The expense and potential unavailability of insurance coverage for our company or our customers could adversely affect our ability
to sell our products, which would harm our business.

We may not have sufficient insurance coverage for future product liability claims. We may not be
able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Any product liability claims brought against us, with or without merit, could increase our product liability insurance
rates or prevent us from securing continuing coverage, harm our reputation in the industry and reduce product sales. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, harming our financial condition and
adversely affecting our financial condition and operating results.

Some of our customers and prospective customers may have difficulty in procuring or
maintaining liability insurance to cover their operation and use of our products. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may
discontinue using our products and potential customers may opt against purchasing our products due to the cost or inability to procure insurance coverage.

Compliance with environmental laws and regulations could be expensive. Failure to comply with environmental laws and regulations could subject us to significant liability.

Our manufacturing operations involve the use of hazardous substances and are subject to a variety of federal, state and local environmental laws and regulations relating to the storage, use, discharge, disposal,
remediation of, and human exposure to, hazardous substances. Our research and development and manufacturing operations produce biological waste materials, such as human and animal tissue, and waste solvents, such as isopropyl alcohol. These
operations are permitted by regulatory authorities, and the resultant waste materials are disposed of in material compliance with environmental laws and regulations. Compliance with these laws and regulations may be expensive and non-compliance
could result in substantial liabilities. In addition, our manufacturing operations may result in the release, discharge, emission or disposal of hazardous substances that could cause us to incur substantial liabilities, including costs for
investigation and remediation. Our leased Redwood City facility sits on property formerly occupied by Rohm & Haas and Occidental Chemical Company and contains residual contamination in soil and groundwater from these past industrial
operations. Rohm & Haas and Occidental Chemical Company previously performed soil remediation on the property under the supervision of the California Regional Water Quality Control Board. Rohm & Haas has indemnified the owner of
the facility and its tenants against costs associated with the residual contamination, but there can be no assurance that this indemnification will be adequate to cover the extent of the liability. Environmental laws and regulations could become
more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We cannot assure you that violations of these laws and regulations will not occur in the future or have not occurred in the
past as a result of human error, accidents, equipment failure or other causes. The expense associated with environmental regulation and remediation could harm our financial condition and operating results.



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Our directors, officers, and affiliates have significant voting power and may take actions that may not be in the best
interests of our other stockholders.

As of August 1, 2007, our directors, officers, and affiliates each holding more than 5% of our common stock
collectively controlled approximately 37% of our outstanding common stock, assuming the exercise of all options held by such persons. As a result, these stockholders, if they act together, would be able to exercise significant control over the
management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership, except in the case of our pending merger
with ev3, may have the effect of delaying or preventing a change in control, might adversely affect the market price of our common stock and may not be in the best interests of our other stockholders.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law could discourage a takeover.

Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might enable our management to resist a takeover. These
provisions include:



| |  | a classified board of directors;
| | - | --------------------------------



| |  | advance notice requirements to stockholders for matters to be brought at stockholder meetings;
| | - | ----------------------------------------------------------------------------------------------



| |  | a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of these provisions could adversely
affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

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

We have never paid cash dividends and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends will depend on our earnings, capital requirements, financial condition, prospects and
other factors our board of directors may deem relevant. If we do not pay dividends, our stock may be less valuable because a return on your investment will only occur if our stock price appreciates.



|ITEM 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



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|ITEM 6. | EXHIBITS
|------- | --------



|               |  |                                                                                                                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                             
|2.1(A)1        |  | Agreement and Plan of Merger, dated as of August 26, 2006, by and between the Registrant and Kerberos Proximal Solutions, Inc.                                                          
|2.1(B)2        |  | Agreement and Plan of Merger, dated as of July 21, 2007, by and among ev3 Inc., FoxHollow Technologies, Inc., and Foreigner Merger Sub, Inc.                                            
|               | 
|3.23           |  | Amended and Restated Certificate of Incorporation.                                                                                                                                      
|               | 
|3.43           |  | Bylaws.                                                                                                                                                                                 
|               | 
|4.23           |  | Amended and Restated Specimen Common Stock certificate.                                                                                                                                 
|               | 
|4.34           |  | Stock Purchase Agreement, dated as of September 26, 2006, between the Registrant and Merck & Co., Inc.                                                                                  
|               | 
|4.44           |  | Registration Rights Agreement, dated as of September 26, 2006, between the Registrant and Merck & Co., Inc.                                                                             
|               | 
|4.55           |  | Form of restricted stock unit agreement for non-executive employees.                                                                                                                    
|               | 
|4.66           |  | Form of restricted stock unit agreement for executive officers.                                                                                                                         
|               | 
|10.1(A)3       |  | Form of Indemnification Agreement for directors and executive officers.                                                                                                                 
|               | 
|10.1(B)2       |  | Amendment, Waiver, Consent and Assumption Agreement dated as of July 21, 2007 by and among Merck & Co., Inc., FoxHollow Technologies, Inc. and ev3 Inc.                                 
|               | 
|10.23          |  | 1997 Stock Plan.                                                                                                                                                                        
|               | 
|10.33          |  | 2004 Equity Incentive Plan.                                                                                                                                                             
|               | 
|10.43          |  | 2004 Employee Stock Purchase Plan.                                                                                                                                                      
|               | 
|10.53          |  | 2004 Preferred Stock Plan.                                                                                                                                                              
|               | 
|10.63          |  | Amended and Restated Investors Rights Agreement, dated February 24, 2004, by and among the Registrant and certain stockholders.                                                        
|               | 
|10.73          |  | First Amendment to Amended and Restated Investors Rights Agreement, dated May 21, 2004, by and among the Registrant and certain stockholders.                                          
|               | 
|10.103         |  | Office Building Lease, dated May 3, 2004, by and between the Registrant and Woodside Technology Center, LLC for office space located at 740 Bay Road, Redwood City, California.         
|               | 
|10.113        |  | Master License Agreement dated August 24, 1999, by and between the Registrant and Surmodics, Inc., as amended.                                                                          
|               | 
|10.133         |  | Second Amendment to Amended and Restated Investors Rights Agreement, dated October 25, 2004, by and among the Registrant and certain stockholders.                                     
|               | 
|10.147        |  | Supplier Agreement between the Registrant and Norman Noble, Inc. dated March 25, 2005.                                                                                                  
|               | 
|10.158        |  | Collaboration and License Agreement between the Registrant and Merck & Co. Inc. dated September 14, 2005.                                                                               
|               | 
|10.169         |  | Time-sharing Agreement dated September 1, 2005, by and between the Registrant and JBS Consulting, LLC.                                                                                  
|               | 
|10.179         |  | Reimbursement Agreement dated September 1, 2005, by and among the Registrant, John B. Simpson, and JBS Consulting, LLC.                                                                 
|               | 
|10.189         |  | Office Building Lease, dated November 1, 2005, by and between the Registrant and Brittania Hacienda VIII LLC for office space located at 2081 Stierlin Court, Mountain View,
California.
|               | 
|10.2310        |  | Office Building Lease, dated February 1, 2007, by and between the Registrant and Slough Redwood City, LLC, for office space located at 900 Chesapeake Drive, Redwood City,
California.  



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|               |  |                                                                                                                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                       
|10.2410        |  | Assignment and Assumption Agreement, Dated as of October 19, 2006, by and between the Registrant and Google, Inc.                                                                                                                                                 
|               | 
|10.2511        |  | Office Building Lease, dated December 14, 2004, by and between Kerberos Proximal Solutions, Inc., a wholly-owned subsidiary of the Registrant, and EOP-Industrial Portfolio, L.L.C., for office
space located at 10600 North Tantau Avenue, Cupertino, California.
|               | 
|10.2611        |  | Office Building Lease, dated January 5, 2007, by and between the Registrant and AMB Property, L.P., for office space located at 1105 Hamilton Court, Menlo Park, California.                                                                                      
|               | 
|10.2812       |  | Amended and Restated Collaboration and License Agreement, dated as of September 26, 2006, by and between the Registrant and Merck & Co., Inc.                                                                                                                     
|               | 
|10.295         |  | Severance Agreement, dated as of February 2, 2007, by and between the Registrant and Kevin Cordell.                                                                                                                                                               
|               | 
|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.                                                                                                                

---

|1 | Incorporated by reference from our Form 8-K filed on August 28, 2006.
|- | ---------------------------------------------------------------------

|2 | Incorporated by reference from our Form 8-K filed on July 23, 2007.
|- | -------------------------------------------------------------------

|3 | Incorporated by reference from our Registration Statement on Form S-1 (Registration No. 333-118191), which was declared effective on October 27, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|4 | Incorporated by reference from our Form 8-K filed on September 28, 2006.
|- | ------------------------------------------------------------------------

|5 | Incorporated by reference from our Form 10-Q for the quarter ended March 31, 2007 filed on May 9, 2007.
|- | -------------------------------------------------------------------------------------------------------

|6 | Incorporated by reference from our Form 10-Q/A filed on August 8, 2007.
|- | -----------------------------------------------------------------------

|7 | Incorporated by reference from our Form 10-Q for the quarter ended March 31, 2005 filed on May 13, 2005.
|- | --------------------------------------------------------------------------------------------------------

|8 | Incorporated by reference from our Form 10-Q for the quarter ended September 30, 2005 filed on November 1, 2005.
|- | ----------------------------------------------------------------------------------------------------------------

|9 | Incorporated by reference from our Form 10-K filed on March 7, 2006.
|- | --------------------------------------------------------------------

|10 | Incorporated by reference from our Form 8-K filed on November 14, 2006.
|-- | -----------------------------------------------------------------------

|11 | Incorporated by reference from our Form 10-K filed on March 13, 2007.
|-- | ---------------------------------------------------------------------

|12 | Incorporated by reference from our Form 10-Q filed on November 9, 2006.
|-- | -----------------------------------------------------------------------

| | Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The confidential portions have been filed with the SEC.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|
|



36



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |                              |  |                                                                                         
|-------------------- |  | ---------------------------- |  | ----------------------------------------------------------------------------------------
|                     |  | FOXHOLLOW TECHNOLOGIES, INC.
|                     |  |                             
|Date: August 9, 2007 |  | By:                          |  | /S/ JOHN B. SIMPSON                                                                     
|                     |  |                              |  | John B. Simpson Chief Executive Officer (Principal Executive Officer)                   
|                     |  |                             
|Date: August 9, 2007 |  | By:                          |  | /S/ MATTHEW B. FERGUSON                                                                 
|                     |  |                              |  | Matthew B. Ferguson Chief Financial Officer (Principal Accounting and Financial Officer)



37