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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 March 31, 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 May 1,
2007
|Common Stock, $0.001 par value |  | 29,612,509                       



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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 March 31, 2007 and December 31, 2006                      |  | 3   
|               |  |                                                                                                   
|               |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006 |  | 4   
|               |  |                                                                                                   
|               |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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              |  | 12  
|               |  |                                                                                                   
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 19  
|               |  |                                                                                                   
|Item 4.        |  | Controls and Procedures                                                                            |  | 19  
|               |  |                                                                                                   
|               |  | Part II: Other Information                                                                         |  |     
|               |  |                                                                                                   
|Item 1.        |  | Legal Proceedings                                                                                  |  | 19  
|               |  |                                                                                                   
|Item 1A.       |  | Risk Factors                                                                                       |  | 20  
|               |  |                                                                                                   
|Item 2.        |  | Changes in Securities and Use of Proceeds                                                          |  | 31  
|               |  |                                                                                                   
|Item 3.        |  | Defaults Upon Senior Securities                                                                    |  | 31  
|               |  |                                                                                                   
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                |  | 31  
|               |  |                                                                                                   
|Item 5.        |  | Other Information                                                                                  |  | 31  
|               |  |                                                                                                   
|Item 6.        |  | Exhibits                                                                                           |  | 32  
|               | 
|Signatures     |  | 34                                                                                                
|               | 
|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)



|                                                                                                                        |  |               |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                        |  | March 31,2007 |         |   | December 31,2006 |  
|Assets                                                                                                                  |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                         |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                               |  | $             | 38,929  |   |                  | $ | 59,546  |  
|Short-term investments                                                                                                  |  |               | 130,787 |   |                  |   | 107,369 |  
|Accounts receivable, net of allowance for doubtful accounts of $1,280 at March 31, 2007 and $1,128 at December 31,
2006 |  |               | 19,421  |   |                  |   | 19,450  |  
|Research collaboration receivable                                                                                       |  |               |        |   |                  |   | 2,826   |  
|Inventories                                                                                                             |  |               | 16,508  |   |                  |   | 14,346  |  
|Prepaid expenses and other current assets                                                                               |  |               | 1,525   |   |                  |   | 2,826   |  
|                                                                                                                        |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                    |  |               | 207,170 |   |                  |   | 206,363 |  
|                                                                                                                        |  |              
|Property and equipment, net                                                                                             |  |               | 9,004   |   |                  |   | 8,328   |  
|Intangibles, net                                                                                                        |  |               | 11,721  |   |                  |   | 12,116  |  
|Goodwill                                                                                                                |  |               | 19,225  |   |                  |   | 19,186  |  
|Other assets                                                                                                            |  |               | 1,138   |   |                  |   | 1,119   |  
|                                                                                                                        |  |               |         |   |                  |   |         |  
|Total assets                                                                                                            |  | $             | 248,258 |   |                  | $ | 247,112 |  
|                                                                                                                        |  |               |         |   |                  |   |         |  
|Liabilities and Stockholders' Equity                                                                                    |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                    |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                        |  | $             | 9,903   |   |                  | $ | 9,385   |  
|Accrued liabilities                                                                                                     |  |               | 12,554  |   |                  |   | 12,000  |  
|Deferred revenue, current                                                                                               |  |               | 32,444  |   |                  |   | 32,444  |  
|                                                                                                                        |  |               |         |   |                  |   |         |  
|Total current liabilities                                                                                               |  |               | 54,901  |   |                  |   | 53,829  |  
|                                                                                                                        |  |              
|Deferred revenue                                                                                                        |  |               | 2,857   |   |                  |   | 5,968   |  
|Other liabilities                                                                                                       |  |               | 1,374   |   |                  |   | 1,166   |  
|                                                                                                                        |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                       |  |               | 59,132  |   |                  |   | 60,963  |  
|                                                                                                                        |  |               |         |   |                  |   |         |  
|                                                                                                                        |  |              
|Commitments and contingencies (Note 12)                                                                                 |  |               |         |   |                  |   |         |  
|                                                                                                                        |  |              
|Stockholders' equity:                                                                                                   |  |               |         |   |                  |   |         |  
|Common stock: $0.001 par value per share                                                                                |  |               | 29      |   |                  |   | 29      |  
|Additional paid-in capital                                                                                              |  |               | 288,579 |   |                  |   | 285,283 |  
|Deferred stock-based compensation                                                                                       |  |               | (1,462  | ) |                  |   | (1,866  | )
|Other comprehensive income                                                                                              |  |               | 28      |   |                  |   | 38      |  
|Accumulated deficit                                                                                                     |  |               | (98,048 | ) |                  |   | (97,335 | )
|                                                                                                                        |  |               |         |   |                  |   |         |  
|Total stockholders' equity                                                                                              |  |               | 189,126 |   |                  |   | 186,149 |  
|                                                                                                                        |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders' equity                                                                              |  | $             | 248,258 |   |                  | $ | 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,March 31, |       
|                                                                         |  | 2007                         |        |   | 2006 |  
|Revenue:                                                                 |  |                              |        |   |      |   |         |  
|Product                                                                  |  | $                            | 41,106 |   |      | $ | 44,583  |  
|Research collaboration                                                   |  |                              | 8,111  |   |      |   | 2,064   |  
|                                                                         |  |                              |        |   |      |   |         |  
|Net revenue                                                              |  |                              | 49,217 |   |      |   | 46,647  |  
|                                                                         |  |                              |        |   |      |   |         |  
|Costs and expenses:                                                      |  |                              |        |   |      |   |         |  
|Product                                                                  |  |                              | 9,119  |   |      |   | 11,157  |  
|Research collaboration                                                   |  |                              | 2,102  |   |      |   | 1,120   |  
|Research and development                                                 |  |                              | 6,939  |   |      |   | 4,091   |  
|Selling, general and administrative                                      |  |                              | 33,616 |   |      |   | 45,516  |  
|Amortization of purchased intangible assets                              |  |                              | 395    |   |      |   |        |  
|                                                                         |  |                              |        |   |      |   |         |  
|Total costs and expenses                                                 |  |                              | 52,171 |   |      |   | 61,884  |  
|                                                                         |  |                              |        |   |      |   |         |  
|Loss from operations                                                     |  |                              | (2,954 | ) |      |   | (15,237 | )
|Interest and other income and expense, net                               |  |                              | 2,241  |   |      |   | 599     |  
|                                                                         |  |                              |        |   |      |   |         |  
|Net loss                                                                 |  | $                            | (713   | ) |      | $ | (14,638 | )
|                                                                         |  |                              |        |   |      |   |         |  
|Net loss per common share:                                               |  |                              |        |   |      |   |         |  
|Basic and diluted                                                        |  | $                            | (0.02  | ) |      | $ | (0.60   | )
|                                                                         |  |                              |        |   |      |   |         |  
|Weighted-average number of shares used in per common share calculations: |  |                              |        |   |      |   |         |  
|Basic and diluted                                                        |  |                              | 29,320 |   |      |   | 24,304  |  
|                                                                         |  |                              |        |   |      |   |         |  

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)



|                                                                                          |  |                             |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Three months endedMarch 31, |        
|                                                                                          |  | 2007                        |         |   | 2006 |  
|Cash flows from operating activities:                                                     |  |                             |         |   |      |   |         |  
|Net loss                                                                                  |  | $                           | (713    | ) |      | $ | (14,638 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                             |         |   |      |   |         |  
|Loss/(gain) on disposal of property and equipment                                         |  |                             | 1       |   |      |   | 1       |  
|Allowance for doubtful accounts                                                           |  |                             | 167     |   |      |   | 152     |  
|Depreciation and amortization                                                             |  |                             | 1,580   |   |      |   | 1,075   |  
|Amortization of deferred stock-based compensation                                         |  |                             | 394     |   |      |   | 719     |  
|Stock-based compensation expense                                                          |  |                             | 3,158   |   |      |   | 14,074  |  
|Provision for excess and obsolete inventories                                             |  |                             | 201     |   |      |   | 354     |  
|Changes in operating assets and liabilities, net of the effect of acquisition:            |  |                             |         |   |      |   |         |  
|Accounts receivable                                                                       |  |                             | (136    | ) |      |   | (2,080  | )
|Research collaboration receivable                                                         |  |                             | 2,826   |   |      |   |        |  
|Inventories                                                                               |  |                             | (2,363  | ) |      |   | 501     |  
|Prepaid expenses and other current assets                                                 |  |                             | 1,301   |   |      |   | (44     | )
|Other assets                                                                              |  |                             | (19     | ) |      |   | (1      | )
|Accounts payable                                                                          |  |                             | 81      |   |      |   | (932    | )
|Accrued liabilities                                                                       |  |                             | 1,511   |   |      |   | 2,500   |  
|Deferred revenue                                                                          |  |                             | (3,111  | ) |      |   | (2,064  | )
|Other liabilities                                                                         |  |                             | 208     |   |      |   | (34     | )
|                                                                                          |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                             | 5,086   |   |      |   | (417    | )
|                                                                                          |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                                                     |  |                             |         |   |      |   |         |  
|Acquisition of property and equipment                                                     |  |                             | (1,426  | ) |      |   | (1,073  | )
|Proceeds from disposal of property and equipment                                          |  |                             | 1       |   |      |   |        |  
|Sales or maturities of investments                                                        |  |                             | 30,019  |   |      |   | 9,010   |  
|Purchases of investments                                                                  |  |                             | (53,447 | ) |      |   | (8,632  | )
|Acquisition of business, net of cash acquired                                             |  |                             | (976    | ) |      |   |        |  
|                                                                                          |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                     |  |                             | (25,829 | ) |      |   | (695    | )
|                                                                                          |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                                     |  |                             |         |   |      |   |         |  
|Proceeds from exercise of options to purchase common stock                                |  |                             | 126     |   |      |   | 914     |  
|Repurchase of common stock                                                                |  |                             |        |   |      |   | (3      | )
|                                                                                          |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                 |  |                             | 126     |   |      |   | 911     |  
|                                                                                          |  |                             |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                 |  |                             | (20,617 | ) |      |   | (201    | )
|                                                                                          |  |                            
|Cash and cash equivalents, beginning of period                                            |  |                             | 59,546  |   |      |   | 24,249  |  
|                                                                                          |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                  |  | $                           | 38,929  |   |      | $ | 24,048  |  
|                                                                                          |  |                             |         |   |      |   |         |  
|Supplemental disclosure of noncash investing and financing activities:                    |  |                             |         |   |      |   |         |  
|Changes in net unrealized gains/(losses) on investments                                   |  |                             | (10     | ) |      |   | 31      |  
|Reversal of deferred stock-based compensation                                             |  |                             | (10     | ) |      |   | (3,964  | )
|Vesting of restricted stock                                                               |  |                             | 20      |   |      |   | 64      |  

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 period ended March 31, 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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.

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 final valuation of net assets is expected to be completed upon the Companys receiving all the relevant information required to complete its
estimates, but no later than one year from the acquisition date in accordance with GAAP.

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.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



The following pro forma information assumes the Kerberos acquisition was effective as of the beginning of the
three-month period ending March 31, 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 months ended March 31, 2006 are as follows (in thousands, except per share data):



|                           |  |   |         |  
|-------------------------- |  | - | ------- | -
|Net revenue                |  | $ | 47,190  |  
|                           |  |   |         |  
|Net loss                   |  | $ | (17,112 | )
|                           |  |   |         |  
|Net loss per common share: |  |   |         |  
|Basic and diluted          |  | $ | (0.69   | )
|                           |  |   |         |  

The pro forma information for the three months ended March 31, 2006 reflects $395,000 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 months ended March 31, 2006 includes 389,653 shares issued to Kerberos stockholders in conjunction with the acquisition.

NOTE 3NET LOSS PER COMMON SHARE:

Basic net loss per common
share is computed by dividing net loss by the weighted-average number of common shares outstanding, excluding common shares subject to repurchase, during the period. Diluted net 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. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net
loss per common share is as follows (in thousands):



|                                                                                                                   |  |                             |        |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                                                   |  | Three Months EndedMarch 31, |       
|                                                                                                                   |  | 2007                        |        |   | 2006 |  
|Numerator:                                                                                                         |  |                             |        |   |      |   |         |  
|Net loss                                                                                                           |  | $                           | (713   | ) |      | $ | (14,638 | )
|                                                                                                                   |  |                             |        |   |      |   |         |  
|Denominator:                                                                                                       |  |                             |        |   |      |   |         |  
|Weighted-average common shares outstanding                                                                         |  |                             | 29,393 |   |      |   | 24,619  |  
|Less: Weighted-average unvested common shares subject to repurchase                                                |  |                             | (73    | ) |      |   | (315    | )
|                                                                                                                   |  |                             |        |   |      |   |         |  
|Weighted-average number of common shares outstanding used in computing basic and diluted net loss per common share |  |                             | 29,320 |   |      |   | 24,304  |  
|                                                                                                                   |  |                             |        |   |      |   |         |  

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):



|                                                                                                      |  |           |  |      
|----------------------------------------------------------------------------------------------------- |  | --------- |  | -----
|                                                                                                      |  | March 31,
|                                                                                                      |  | 2007      |  | 2006 
|Options to purchase common stock and common stock to be issued under the employee stock purchase plan |  | 3,971     |  | 3,727
|                                                                                                      |  |           |  |      



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FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



NOTE 4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 loss.

NOTE 5INVESTMENTS:

Investments consisted of the following (in thousands):



|                         |  |            |         |            |   |            |  |   |   |  |   |        
|------------------------ |  | ---------- | ------- | ---------- | - | ---------- |  | - | - |  | - | -------
|                         |  | Cost Basis |         | Unrealized |   | Fair Value
|                         |  | Gains      |         | Losses     |  
|At March 31, 2007        |  |            |         |            |   |            |  |   |   |  |   |        
|US Government securities |  | $          | 101,817 |            | $ | 17         |  | $ |  |  | $ | 101,834
|Corporate bonds          |  |            | 28,942  |            |   | 11         |  |   |  |  |   | 28,953 
|                         |  |            |         |            |   |            |  |   |   |  |   |        
|Total                    |  | $          | 130,759 |            | $ | 28         |  | $ |  |  | $ | 130,787
|                         |  |            |         |            |   |            |  |   |   |  |   |        
|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 March 31, 2007 and December 31, 2006 had maturities of less than a year.

NOTE 6 INVENTORIES:

Inventories consisted of the following (in thousands):



|                |  |               |        |                  |   |       
|--------------- |  | ------------- | ------ | ---------------- | - | ------
|                |  | March 31,2007 |        | December 31,2006
|Raw materials   |  | $             | 9,765  |                  | $ | 9,776 
|Work in process |  |               | 2,050  |                  |   | 1,644 
|Finished goods  |  |               | 4,693  |                  |   | 2,926 
|                |  |               |        |                  |   |       
|Total           |  | $             | 16,508 |                  | $ | 14,346
|                |  |               |        |                  |   |       

NOTE 7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 three months ended March 31, 2007 and 2006 is as follows (in thousands):



|                             |  |      |     |   |      |   |      |  
|---------------------------- |  | ---- | --- | - | ---- | - | ---- | -
|                             |  | 2007 |     |   | 2006 |  
|Balance at January 1         |  | $    | 240 |   |      | $ | 217  |  
|Add: Accruals for warranties |  |      | 143 |   |      |   | 319  |  
|Less: Cost of replacements   |  |      | (89 | ) |      |   | (284 | )
|                             |  |      |     |   |      |   |      |  
|Balance at March 31          |  | $    | 294 |   |      | $ | 252  |  
|                             |  |      |     |   |      |   |      |  



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



NOTE 8GOODWILL AND INTANGIBLE ASSETS:

The Company recorded approximately $19.2 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 during the
period as a result of updating our estimates used in the purchase accounting.

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



|                        |  |                     |        |                         |   |      |     |  |   |        |  |        
|----------------------- |  | ------------------- | ------ | ----------------------- | - | ---- | --- |  | - | ------ |  | -------
|                        |  | March 31, 2007      |        | AmortizationPeriod     
|                        |  | GrossCarryingAmount |        | AccumulatedAmortization |   |      | Net | 
|Acquired technology     |  | $                   | 12,400 |                         | $ | (852 | )   |  | $ | 11,548 |  | 8 years
|Customer relationships  |  |                     | 190    |                         |   | (17  | )   |  |   | 173    |  | 6 years
|                        |  |                     |        |                         |   |      |     |  |   |        |  |        
|Total intangible assets |  | $                   | 12,590 |                         | $ | (869 | )   |  | $ | 11,721 |  |        
|                        |  |                     |        |                         |   |      |     |  |   |        |  |        

Amortization expense for intangible assets for the three months ended March 31, 2007 was $395,000. Based on
the intangible asset balances at March 31, 2007, the Company expects to recognize amortization expense of $1.2 million in the remaining nine months of 2007, approximately $1.6 million for each year from 2008 to 2013, and approximately $1.1
million in 2014.

NOTE 9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 10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



9



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



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, was 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 11RECENT
ACCOUNTING PRONOUNCEMENTS:

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.

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.

NOTE 12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.



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(unaudited)



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. 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

|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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Results of operations. This section provides our analysis and outlook for the significant line items on our condensed consolidated statements of
operations.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 March 31, 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



12



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##### Table of Contents

commenced full commercial introduction of the SilverHawk in the United States. 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 over 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-month period ended March 31, 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., which manufactures and sells innovative medical devices for the removal of thrombi, or blood clots, from occluded arteries.

For the three months ended March 31, 2007, we generated net revenue of $49.2 million and a net loss of $713,000. As of March 31, 2007, our accumulated deficit
was $98.0 million. As of March 31, 2007, our cash, cash equivalents and investments balances totaled $169.7 million.



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##### Table of Contents

Results of Operations

Three Months Ended March 31, 2007 and March 31, 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 March 31, |       
|                                                                                                                                                                       |  | 2007                         |        |   | 2006 |    
|                                                                                                                                                                       |  | Amount                       |        |   | % 1  |     |   | Amount |   |         | % 1 | 
|Revenue:                                                                                                                                                               |  |                              |        |   |      |     |   |        |   |         |     |  |     |  
|Product                                                                                                                                                                |  | $                            | 41,106 |   |      | 84  | % |        | $ | 44,583  |     |  | 96  | %
|Research collaboration                                                                                                                                                 |  |                              | 8,111  |   |      | 16  | % |        |   | 2,064   |     |  | 4   | %
|                                                                                                                                                                       |  |                              |        |   |      |     |   |        |   |         |     |  |     |  
|Net revenue                                                                                                                                                            |  |                              | 49,217 |   |      | 100 | % |        |   | 46,647  |     |  | 100 | %
|                                                                                                                                                                       |  |                              |        |   |      |     |   |        |   |         |     |  |     |  
|Costs and expenses:                                                                                                                                                    |  |                              |        |   |      |     |   |        |   |         |     |  |     |  
|Product (includes $472 and $332 in stock-based compensation expense for the three months ended March 31, 2007 and 2006,
respectively)                                  |  |                              | 9,119  |   |      | 22  | % |        |   | 11,157  |     |  | 25  | %
|Research collaboration                                                                                                                                                 |  |                              | 2,102  |   |      | 26  | % |        |   | 1,120   |     |  | 54  | %
|Research and development (includes $750 and $527 in stock-based compensation expense for the three months ended March 31, 2007 and 2006,
respectively)                 |  |                              | 6,939  |   |      | 14  | % |        |   | 4,091   |     |  | 9   | %
|Selling, general and administrative (includes $2,330 and $13,934 in stock-based compensation expense for the three months ended March 31,
2007 and 2006, respectively) |  |                              | 33,616 |   |      | 68  | % |        |   | 45,516  |     |  | 98  | %
|Amortization of purchased intangible assets                                                                                                                            |  |                              | 395    |   |      | 1   | % |        |   |        |     |  | 0   | %
|                                                                                                                                                                       |  |                              |        |   |      |     |   |        |   |         |     |  |     |  
|Total costs and expenses                                                                                                                                               |  |                              | 52,171 |   |      | 106 | % |        |   | 61,884  |     |  | 133 | %
|                                                                                                                                                                       |  |                              |        |   |      |     |   |        |   |         |     |  |     |  
|Loss from operations                                                                                                                                                   |  |                              | (2,954 | ) |      | -6  | % |        |   | (15,237 | )   |  | -33 | %
|Interest and other income and expense, net                                                                                                                             |  |                              | 2,241  |   |      | 5   | % |        |   | 599     |     |  | 1   | %
|                                                                                                                                                                       |  |                              |        |   |      |     |   |        |   |         |     |  |     |  
|Net loss                                                                                                                                                               |  | $                            | (713   | ) |      | -1  | % |        | $ | (14,638 | )   |  | -32 | %
|                                                                                                                                                                       |  |                              |        |   |      |     |   |        |   |         |     |  |     |  

---

|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 $41.1 million for the three months ended March 31, 2007 as compared to $44.6 million for the three months ended March 31, 2006. The decrease of $3.5 million was attributable to
a decrease in the number of SilverHawk devices sold. The decrease in the number of devices sold was 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 March 31, 2007 as compared to $2.1 million for the three months ended March 31, 2006. For the three months ended March 31, 2007, all revenue was recognized
under the Amended Merck Collaboration Agreement. For the three months ended March 31, 2006, all revenue was recognized in connection with the delivery of tissue samples under the Merck Collaboration Agreement. The increase of $6.0 million was
due to the expansion of our collaboration under the Amended Merck Collaboration Agreement. 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.



14



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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 $9.1 million for the three months ended March 31,
2007 as compared to $11.2 million for the three months ended March 31, 2006. The decrease was primarily attributable to a decrease in the number of SilverHawk devices sold and a decrease in product costs as a percentage of product revenues. As
a percentage of product revenue, product costs were 22% in the three months ended March 31, 2007 as compared to 25% for the three months ended March 31, 2006. Primary factors that contributed to the decrease in product costs as a
percentage of product revenue included continued improvements related to the absorption of manufacturing overhead costs associated improved purchasing efficiencies of supplies and materials, and improved labor and manufacturing efficiencies. 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 $2.1 million for the three months ended March 31, 2007 as compared to $1.1 million for the three months ended March 31, 2006. The increase was primarily attributable to a $709,000 increase in personnel-related costs related resulting
from additional hiring of research and clinical personnel, and a $519,000 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 $6.9 million for the three months ended March 31, 2007 as compared to $4.1 million for the three months ended March 31, 2006. The
increase was primarily attributable to a $1.2 million increase in cost of materials and services used in product development, a $839,000 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 $223,000 increase in stock-based compensation. As a percentage of net revenue, research and development expenses for the three months ended
March 31, 2007 were 14% as compared to 9% for the three months ended March 31, 2006. We expect research and development expenses to increase 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 $33.6 million for the three months ended March 31, 2007
as compared to $45.5 million for the three months ended March 31, 2006. The decrease was primarily attributable to a decrease in stock-based compensation of $11.6 million, of which $11.4 million relates to the retirement of our former chief
executive officer, and a $1.7 million decrease in personnel costs related to a decrease in the size of our direct sales force and decreased commission payouts. The decrease was partially offset by a $1.4 million increase in legal, accounting, and
consulting expenses and a $206,000 increase in the cost of product demonstration units. As a percentage of net revenue, selling, general and administrative expenses for the three months ended March 31, 2007 were 68% as compared to 98% for the
three months ended March 31, 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 March 31, 2007 as
compared to $0 for the three months ended March 31, 2006. The increase in amortization was attributable to the intangible assets purchased in the Kerberos acquisition in September 2006. We expect amortization of purchased intangibles of $1.2
million in the remaining nine 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

Interest and Other Income and Expense, net. Interest and other income and expense was $2.2 million for the
three months ended March 31, 2007 as compared to $599,000 for the three months ended March 31, 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 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 three months ended March 31, 2007 we recorded $3.5 million in stock-based compensation expense for employees. As of March 31, 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 $31.7 million, net of forfeitures.
The remaining weighted-average requisite service period of these options is approximately three years.

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 March 31, 2007 was $14.9 million, net of stock option cancellations, with accumulated amortization of $13.4 million. The remaining $1.5 million 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:



|                              |  |        |            
|----------------------------- |  | ------ | -----------
|Period                        |  | Amount
|Remaining nine months of 2007 |  | $      | 1.1 million
|2008                          |  | $      | 0.4 million

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 $49,000 and $234,000 in stock-based compensation expense for non-employees in the three months ended March 31, 2007 and 2006, respectively.

Liquidity and Capital Resources

In September 2006, we entered into a Stock Purchase Agreement and a Registration
Rights Agreement with Merck & Co. which became effective on November 9, 2006. Under the terms of the Stock Purchase Agreement, we received $95.0 million in exchange for approximately 3.2 million shares of our stock. The shares are
unregistered and the stock contains certain rights, preferences and restrictions including Mercks right to a seat on the board of directors, anti-dilution provisions, and a three-year lock-up provision. As this stock contains rights,
preferences and restrictions not applicable to common shareholders, we obtained a contemporaneous independent third-party valuation of the stock resulting in a determination that its fair value was $68.9 million. The fair value of the stock issued
to Merck was determined based on the market value of an equivalent number of shares of our common stock traded on the NASDAQ Global Market on November 9, 2006, or $92.9 million, adjusted for valuation discounts and premiums related to the
specific rights, preferences and restrictions applicable to the shares purchased by Merck. The difference between the value of shares issued to Merck and the consideration paid for the shares based on the price specified in the Stock Purchase
Agreement was primarily attributable to the lock-up provision that precludes the disposition of the shares for three years. As we negotiated the Stock Purchase Agreement and the Amended Merck Collaboration Agreement concurrently, we believe that the
Stock Purchase Agreement and the Amended Merck Collaboration Agreement represent a single economic arrangement. As such, we have accounted for the difference between the amount paid by Merck and the fair value of the shares as determined by the
independent third-party valuation, or $26.1 million, as a prepayment for services to be provided under the Amended Merck Collaboration Agreement. The prepayment has been recorded as deferred revenue and will be recognized as revenue over the
estimated four-year term of the collaboration agreement. As of March 31, 2007, we had $38.9 million of cash and cash equivalents, $130.8 million of investments, and $152.3 million of working capital.



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Contractual Obligations. The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due as of March 31, 2007:



|                   |  |       |        |                         |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      
|------------------ |  | ----- | ------ | ----------------------- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | ---------- | ----- |  | - | ----- |  | - | -----
|                   |  | Total |        | 2007(remaining9 months) |   | 2008  |  | 2009 |       | 2010 |   | 2011  |  | Thereafter
|Operating leases   |  | $     | 18,671 |                         | $ | 1,815 |  | $    | 2,205 |      | $ | 2,262 |  | $          | 2,347 |  | $ | 2,103 |  | $ | 7,939
|Supplier agreement |  |       | 4,043  |                         |   | 597   |  |      | 3,446 |      |   |      |  |            |      |  |   |      |  |   |     
|Royalty obligation |  |       | 64     |                         |   | 64    |  |      |      |      |   |      |  |            |      |  |   |      |  |   |     
|                   |  |       |        |                         |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   |      
|Total              |  | $     | 22,778 |                         | $ | 2,476 |  | $    | 5,651 |      | $ | 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 Menlo Park, California expiring May 2007, 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 $4.0 million remains at March 31, 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.

Net Cash Provided by (Used in) Operating Activities.Net cash provided by operating activities was $5.1 million for the three months ended March 31, 2007 as compared to $417,000 used in operating activities for the three
months ended March 31, 2006. For the three months ended March 31, 2007, net cash provided by operating activities was primarily attributable to a net loss of $713,000 off-set by non-cash charges of $3.6 million related to stock-based
compensation and depreciation and amortization of $1.6 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 $3.1 million
decrease in deferred revenue related to amortization of research collaboration revenue and a $2.4 million increase in inventory balances as we purchased raw materials and produced new products. For the three months ended March 31, 2006, net
cash used in operating activities was primarily attributable to a net loss of $14.6 million, decreases of deferred revenue of $2.1 million as we delivered tissue samples under the Merck Collaboration Agreement and increases in accounts receivable
balances of $2.1 million as we increased our net revenue; partially offset by adjustments for non-cash charges related to stock-based compensation of $14.8 million which includes a charge of $11.4 million related to the retirement of our former
chief executive officer, depreciation and amortization of $1.1 million and increases in accrued liabilities of $2.5 million due to our increased operating expenses.

Net Cash Used in Investing Activities. Net cash used in investing activities was $25.8 million for the three months ended March 31, 2007 as compared to $695,000 used in investing activities for the
three months ended March 31, 2006. For the three months ended March 31, 2007, net cash used in investing activities was primarily attributable to purchases of investments of $53.4 million, $1.4 million in purchases of property and
equipment, and $976,000 used to pay direct costs associated with the Kerberos acquisition, offset by $30.0 million in sales or maturities of investments. For the three months ended March 31, 2006, net cash used in investing activities was
primarily attributable to purchases of investments of $8.6 million and $1.1 million in purchases of property and equipment, offset by $9.0 million in sales or maturities of investments.

Net Cash Provided by Financing Activities. Net cash provided by financing activities was $126,000 for the three months ended March 31, 2007 as compared to $911,000 for the three months ended
March 31, 2006. For each of the three month periods ended March 31, 2007 and 2006, net cash provided by financing activities was attributable to proceeds from exercise of options to purchase common stock.



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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 March 31, 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.

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 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.

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



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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.



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

Our
exposure to interest rate risk at March 31, 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 three
months ended March 31, 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



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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. 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 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

The instability we may experience based on our continued management changes and involvement in arbitration or litigation related to those changes
may further depress the price of our stock.

In 2006, we went through a period of transition and replaced our president and chief executive officer,
chief operating officer, vice president of U.S. sales and vice president of marketing. Recently, we hired a new senior vice president of sales to replace the prior vice president of sales we appointed in January 2006. In addition, Dr. Simpson,
our chief executive officer and president, has indicated that if we find a suitable replacement, he plans to transition out of his current role by the end of 2007 into a position focused on research and development of new company products. As we
search for and hire a new president and chief executive officer, we may again experience a period of instability. We are already the subject of litigation by stockholders who have suffered losses in the value of our stock during periods of
transition, and we may incur costs or liabilities as a result of the departure of 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.



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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.

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.



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If we make acquisitions or divestitures, we could encounter difficulties that harm our business.

We may acquire companies, products or technologies that we believe to be complementary to the present or future direction of our business. If we engage in such
acquisitions, we may have difficulty integrating the acquired personnel, financials, operations, products or technologies. For example, on September 12, 2006, we acquired Kerberos Proximal Solutions, Inc. and we are now beginning to sell the
Rinspirator. We may find that we are unable to gain market share or physician acceptance for this product. In addition, we may experience difficulties with transitioning the manufacturing of the Rinspirator to our facilities and the Rinspirator may
be subject to regulatory and intellectual property risks that are different from those that we have encountered with the SilverHawk. In addition to the Kerberos acquisition, we may acquire other companies and product lines or enter into distribution
agreements. Acquisitions may dilute our earnings per share, disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities, and increase our risk of litigation, all of which could harm our
business. If we use cash to acquire companies, products or technologies, it may divert resources otherwise available for other purposes. If we use our common stock to acquire companies, products or technologies, our stockholders may experience
substantial dilution.

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. In December 2005 our president and chief executive officer retired
from our company. Since then, our vice president of sales and vice president of marketing have resigned. In addition, we decided to replace our chief operating officer and the senior vice president of sales that we appointed in January 2006. In
addition, our current chief executive officer and president has indicated that if we find a suitable replacement, he plans to transition out of his current role by the end of 2007 into a position focused on research and development of new company
products. We can not provide any assurance that we will find a qualified and acceptable replacement for the position of chief executive officer. In addition, we could lose some members of our senior management depending on who is selected to fill
that position. The further 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
$713,000 for the three months ended March 31, 2007 and $12.2 million for the year ended December 31, 2006. As of March 31, 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 field inventory for
SilverHawk product can fluctuate significantly and we believe has 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.

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



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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 rapidly 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.

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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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.

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.
| | - |  | ----------------------------------------------------------------------------------------------

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



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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.

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 excised plaque were not captured properly in our device, it 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.

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



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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. 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.



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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. 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.



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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 first quarter of 2007, the FDA has received 11 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;
| | - |  | ---------------------------------------------------------------------------



| |  |  | 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.



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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.

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



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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 the following 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.

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 May 1, 2007,
our directors, officers, and affiliates each holding more than 5% of our common stock collectively controlled approximately 33% 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 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.



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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
|------- | --------



|              |  |                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                             
|2.11          |  | Agreement and Plan of Merger, Dated as of August 26, 2006, by and between the Registrant and Kerberos Proximal Solutions, Inc.                                                          
|              | 
|3.22          |  | Amended and Restated Certificate of Incorporation.                                                                                                                                      
|              | 
|3.42          |  | Bylaws.                                                                                                                                                                                 
|              | 
|4.22          |  | Amended and Restated Specimen Common Stock certificate.                                                                                                                                 
|              | 
|4.33          |  | Stock Purchase Agreement, dated as of September 26, 2006, between the Registrant and Merck & Co., Inc.                                                                                  
|              | 
|4.43          |  | Registration Rights Agreement, dated as of September 26, 2006, between the Registrant and Merck & Co., Inc.                                                                             
|              | 
|4.5           |  | Form of restricted stock unit agreement for non-executive employees                                                                                                                     
|              | 
|4.6           |  | Form of restricted stock unit agreement for executive officers                                                                                                                          
|              | 
|10.12         |  | Form of Indemnification Agreement for directors and executive officers.                                                                                                                 
|              | 
|10.22         |  | 1997 Stock Plan.                                                                                                                                                                        
|              | 
|10.32         |  | 2004 Equity Incentive Plan.                                                                                                                                                             
|              | 
|10.42         |  | 2004 Employee Stock Purchase Plan.                                                                                                                                                      
|              | 
|10.52         |  | 2004 Preferred Stock Plan.                                                                                                                                                              
|              | 
|10.62         |  | Amended and Restated Investors Rights Agreement, dated February 24, 2004, by and among the Registrant and certain stockholders.                                                        
|              | 
|10.72         |  | First Amendment to Amended and Restated Investors Rights Agreement, dated May 21, 2004, by and among the Registrant and certain stockholders.                                          
|              | 
|10.102        |  | 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2       |  | Master License Agreement dated August 24, 1999, by and between the Registrant and Surmodics, Inc., as amended.                                                                          
|              | 
|10.132        |  | Second Amendment to Amended and Restated Investors Rights Agreement, dated October 25, 2004, by and among the Registrant and certain stockholders.                                     
|              | 
|10.144       |  | Supplier Agreement between the Registrant and Norman Noble, Inc. dated March 25, 2005.                                                                                                  
|              | 
|10.155       |  | Collaboration and License Agreement between the Registrant and Merck & Co. Inc. dated September 14, 2005.                                                                               
|              | 
|10.166        |  | Time-sharing Agreement dated September 1, 2005, by and between the Registrant and JBS Consulting, LLC.                                                                                  
|              | 
|10.176        |  | Reimbursement Agreement dated September 1, 2005, by and among the Registrant, John B. Simpson, and JBS Consulting, LLC.                                                                 
|              | 
|10.186        |  | 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.
|              | 
|10.237        |  | 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.  



32



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                       
|10.247        |  | Assignment and Assumption Agreement, Dated as of October 19, 2006, by and between the Registrant and Google, Inc.                                                                                                                                                 
|              | 
|10.258        |  | 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.
|              | 
|10.268        |  | 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9       |  | Amended and Restated Collaboration and License Agreement, dated as of September 26, 2006, by and between the Registrant and Merck & Co., Inc.                                                                                                                     
|              | 
|10.29         |  | 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 Registration Statement on Form S-1 (Registration No. 333-118191), which was declared effective on October 27, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | Incorporated by reference from our Form 8-K filed on September 28, 2006.
|- | ------------------------------------------------------------------------

|4 | Incorporated by reference from our Form 10-Q for the quarter ended March 31, 2005 filed May 13, 2005.
|- | -----------------------------------------------------------------------------------------------------

|5 | Incorporated by reference from our Form 10-Q for the quarter ended September 30, 2005 filed November 1, 2005.
|- | -------------------------------------------------------------------------------------------------------------

|6 | Incorporated by reference from our Form 10-K filed on March 7, 2006.
|- | --------------------------------------------------------------------

|7 | Incorporated by reference from our Form 8-K filed on November 14, 2006.
|- | -----------------------------------------------------------------------

|8 | Incorporated by reference from our Form 10-K filed on March 13, 2007.
|- | ---------------------------------------------------------------------

|9 | 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.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------



33



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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: May 9, 2007 |  |  |  | By:                          |  | /s/ JOHN B. SIMPSON                                                 
|                  |  |  |  |                              |  | John B. Simpson                                                     
|                  |  |  |  |                              |  | Chief Executive Officer (Principal Executive Officer)               
|                  |  |  | 
|Date: May 9, 2007 |  |  |  | By:                          |  | /s/ MATTHEW B. FERGUSON                                             
|                  |  |  |  |                              |  | Matthew B. Ferguson                                                 
|                  |  |  |  |                              |  | Chief Financial Officer (Principal Accounting and Financial Officer)



34