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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, 2005



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 an accelerated filer (as defined by rule 12b-2 of the Exchange
Act).    YES ̈NO  x



|                               |  |                                  
|------------------------------ |  | ---------------------------------
|Class                          |  | Shares Outstanding at May 1, 2005
|Common Stock, $0.001 par value |  | 23,064,016                       



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##### Table of Contents

FOXHOLLOW TECHNOLOGIES, INC.



FORM
10-Q



TABLE OF CONTENTS



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                       |  | Page
|Part I: Financial Information
|                              |  |                                                                                      
|Item 1.                       |  | Condensed Financial Statements (unaudited):                                           |  |     
|                              |  |                                                                                      
|                              |  | Condensed Balance Sheets at March 31, 2005 and December 31, 2004                      |  | 3   
|                              |  |                                                                                      
|                              |  | Condensed Statements of Operations for the Three Months Ended March 31, 2005 and 2004 |  | 4   
|                              |  |                                                                                      
|                              |  | Condensed Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 |  | 5   
|                              |  |                                                                                      
|                              |  | Notes to Condensed Financial Statements                                               |  | 6   
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 27  
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 27  
|                             
|Part II: Other Information   
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 28  
|                              |  |                                                                                      
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                             |  | 28  
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 28  
|                              |  |                                                                                      
|Item 5.                       |  | Other Information                                                                     |  | 28  
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 29  
|                              | 
|Signatures                    |  | 30                                                                                   
|                              | 
|Certifications                |  |                                                                                      



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##### Table of Contents

PART I:    FINANCIAL INFORMATION



ITEM 1.    CONDENSED FINANCIAL STATEMENTS



FOXHOLLOW TECHNOLOGIES, INC.



CONDENSED BALANCE SHEETS

(in thousands, unaudited)



|                                                                                                                    |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                    |  | March 31,2005 |         |   | December 31,2004 |  
|Assets                                                                                                              |  |               |         |   |                  |   |         |  
|Current assets:                                                                                                     |  |               |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                           |  | $             | 12,506  |   |                  | $ | 27,506  |  
|Short-term investments                                                                                              |  |               | 44,992  |   |                  |   | 42,887  |  
|Accounts receivable, net of allowance for doubtful accounts of $478 at March 31, 2005 and $324 at December 31, 2004 |  |               | 11,322  |   |                  |   | 7,666   |  
|Inventories                                                                                                         |  |               | 9,197   |   |                  |   | 7,619   |  
|Prepaid expenses and other current assets                                                                           |  |               | 2,342   |   |                  |   | 1,091   |  
|                                                                                                                    |  |               |         |   |                  |   |         |  
|Total current assets                                                                                                |  |               | 80,359  |   |                  |   | 86,769  |  
|                                                                                                                    |  |              
|Property and equipment, net                                                                                         |  |               | 5,319   |   |                  |   | 3,506   |  
|Long-term investments                                                                                               |  |               | 4,238   |   |                  |   |        |  
|Other assets                                                                                                        |  |               | 562     |   |                  |   | 561     |  
|                                                                                                                    |  |               |         |   |                  |   |         |  
|Total assets                                                                                                        |  | $             | 90,478  |   |                  | $ | 90,836  |  
|                                                                                                                    |  |               |         |   |                  |   |         |  
|Liabilities and Stockholders Equity                                                                                |  |               |         |   |                  |   |         |  
|Current liabilities:                                                                                                |  |               |         |   |                  |   |         |  
|Accounts payable                                                                                                    |  | $             | 5,974   |   |                  | $ | 3,757   |  
|Accrued liabilities                                                                                                 |  |               | 7,576   |   |                  |   | 5,406   |  
|                                                                                                                    |  |               |         |   |                  |   |         |  
|Total liabilities                                                                                                   |  |               | 13,550  |   |                  |   | 9,163   |  
|                                                                                                                    |  |               |         |   |                  |   |         |  
|Stockholders equity                                                                                                |  |               |         |   |                  |   |         |  
|Common stock: $0.001 par value per share                                                                            |  |               | 22      |   |                  |   | 22      |  
|Additional paid-in capital                                                                                          |  |               | 170,010 |   |                  |   | 169,389 |  
|Deferred stock-based compensation, net                                                                              |  |               | (12,949 | ) |                  |   | (14,202 | )
|Other comprehensive loss                                                                                            |  |               | (137    | ) |                  |   | (41     | )
|Accumulated deficit                                                                                                 |  |               | (80,018 | ) |                  |   | (73,495 | )
|                                                                                                                    |  |               |         |   |                  |   |         |  
|Total stockholders equity                                                                                          |  |               | 76,928  |   |                  |   | 81,673  |  
|                                                                                                                    |  |               |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                          |  | $             | 90,478  |   |                  | $ | 90,836  |  
|                                                                                                                    |  |               |         |   |                  |   |         |  



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





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FOXHOLLOW TECHNOLOGIES, INC.



CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



|                                                                                 |  |                             |        |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                 |  | Three Months EndedMarch 31, |       
|                                                                                 |  | 2005                        |        |   | 2004 |  
|Net revenue                                                                      |  | $                           | 21,478 |   |      | $ | 4,775  |  
|Cost of revenue (1)                                                              |  |                             | 8,891  |   |      |   | 4,109  |  
|                                                                                 |  |                             |        |   |      |   |        |  
|Gross profit                                                                     |  |                             | 12,587 |   |      |   | 666    |  
|                                                                                 |  |                             |        |   |      |   |        |  
|Operating expenses:                                                              |  |                             |        |   |      |   |        |  
|Research and development (1)                                                     |  |                             | 2,409  |   |      |   | 1,215  |  
|Selling, general and administrative (1)                                          |  |                             | 17,120 |   |      |   | 5,669  |  
|                                                                                 |  |                             |        |   |      |   |        |  
|Total operating expenses                                                         |  |                             | 19,529 |   |      |   | 6,884  |  
|                                                                                 |  |                             |        |   |      |   |        |  
|Loss from operations                                                             |  |                             | (6,942 | ) |      |   | (6,218 | )
|                                                                                 |  |                            
|Interest and other income                                                        |  |                             | 419    |   |      |   | 26     |  
|                                                                                 |  |                             |        |   |      |   |        |  
|Net loss                                                                         |  |                             | (6,523 | ) |      |   | (6,192 | )
|Dividend related to beneficial conversion feature of convertible preferred stock |  |                             |       |   |      |   | (1,780 | )
|                                                                                 |  |                             |        |   |      |   |        |  
|Net loss attributable to common stockholders                                     |  | $                           | (6,523 | ) |      | $ | (7,972 | )
|                                                                                 |  |                             |        |   |      |   |        |  
|Net loss per common share:                                                       |  |                             |        |   |      |   |        |  
|Basic and diluted                                                                |  | $                           | (0.29  | ) |      | $ | (12.48 | )
|                                                                                 |  |                             |        |   |      |   |        |  
|Weighted-average number of shares used in per common share calculations:         |  |                             |        |   |      |   |        |  
|Basic and diluted                                                                |  |                             | 22,345 |   |      |   | 639    |  
|                                                                                 |  |                             |        |   |      |   |        |  
|(1)    Includes the following stock-based compensation charges:                  | 
|                                                                                 |  |                            
|Cost of revenue                                                                  |  | $                           | 173    |   |      | $ | 38     |  
|Research and development                                                         |  |                             | 319    |   |      |   | 72     |  
|Selling, general and administrative                                              |  |                             | 1,284  |   |      |   | 898    |  
|                                                                                 |  |                             |        |   |      |   |        |  
|                                                                                 |  | $                           | 1,776  |   |      | $ | 1,008  |  
|                                                                                 |  |                             |        |   |      |   |        |  



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





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FOXHOLLOW TECHNOLOGIES, INC.



CONDENSED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)



|                                                                                 |  |                             |         |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                 |  | Three Months EndedMarch 31, |        
|                                                                                 |  | 2005                        |         |   | 2004 |  
|Cash flows from operating activities:                                            |  |                             |         |   |      |   |        |  
|Net loss                                                                         |  | $                           | (6,523  | ) |      | $ | (6,192 | )
|Adjustments to reconcile net loss to net cash used in operating activities:      |  |                             |         |   |      |   |        |  
|Allowance for doubtful accounts                                                  |  |                             | 154     |   |      |   | 91     |  
|Depreciation and amortization                                                    |  |                             | 603     |   |      |   | 218    |  
|Amortization of deferred stock-based compensation                                |  |                             | 1,202   |   |      |   | 799    |  
|Stock-based compensation expense                                                 |  |                             | 574     |   |      |   | 209    |  
|Provision for excess and obsolete inventories                                    |  |                             | 842     |   |      |   | 270    |  
|Changes in operating assets and liabilities:                                     |  |                             |         |   |      |   |        |  
|Accounts receivable                                                              |  |                             | (3,810  | ) |      |   | (1,699 | )
|Inventories                                                                      |  |                             | (2,420  | ) |      |   | (975   | )
|Prepaid expenses and other current assets                                        |  |                             | (1,251  | ) |      |   | (3     | )
|Other assets                                                                     |  |                             | (1      | ) |      |   | 11     |  
|Accounts payable                                                                 |  |                             | 2,217   |   |      |   | 394    |  
|Accrued liabilities                                                              |  |                             | 2,242   |   |      |   | 706    |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Net cash used in operating activities                                            |  |                             | (6,171  | ) |      |   | (6,171 | )
|                                                                                 |  |                             |         |   |      |   |        |  
|Cash flows from investing activities:                                            |  |                             |         |   |      |   |        |  
|Acquisition of property and equipment                                            |  |                             | (2,416  | ) |      |   | (239   | )
|Sales or maturities of investments                                               |  |                             | 7,456   |   |      |   | 2,535  |  
|Purchases of investments                                                         |  |                             | (13,895 | ) |      |   |       |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Net cash provided by (used in) investing activities                              |  |                             | (8,855  | ) |      |   | 2,296  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Cash flows from financing activities:                                            |  |                             |         |   |      |   |        |  
|Proceeds from issuance of convertible preferred stock, net                       |  |                             |        |   |      |   | 4,764  |  
|Proceeds from exercise of options to purchase common stock                       |  |                             | 32      |   |      |   | 14     |  
|Repurchase of common stock                                                       |  |                             | (6      | ) |      |   |       |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Net cash provided by financing activities                                        |  |                             | 26      |   |      |   | 4,778  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                             |  |                             | (15,000 | ) |      |   | 903    |  
|                                                                                 |  |                            
|Cash and cash equivalents, beginning of period                                   |  |                             | 27,506  |   |      |   | 2,637  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                         |  | $                           | 12,506  |   |      | $ | 3,540  |  
|                                                                                 |  |                             |         |   |      |   |        |  
|Supplemental disclosure of noncash investing and financing activities:           |  |                             |         |   |      |   |        |  
|Changes in net unrealized gains on investments                                   |  | $                           | (96     | ) |      | $ |       |  
|Reversal of deferred stock-based compensation                                    |  |                             | (51     | ) |      |   |       |  
|Vesting of restricted stock                                                      |  |                             | 72      |   |      |   |       |  
|Dividend related to beneficial conversion feature of convertible preferred stock |  |                             |        |   |      |   | 1,780  |  
|Deferred stock-based compensation                                                |  |                             |        |   |      |   | 7,845  |  



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





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FOXHOLLOW TECHNOLOGIES INC.



NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)



NOTE 1Organization and Basis of Presentation:



Organization



FoxHollow Technologies, Inc. (the Company) designs, develops, manufactures and sells medical devices primarily for the treatment of peripheral
artery disease (PAD). PAD results from the accumulation of plaque in the arteries. The Company sells the SilverHawk Plaque Excision System (SilverHawk), a minimally-invasive single-use catheter system designed for removal of
plaque from arteries. Plaque removal re-opens previously narrowed arteries, allowing increased blood flow to tissue and organs. In June 2003, the U.S. Food and Drug Administration (FDA) granted 510(k) clearance to market the SilverHawk
for treatment of atherosclerosis in the peripheral vasculature. The Company was incorporated in the state of Delaware on September 24, 1996. On October 28, 2004, the Company completed an initial public offering of 4.5 million shares of its common
stock at $14.00 per share. Additionally, on October 29, 2004, the underwriters exercised their over-allotment option to purchase 675,000 shares at $14.00 per share. Proceeds from the offering after deducting underwriting discounts and commissions
but before expenses were $67.4 million.



Basis of Presentation



The accompanying unaudited condensed 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, 2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005, or for any future period. These condensed 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, 2004, filed with the Securities and Exchange Commission on March 28, 2005. Certain items in the prior periods financial statements have been reclassified to conform to the current periods format.



NOTE 2Accounting for Stock-Based Compensation:



The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its interpretations and complies with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock- Based Compensation-Transition and Disclosurean amendment of FASB Statement No. 123. Under APB Opinion No. 25, compensation
expense is based on the difference, if any, on the date of the grant between the fair value of the Companys stock and the exercise price. Employee stock-based compensation is amortized on a straight-line basis over the vesting period of the
underlying options. SFAS No. 123 defines the fair value based method of accounting for an employee stock option or similar equity investment.



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The following table illustrates the effect on net loss if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation arrangements (in thousands, except per share data):





|                                                                                   |  |                             |        |   |      |   |        |  
|---------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                   |  | Three Months EndedMarch 31, |       
|                                                                                   |  | 2005                        |        |   | 2004 |  
|Net loss attributable to common stockholders, as reported                          |  | $                           | (6,523 | ) |      | $ | (7,972 | )
|Add: Employee stock-based compensation included in reported net loss               |  |                             | 1,202  |   |      |   | 799    |  
|Deduct: Employee total stock-based compensation determined under fair value method |  |                             | (1,808 | ) |      |   | (818   | )
|                                                                                   |  |                             |        |   |      |   |        |  
|Pro forma net loss attributable to common stockholders                             |  | $                           | (7,129 | ) |      | $ | (7,991 | )
|                                                                                   |  |                             |        |   |      |   |        |  
|Net loss attributable to common stockholders per common share, basic and diluted:  |  |                             |        |   |      |   |        |  
|As reported                                                                        |  | $                           | (0.29  | ) |      | $ | (12.48 | )
|                                                                                   |  |                             |        |   |      |   |        |  
|Pro forma                                                                          |  | $                           | (0.32  | ) |      | $ | (12.51 | )
|                                                                                   |  |                             |        |   |      |   |        |  



The Company accounts
for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments that Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, which require that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as
the underlying equity instruments vest. Non-employee stock-based compensation expense is being recognized on a straight-line basis over the vesting periods of the related options, generally two years.



NOTE 3Net Loss Per Common Share:



Basic net loss per common share is computed by dividing net loss
attributable to common stockholders 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 options, warrants, common stock subject to repurchase, and convertible preferred stock. 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, |       
|                                                                                                                   |  | 2005                        |        |   | 2004 |  
|Numerator:                                                                                                         |  |                             |        |   |      |   |        |  
|Net loss                                                                                                           |  | $                           | (6,523 | ) |      | $ | (6,192 | )
|Dividend related to beneficial conversion feature of convertible preferred stock                                   |  |                             |       |   |      |   | (1,780 | )
|                                                                                                                   |  |                             |        |   |      |   |        |  
|Net loss attributable to common stockholders                                                                       |  | $                           | (6,523 | ) |      | $ | (7,972 | )
|                                                                                                                   |  |                             |        |   |      |   |        |  
|Denominator:                                                                                                       |  |                             |        |   |      |   |        |  
|Weighted-average common shares outstanding                                                                         |  |                             | 23,013 |   |      |   | 639    |  
|Less: Weighted-average unvested common shares subject to repurchase                                                |  |                             | (668   | ) |      |   |       |  
|                                                                                                                   |  |                             |        |   |      |   |        |  
|Weighted-average number of common shares outstanding used in computing basic and diluted net loss per common share |  |                             | 22,345 |   |      |   | 639    |  
|                                                                                                                   |  |                             |        |   |      |   |        |  



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The following outstanding options, convertible preferred stock, and warrants were excluded from the
computation of diluted net loss per common share for the periods presented because including them would have had an antidilutive effect (in thousands):



|                                                 |  |                             |  |       
|------------------------------------------------ |  | --------------------------- |  | ------
|                                                 |  | Three MonthsEnded March 31,
|                                                 |  | 2005                        |  | 2004  
|Convertible preferred stock                      |  |                            |  | 11,213
|Options to purchase common stock                 |  | 4,524                       |  | 3,439 
|Warrants to purchase convertible preferred stock |  |                            |  | 213   
|                                                 |  |                             |  |       
|                                                 |  | 4,524                       |  | 14,865
|                                                 |  |                             |  |       



NOTE 4Comprehensive Income:



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



NOTE 5Investments:



Investments consisted of the following (in thousands):



|                                                         |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|-------------------------------------------------------- |  | --------- | ------ | --------------- | - | ---------------- |  | - | --------- | - |  | - | ------
|Short-Term Investments                                   |  | CostBasis |        | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|At March 31, 2005                                        |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|US Government securities (maturities less than one year) |  | $         | 34,585 |                 | $ | 1                |  | $ | (91       | ) |  | $ | 34,495
|Corporate bonds (maturities less than one year)          |  |           | 10,523 |                 |   | 7                |  |   | (33       | ) |  |   | 10,497
|                                                         |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|Total                                                    |  | $         | 45,108 |                 | $ | 8                |  | $ | (124      | ) |  | $ | 44,992
|                                                         |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|Long-Term Investments                                    |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|At March 31, 2005                                        |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|US Government securities (maturities more than one year) |  | $         | 4,259  |                 | $ |                 |  | $ | (21       | ) |  | $ | 4,238 
|                                                         |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|Total                                                    |  | $         | 4,259  |                 | $ |                 |  | $ | (21       | ) |  | $ | 4,238 
|                                                         |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|                                                         |  |           |        |                
|Short-Term Investments                                   |  | CostBasis |        | UnrealizedGains |   | UnrealizedLosses |  |   | FairValue
|At December 31, 2004                                     |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|US Government securities (maturities less than one year) |  | $         | 32,306 |                 | $ | 1                |  | $ | (21       | ) |  | $ | 32,286
|Corporate bonds (maturities less than one year)          |  |           | 10,622 |                 |   | 7                |  |   | (28       | ) |  |   | 10,601
|                                                         |  |           |        |                 |   |                  |  |   |           |   |  |   |       
|Total                                                    |  | $         | 42,928 |                 | $ | 8                |  | $ | (49       | ) |  | $ | 42,887
|                                                         |  |           |        |                 |   |                  |  |   |           |   |  |   |       



The Company has not
experienced any significant realized gains or losses on its investments in the periods presented in the statements of operations.



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NOTE 6Inventories:



Inventories consisted of the following (in thousands):



|                |  |               |       |                  |   |      
|--------------- |  | ------------- | ----- | ---------------- | - | -----
|                |  | March 31,2005 |       | December 31,2004
|Raw materials   |  | $             | 5,821 |                  | $ | 4,833
|Work in process |  |               | 928   |                  |   | 1,366
|Finished goods  |  |               | 2,448 |                  |   | 1,420
|                |  |               |       |                  |   |      
|                |  | $             | 9,197 |                  | $ | 7,619
|                |  |               |       |                  |   |      



NOTE 7Recent Accounting
Pronouncements:



In December 2004, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (revised 2004), (SFAS No. 123(R)). SFAS No. 123(R) would require companies to measure all
stock-based compensation awards, including grants of employee stock options, using a fair value method and record such expense in the financial statements. In addition, the adoption of SFAS No. 123(R) will require additional accounting related to
the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. On April 14, 2005, the Securities and Exchange Commission (SEC) approved a new rule for public companies
that delays the effective date of SFAS 123(R). Under the SECs rule, SFAS 123(R) is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005, which will require the Company to adopt this
standard by January 1, 2006. The Company is in the process of assessing the impact of adopting this new standard.



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|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 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 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,
2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Factors affecting future operating results.This section discusses the most significant factors that could affect our future financial results. The factors discussed in this
section are in addition to factors that may be described in the MD&A captions discussed above and elsewhere in this report.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Company Description. We design, develop, manufacture and sell medical devices primarily for the treatment of peripheral artery disease. 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. Our first 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 and a battery-driven control unit that connects to the catheter, 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.



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 FDA to market the SilverHawk for treatment of atherosclerosis in the peripheral vasculature in June 2003. In
July 2003, we began to build our U.S. direct sales organization and initiated sales of the SilverHawk to several large medical centers in the United States. In January 2004, we commenced full commercial introduction of the SilverHawk in the United
States. 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,



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our sales outside of the United States have been limited, and we expect our international sales to remain limited for the foreseeable future.



We are expanding our direct sales force in the United States to further
penetrate the PAD market. We have increased our sales force from 69 direct sales representatives as of December 31, 2004 to 89 as of March 31, 2005, and we expect to continue to grow our sales force. We market the SilverHawk through our direct sales
force in the United States primarily to interventional cardiologists, as well as to vascular surgeons and interventional radiologists. We sell the SilverHawk to over 700 current hospital customers in the United States. No single customer accounted
for more than 5% of our net revenue in the three months ended March 31, 2005. 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 manufacture the
SilverHawk with parts manufactured in-house and components supplied by vendors, which we then assemble, test and package. We offer five different SilverHawk catheters of various diameters and tip lengths to accommodate differing artery sizes and
amounts of plaque.



For the three months ended March 31, 2005,
we generated net revenue of $21.5 million and a net loss of $6.5 million. As of March 31, 2005, our accumulated deficit was $80.0 million. We expect to continue to incur net losses until the fourth quarter in 2005, excluding stock-based
compensation, as we expand our sales force and grow our operations. As of March 31, 2005, our cash, cash equivalents, short-term and long-term investments balances were $61.7 million. On October 28, 2004, the Company completed an initial public
offering of 4.5 million shares of its common stock. Additionally, on October 29, 2004, the underwriters of the offering exercised their over-allotment option to purchase 675,000 shares. Proceeds from the offering after deducting underwriting
discounts and commissions but before expenses were $67.4 million.



Results
of Operations



Three Months Ended March 31, 2005 and March 31, 2004



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



|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|--------------------------------------------------------------- |  | ---------------------------- | ------ | - | --------------- | --- | - | ------ | - | ------ | --------------- |  | ---- | -
|                                                                |  | Three Months Ended March 31, |       
|                                                                |  | 2005                         |        |   | 2004            |    
|                                                                |  | Amount                       |        |   | % of NetRevenue |     |   | Amount |   |        | % of NetRevenue | 
|Net revenue                                                     |  | $                            | 21,478 |   |                 | 100 | % |        | $ | 4,775  |                 |  | 100  | %
|Cost of revenue (1)                                             |  |                              | 8,891  |   |                 | 41  | % |        |   | 4,109  |                 |  | 86   | %
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|Gross profit                                                    |  |                              | 12,587 |   |                 | 59  | % |        |   | 666    |                 |  | 14   | %
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|Operating expenses                                              |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|Research and development (1)                                    |  |                              | 2,409  |   |                 | 11  | % |        |   | 1,215  |                 |  | 25   | %
|Selling, general and administrative (1)                         |  |                              | 17,120 |   |                 | 80  | % |        |   | 5,669  |                 |  | 119  | %
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|Total operating expenses                                        |  |                              | 19,529 |   |                 | 91  | % |        |   | 6,884  |                 |  | 144  | %
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|Loss from operations                                            |  |                              | (6,942 | ) |                 | -32 | % |        |   | (6,218 | )               |  | -130 | %
|Interest and other income                                       |  |                              | 419    |   |                 | 2   | % |        |   | 26     |                 |  | 1    | %
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|Net loss                                                        |  | $                            | (6,523 | ) |                 | -30 | % |        | $ | (6,192 | )               |  | -129 | %
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|(1)    Includes the following stock-based compensation charges: | 
|                                                                |  |                              |        |  
|Cost of revenue                                                 |  | $                            | 173    |   |                 |     |   |        | $ | 38     |                 |  |      |  
|Research and development                                        |  |                              | 319    |   |                 |     |   |        |   | 72     |                 |  |      |  
|Selling, general and administrative                             |  |                              | 1,284  |   |                 |     |   |        |   | 898    |                 |  |      |  
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  
|                                                                |  | $                            | 1,776  |   |                 |     |   |        | $ | 1,008  |                 |  |      |  
|                                                                |  |                              |        |   |                 |     |   |        |   |        |                 |  |      |  



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Net Revenue. Net revenue is derived from sales of the SilverHawk. Net revenue was $21.5
million for the three months ended March 31, 2005 as compared to $4.8 million for the three months ended March 31, 2004. The increase in net revenue was attributable to an increase in the number of SilverHawk devices sold as well as a 39% increase
in the average sales price per unit. The increase in the number of devices sold is primarily attributable to an increase in the number of hospital customers purchasing our devices as we have expanded our sales force. The increase in the average
sales price per unit is attributable to price increases related to improvements to the SilverHawk design. We expect our net revenue to increase as we continue to expand our sales force to increase penetration of the U.S. PAD market.



Cost of Revenue. Cost of revenue consists primarily of
material, labor and overhead costs. Cost of revenue was $8.9 million for the three months ended March 31, 2005 as compared to $4.1 million for the three months ended March 31, 2004. The increase was primarily attributable to the increase in the
number of SilverHawk devices sold. As a percentage of net revenue, cost of revenue was 41% in the three months ended March 31, 2005 as compared to 86% in the three months ended March 31, 2004. Primary factors that contributed to the decrease in the
cost of revenue as a percentage of net revenue included improved absorption of manufacturing overhead costs associated with increased production volumes, improved purchasing efficiencies for supplies and materials, and improved labor and
manufacturing efficiencies, partially offset by an increase in stock-based compensation of $135,000. We expect that cost of revenue as a percentage of net revenue will continue to decrease as we implement cost reduction initiatives and benefit from
economies of scale.



Research and Development.
Research and development expenses consist primarily of personnel and material costs within our product development, regulatory and clinical organizations and the costs of clinical studies. Research and development expenses were $2.4 million for the
three months ended March 31, 2005 as compared to $1.2 million for the three months ended March 31, 2004. The increase was primarily attributable to a $827,000 increase in personnel related costs, a $247,000 increase in stock-based compensation and a
$69,000 increase in consulting expenses. As a percentage of net revenue, research and development expenses were 11% in the three months ended March 31, 2005. In future periods, we expect research and development expenses to grow in absolute terms
but remain consistent as a percentage of net revenue as we enhance the capabilities of the SilverHawk and explore new applications and indications for our plaque excision technology platform.



Selling, General and Administrative. Selling, general and
administrative expenses consist primarily of personnel 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 $17.1 million for the three months ended March 31, 2005 as compared to $5.7 million for the three months ended March 31, 2004. The increase was primarily attributable to a $7.6 million increase in personnel costs related
to employment of additional sales and marketing personnel and sales commissions paid, a $386,000 increase in stock-based compensation, a $1.0 million increase in travel and related expenses, and a $642,000 increase in marketing and promotional
activities. As a percentage of net revenue, selling, general and administrative expenses in the three months ended March 31, 2005 were 80%. We expect to incur additional operating costs, such as professional fees and insurance costs, related to the
growth of our business and our operations as a public company. We expect selling, general and administrative expenses to increase in absolute terms as we expand our sales and marketing efforts and incur additional administrative costs, but to
decrease as a percentage of net revenue as we leverage our existing selling, general and administrative infrastructure.



Interest and Other Income. Interest and other income was $419,000 for the three months ended March 31, 2005 as compared to $26,000 for the
three months ended March 31, 2004. The increase in interest and other income is primarily attributable to higher average cash, cash equivalents, and investment balances that increased as a result of cash received from financing activities.



Beneficial Conversion Feature. The issuance of
Series E convertible preferred stock resulted in a beneficial conversion feature, calculated in accordance with EITF No. 00-27, Application of Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,



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to Certain Convertible Instruments, based on the conversion price and fair value of the common stock on the date of issuance. Accordingly, we
recognized $1.8 million as a charge to additional paid-in-capital to account for the deemed dividend on the convertible preferred stock for the three months ended March 31, 2004. The amount of the deemed dividend related to the beneficial conversion
feature was recorded upon issuance of the convertible preferred stock, as the convertible preferred stock can be converted to common stock by the holder at any time.



Stock-Based Compensation



We record deferred stock-based compensation for financial reporting purposes as the difference between the exercise price of options granted to employees
and directors and the estimated fair value of our common stock at the time of grant. Deferred stock-based compensation is amortized on a straight-line basis to cost of revenue, research and development expenses and selling, general and
administrative expenses. Deferred stock-based compensation recorded through March 31, 2005 was $20.2 million, net of stock option cancellations, with accumulated amortization of $7.2 million. The remaining $13.0 million will be amortized over the
vesting periods of the 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 9 months of 2005 |  | $      | 3.6 million
|2006                       |  | $      | 4.8 million
|2007                       |  | $      | 3.9 million
|2008                       |  | $      | 0.7 million



Stock-based
compensation expenses related to stock options granted to non-employees are recognized as the stock options are earned. The amount of stock-based compensation expenses to be recorded in future periods may decrease if unvested options are cancelled.
Our stock-based compensation expenses will fluctuate as the fair market value of our common stock fluctuates. We recorded $574,000 and $209,000 in stock-based compensation expense in the three months ended March 31, 2005 and 2004, respectively.



Liquidity and Capital Resources



On October 28, 2004, the Company completed an initial public offering of 4.5
million shares of its common stock. Additionally, on October 29, 2004, the underwriters exercised their over-allotment option of 675,000 shares. Proceeds from the offering, after deducting underwriting discounts and commissions but before expenses,
were $67.4 million. As of March 31, 2005, we had $12.5 million of cash and cash equivalents, $45.0 million of short-term investments, $4.2 million of long-term investments, and $66.8 million of working capital.



The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due as of March 31, 2005:



|                                   |  |                        |        |                     |   |               |  |               |       |                       |   |       |  |   |    
|---------------------------------- |  | ---------------------- | ------ | ------------------- | - | ------------- |  | ------------- | ----- | --------------------- | - | ----- |  | - | ---
|                                   |  | Payments Due by Period
|                                   |  | (in thousands)        
|Contractual Obligations            |  | Total                  |        | Less than1 year (*) |   | 1-3 years(**) |  | 3-5 years(**) |       | More than5 years (**)
|Operating leases                   |  | $                      | 5,582  |                     | $ | 679           |  | $             | 2,452 |                       | $ | 1,817 |  | $ | 634
|Related party consulting agreement |  |                        | 1,242  |                     |   | 225           |  |               | 900   |                       |   | 117   |  |   |   
|Royalty obligation                 |  |                        | 60     |                     |   | 60            |  |               |      |                       |   |      |  |   |   
|Purchase agreement                 |  |                        | 5,657  |                     |   |              |  |               | 5,657 |                       |   |      |  |   |   
|                                   |  |                        |        |                     |   |               |  |               |       |                       |   |       |  |   |    
|                                   |  | $                      | 12,541 |                     | $ | 964           |  | $             | 9,009 |                       | $ | 1,934 |  | $ | 634
|                                   |  |                        |        |                     |   |               |  |               |       |                       |   |       |  |   |    

---

|(*) | Remaining 9 months.
|--- | -------------------

|(**) | Calendar year periods.
|---- | ----------------------



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The long-term commitments under operating leases shown above consist of payments related to our real
estate leases in Redwood City, California expiring December 2005 and August 2011.



In May 2004, we entered into a consulting agreement with the chairman of our board of directors, Dr. John B. Simpson, pursuant to which he provides us with consulting services and is paid $25,000 per month. The term
of the agreement is five years unless terminated earlier.



For
2006 and each year thereafter, the quarterly minimum patent royalty obligation 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.



In March 2005, the
Company entered into a purchase agreement with one of its suppliers for certain manufacturing components used in the Companys devices. Under the terms of this agreement, the Company will be required to make payments to the supplier for
differences between actual purchase quantities and the minimum purchase quantities defined in the agreement.



Net Cash Used in Operating Activities. Net cash used in operating activities was $6.2 million for the three months ended March 31, 2005
compared to $6.2 million for the three months ended March 31, 2004. For each of these periods, net cash used in operating activities was attributable primarily to net losses after adjustment for non-cash allowances and provisions, depreciation and
amortization, amortization of deferred stock-based compensation charges and increases in working capital requirements due to increased sales of the SilverHawk.



Net Cash Provided by (Used in) Investing Activities. Net cash used in investing activities was $8.9 million for the three months ended
March 31, 2005 compared to net cash provided by investing activities of $2.3 million for the three months ended March 31, 2004. For the three months ended March 31, 2005, net cash used in investing activities was attributable to purchases of
investments and acquisition of property and equipment offset by sales or maturities of investments. For the three months ended March 31, 2004, net cash provided by investing activities was attributable to sales or maturities of investments offset by
acquisition of property and equipment.



Net Cash Provided
by Financing Activities. Net cash provided by financing activities was $26,000 for the three months ended March 31, 2005 compared to $4.8 million for the three months ended March 31, 2004. For the three months ended March 31, 2005, net cash
provided by financing activity was attributable to proceeds from issuance of common stock related to stock option exercises offset by repurchases of common stock. For the three months ended March 31, 2004, net cash provided by financing activity was
attributable to issuance of convertible preferred stock and issuance of common stock related to stock option exercises.



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



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



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



| |  |  | costs of obtaining and maintaining FDA and other regulatory clearances of the SilverHawk;
| | - |  | -----------------------------------------------------------------------------------------



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



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



Off-Balance-Sheet Arrangements.As of March 31, 2005, we did not have any significant off-balance-sheet arrangements, as defined in Item
303(a)(4)(ii) of SEC Regulation S-K.



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Summary.We believe that our current cash, cash equivalents, 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 product development 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.



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment (revised 2004), (SFAS No. 123(R)). SFAS No. 123(R) would require companies to measure all stock-based compensation awards, including grants of employee stock options, using a fair value method and record
such expense in the financial statements. In addition, the adoption of SFAS No. 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment
arrangements. On April 14, 2005, the Securities and Exchange Commission (SEC) approved a new rule for public companies that delays the effective date of SFAS 123(R). Under the SECs rule, SFAS 123(R) is now effective for public companies for
annual, rather than interim, periods that begin after June 15, 2005, which will require the Company to adopt this standard by January 1, 2006. The Company is in the process of assessing the impact of adopting this new standard.



Factors Affecting Future Operating Results



We have a limited history of operations and a history of net losses. Our cost of
producing and selling goods is high relative to our sales. Consequently, we may not be able to achieve profitability even if we are able to generate significant revenue from sales of the SilverHawk.



We have a limited history of operations upon which you can evaluate our
business. In particular, we incurred net losses of $6.5 million in the first quarter of 2005 and $29.9 million in the full year of 2004. As of March 31, 2005, we had an accumulated deficit of $80.0 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.



Our cost of revenue was approximately 41% of our net revenue for the three
months ended March 31, 2005 and approximately 86% of our net revenue for the three months ended March 31, 2004. We expect to continue to have high costs of revenue for the immediate future. In addition, we expect our operating expenses will increase
as we expand our business to meet anticipated growing demand for the SilverHawk and devote substantial resources to our sales force expansion, sales and marketing programs and research and development activities. If over the long-term we are unable
to reduce our cost of producing goods and expenses relative to our net revenue, we may not achieve profitability even if we are able to generate significant revenue from sales of the SilverHawk. Our failure to achieve and sustain profitability would
negatively impact the market price of our common stock.



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We depend on a single product, the SilverHawk, which we only recently introduced in the United States. If the
SilverHawk fails to gain or loses market acceptance, our business will suffer.



The SilverHawk is our only product, and we are wholly dependent on it. We expect that sales of the SilverHawk in the United States will account for substantially all of our revenue for the foreseeable future. Because
of its recent commercial introduction, the SilverHawk has limited product and brand recognition. We do not know if the SilverHawk will be successful over the long term. 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 have no current plans to conduct such comparative
studies. In addition, demand for the SilverHawk may decline or may not increase as quickly as we expect. Failure of the SilverHawk to significantly penetrate current or new markets would negatively impact our business, financial condition and
results of operations.



We have no long-term data regarding the safety and
efficacy of the SilverHawk. Any long-term data that is generated may not be positive or consistent with our limited short-term data, which would affect the rate at which our device is adopted.



The SilverHawk is a novel product, and our success depends on its acceptance
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. Because our technology is relatively new in the treatment of PAD, to date there have been four single-center, clinical experiences with limited patient populations that have measured short-term restenosis and
patency rates up to six months following treatment. There has been one single-center study measuring patency rates one year following treatment. None of these studies were conducted by us. We have not conducted, and do not have any current plans to
conduct, studies designed to measure restenosis rates or patency rates after treatment with the SilverHawk. If we decide to conduct such studies in the future, they will be expensive and time consuming. Our TALON registry may produce limited subset
data regarding restenosis and patency rates, but such an evaluation is not mandated by the registry protocol. Another important factor that physicians will consider is the rate of reintervention, or retreatment, following the SilverHawk procedure.
Our TALON registry is designed to gather reintervention data, but we cannot provide any assurance that the data collected will be compelling to the medical community, because it may not be scientifically meaningful and may not demonstrate that the
SilverHawk is an attractive procedure when compared against data from alternative procedures. In addition, the long-term effects of the SilverHawk procedure are not known. We expect one-year reintervention data from a subset of the TALON registry to
be available during the second quarter of 2005.



The results of
short-term clinical experience of the SilverHawk do not necessarily predict long-term clinical benefit. Restenosis rates usually increase over time, and typically one-year restenosis rates are substantially higher than six-month 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 the 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 our TALON registry or any clinical studies or clinical or commercial experience indicate that the SilverHawk is not as safe or effective as other treatment
options or as current short-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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Our ability to market the SilverHawk in the United States is limited to use in peripheral vessels, and 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.



We have FDA clearance 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. While off-label uses of medical devices are common and FDA does not regulate physicians choice of treatments, FDA does restrict a manufacturers communications regarding such off-label use. We may not actively promote or
advertise the SilverHawk for off-label uses. In addition, we cannot make comparative claims regarding the use of the SilverHawk against any alternative treatments without conducting head-to-head comparative clinical studies, which would be expensive
and time consuming. We do not have any current plans to conduct clinical studies in the near future to evaluate the SilverHawk against any alternative method of treatment. If our promotional activities fail to comply with 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 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. FDA may require that we resubmit an application for an Investigational Device Exemption, or IDE, before we can recommence our coronary clinical trial. Such a resubmission could add significant time to the regulatory approval
process for the use of the SilverHawk in coronary arteries. If FDA approves our IDE and we recommence a coronary clinical trial with our redesigned product, we do not know whether that trial will be successful. Even if we believe a clinical trial
demonstrates promising safety and efficacy data, such results may not be sufficient to obtain FDA approval. Without conducting and successfully completing further clinical studies, our ability to market the SilverHawk will be limited and our revenue
expectations may not be realized.



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



We believe that we must educate physicians to change their screening and referral practices. For example, 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 both coronary artery disease and 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 in particular, they may not refer patients to interventional cardiologists, vascular surgeons
or interventional radiologists for the SilverHawk procedure, 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.



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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, provides challenges to our organization, requiring us to rapidly expand our sales personnel and manufacturing operations. Our sales force has increased from 69 direct sales representatives on December 31, 2004 to 89
on March 31, 2005, and we expect to continue to grow our sales force and invest heavily in recruiting and retaining sales representatives. We are also currently in the process of expanding our manufacturing operations significantly. Rapid expansion
in personnel means that less experienced people may be 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 in commercial quantities, which could adversely impact our business.



Because we have only limited experience in manufacturing the SilverHawk 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 the SilverHawk for the following additional reasons:



| |  |  | we are in the process of significantly expanding our manufacturing operations, and our production processes may have to change to accommodate this growth;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | we may experience a delay in obtaining validation for our new controlled-environment room at our new manufacturing facility;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | we have limited experience manufacturing the SilverHawk in compliance with FDAs Quality System Regulation; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If we are unable to keep up with demand for the
SilverHawk, our revenue could be impaired, market acceptance for the SilverHawk could be adversely affected, and our customers might instead purchase our competitors products. Our inability to successfully manufacture the SilverHawk would have
a material adverse effect on our revenue.



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. 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;
| | - |  | --------------------------------------------------------------------------------------------------------



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



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| |  |  | 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 SilverHawk components, 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 our components. For example, we rely on one vendor for our torque shaft, one vendor for our
cutting blade motor, and one vendor for our flex circuit. These components are critical to the SilverHawk 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, 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 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 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 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 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, 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 or carotid arteries. 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. We continue to sell in the European
Union a version of the SilverHawk for use in the coronary arteries that does not incorporate some modifications and product enhancements we have made in later generations of our peripheral device,



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including an improved catheter shaft that may allow for more precise and stable rotational positioning, a marker that may allow for improved placement of the
catheter and cutting blade, and an improved handle and interface designed to provide the user with greater control. We are currently in the process of incorporating these design improvements into the European version of the SilverHawk used in
coronary arteries. Until these improvements are available in the European version of the SilverHawk, there could be greater risk of injury with that product. 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.



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.



We compete against very large and well-known stent and angioplasty device manufacturers, including Abbott Laboratories,
Boston Scientific, Cook, Guidant, Johnson & Johnson and Medtronic. We also compete against smaller manufacturers, including, among others: ev3, a manufacturer of peripheral vascular stents; Spectranetics, a manufacturer of excimer lasers for the
treatment of coronary artery disease and PAD; and Vascular Architects, a manufacturer of stents. 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. 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 the SilverHawk from our competitors and their products, and includes such factors as:



| |  |  | the SilverHawks ability to treat PAD 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 treating PAD, 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 the SilverHawk 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 is currently conducting clinical trials for the use of drug-eluting stents and Edwards is conducting clinical trials



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for the use of non-drug-eluting stents in the peripheral vasculature, each of which, if successful, may impact future SilverHawk sales. If we are unable to
innovate successfully, the SilverHawk could become obsolete, and our revenue would decline as our customers purchase our competitors products.



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 the SilverHawk.



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 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 the SilverHawk to avoid infringement. Adverse determinations in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling the SilverHawk, which would have
a significant adverse impact on our business.



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



We are aware of patent families related to catheter positioning and atherectomy, or plaque removal, owned or licensed by Guidant. 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 Guidant, and he is a listed inventor on several patents covering that device.
Those patents are now held by Guidant. Guidants device is currently marketed and sold for use in coronary arteries. We are not currently aware of any claims Guidant 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 Guidant, we may be prevented from asserting an invalidity defense regarding those patents, and our defense may be compromised. Guidant 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,
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



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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 a
SilverHawk device and attempt to replicate some or all of the competitive advantages we derive from our development efforts or design around our protected technology. If our intellectual property is not adequately protected against competitors
products and methods, our competitive position could be adversely affected, as could our business.



If we 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. 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 which could harm our business. If we use cash to acquire companies, products or technologies, it may divert resources available for other purposes. If we use our
common stock to acquire companies, products or technologies, it may substantially dilute the percentage of the company held by stockholders who own securities prior to the acquisition.



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



The SilverHawk is a medical device that is subject to extensive regulation by 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 premarketing approval from 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 FDA and obtain premarket approval. Therefore, even if 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.



We are also subject to medical device reporting regulations that require
us to report to FDA if our product causes or contributes to a death or serious injury or malfunctions. As of March 31, 2005, FDA had received twenty-five reports of major complications during SilverHawk procedures, which complications included two
deaths with no device implications, three stent and device interactions requiring surgery, seven stent and device



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interactions requiring intervention, five tip detachments requiring intervention, four tip detachments requiring intervention that were linked to having used
the device without following instructions, one tip delamination, one tip detachment requiring surgical retrieval, one perforation treated interventionally, and one iliac perforation repaired surgically. The identification or increased frequency of
serious safety risks could result in product recall or withdrawal of our clearance or approval.



FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action
by 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 or modifications to existing products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



Modifications to the SilverHawk 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. 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, FDA can review 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, the SilverHawk 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 FDA
disagrees and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the SilverHawk 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 FDAs Quality System Regulation, our manufacturing operations could be delayed and SilverHawk sales could suffer.



Our manufacturing processes and those of our suppliers are required to comply with 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 the SilverHawk. 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 FDA, state authorities and comparable agencies in other countries. We were recently inspected
by FDA, and two minor observations were noted. We corrected the observations, and they were verified by FDA. 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



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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.



The SilverHawk has been and may in the future be subject to product recalls that could harm our reputation.



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. Thirty-eight of 127 affected devices were used in procedures on patients. While no adverse events were reported 30 days after these procedures, we have been
unable to determine whether the devices we recalled were contaminated or whether the laboratory that initially tested the recalled devices incorrectly concluded that the units were not sterile. 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 the SilverHawk could affect the adoption of the SilverHawk and our future revenue.



Currently, the SilverHawk procedure is typically reimbursed by third-party
payors, including Medicare and private healthcare insurance companies, under existing atherectomy codes. These payors may adversely change their coverage and reimbursement policies, as well as payment amounts. 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 the SilverHawk procedure, they are less likely to use it and our business would be adversely impacted.



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



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



The expense and potential unavailability of insurance coverage for our company or our
customers could adversely affect our ability to sell the SilverHawk, 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



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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 the SilverHawk. Medical malpractice carriers are withdrawing coverage in certain states or substantially increasing premiums. If this trend continues or worsens, our customers may discontinue using the SilverHawk and
potential customers may opt against purchasing the SilverHawk due to the cost or inability to procure insurance coverage.



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



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



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 Bay Road facility was 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 Bay Road 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.



To
market and sell the SilverHawk internationally, we depend on distributors, and they may not be successful.



For the quarter ended March 31, 2005, we derived less than 1% of revenue from international sales. Over the long term, we intend to grow our business
internationally, and to do so we may need to attract third-party



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distributors to sell the SilverHawk internationally. Distributors may not commit the necessary resources to market and sell the SilverHawk to the level of
our expectations. If we are unable to locate distributors in particular geographic areas, we may not realize expected long-term international revenue growth.



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



Our directors, officers and principal stockholders each
holding more than 5% of our common stock collectively will control approximately 55% 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
control 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.



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.



The cost of public company compliance with the securities laws and
regulations is substantial and recently enacted and proposed changes to these laws and regulations will further increase our general and administrative expenses.



The cost of complying with the reporting requirements under the Securities and Exchange Act of 1934 are substantial. In
addition, the Sarbanes-Oxley Act of 2002, along with other recent and proposed rules from the SEC and Nasdaq, have required further legal and financial compliance costs, and made some corporate actions more difficult. For example, compliance with
the internal control requirements of Sarbanes-Oxley Section 404 requires us to commit significant resources to document and review the adequacy of our internal controls. While we are expending significant resources in developing the required
documentation and testing procedures required by Section 404, we can provide no assurance as to conclusions by our external auditors with respect to the effectiveness of our internal controls over financial reporting. If we are unable to comply with
the requirements of Section 404, we will have to issue a report that our internal controls are not effective, which could cause the market price of our stock to decline.



In addition, the changes in securities laws and regulations may make it more difficult and more expensive for us to maintain
director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments also could make it more difficult for us to attract and retain qualified executive
officers and members of our board of directors, particularly with regard to our audit committee.



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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.



Our lock-up period is scheduled to expire in the second quarter of 2005, which may increase the short-term volatility of our stock.



Our lock-up period, if not otherwise modified, is scheduled to expire on May
14, 2005. Upon expiration of the lock-up period, approximately 17.7 million shares will be available for sale subject to any resale restrictions of the federal securities laws, including, in some instances, the limitations of Rules 144 and 701 under
the Securities Act of 1933, as amended. The expiration of the lock-up period may result in near-term volatility in our stock.



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our exposure to interest rate risk at March 31, 2005 is related primarily to our investment portfolio. Our investment portfolio includes fixed rate debt
instruments of high quality 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 short-term
and long-term investments is 5 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 100% and 98% of our sales
were made in U.S. dollars for the three months ended March 31, 2005 and 2004, respectively. To date, we have not had any material exposure to foreign currency rate fluctuations.



ITEM 4.    CONTROLS AND PROCEDURES



An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report was carried out
under the supervision and with the participation of our management, including our chief executive officer and chief financial officer. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are effective to ensure that material information relating to us, is made known to them, particularly during the period in which this report was prepared, in order to allow timely decisions regarding required
disclosure.



There was no change in our internal control over
financial reporting (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.



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PART II: OTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS



The Company is not presently party to any material litigation.



ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS



We registered the initial public offering of our common stock, par value $0.001 per share, on a Registration Statement on Form S-1, as amended,
(Registration No. 333-118191), which was declared effective on October 27, 2004. On October 28, 2004, we completed the initial public offering of our common stock by selling 4.5 million shares at $14.00 per share. Additionally, on October 29, 2004,
the underwriters exercised their over-allotment option to purchase 675,000 shares at $14.00 per share. Proceeds from the offering after deducting underwriting discounts and commissions of $5.1 million, but before expenses were $67.4 million. The
managing underwriters of the offering were J.P. Morgan Securities, Inc., Piper Jaffray & Co., Thomas Weisel Partners, LLC and William Blair & Company, LLC. From the time of receipt on November 2, 2004, we have applied the net proceeds from
this offering toward working capital.



Of the $67.4 million in
net proceeds, through March 31, 2005, we have spent approximately, $20.0 million for sales and marketing initiatives, $3.2 million for research and development activities and $17.6 million for operating and general corporate purposes. In addition,
we invested the proceeds from the offering in short-term, investment grade, interest-bearing instruments.



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



None.



ITEM 5.    OTHER INFORMATION



In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the Act), we are required to disclose the non-audit services approved
by our Audit Committee to be performed by PricewaterhouseCoopers LLP, our external accountants. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a
company. The Audit Committee has approved the engagement of PricewaterhouseCoopers LLP for the following non-audit services: (1) tax matter consultations concerning foreign, U.S. federal and state taxes; and (2) the preparation of federal and state
income tax returns.



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ITEM 6.    EXHIBITS



|              |  |                                                                                                                                                                                
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                    
|              | 
|3.2*          |  | Amended and Restated Certificate of Incorporation.                                                                                                                             
|              | 
|3.4*          |  | Bylaws.                                                                                                                                                                        
|              | 
|4.2*          |  | Amended and Restated Specimen Common Stock certificate.                                                                                                                        
|              | 
|10.1*         |  | Form of Indemnification Agreement for directors and executive officers.                                                                                                        
|              | 
|10.2*         |  | 1997 Stock Plan.                                                                                                                                                               
|              | 
|10.3*         |  | 2004 Equity Incentive Plan.                                                                                                                                                    
|              | 
|10.4*         |  | 2004 Employee Stock Purchase Plan.                                                                                                                                             
|              | 
|10.5*         |  | 2004 Preferred Stock Plan.                                                                                                                                                     
|              | 
|10.6*         |  | Amended and Restated Investors Rights Agreement, dated February 24, 2004, by and among the Registrant and certain stockholders.                                               
|              | 
|10.7*         |  | First Amendment to Amended and Restated Investors Rights Agreement, dated May 21, 2004, by and among the Registrant and certain stockholders.                                 
|              | 
|10.8*         |  | Sublease Agreement, dated June 30, 2000, by and between the Registrant and Perclose, Inc. for office space located at 300 Saginaw Drive, Redwood City, California.             
|              | 
|10.9*         |  | First Amendment to Sublease Agreement, dated September 17, 2002, by and between the Registrant and Perclose, Inc.                                                              
|              | 
|10.10*        |  | 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*       |  | Master License Agreement dated August 24, 1999, by and between the Registrant and Surmodics, Inc., as amended.                                                                 
|              | 
|10.12*        |  | Consulting Agreement dated May 21, 2004, by and between the Registrant and John B. Simpson.                                                                                    
|              | 
|10.13*        |  | Second Amendment to Amended and Restated Investors Rights Agreement, dated October 25, 2004, by and among the Registrant and certain stockholders.                            
|              | 
|10.14        |  | Supplier Agreement between the Registrant and Norman Noble, Inc. dated March 25, 2005 .                                                                                        
|              | 
|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          |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

---

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

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



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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 13, 2005 |  |  |  | By: |  | /s/    ROBERT W. THOMAS     
|                   |  |  |  |     |  |                              |  | Robert W. Thomas President and Chief Executive
Officer and Director (Principal Executive Officer)
|                   |  |  | 
|Date: May 13, 2005 |  |  |  | By: |  | /s/    MATTHEW B. FERGUSON  
|                   |  |  |  |     |  |                              |  | Matthew B. Ferguson Chief Financial
Officer (Principal Accounting and Financial Officer)         





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