UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM 10-K




(Mark
One)


x
            ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
fiscal year ended December 31, 2008




Or




 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




Commission
file number: 001-33382




SENORX,
INC.


(Exact
name of registrant as specified in its charter)




Delaware
            33-0787406(State
      of Incorporation)
            (I.R.S.
      Employer
              Identification
      Number)3
      Morgan
              Irvine,
      California
            92618(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s
telephone number, including area code: (949) 362-4800




Securities
registered pursuant to Section 12(b) of the Act:




Title
      of each class:
            Name
      of each exchange on which registered:Common
      Stock, par value $0.001
            The
      NASDAQ Stock Market, LLC
              (NASDAQ
      Global Market)




Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No  x




Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x




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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.     ̈




Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check
one):






Large accelerated
      filer    ̈
            Accelerated
      filer  x
            Non-accelerated
      filer   ̈
            Smaller reporting
      company   ̈


(Do not
check if a smaller reporting company)




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




The
aggregate market value of the registrant’s common stock, held by non-affiliates
of the registrant as of June 30, 2008 (which is the last business day of
registrant’s most recently completed second fiscal quarter) based upon the
closing price of such stock on the NASDAQ Global Market on that date, was
$76,761,689. For purposes of this disclosure, shares of common stock held by
entities and individuals who own 5% or more of the outstanding common stock and
shares of common stock held by each officer and director have been excluded in
that such persons may be deemed to be “affiliates” as that term is defined under
the Rules and Regulations of the Securities Exchange Act of 1934. This
determination of affiliate status is not necessarily conclusive.




At
February 27, 2009, the Registrant had 17,331,451 shares of Common Stock
outstanding.









DOCUMENTS
INCORPORATED BY REFERENCE




Items 10,
11, 12, 13 and 14 of Part III of this Form 10-K incorporate
information by reference from the registrant’s definitive proxy statement to be
filed with the Securities and Exchange Commission within 120 days after the
close of the fiscal year covered by this annual report.





SENORX,
INC.


FISCAL
YEAR 2008 FORM 10-K ANNUAL REPORT




TABLE
OF CONTENTS




PART
      IItem
      1.
            Business
            1Item
      1A.
            Risk
      Factors
            19Item
      1B.
            Unresolved
      Staff
      Comments
            30Item
      2.
            Properties
            30Item
      3.
            Legal
      Proceedings
            30Item
      4.
            Submission
      of Matters to a Vote of Security
      Holders
            31PART
      IIItem
      5.
            Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            31Item
      6.
            Selected
      Financial
      Data
            33Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            34Item
      7a.
            Quantitative
      and Qualitative Disclosures about Market
      Risk
            46Item
      8.
            Financial
      Statements and Supplementary
      Data
            46Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            46Item
      9A.
            Controls
      and
      Procedures
            46Item
      9B.
            Other
      Information
            49PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate
      Governance
            49Item
      11.
            Executive
      Compensation
            49Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            49Item
      13.
            Certain
      Relationships and Related Transactions and Director
      Independence
            49Item
      14.
            Principal
      Accountant Fees and
      Services
            49PART
      IVItem
      15.
            Exhibits
      and Financial Statement
      Schedules
            49Signatures
            
            74




-i-


PART
I




This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. These statements include, but are not
limited to, those concerning the following: regarding future events, our future
financial performance, business strategy, product introductions and plans and
objectives of management for future operations, regulatory approvals, and
clinical timelines. Forward-looking statements are subject to risks and
uncertainties that could cause actual results and events to differ materially.
For a detailed discussion of these risks and uncertainties, see the
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of this Form 10-K. We undertake no obligation to update
forward-looking statements to reflect events or circumstances occurring after
the date of this Form 10-K.




ITEM 1.
            BUSINESS




Overview




We
develop, manufacture and sell minimally-invasive medical devices that are used
in the diagnosis of breast cancer. Our initial product focus has been biopsy
systems and breast tissue markers and in January 2008 we launched a radiation
balloon catheter for localized partial breast radiation therapy. With the
emergence of clinicians coordinating multi-disciplinary patient care through
integrated breast centers, we believe that our ability to provide a broad array
of products will enhance our competitive positioning. Since we launched our
first breast tissue marker products in 2002, we have established over 1,000
customer accounts. In 2008, we generated net revenues of $46.7 million. The sale
of disposable products, including our breast biopsy probes, radiation therapy
products and tissue markers, accounted for 87.3% of our revenues in
2008.




The EnCor
system, our flagship product for use in breast biopsy procedures, is a
minimally-invasive vacuum-assisted breast biopsy system. EnCor allows users to
obtain multiple biopsy samples with a quick, single probe insertion. In contrast
to existing competitive systems, EnCor is the only commercialized “open/closed”
tissue collection systemcompatible in all three
imaging modalities,providing the operator
with a clear view of tissue samples through a proprietary transparent collection
chamber, and the ability to either open the chamber to examine and remove one or
more samples or to continue uninterrupted collection of multiple samples. EnCor
also incorporates novel programmability, which allows the user to select
automated cutting patterns, tissue density, number of samples, and to deliver
anesthetic. The EnCor system’s handpieces and disposable probes are compatible
with the most commonly used imaging modalities, including x-ray, ultrasound,
magnetic resonance imaging, MRI, and positron emission tomography, or PET. With
its simplicity and versatility, we believe that EnCor can play an important role
in the paradigm shift from invasive open surgical to minimally-invasive biopsy
procedures. We launched the EnCor system on a limited basis and conducted
marketing preference testing in late 2004 and subsequently progressed with a
full commercial launch in November 2005. In 2007, we further enhanced the
versatility of the EnCor system with the FDA clearance in the United States of
our new SenoSonix system, a combination of EnCor with state-of-the art
ultrasound imaging technology, and with the commercial launch of VisiLoc, an MRI
visible obturator that helps to facilitate accurate probe placement under MRI
guidance. As of December 31, 2008, we had an installed base of 776 EnCor systems
and we had sold more than 205,000 EnCor disposable probes.




Our
Contura Multi-Lumen Radiation Balloon Catheter, or Contura MLB, our flagship
radiation therapy product, for which we received FDA 510(k) clearance in May
2007 and launched in January 2008, is designed to be a novel localized partial
breast radiation therapy device that uses vacuum to remove excess seroma and air
to enhance conformance of often irregularly shaped lumpectomy cavity walls to
the balloon’s surface in order to deliver precise radiation dosing through
multiple radiation source lumens. We believe that Contura MLB can play an
important role in the paradigm shift from traditional whole breast radiation
therapy to localized partial breast radiation therapy.




Our
headquarters is in Irvine, California and we were incorporated in Delaware in
January 1998.




Industry
Overview




Breast
Cancer




One in
eight women in the United States will develop breast cancer during her lifetime,
a risk that was one in fourteen in 1960. It is estimated that in the United
States, approximately 192,000 new cases of breast cancer were diagnosed in 2008.
Breast cancer is the second-leading cause of cancer-related death in U.S. women
overall, and the leading cause of cancer-related death for women of ages 20 to
59.




-1-




Over 70%
of breast cancers occur in women who have no identifiable risk factor other than
age. The older a woman is, the greater her chance of getting breast cancer. One
of the major challenges in the treatment of breast cancer is that, while the
disease typically does not show symptoms in early stages, survival is
dramatically impacted by the stage at which the disease is diagnosed and
treated. If breast cancer is detected at an early “localized” stage and treated,
the 5-year survival rate is 98%. If the cancer has spread to nearby lymph nodes,
the 5-year survival rate decreases to 81%. If the cancer has spread, or
metastasized, to organs such as the lungs, bone marrow, liver or brain, the
5-year survival rate falls to 26%. These statistics underscore the need for
early diagnosis and treatment of breast cancer. Currently, 62% of breast cancers
are discovered at an early, localized stage. The number of breast biopsies
performed annually has increased significantly since 1997 when the American
Cancer Society updated its guidelines for breast cancer screening, recommending
that women should begin annual screening at age 40 rather than the previously
recommended age 50. However, some studies conclude that annual breast cancer
screening by mammography for women under age 50 may be more harmful, due to
increased radiation exposure, than beneficial and as a result of this and other
factors, the trend towards earlier and broader screening programs may not
continue or mammography may be supplemented by other screening modalities in the
future.  However, outside of the United States, mammography screening
programs are in the early stage of adoption, which has been accelerating in the
last several years.




Breast
Cancer Screening, Diagnosis and Treatment




The
principal means of breast cancer screening are physical examination and
mammography. In a physical examination, the patient’s breast is examined to
search for palpable lesions or any other abnormalities. However, physical
examination cannot detect small, early stage lesions that may be cancerous. As a
result, mammography, a low-dose x-ray imaging technique, is recognized as the
best screening method for detecting breast cancer in its earliest stages, when
the disease is most successfully treated and there are more treatment options.
Historically, mammograms are believed to find 85% to 90% of breast cancers in
women over 50, and can discover a lesion one to four years before a lump can be
felt. Newer technologies, such as digital mammography and tomosynthesis, are
being introduced into the market and may help increase the lesion detection
rate.  Nevertheless, for patients with dense breast tissue, breast
implants or patients who are breastfeeding, the images produced by a mammogram
can be difficult for a radiologist to interpret. Consequently, physicians will
often order a secondary screening using ultrasound, or, in some cases,
MRI.




If breast
cancer screening detects a lesion, a physician will typically recommend that the
patient undergo a breast biopsy, a diagnostic procedure in which breast tissue
samples are extracted to determine whether a lesion is benign or malignant. The
breast biopsy procedure is performed by either a radiologist or surgeon. As a
final step in the biopsy procedure, the physician usually places a tissue marker
at the location from which the sample was removed as a point of reference. If
the sample is found to be cancerous and more tissue must be removed from the
breast, the marker will help the physician identify the specific area from which
tissue should be removed. This can minimize the amount of healthy tissue removed
from the breast during surgery. If surgery is not required, the marker will be
visible on future screenings to enable the physician to identify the site of the
previous biopsy.




If a
breast biopsy indicates that a patient’s lesion is malignant, the patient is
often scheduled for surgery to remove the tumor and to sample nearby lymph nodes
to determine if the cancer has spread. Surgical procedures include a breast
conserving therapy, known as lumpectomy, in which the cancerous lesion and a
margin of surrounding normal tissue is removed, and mastectomy, in which the
entire breast is removed. It is estimated that at least 50% of women with breast
cancer, typically women whose breast cancer was detected at an early stage, are
good candidates for lumpectomies. In most cases, a course of radiation therapy
after lumpectomy is part of the treatment, as a means of destroying any cancer
cells that may remain. Additionally, 75% of women who have mastectomies go on to
have surgical reconstruction of one or both breasts, either using artificial
implants or their own body tissue to rebuild the breast. Some women who have
lumpectomies also choose breast reconstruction for cosmetic
improvement.




Evolution
of Breast Biopsy Procedures




In the
United States, there are approximately 1.8 million breast biopsies performed
annually. This number has increased significantly since 1997, at which time
approximately 750,000 biopsies were performed. In 1997, the American Cancer
Society updated its guidelines for breast cancer screening, recommending that
women should begin annual screening at age 40. The previous guideline had
recommended annual mammography for women beginning at age 50. This updated
guidance, along with increased public awareness and technological improvements
in screening and diagnostic equipment, likely has contributed to the increase in
breast biopsies over the past decade. Biopsy methods include surgical biopsy,
needle biopsy, and vacuum-assisted biopsy, all of which, according to the
American Cancer Society, have similar accuracy rates.




-2-




Surgical Biopsy.
Traditionally, most breast biopsies were performed as open surgical procedures,
and such procedures remain common today, often being preferred for large
lesions. The procedure has several drawbacks. Surgery is highly invasive,
requires at least one full day of recovery and can leave a visible scar and
depression at the site of the removed tissue. It can also lead to scar tissue
formation within the breast, which can complicate the interpretation of
follow-up mammograms.




Needle Biopsy. Needle biopsy
emerged as the first minimally-invasive biopsy technique, enabling extraction of
tissue samples without surgery, but rather through insertion of a needle to
remove tissue. The typical procedure involves repeated needle insertions to
acquire multiple samples. If the breast lesion is large enough to feel, the
physician can do a needle biopsy by directly guiding the needle into the lesion.
If the lesion is too small or too deep within the breast to be felt, a needle
biopsy is done using breast imaging methods to guide the needle into the lesion.
There are two types of needle biopsy:




•
            Fine needle aspiration
      uses a fine-gauge, hollow needle and a syringe to sample clusters of cells
      from a lesion. While fine needle aspiration is the fastest and simplest
      procedure among all biopsy methods, it is typically used only on lesions
      that are large enough to be felt. An experienced breast cytopathologist is
      required to determine if cells are cancerous, but this method cannot
      distinguish between cancer that remains confined to particular cells,
      known as in situ
      cancer, from invasive cancer that has spread to surrounding tissue, two
      types of cancer that are generally treated
  differently.




•
            Core needle biopsy uses
      an inner notched needle and a larger outer hollow needle, which are
      sequentially advanced, to cut and collect single tissue samples. Compared
      to fine needle aspiration, core needle biopsy allows for a more accurate
      assessment of a breast lesion because the larger core needle usually
      removes enough tissue for the pathologist to evaluate abnormal cells in
      relation to the surrounding small sample of breast tissue taken in the
      specimen. However, this method is not well-suited to characterizing small
      lesions or calcifications that may indicate early cancers. False negatives
      may occur if the needle misses the lesion and instead takes a sample of
      normal tissue, which may lead to the undiagnosed cancer going
      untreated.  Also, it is sometimes difficult to penetrate dense
      breast tissue with core needles.




Vacuum-Assisted Biopsy. In a
single sample, vacuum-assisted biopsy is able to remove approximately six to ten
times as much breast tissue as core needle biopsy. Vacuum-assisted biopsy
incorporates a special probe that can capture tissue samples from a single
insertion into the breast through a small nick in the skin, promoting minimal
patient discomfort and a relatively short procedure time. Vacuum-assisted biopsy
is typically performed with imaging technology, either using a specially
designed stereotactic x-ray table to pinpoint the site of the lesion, or with
real-time ultrasound guidance. During the procedure, vacuum is used to draw
tissue from the lesion into an opening located on or at the end of the biopsy
probe, and a cutter is then used to sever this tissue sample. Among the
minimally-invasive biopsy options, vacuum-assisted biopsy is the only method
that can obtain multiple contiguous tissue samples with a single insertion,
which makes the procedure an attractive alternative for most lesions, including
those that may be indicative of early stage cancer.




A
vacuum-assisted biopsy device can either be an “open” or “closed” system. An
open system requires each sample to be individually cut, extracted and removed
from the device, a relatively time consuming process that requires the
assistance of a technician. The first open system vacuum-assisted biopsy device,
the Mammotome, was introduced in 1995. A closed system automatically transports
samples to a sealed tissue collection chamber, allowing multiple samples to be
collected without having to interrupt collection by removing tissue from the
device. In 2002, a closed system vacuum-assisted biopsy device called the ATEC
was introduced. Both open and closed systems have been widely adopted. While
closed systems may result in faster procedure times and minimize fluid loss,
open systems allow visualization of the sample, which may be preferred by a
technician to ensure that the proper area of the breast is being targeted.
Today, in many cases customers prefer a vacuum-assisted biopsy system that is
compatible with all three major imaging modalities, stereotactic, ultrasound,
and MRI.




-3-




According
to the Millennium Research Group, vacuum-assisted biopsies became the
predominant biopsy method, surpassing open surgical breast biopsy procedures in
2007. Vacuum-assisted biopsies are already the predominant minimally-invasive
method, accounting for 681,700 of 1,839,500 such procedures performed in the
United States in 2008.  Millennium projects that vacuum-assisted
biopsies will account for 1,075,900 of 2,342,200 such procedures performed in
the United States in 2013.




Evolution
from Whole to Partial Breast Radiation Therapy




Following
a lumpectomy to remove a cancerous breast tumor, many patients are subsequently
treated with breast radiation therapy to destroy any cancer cells that may
remain. Similar to the evolution in breast biopsy toward minimally-invasive
procedures, radiation therapy is beginning to transition from whole breast
radiation, which is currently used in the vast majority of cases, to more
localized radiation therapy.




Whole Breast Radiation.
Following a lumpectomy, the current standard of care is to treat patients with
external beam radiation that is widely directed at the whole breast. Although
the use of radiation has improved long-term survival rates, this treatment is
inconvenient for patients, often requiring daily outpatient radiation treatments
for six to eight weeks, and can expose healthy tissue and organs to damaging
effects from the radiation.




Accelerated Partial Breast
Irradiation, or APBI. APBI delivers localized radiation to a targeted
surgical site. For appropriate patients, this method offers a number of
advantages including greatly-diminished treatment time, concentrated radiation
exposure and the reduction of skin irritation and burning. There are currently
three approaches to APBI in the market.




•
            Radiation Balloon
      Brachytherapy. This approach involves a catheter attached to a
      fluid expandable balloon that is inserted into the lumpectomy cavity. A
      mixture of saline and contrast media is injected to expand the balloon to
      contact the walls of the lumpectomy cavity, a radioactive source is then
      inserted into the balloon. Radiation is administered for five to ten
      minutes, allowing a therapeutic radiation dose to penetrate tissue
      approximately one centimeter from the exterior of the balloon. Typically,
      this procedure is repeated twice a day for five days on an outpatient
      basis. While the technical challenges are fewer than with other partial
      breast radiation treatment options, delivering a uniform radiation dose
      remains an obstacle due to the difficulties in conforming the shape of the
      balloon to the walls of the often irregularly-shaped cavity, the site of
      the cavity, or accumulation of fluid from the body around the balloon.
      Radiation balloon brachytherapy is in the early stage of adoption by the
      market.




•
            Conformal Radiotherapy.
      Like whole breast radiation, this approach uses a radiation source outside
      the body. Rather than targeting the entire breast, however, this approach
      typically uses a CT scan to pinpoint the tumor site in three dimensions
      and a computer program to aim radiation beams that “conform” closely to
      the shape of the tumor and thereby helping to minimize damage to healthy
      tissue. This approach is well-established in the treatment of prostate
      cancer, but is in the early stages of adoption and clinical study for
      breast cancer. Conformal radiotherapy may play a greater role in
      brachytherapy in the future.




•
            Multi-Catheter Interstitial
      Brachytherapy. This approach involves placing 20 to 30 small
      catheters completely through the breast at carefully selected locations
      around the lumpectomy site. A radioactive source is inserted into the
      catheters twice a day for about 20 minutes to deliver radiation, typically
      over a one-week period, during which time the catheters remain in the
      breast. The multiple catheter placements may cause infection, as well as
      potential cosmetic damage. Additionally, the procedure requires a high
      level of technical expertise for appropriate catheter placement and
      radiation dose administration.




Breast
Care Market Trends




The
breast care market has undergone a significant evolution over recent years,
driven by advancements in imaging technologies, which has led a paradigm shift
to less invasive devices and procedures for screening and for diagnosis, and to
comprehensive patient care through integrated breast centers.




Advances in Imaging Technology for
Screening. Digital mammography is being rapidly adopted as clinical
studies suggest advantages over traditional film mammography. When the patient
has dense breast tissue, breast implants or is breastfeeding, the images
produced by either traditional or digital mammography can be difficult for a
radiologist to interpret. Consequently, physicians will often order a secondary
screening using ultrasound. MRI may also be used as a secondary screening method
for these patients, and is being recommended as a primary screening technique
for high-risk women as young as 30.  Breast tomosynthesis, a newer
form of digital mammography which is an emerging technology that is currently in
the experimental development stage.  Tomosynthesis  is a
process in which multiple 2D x-rays of the breast are combined using computer
software to produce a more focused 3D image.




-4-




Advances in Imaging Technology for
Biopsy. Technological advances in imaging have allowed for more effective
and less invasive diagnosis and treatment of breast cancer. While stereotactic
x-ray imaging and ultrasound guidance are used most frequently in conjunction
with biopsy procedures, MRI may also become an important alternate imaging
modality for both diagnosis and treatment.




•
            Stereotactic x-ray
      imaging uses x-ray to capture images of breast tissue. With the
      patient lying on a specialized treatment table known as a stereotactic
      table, x-ray images are taken from two angles which permits integrated
      computerized equipment to map the exact location of the target lesion,
      thereby enabling the physician to fire a biopsy needle or probe into the
      lesion. Stereotactic imaging is used in the vast majority of
      vacuum-assisted biopsies today.




•
            Ultrasound imaging
      bounces low-power, high-frequency sound waves off internal tissue to
      provide real-time images of the interior of the breast to guide the
      physician’s manual placement of a biopsy probe at the site of the lesion.
      Ultrasound is widely available and relatively inexpensive, and does not
      expose the patient to radiation. As with screening, ultrasound is used as
      a primary breast imaging application for biopsy of women who have dense
      breast tissue, typically under the age of 40, women with breast implants
      or women who are breastfeeding.




•
            Magnetic resonance
      imaging (MRI) uses a magnet, radio waves and a computer to make a
      series of detailed images of the inside of the breast. Technological
      advances have made MRI an emerging alternative for image-guided biopsy.
      Several academic institutions and leading breast centers have begun
      performing biopsies under MRI guidance. Although there are several
      hurdles, including the relatively high cost of and significant time
      required for this procedure, the clinical benefits of this approach are
      gaining acceptance.




Paradigm Shift to Less Invasive
Procedures. Advancements in imaging technology have allowed abnormal
breast tissue to be identified at an early stage and have helped facilitate the
emergence of novel, less invasive diagnostic and therapeutic devices for
accessing and removing this tissue. For example, open surgical biopsies and
needle biopsies are giving way to minimally-invasive vacuum-assisted procedures.
Similarly, excision of tumors is shifting from invasive mastectomies to less
invasive lumpectomies. In addition, radiation treatment is shifting from whole
breast radiation to partial breast radiation.




Emergence of Integrated Breast
Centers. Effective screening, diagnosis and treatment of breast cancer
require interaction among specialists in multiple departments of a healthcare
system. These include, but are not limited to, surgery, oncology, radiology,
pathology and plastic surgery. While many of these services exist in any given
healthcare system, the concept of a breast center is to organize these services
into a coordinated, multidisciplinary approach where the patient’s care is
integrated. This coordinated approach allows for higher-quality and more
patient-focused care than she might receive from the same specialists working in
isolation. Breast centers can be at one physical location, with all services
available at one site, or they can be virtual, organizing the interaction of
diverse services found at different locations. A factor in the accelerating
establishment of integrated breast centers is the increasing public awareness of
the importance of quality breast care. Breast centers are also actively
educating the general public as it relates to the latest clinical and
technological advances available in minimally-invasive diagnosis and
treatment.




We
believe that there is significant opportunity for a company that offers breast
centers a full range of minimally-invasive diagnostic and therapeutic devices
that are both compatible with multiple imaging modalities and flexible enough to
be tailored to the diverse needs of the physicians on the breast care
team.




Our
Solution




We have
commercialized, and are continuing to develop, a broad product line of
minimally-invasive breast care devices to be used by breast care specialists. By
focusing on the continuum of care from diagnostic to excision and therapeutic
procedures, we believe that we will be an attractive and convenient supplier for
integrated breast centers.




-5-




Our
Breast Care Management Product Continuum









Our
current commercial products and products under development include:




•
            Diagnostic.
      Breast biopsy systems, location and lymph node gamma ray detection
      devices.




•
            Marking.
      Tissue markers which identify the biopsy site, under the major imaging
      modalities, for future diagnostic and surgical reference, and are
      compatible with most imaging technologies and biopsy
    devices.




•
            Lesion
      Location. Devices used to facilitate lesion excision and
      treatment.




•
            Treatment.
      Radiation balloons and other devices for localized partial breast
      radiation therapy.




•
            Excising.
      Tissue cutting devices designed to facilitate the contoured removal of
      lesions and facilitate the use of balloons in radiation
      therapy.




The EnCor
system, our flagship product for use in breast biopsy procedures, is a
vacuum-assisted system which allows users to obtain multiple tissue samples with
a quick, single insertion. EnCor can be used with multiple imaging modalities,
including stereotactic x-ray, ultrasound and MRI. EnCor is the only
“open/closed” tissue collection system compatible in all three imaging
modalities, providing the operator with a clear view of tissue samples through a
proprietary transparent collection chamber, and the ability to either open the
chamber to examine and remove one or more samples or to continue uninterrupted
collection of multiple samples. Our EnCor system also incorporates proprietary
programmability and automation features which provide a competitive advantage to
other marketed biopsy systems. In 2007, we further enhanced the versatility of
the EnCor system with the FDA clearance in the United States of our new
SenoSonix system, a combination of EnCor with state-of-the art ultrasound
imaging technology, and with the commercial launch of VisiLoc, an MRI visible
obturator that helps to facilitate accurate probe placement under MRI
guidance.




The
Contura Multi-Lumen Radiation Balloon Catheter, or Contura MLB, our flagship
radiation therapy product, for which we received FDA 510(k) clearance in May
2007 and launched in January 2008, is designed to be a novel localized partial
breast radiation therapy device that uses vacuum to remove excess seroma and air
to enhance conformance of often irregularly shaped lumpectomy cavity walls to
the balloon’s surface in order to deliver precise radiation dosing through
multiple radiation source lumens.




Our
Strategy




Our goal
is to become the leader in providing minimally-invasive solutions across the
continuum of care in the breast care market. The key elements of our business
strategy to achieve this goal are to:




•
            Provide
      Differentiated, Tailored Solutions in the Breast Biopsy Market. .
      We believe that our EnCor breast biopsy system represents a significant
      advancement in the breast biopsy market. We seek to leverage this recent
      product introduction to establish a leadership position in the
      minimally-invasive breast biopsy market. We believe that by making the
      EnCor system modular and upgradeable, which enables the addition of
      features over time, customers will view it as an attractive platform
      product that can be tailored to the needs of their practice. The EnCor
      system allows for significant flexibility across multiple imaging
      modalities, programmability, automation and the ability to shift between
      open and closed tissue collection. In addition to EnCor, we believe that
      EnCor 360 and SenoSonix with EnCor is a complementary product that will
      continue to address a need in the ultrasound guided vacuum-assisted biopsy
      market. We intend to continue to develop and commercialize advanced
      products in the minimally-invasive breast biopsy market, such as VisiLoc,
      which helps to facilitate accurate biopsy probe placement under MRI.
      Additionally, we believe that the EnCor hardware architecture and the ease
      of software upgrades allows us to continuously and easily bring
      technological improvements to market and to easily interface with imaging
      equipment sold by a broad spectrum of
  manufacturers.




-6-




•
            Focus on
      leveraging existing R&D Competencies to Develop Products Across the
      Continuum of Interventional Breast Care. While our initial product
      focus has involved devices used in diagnosis of breast cancer, such as
      biopsy systems and breast tissue markers, we launched Contura MLB in
      January 2008 and are also developing a series of additional lesion
      location, excision and therapeutic products that we will seek to
      commercialize over the next few years. With the emergence of integrated
      breast centers designed to provide comprehensive and specialized patient
      care, we believe that our ability to provide novel solutions to a broad
      set of needs in breast cancer management will enhance our competitive
      positioning in the market.  The Company is also working on
      future generations of biopsy
products.




•
            Leverage
      Clinical Education with Key Opinion Leaders in Breast Care Centers.
      We believe that integrated breast centers are emerging as the focal point
      for breast care, with teams of surgeons, radiologists, oncologists and
      technicians providing coordinated care. Our products, spanning the
      continuum of breast care from diagnostics to therapeutics, positions us to
      meet many clinical needs of breast centers. As a key element of our
      strategy, we focus on educating and training clinicians on our products
      through frequent hands-on classes and industry events. We have worked with
      key opinion leaders in training several thousand clinicians in the
      effective use of our products.




•
            Capitalize
      on Product Cross-Selling Opportunities within Our Existing Customer
      Base. We believe that we have a significant opportunity to grow our
      revenues by selling additional products to existing customers. We have
      established a strong base of customers who have a history of placing
      repeat orders for our products. We believe this customer base is an
      attractive target for early adoption of our complementary products as they
      are commercially launched. For example, our EnCor and EnCor 360 biopsy
      hardware, disposables and tissue markers are sold to the same surgeon
      customers that are purchasing Contura
MLB.




•
            Pursue
      Strategic Acquisitions and Partnerships. In addition to adding to
      our product portfolio through internal development efforts, we intend to
      explore the acquisition of other product lines, technologies or companies
      that may leverage our sales force or be complementary to our strategic
      objectives. We may also evaluate distribution agreements, licensing
      transactions and other strategic partnerships, which may include expansion
      of our selling and marketing efforts beyond the United States. We are also
      collaborating with a number of large and smaller corporations who
      sell imaging products to offer our customers bundled packages of products
      and joint clinical education
programs.




-7-


Our
Products and Products under Development




We are
focused on developing and offering a broad portfolio of products that address
needs across the continuum of breast care, from the diagnosis to the treatment
of breast cancer. The sale of disposable products, including our breast biopsy
probes, tissue markers and radiation therapy products, accounted for 87.3% of
our revenues in 2008, 86% in 2007 and 89% in 2006. The following table provides
information concerning our primary products and products under
development.




Product
      Category/Name
            Primary
      Component(s)
            Year
      (or
              Expected Year)
              of
      Full
              Commercial
              LaunchDIAGNOSTIC
      PRODUCTSBreast
      BiopsySenoRx
      Breast Biopsy Console
            Console
      for EnCor and EnCor 360 Biopsy Devices
            2002EnCor
            Reusable
      Handpiece and Disposable Probe
            2005(1)EnCor
      360(3)
            Reusable
      Handpiece and Disposable Probe
            2003(1)VisiLoc
            Obturator
      Compatible with EnCor MRI
            2008SenoSonix
            EnCor
      Hardware Integration with ultrasound imaging
            2008SenoSonix
      Handcarry
            EnCor
      hardware with handcarry ultrasound component
            2009Tissue
      Markers and Location DevicesGel
      Mark
            Applicator
      and Combination Metal/Bioresorbable Markers
            2002Gel
      Mark Ultra
            Applicator
      and Combination Metal/Bioresorbable Markers
            2004Gel
      Mark UltraCor
            Applicator
      and Combination Metal/Bioresorbable Markers
            2004SenoMark
            Applicator
      and Combination Metal/Bioresorbable Markers
            2006Gel
      Mark UltraCor MRI
            Applicator
      and Combination Metal/Bioresorbable Markers
            2006(1)Tissue
      Marker Line Extension
            Applicator
      and Combination Metal/Bioresorbable Markers
            2009Starch
      Mark
            Metal/Bioresorbable
      Markers
            2009Loc
      Wire Replacement
            Signal
      transmission devices
            2010Gamma
      Ray DetectionGamma
      Finder
            Reusable
      Probe and Disposable Sleeve
            2003THERAPEUTIC/EXCISION
      PRODUCTSRadiation
      TherapyContura
      MLB
            Radiation
      Balloon
            2008Contura
      Shape Select MLB
            Contura
      MLB that expands to multiple shapes
            2009CED
      Device
            Radiation
      Balloon Introducer
            2009Excision
      and ReconstructionSenoPulse
      RF Generator
            Console
      for Excision/Reconstruction Devices
            2011(2)Single
      Step
            Reusable
      Handpiece and Disposable Probe
            2011(2)





(1)
            FDA
      clearance received and product available prior to full commercial
      launch.




(2)
            Subject
      to submission for and receipt of FDA 510(k) clearance; initial preference
      testing may occur one year earlier.




(3)
            Previously
      referred to by us and marketed as
  SenoCor 360.




-8-




Breast
Biopsy Systems




Components
of Our Breast Biopsy Systems




Our
breast biopsy systems primarily consist of two components—reusable handpieces
and disposable probes—and are used in conjunction with our SenoRx Breast Biopsy
Console.




•
            SenoRx Breast Biopsy
      Console. The SenoRx Breast Biopsy Console is compatible with both
      our EnCor and EnCor 360 reusable handpieces and disposable probes. This
      modular console is a portable hardware system which may be conveniently
      transported to various areas of the healthcare facility. The primary
      modules of our console include:




•
            a
      control module, which facilitates convenient user interface with
      proprietary software, a visual display screen, and controls that allows
      the user to customize the various parameters of the diagnostic procedure;
      and




•
            a
      vacuum system, which pulls tissue into the probe for excision and
      subsequent delivery of tissue to the sample collection
      chamber.




•
            Reusable Handpieces.
      Handpieces are instruments which facilitate placement or insertion of the
      biopsy probe. The handpieces primarily consist of motors, circuitry,
      sensors and proprietary software incorporated into a housing. We
      commercialize three different biopsy handpieces: EnCor
      Stereotactic/Ultrasound, EnCor MRI, and EnCor
  360.




•
            Disposable Probes and
      Accessories. Our probes are sterile, single-use, vacuum-assisted
      disposables, which are used with our EnCor and EnCor 360 handpieces. They
      consist of a sharp stainless steel tissue cutter and, with EnCor, a tissue
      sample collection chamber. The probe accessories also include additional
      tubing and a vacuum canister.




We offer
probes in a variety of sizes, ranging from 7-gauge to 10-gauge, depending on
user preference. The probe cutters and tips incorporate one or more of our
proprietary tissue cutting technologies.




•
            Tri-Concave Tip. A
      three-edged tip used on our EnCor probes, EnCor 360 probes and MRI
      insertion device, designed especially for facilitating easy placement into
      dense breast tissue.




•
            360° Tissue Cutter. A
      hollow, cylindrical cutting edge used on our EnCor 360 probes, which
      automatically rotates and advances to generate large 360° contiguous
      samples.




•
            Oscillating Cutters.
      Cone-shaped cutters used on our EnCor probes, which shear tissue in a
      manner similar to a scissors cut.




In 2007,
we also received clearance for and launched two additional products that are
used together or in conjunction with our EnCor system.




•
            VisiLoc MRI Visible
      Obturator. An MRI visible obturator that is used during an
      MRI-guided EnCor procedure, designed to facilitate biopsy probe placement
      under MRI guidance.




•
            SenoSonix with EnCor.
      An integration of our EnCor system with a state-of-the-art ultrasound
      imaging system developed by UltraSonix Medical
  Corporation.




EnCor
Breast Biopsy System




Our
flagship product for use in breast biopsy procedures, the EnCor system, is a
vacuum-assisted breast biopsy system that facilitates adoption of
minimally-invasive biopsy procedures over open surgical biopsy. The EnCor system
is comprised of a reusable handpiece and disposable probes that are used in
conjunction with our SenoRx Breast Biopsy Console. We believe the EnCor system
offers a comprehensive set of features which make it an attractive solution for
meeting the diverse demands of breast care providers. Key features of the EnCor
system include:




•
            Single Insertion/Multiple
      Sample. Offers the flexibility to obtain multiple samples from a
      single insertion, enhancing speed and convenience in biopsy
      procedures.




•
            “Open/Closed” System.
      Functions either as an open or closed system, providing the operator with
      a clear view of tissue samples through a proprietary transparent
      collection chamber, and the ability to either open the chamber to examine
      and remove one or more samples or to continue uninterrupted collection and
      automatic transfer of multiple samples from inside the breast to the
      collection chamber.




-9-




•
            Highly-Automated and
      Programmable. Automated and programmable tissue collection and
      automated anesthetic delivery. Aligns and rotates automatically through a
      variety of optional programmed cutting patterns. Provides multiple
      programmed options for users to choose their own approach to the array of
      lesions they may encounter.




•
            Multi-Modality System.
      Compatible with each of the three major imaging modalities used in the
      market—stereotactic, ultrasound and MRI—and transportable, eliminating the
      need for multiple systems.




•
            Modular Hardware and
      Upgradeable Design. Customers are able to purchase all or part of
      the system according to their needs, thus minimizing up-front costs. In
      addition, the modular system facilitates easy repair and replacement of
      components. Software-based design allows us to continuously innovate by
      adding new features which may extend the useful life of the device. The
      user may update the system by upgrading software rather than purchasing
      new hardware.




•
            Precise Probe
      Placement. Tools to facilitate accurate placement of EnCor probe
      under MRI imaging.




The EnCor
system also incorporates a number of additional features, including
compatibility with our tissue markers, multiple gauge sizes, automated sample
rinsing, lighting, an ergonomically-designed handpiece, noise reduction and
novel MRI probe insertion accessories and proprietary ultrasound options. We
received FDA 510(k) clearance and conducted marketing preference testing of the
EnCor system in 2004, with full commercial launch in 2005.




EnCor
360 Breast Biopsy System




Our EnCor
360 system utilizes a vacuum to provide the physician with a contiguous 360°
breast biopsy sample. The EnCor 360 system incorporates our mechanical
Tri-Concave Tip to penetrate virtually any lesion, regardless of size, location
or density. EnCor 360 secures tissue through the end of the probe, providing a
large, high-quality sample. Since the EnCor 360 is interchangeable and
compatible with the SenoRx Breast Biopsy console, users may select EnCor 360 or
EnCor depending upon their clinical and economic objectives.




We
received FDA 510(k) clearance in 2002 and launched EnCor 360 in 2003, as our
initial product in the vacuum-assisted breast biopsy segment. We intend to
continue to offer the EnCor 360 as a low-cost, ultrasound-guided breast biopsy
device. We believe that our EnCor 360 and future product enhancements will
continue to appeal to clinicians doing ultrasound biopsies in their offices,
which is a more price-sensitive segment of the biopsy market.




SenoSonix
with EnCor




In
October 2007 we received 510(k) clearance from the FDA for SenoSonix with EnCor,
an integration of our EnCor system with a state-of-the-art ultrasound imaging
system developed by UltraSonix Medical Corporation of Canada. We received the
right to affix CE Mark in the European Union for SenoSonix with EnCor in April
of 2008 and patents are currently pending. We are marketing SenoSonix with EnCor
primarily for physician in-office procedures, particularly in Europe, where we
believe a greater percentage of biopsy procedures are done under ultrasound
imaging guidance. SenoSonix with EnCor may be used with either our EnCor or
EnCor 360 probes.  In 2009, we plan to introduce a new version of
SenoSonix that will incorporate a “handcarry” ultrasound component, which will
increase ease of portability.




VisiLoc
MRI Visible Obturator




We
launched the VisiLoc MRI Visible Obturator in the United States in November
2007. VisiLoc is an MRI visible obturator that is used during an MRI-guided
EnCor procedure and is designed to help facilitate biopsy probe placement under
MRI guidance.




Gel
Mark and SenoMark (Biopsy Site Tissue Markers)




Biopsy
site tissue markers are placed at a biopsy site to provide a visible landmark
for future surgical reference. If cancer is found and more tissue must be
removed from the breast, the marker will help the physician identify the
specific area from which tissue should be removed. If surgery is not necessary,
the marker will be visible on future mammograms to enable the breast care
specialist to identify the site of the biopsy.




-10-




We offer
a full portfolio of tissue markers that are compatible not only with our EnCor
and EnCor 360 biopsy product lines, but also with competing biopsy systems. Our
products consist of markers that come in a variety of materials, including
gelatin and synthetic materials, titanium and stainless steel, and associated
delivery applicators. The markers are designed to facilitate easy placement and
optimize visibility under different imaging modalities.




We were
first to commercialize markers visible not only under x-ray, but also ultrasound
imaging. Gel Mark and Gel Mark Ultra are designed to provide pellet-shaped,
ultrasound-visible, bioresorbable tissue marker alternatives. Gel Mark UltraCor
provides core needle users with an ultrasound-visible tissue marking
alternative. SenoMark provides those users who prefer a pad-shape with an
ultrasound-visible, bioresorbable tissue marker alternative. Our UltraCor MRI
may be an attractive alternative for clinicians interested in marking lesions
under MRI guidance. We received FDA 510(k) clearance and began commercializing
Gel Mark in 2002, Gel Mark Ultra and Gel Mark UltraCor in 2004, and SenoMark in
2006. We received FDA 510(k) clearance and conducted marketing preference
testing of the Gel Mark UltraCor MRI in 2004, with full commercial launch
occurring in the second half of 2006. The Company is also exploring the use of
new types of tissue markers for use in other indications, including a locwire
replacement used to stage the lumpectomy procedure.  We intend to
commence clinical trials for this product by 2010.




Gamma
Finder (Gamma Ray Detection Device)




Immediately
prior to removal of a malignant lesion in the breast, a patient may be injected
with gamma ray emitting isotopes near the site of the lesion to determine if the
cancer has spread. Our Gamma Finder is currently the only cordless handpiece
probe to detect the emission of gamma rays, and, consequently, whether breast
cancer has spread to the lymph nodes. The Gamma Finder detects and gives a
numerical indication and an acoustic signal when close to a gamma ray emitting
source. Our Gamma Finder has all the features of traditional, larger, corded
gamma ray detection devices, with the convenience of a portable and compact
device. The Gamma Finder consists of a reusable probe and a disposable sterility
sleeve. We began commercializing the Gamma Finder in 2003 upon receipt of FDA
510(k) clearance, and, in 2005, added automatic ten second count and binary
pitch mode features.




Contura
MLB Radiation Balloon




Current
radiation therapy includes less invasive alternatives to whole breast radiation
therapy, known as partial breast radiation therapy, consisting of balloon
brachytherapy, conformal radiotherapy and multi-catheter interstitial
brachytherapy. We believe that balloon brachytherapy will be widely adopted over
time due to its ease of use, low-cost and clinical effectiveness and in January
2008 launched our Contura Multi-Lumen Radiation Balloon Catheter, or Contura
MLB.




Our
Contura MLB design consists of a multilumen catheter with several access ports
on one end and an inflatable balloon on the other. The balloon is positioned
into the cavity formed in the breast following a lumpectomy and subsequently
inflated with saline through one of the ports. Small openings in the catheter
allow for the suction of excess seroma and air from the lumpectomy cavity
through a second access port. We believe that this suction feature will help
conform the walls of the lumpectomy cavity to the exterior of the balloon.
Multiple lumens are designed to provide for precise placement of radioactive
seeds, which we believe will allow clinicians to expand their use of radiation
therapy to a greater number of patients. Such patients may include those with
smaller anatomies and with tumors closer to the skin, which were not previously
able to receive treatment with other minimally-invasive radiation balloon
products. The overall design and the use of special balloon materials is
intended to control the distance between the radiation source and the tissue in
contact with the balloon and to result in controlled radiation
dosing.




We
received FDA 510(k) clearance for Contura MLB in May 2007 and launched in
January 2008. Following the clearance of Contura MLB in May 2007, we began
limited commercialization and market preference testing of the product. We
anticipate developing and commercializing additional line extensions for this
product over the next several years, including Contura Shape-Select MLB in 2009.
Clinical investigators for Contura MLB have either presented, published or had
accepted 16 articles or abstracts related to Contura MLB.




SenoPulse
RF Generator (Excision/Therapeutic Console)




The
SenoPulse RF Generator will be used to power our radiofrequency cutting
technologies in order to provide advanced breast tissue cutting capabilities.
The SenoPulse RF Generator offers high-frequency and impedance-matching
circuitry to enable cutting into a wide variety of tissue types, high start
voltage and sustained power for continuous cutting ability, and low heat
generation to minimize thermal damage. The SenoPulse RF Generator directs
modulated, monopolar radiofrequency energy and will be used in the Single Step
cutting and excision devices. We received FDA 510(k) clearance for the SenoPulse
RF Generator in 2005.




-11-




Tissue
Cutting Devices for Excision and Reconstruction




Single
Step is an alternative excision device to a scalpel or a straight-bladed
electrosurgical scalpel commonly known as a Bovie. The Single Step system is an
automated surgical excision device that uses a long-wire RF disposable probe and
reusable handpiece to cut and remove a large, intact volume of tissue through a
small surgical incision. The Single Step system is powered by the SenoPulse RF
Generator. The Single Step probe is inserted into the breast, where the surgeon
anchors the device and excises tissue of a predetermined size. The surgeon
controls the amount and shape of the tissue removed by selecting the appropriate
option on the SenoPulse RF Generator. The Single Step is designed to produce a
smooth and optimally-shaped cavity to facilitate lesion removal and subsequent
use of balloon brachytherapy. We intend to build upon data obtained with one of
our previous products by evaluating the clinical benefit of anchoring or
stabilizing lesions in conjunction with the automatic lesion cutting ability of
our Single Step system. We received FDA 510(k) clearance for the Single Step and
anticipate making several design enhancements and conducting clinical testing
prior to fully commercializing the product in 2011. We have also received FDA
510(k) clearance for a second, long wire RF cutting device that may be useful in
lesion excision and tissue reconstruction.




Sales
and Marketing




We focus
our sales and marketing efforts on increasing awareness of our products among
breast care specialists, including radiologists, surgeons and oncologists. We
market and sell our products through a direct sales force in the United States.
As of December 31, 2008, we employed a vice president of global sales and a
vice president of global marketing and support staff and a 67 person direct
sales force, including 19 clinical specialists, eight brachytherapy specialists,
six regional sales managers and 34 sales representatives.




In our
selling process, we use clinical studies, cost-benefit data and case studies. To
date, we have 39 clinical studies that have either been published or presented
as abstracts at major medical meetings. Peer-to-peer selling is also a critical
element of our strategy. We have developed popular training seminars, including
a Continuing Medical Education-accredited course led by our internal personnel
and by nationally-known breast cancer specialists Drs.
Nathalie Duchesne, Mark Gittleman, Phillip Israel, Terese Kaske, Frank Vicini,
Doug Arthur, Dorin Todor,Phillipe
Sebag, Rakesh Patel and Robin Wilson who present our clinical data and/or
products from time to time. We hosted 73 seminars in 2008, educating and
providing hands-on training to over 1,575 clinicians about our products. We
initiated a Contura MLB long-term physician registry study with more than 80
patients enrolled at the end of 2008.




An
additional element of our educational efforts is our relationships with several
manufacturers of ultrasound imaging systems. With these companies, we co-sponsor
several breast practice seminars across the country to educate clinicians on the
changes that are driving the specialization of breast care and the emergence of
integrated breast centers. We also contribute to organizations designed to
increase awareness of breast cancer, including our sponsorship of the newsletter
and website of the American Society of Breast Surgeons.




International
sales have not historically accounted for a significant portion of total sales,
but have been increasing incrementally in recent years. We do not have a direct
sales force outside of the United States. We have the authorization to affix the
CE Mark to Gel Mark Ultra, Gel Mark UltraCor, and our EnCor system and to
commercialize these devices in the European Economic Community, Hong Kong,
Singapore, Taiwan, Mexico, South Korea, and Australia. In 2007, we partnered
with local distributors who have breast imaging and/or interventional radiology
franchises in Austria, Belgium, the United Kingdom, Hong Kong, Ireland,
Luxembourg, The Netherlands, Singapore, Switzerland, and Taiwan to sell EnCor
and our Gel Mark products in these ten countries. In 2009 we added distributors
in Denmark, Finland, France, Germany, Iceland, Italy, Mexico, Norway, Portugal,
Russia, South Korea, Spain and Sweden. We are currently in negotiations with
distributors for a number of additional countries in which our products are
already approved and intend to further expand beyond these countries in 2009. We
also have agreements with distributors in China and in the Middle East that are
assisting us in applying for regulatory approvals to market our products in
those countries. Our International Distributors are managed by two sales
managers who report to our Vice President of Global Sales and Business
Development.




-12-




Competition




We
compete primarily on the basis of our ability to provide minimally-invasive
products to diagnose and treat breast cancer safely and effectively, with ease
and predictability of product use, brand name recognition and cost. We believe
that we compete favorably with respect to these factors, although we cannot
assure you that we will be able to continue to do so in the future or that new
products that perform better than those we offer will not be
introduced.




The
markets in which our products compete are highly competitive, subject to change
and significantly affected by new product introductions and other activities of
industry participants. We face different competitors within different product
lines. To our knowledge, we do not have one competitor that produces products
that compete with all our products. Several of our competitors have significant
financial and human capital resources and have established reputations with our
target customers, as well as worldwide distribution channels that are more
effective than ours. We are aware that several companies are developing products
that, if successfully commercialized, would compete with our current and future
products.




Our
vacuum assisted breast biopsy and tissue marker products compete with, among
others, products sold by Johnson & Johnson, C.R. Bard and Hologic. A new
vacuum assisted biopsy product from Rubicor is scheduled for launch in
2009.  In November 2008, Hologic introduced the Eviva probe, which
features an “open/closed” system. Contura MLB competes against
well-established whole breast external beam radiation devices, as well as
current and potential future manufacturers of balloon brachytherapy devices and
image-guided targeted radiation beam therapy. We compete directly with the
current industry leader, Hologic, as well as other companies that have
minimally-invasive therapeutic devices in various stages of development.
Short-term brachytherapy products from Cianna Medical and Xoft began to be
commercialized in 2008. Our commercial success will depend on a general market
shift from whole to partial breast radiation and our ability to overcome
Hologic’s current market leadership with its current balloon product.
Furthermore, we compete against Hologic with their product bundling programs for
digital mammography and stereotactic table platforms. Our excision products will
compete with manufacturers of handheld surgical excision instrumentation and
standard RF cutting devices.




Our
competitors dedicate, and we believe they will continue to dedicate, significant
resources to promote their products aggressively. The breast cancer market is
also characterized by extensive research efforts and technological progress. As
a result, new products are likely to be developed and introduced into the market
that could compete with our products more effectively.




Manufacturing




We
assemble and package a significant portion of our finished products at our
current corporate headquarters in Irvine, California, where we moved to in
August 2008. Our Gamma Finder is licensed and produced exclusively for us by
World of Medicine, a German medical device company. We manufacture in-house
several components used in our products, and we rely on several outside vendors
to produce many components, and in some cases completed products that we quality
check, sterilize, and package at our corporate headquarters. We also have
established a production engineering department to focus on integrating product
changes into the manufacturing process and to continually improve upon product
quality and cost.




We
manufacture our proprietary products in a controlled environment and have
implemented quality control systems as part of our manufacturing processes. We
believe our manufacturing facility and control systems comply with the FDA’s
Quality System Regulations, or QSRs. We are certified to ISO 13485:2003, the
medical device manufacturing standard, and applicable medical device directives
promulgated by the European Economic Community, which facilitates entry of our
products into the European Economic Community. We have received our CMDCAS
Certificate of Registration permitting importation of our devices into
Canada.




Since
2005, we have continued to transfer portions of our manufacturing operations to
Infus Medical, a contract manufacturer with facilities in Thailand, which
currently provides us with certain tissue marker production, biopsy probe
production and assembly and packaging services. We anticipate that over time we
will continue to transfer additional responsibility to this manufacturer related
to production, assembly and packaging. We believe that transferring production
of our more established products abroad in a stepwise manner, along with
increased sales volume, will result in cost savings and will allow us to focus
our domestic efforts on developing, modifying and promoting our newer products.
We will continue to produce certain of our products at our facility in Irvine,
California for the foreseeable future.




-13-




We have
one product and several components of other products that we obtain from
sole-source suppliers. We rely on one vendor, World of Medicine, for our Gamma
Finder product, one vendor, Faulhaber, for our biopsy handpiece motors, one
vendor, NuSil Technology, for a coating used in our biopsy probes, and two
vendors, UltraSonix and Teratech, for the ultrasound technology used in
SenoSonix with EnCor. We do not believe that we could replace these suppliers
without significant effort and delay in production. Other products and
components come from single suppliers, but alternate suppliers are easier to
identify, though in many cases we have not yet qualified alternate suppliers. We
do not carry a significant inventory of most components used in our products,
with the exception of the gamma finder product. Most of our suppliers have no
contractual obligations to supply us with, and we are not contractually
obligated to purchase from them, the components used in our
devices.




On March
5, 2008, we entered into a Lease Agreement with The Irvine Company LLC for the
lease of approximately 41,402 square feet space at 3 Morgan, Irvine, California.
The term of the lease commenced on November 1, 2008, although we moved into the
property in August pursuant to a period of rent-free early occupancy and will
expire on January 31, 2014.




Government
Regulation




Our
products are medical devices subject to extensive and rigorous regulation by the
FDA, as well as other federal and state regulatory bodies in the United States
and comparable authorities in other countries. The FDA regulations govern, among
other things, the following activities that we perform, or that are performed on
our behalf, to ensure that medical products distributed domestically or exported
internationally are safe and effective for their intended uses:




•
            product
      design, development and
manufacture;




•
            product
      safety, testing, labeling and
storage;




•
            premarketing
      clearance or approval;




•
            recordkeeping
      procedures;




•
            product
      marketing, sales and distribution;
and




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




The FDA’s Premarket Clearance and
Approval Requirements. Unless an exemption applies, each medical device
we wish to distribute commercially in the United States will require either
prior 510(k) clearance or a premarket approval, or a PMA, from the FDA. Medical
devices are classified into one of three classes—Class I, Class II, or
Class III—depending on the degree or risk associated with each medical
device and the extent of control needed to ensure safety and effectiveness.
Devices deemed to pose lower risks are placed in either Class I or II,
which requires the manufacturer to submit to the FDA a premarket notification
requesting permission to commercially distribute the device. This process is
generally known as 510(k) clearance. Some low-risk devices are exempted from
this requirement. Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or devices deemed not
substantially equivalent to a previously cleared 510(k) device, are placed in
Class III, requiring premarket approval. Our minimally-invasive breast care
products are Class I and II devices.




510(k) Clearance Pathway.
When a 510(k) clearance is required, we must submit a premarket notification to
the FDA demonstrating that our proposed device is substantially equivalent to a
previously cleared and legally marketed 510(k) device or a device that was in
commercial distribution before May 28, 1976 for which the FDA has not yet
required the submission of a PMA application. By statute, the FDA is required to
clear or deny a 510(k) premarket notification within 90 days of submission of
the application. As a practical matter, clearance often takes significantly
longer. The FDA may require further information, including clinical data, to
make a determination regarding substantial equivalence. If the FDA determines
that the device, or its intended use, is not substantially equivalent to a
previously-cleared device or use, the FDA will place the device, or the
particular use, into Class III.




Premarket Approval Pathway. A
PMA application must be submitted to the FDA if the device cannot be cleared
through the 510(k) process. The PMA application process is much more demanding
than the 510(k) premarket notification process. A PMA application must be
supported by extensive data, including but not limited to technical,
preclinical, clinical trials, manufacturing and labeling to demonstrate to the
FDA’s satisfaction the safety and effectiveness of the device.




-14-




After a
PMA application is submitted and the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for review. The FDA has 180 days to review an “accepted” PMA
application, although the review of an application generally occurs over a
significantly longer period of time and can take up to several years. During
this review period, the FDA may request additional information or clarification
of the information already provided. Also, an advisory panel of experts from
outside the FDA may be convened to review and evaluate the application and
provide recommendations to the FDA as to the approvability of the device. In
addition, the FDA will conduct a preapproval inspection of the manufacturing
facility to ensure compliance with the QSRs. New PMA applications or PMA
application supplements are required for significant modification to the
manufacturing process, labeling and design of a device that is approved through
the premarket approval process. Premarket approval supplements often require
submission of the same type of information as a premarket approval application,
except that the supplement is limited to information needed to support any
changes from the device covered by the original premarket approval application
and may not require as extensive clinical data or the convening of an advisory
panel. We do not anticipate that any of our products in development will require
the submission and approval of a PMA.




Clinical Trials. Clinical
trials are almost always required to support an FDA premarket application and
are sometimes required for 510(k) clearance. These trials generally require
submission of an application for an Investigational Device Exemption, or IDE, to
the FDA. The IDE application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe to test the
device in humans and that the testing protocol is scientifically sound. The IDE
must be approved in advance by the FDA for a specific number of patients unless
the product is deemed a non-significant risk device eligible for more
abbreviated IDE requirements. Clinical trials for significant risk devices may
not begin until the IDE application is approved by the FDA and the appropriate
institutional review boards, or IRBs, at the clinical trial sites. Our clinical
trials must be conducted under the oversight of an IRB at the relevant clinical
trial sites and in accordance with the FDA’s regulations, including but not
limited to those relating to good clinical practices. We are also required to
obtain patients’ informed consent that complies with both the FDA’s requirements
and state and federal privacy regulations. We, the FDA or the IRB at each site
at which a clinical trial is being performed may suspend a clinical trial at any
time for various reasons, including a belief that the risks to study subjects
outweigh the benefits. Even if a trial is completed, the results of clinical
testing may not demonstrate the safety and efficacy of the device, may be
equivocal or may otherwise not be sufficient to obtain approval or clearance of
the product.




Pervasive and Continuing
Regulation. After a device is placed on the market, numerous regulatory
requirements continue to apply. These include:




•
            the
      FDA’s Quality System Regulations, which require manufacturers, including
      third-party manufacturers, to follow stringent design, testing, control,
      documentation and other quality assurance procedures during all aspects of
      the manufacturing process;




•
            labeling
      regulations and FDA prohibitions against the promotion of products for
      uncleared, unapproved or off-label
uses;




•
            clearance
      or approval of product modifications that could significantly affect
      safety or efficacy or that would constitute a major change in intended
      use;




•
            medical
      device reporting, or MDR, regulations, which require that manufacturers
      report to the FDA if their device may have caused or contributed to a
      death or serious injury or malfunctioned in a way that would likely cause
      or contribute to a death or serious injury if the malfunction were to
      recur; and




•
            post-market
      surveillance regulations, which apply when necessary to protect the public
      health or to provide additional safety and effectiveness data for the
      device.




After a
device receives 510(k) clearance or a PMA, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, will require a new clearance or approval. The
FDA requires each manufacturer to make this determination initially, but the FDA
can review any such decision and can disagree with a manufacturer’s
determination. We have modified various aspects of some of our marketed products
since receiving regulatory clearance, but we believe that new 510(k) clearances
are not required for these modifications. If the FDA disagrees with our
determination not to seek a new 510(k) clearance or PMA, the FDA may
retroactively require us to seek 510(k) clearance or premarket approval. The FDA
could also require us to cease marketing and distribution and/or recall the
modified device until 510(k) clearance or premarket approval is obtained. Also,
in these circumstances, we may be subject to significant regulatory fines,
penalties and Warning Letters.




-15-




The MDR
regulations require that we report to the FDA any incident in which our product
may have caused or contributed to a death or serious injury or in which our
product malfunctioned and, if the malfunction were to recur, would likely cause
or contribute to death or serious injury.




We have
registered with the FDA as a medical device manufacturer and have obtained a
manufacturing license from the California Department of Health Services, or
CDHS. The FDA has broad post-market and regulatory enforcement powers. We are
subject to unannounced inspections by the FDA and the Food and Drug Branch of
CDHS, or FDB, to determine our compliance with the QSRs and other regulations,
and these inspections may include the manufacturing facilities of our suppliers.
We underwent an inspection of our facilities by the FDA in April 2005, which
resulted in the issuance in July 2005 of a Warning Letter from the FDA related
to, among other things, our failure to adequately validate manufacturing changes
we undertook to prevent the tip of the Gel Mark Ultra biopsy site marker
shearing off in the patient’s breast during surgery, which we had experienced.
The letter required us to take prompt action to strengthen our Quality System
and product engineering area. We responded to the FDA with a comprehensive
corrective action plan in August 2005. In 2008, no incidents of tip sheer were
reported to SenoRx.  We believe we are in compliance with QSRs. If,
upon reinspection, the FDA determines we have not properly addressed their
concerns or they identify new violations, we can be subject to 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;




•
            refusal
      of our requests for 510(k) clearance or premarket approval of new
      products, new intended uses or modifications to existing
      products;




•
            withdrawal
      of 510(k) clearance or premarket approvals that have already been granted;
      and




•
            criminal
      prosecution.




Fraud and Abuse. We may
directly or indirectly be subject to various federal and state laws pertaining
to healthcare fraud and abuse, including anti-kickback laws. In particular, the
federal Anti-Kickback Statute prohibits persons from knowingly and willfully
soliciting, offering, receiving or providing remuneration, directly or
indirectly, in exchange for or to induce either the referral of an individual,
or the furnishing, arranging for or recommending a good or service, for which
payment may be made in whole or part under federal healthcare programs, such as
the Medicare and Medicaid programs. Penalties for violations include criminal
penalties and civil sanctions such as fines, imprisonment and possible exclusion
from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback
Statute is broad and prohibits many arrangements and practices that are lawful
in businesses outside of the healthcare industry. In implementing the statute,
the Office of Inspector General, or OIG, has issued a series of regulations,
known as the “safe harbors.” These safe harbors set forth provisions that, if
all their applicable requirements are met, will assure healthcare providers and
other parties that they will not be prosecuted under the Anti-Kickback Statute.
The failure of a transaction or arrangement to fit precisely within one or more
safe harbors does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that do not fully
satisfy each applicable element of a safe harbor may result in increased
scrutiny by government enforcement authorities, such as the OIG.




International. International
sales of medical devices are subject to foreign governmental regulations, which
vary substantially from country to country. The time required to obtain
clearance or approval by a foreign country may be longer or shorter than that
required for FDA clearance or approval, and the requirements may be
different.




The
primary regulatory environment in Europe is that of the European Economic
Community, which has adopted numerous directives and has promulgated voluntary
standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms with the essential requirements of
the applicable directives and, accordingly, can be commercially distributed
throughout the member states of the European Economic Community, and other
countries that comply with or mirror these directives. The method of assessing
conformity varies depending on the type and class of the product, but normally
involves a combination of self-assessment by the manufacturer and a third-party
assessment by our designated notified body, an independent and neutral
institution appointed by a country to conduct the conformity assessment. This
third-party assessment may consist of an audit of the manufacturer’s quality
system and specific testing of the manufacturer’s device. Such an assessment is
required in order for a manufacturer to commercially distribute the product
throughout these countries. ISO 9001 and ISO 13845 certifications are voluntary
harmonized standards. Compliance establishes the presumption of conformity with
the essential requirements for a CE Marking. We have the authorization to affix
the CE Mark to Gel Mark Ultra, Gel Mark UltraCor, and our EnCor system and to
commercialize these devices in the European Economic Community, Australia, Hong
Kong, Mexico, Singapore, South Korea, Taiwan, and several other
countries.  The Company has an active program to comply with the “WEE”
directive should it be adopted in Europe and Asia in the next five
years.




-16-




In 2007
we began partnering with local distributors who have breast imaging and/or
interventional radiology franchises in countries outside North
America.  Through these distributors, we have been selling our EnCor
and GelMark products in Austria, Belgium, Denmark, Finland, France, Germany,
Hong Kong, Iceland, Ireland, Italy,Luxembourg, Mexico, The Netherlands,
Norway, Portugal, Russia, Singapore, South Korea, Spain, Sweden,Switzerland, Taiwan and the United
Kingdom.  In addition, in the second half of 2008, we entered into
relationships with distributors in China and in the Middle East.




Third-Party
Reimbursement




Payment
for patient care in the United States is generally made by third-party payors,
including private insurers and government insurance programs, such as Medicare
and Medicaid. The Medicare program, the largest single payor in the United
States, is a federal governmental health insurance program administered by the
Centers for Medicare and Medicaid Services, or CMS. Reimbursement for procedures
related to breast cancer has been favorable as a result of the growing awareness
of the impact of the disease as well as the recognition that proactive diagnosis
and treatment is critical for effective care. The costs associated with the
purchase of our products are reimbursed through Medicare, Medicaid and other
third-party payors. International market acceptance of our products may depend,
in part, upon the availability of reimbursement within the prevailing healthcare
payment systems. Reimbursement and healthcare payment systems in international
markets vary significantly by country, and include both government-sponsored
healthcare and private insurance.




Research
and Development




As of
December 31, 2008, we had 18 employees, as well as several key on-going
consultants, in our research and development department, which is overseen by
our chief technical officer. Historically, we focused our research and
development efforts on diagnostic products, including our breast biopsy systems
and our tissue markers. While we plan to continue to develop our diagnostic
products, we are also focused on developing our therapeutic and excision
products to enable us to serve the continuum of care in the breast care market.
We are currently developing various radio frequency basedexcision and reconstructive cutting
devices, marker and new therapeutic radiation therapy
devices.




Research
and development expenses for 2008, 2007 and 2006 were $6.1, $6.4 million and
$5.3 million, respectively. We expect research and development efforts and
expenses to increase in absolute dollar terms but decrease as a percentage of
net revenues.




Patents
and Proprietary Technology




We plan
to pursue and maintain intellectual property protection in the United States,
Europe, Japan, Canada and other countries such as China and Australia. As of
December 31, 2008, we have 55 issued United States patents primarily
covering devices relating to breast biopsy, including biopsy site marking
devices, excision devices and balloon products, the earliest of which will
expire in 2018 and the last of which will expire in 2024, and 2 granted European
regional patents which have been validated in 7 national countries.




In
addition, we have 99 pending United States patent applications, 9 pending PCT
(international) patent applications, 25 pending European regional patent
applications, 25 pending Canadian patent applications, 2 pending Japanese patent
applications, 10 pending Australian patent applications, as well as pending
patent applications in Brazil, China, Mexico, South Korea and Singapore. We
believe we have a strong intellectual portfolio that has permitted us to make
modifications to our products in response to competition without significant
disruption to our operations.




-17-




We have
several issued United States patents related either to the design or use of
Contura MLB and additional United States patent applications and continuations
are pending. In December 2008 we were granted a patent relating to Contura MLB’s
asymmetrical radiation of a breast cavity with a balloon. During the development
of Contura MLB, we appropriately considered the intellectual property landscape,
including citing as appropriate in our own patent filings the Hologic/Proxima
patents that are the subject matter of our current litigation with
Hologic.




Together,
our patents and patent applications protect aspects of our technologies. Key
areas of our issued and pending patent coverage include:




•
            biopsy
      systems, covering current embodiments and variations to the design of the
      EnCor and EnCor 360 probes, handpieces and control
  module;




•
            mechanical
      cutters, covering the Tri-Concave penetrating tip and the EnCor and EnCor
      360 tissue cutting mechanisms;




•
            radiofrequency
      technologies, covering the SenoPulse RF Generator, devices powered by the
      generator, including the Single Step and long wire scalpels, EnCor 360
      probe and lesion location devices;




•
            bioresorbable
      biopsy site markers, covering marker materials, methods for imparting
      ultrasound visibility, and marker delivery systems;
  and




•
            Contura
      MLB, covering the use of vacuum to help conform tissue surrounding the
      lumpectomy cavity to the walls of the radiation delivery balloon, our
      proprietary balloon manufacturing process and delivery of radiation
      through multiple lumens in a balloon
catheter.




We also
rely on copyrights, trade secrets, technical know-how and continuing innovation
to develop and maintain our competitive position. We seek to protect our
proprietary information and other intellectual property by generally requiring
our employees, consultants, contractors, outside scientific collaborators and
other advisors to execute non-disclosure agreements on commencement of their
employment or engagement.




Employees




As of
December 31, 2008, we had 155 employees, including 78 employees in sales
and marketing, 18 employees in research and development, 36 employees in
manufacturing, 14 employees in clinical, regulatory and quality assurance and
nine employees in general and administrative. We believe that our future success
will depend on our continued ability to attract, hire and retain qualified
personnel. None of our employees are represented by a labor union or are parties
to a collective bargaining agreement, and we believe our employee relations are
good.




Available
Information




We are
subject to the reporting requirements under the Securities Exchange Act of 1934.
Consequently, we are required to file reports and information with the
Securities and Exchange Commission (SEC), including reports on the following
forms: annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934. These reports and other information concerning the company may be
accessed through the SEC’s website at http://www.sec.gov. You may also read and
copy any materials we file with the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. Information on the operation of the
Public Reference Room can be obtained by calling 1-800-SEC-0330.




You may
also find on our website at http://www.senorx.com/ electronic copies of our
annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
Such filings are placed on our website as soon as reasonably practicable after
they are filed with the SEC. Our charter for our Audit and Compensation
Committees and our Code of Ethics are available on our website. In the event
that we grant a waiver under our Code of Ethics, to any of our officers and
directors, we will publish it on our website.




-18-





ITEM 1A.
            RISK
      FACTORS




RISKS
RELATED TO OUR BUSINESS




We
have a limited history of operations and a history of net losses, and we may not
be able to achieve profitability even if we are able to generate significant
revenues.




We have a
limited history of operations upon which you can evaluate our business. We began
selling our first products in 2002, fully launched our flagship product for use
in breast biopsy procedures, the EnCor system, in November 2005, and launched
our flagship radiation therapy product, the Contura MLB, in January 2008. We
incurred net losses of $8.7 million in 2008, $9.9 million in 2007and $15.4
million in 2006, and, as of December 31, 2008, had an accumulated deficit of
approximately $84.2 million. In addition, we expect our operating expenses to
increase as we expand our business to meet anticipated increased demand for our
EnCor system, continue with the full commercialization of the Contura MLB, and
devote resources to our sales and marketing and research and development
activities. In order for us to become profitable, we believe that our EnCor
system and Contura MLB must be widely adopted. We cannot assure you that we will
be able to achieve or sustain profitability even if we are able to generate
significant revenues. Our failure to achieve and sustain profitability would
negatively impact the market price of our common stock and require us to obtain
additional funding. If our future funding requirements increase beyond currently
expected levels, as a result of our failure to achieve or sustain profitability
relating to sales, litigation expenses or otherwise, we cannot make any
assurance that additional funding will be available on a timely basis on terms
acceptable to us, or at all, particularly in the short-term due to the current
credit and equity market funding environments.




Our
success depends upon market adoption of our EnCor system and Contura MLB,
without which our results of operations will suffer.




Until
2007, we derived our revenues primarily from our tissue marker products.
However, our EnCor system and Contura MLB now account for a majority of our
revenue growth, and we expect this to continue for the foreseeable future. Our
ability to meet this expectation is based upon a number of assumptions,
including:




•
            we
      have limited experience selling to radiological oncologists, the primary
      market for this product;




•
            attracting
      and retaining qualified sales professionals to sell
  it;




•
            differentiating
      Contura MLB from competing products and obtaining a significant share of
      this market;




•
            protecting
      it with intellectual property
rights;




•
            sustaining
      adequate third-party reimbursement
;




•
            producing
      compelling clinical data on safety and
  effectiveness;




•
            partnering,
      as necessary, with suppliers; and




•
            manufacturing
      it consistently within our specifications and in accordance with the FDA’s
      Quality System Regulations.




Even if
we are able to present potential customers with compelling clinical data,
technological advancements or influential user experiences, they may be
reluctant to switch from a competing device to which they have grown accustomed.
We may not be successful in our near-term strategy of marketing EnCor and
Contura MLB to our existing customer base of tissue marker users, and users of
our earlier vacuum-assisted breast biopsy system. Our commercial success also
depends on the continued general market shift to less invasive biopsy
procedures.


-19-




Our
future success will depend in part upon our ability to successfully
commercialize our Contura
MLB.




We expect
our Contura MLB, which we received FDA 510(k) clearance in May 2007, to rapidly
become a significant contributor to our revenues. The Contura MLB development
has been completed, but there remain significant challenges that must be
overcome before we can obtain significant revenues from this product,
including:




•
            we
      have limited experience selling to radiological oncologists, the primary
      market for this product;




•
            attracting
      and retaining qualified sales professionals to sell
  it;




•
            differentiating
      Contura MLB from competing products and obtaining a significant share of
      this market;




•
            protecting
      it with intellectual property
rights;




•
            obtaining
      adequate third-party reimbursement;




•
            producing
      compelling clinical data on safety and
  effectiveness;




•
            partnering,
      as necessary, with suppliers; and




•
            manufacturing
      it consistently within our specifications and in accordance with the FDA’s
      Quality System Regulations.




If we are
able to overcome these challenges, we may nevertheless be unable to convince
potential customers that the Contura MLB represents a compelling alternative to
competing products. It has been reported that new short-term brachytherapy
products from Cianna Medical and Xoft began to be commercialized in 2008. Our
commercial success will also depend on a general market shift from whole to
partial breast radiation. If we are unable to obtain a significant share of the
brachytherapy market for the reasons listed above, or that competing products
are more compelling and achieve better acceptance by the market, our long-term
commercialization experience with the Contura MLB could be significantly below
expectations or not achieved at all, which would have a material adverse effect
on our future financial performance. Additionally, the adoption of conformal
radiotherapy may grow at a faster rate than the overall market for partial
breast radiation therapies, and as a result, could impact the speed of adoption
of balloon brachytherapy devices, including Contura MLB.




We
are currently and may in the future be subject to costly claims of infringement
or misappropriation of the intellectual property rights of others, which could
impact our business and harm our operations.




Our
industry has been characterized by frequent demands for licenses and litigation.
In January 2008, Hologic and its wholly-owned subsidiaries, including Cytyc
Corporation and Cytyc LP, filed a lawsuit against us in the United States
District Court, Northern District of California, San Jose Division. The
complaint generally alleges patent infringement of certain Hologic brachytherapy
patent claims, seeking unspecified monetary damages and an injunction against us
for infringement of those claims. This litigation is still ongoing and because
the outcome is undetermined, we cannot reasonably estimate the possible loss or
range of loss that may arise from the litigation or the likelihood of success.
If we lose this law suit, we may be completely prevented from selling Contura
MLB and as a result, our future prospects will be significantly
harmed.




Our
competitors, potential competitors or other patent holders may, in the future,
assert that our products and the methods we employ are covered by their patents
or misappropriate their intellectual property. In addition, we do not know
whether our competitors will apply for and obtain patents that will prevent,
limit or interfere with our ability to make, use, sell or import our products.
Because patent applications may take years to issue, there may be applications
now pending of which we are unaware that may later result in issued patents that
our products infringe. There also could be existing patents that one or more
components of our systems may inadvertently infringe. Although we may seek to
settle any future claims, we may not be able to do so on reasonable terms, or at
all. If we lose a claim against us, we may be ordered to pay substantial
damages, including compensatory damages, which may be trebled in certain
circumstances, plus prejudgment interest. We also could be enjoined,
temporarily, preliminarily or permanently, from making, using, selling, offering
to sell or importing our products or technologies essential to our products,
which could significantly harm our business and operating
performance.




We may
become involved in litigation not only as a result of alleged infringement of a
third party’s intellectual property rights but also to protect our own
intellectual property. Enforcing our patent rights against infringers, even when
such litigation is resolved in our favor, could involve substantial costs and
divert management’s attention from our core business and harm our
reputation.




-20-




We
have limited clinical data regarding the safety and efficacy of our products. If
future data or clinical experience is negative, we may lose significant market
share.




Our
success depends on the acceptance of our products by the medical community as
safe and effective. Physicians that may be interested in using our products may
hesitate to do so without long-term data on safety and efficacy. The limited
clinical studies on some of our products that have been published or presented
as abstracts at major medical meetings typically have been based on the work of
a small number of physicians examining small patient populations over relatively
short periods. Accordingly, the results of these clinical studies do not
necessarily predict long-term clinical results, or even short-term clinical
results from the broader physician community. If future safety or efficacy data
or clinical experience is negative, we may lose significant market
share.




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




Many of
our products compete, and our future products may compete, against products that
are more established and accepted within our target markets. With fewer
resources and operating history than many of our competitors and potential
future competitors, and a less-established reputation, it may be difficult for
our products to gain significant market penetration. We may be unable to
convince physicians to switch their practice away from competing devices.
Competing effectively will require us to distinguish our company and our
products from our competitors and their products, and turns on factors such
as:




•
            ease
      of use and performance;




•
            price;




•
            quality
      and scale of our sales and marketing
efforts;




•
            our
      ability to offer a broad portfolio of products across the continuum of
      breast care;




•
            establishing
      a strong reputation through compelling clinical study publications and
      endorsements from influential physicians;
and




•
            brand
      and name recognition.




Competition
could result in price-cutting, reduced profit margins and loss of market share,
any of which could have a material adverse effect on our results of operations.
In addition, our competitors with greater financial resources could acquire
other companies that would enhance their name recognition and market share, and
allow them to compete more effectively by bundling together related products.
For example one competitor provides incentives for the purchase of its biopsy
capital equipment and disposables when purchased with its digital mammography
and stereotactic tables. Certain potential customers may view this value
proposition as attractive, which could result in their decision not to purchase
our products. We also anticipate that new products and improvements to existing
products could be introduced that would compete with our current and future
products. If we are unable to compete effectively, we will not be able to
generate expected sales and our future financial performance will
suffer.




Our
ability to compete depends upon our ability to innovate, develop and
commercialize new products and product enhancements.




The
markets in which we compete involve rapid and substantial technological
development and product innovations. There are few barriers to prevent new
entrants or existing competitors from developing or acquiring products or
technological improvements that compete effectively against our products or
technology. If we are unable to innovate successfully to anticipate or respond
to competitive threats, obtain regulatory approvals, or protect such innovation
with defensible intellectual property, our revenues could fail to grow or could
decline. Our business strategy is in part based upon our expectation that we
will continue to make frequent new product introductions and improvements to
existing products that will be demanded by our target customers. If we are
unable to continue to develop new products and technologies as anticipated, our
ability to grow and our future financial performance could be materially harmed.
For example, we recently received 510(k) clearance from the FDA for our new
SenoSonix System, an integration of EnCor with ultra sound technology from
Ultrasonix Medical Corporation of Canada. We have yet to commercially launch
this product and there can be no assurances that we will be successful in
obtaining meaningful revenues once it has been commercialized.




-21-




Our
business strategy is heavily focused on integrated breast centers and other
large institutions.




We are
focusing our sales efforts on becoming a preferred provider to integrated breast
centers and other large customer accounts. We cannot assure you that we will be
able to secure or maintain these accounts or that this strategy will maximize
our revenue growth. These targeted customers often have a rigorous and lengthy
qualification process for approving new vendors and products. Additionally,
breast centers are in many cases not located at one physical location, but
instead involve the coordinated efforts of various geographically dispersed
offices and physicians, which may complicate the qualification process and may
strain our sales and support organizations. Further, these customers have not
entered, and we do not expect them in the future to enter, long-term contracts
to purchase our products. Therefore, obtaining approval from these potential
customers to sell them our products may not result in significant or long-term
sales of our products to them. Our strategy of focusing on large institutions
may result in relatively few customers contributing a significant amount to our
revenues. For example, Kaiser Permanente is our largest customer, and in the
years ended December 31, 2008 and 2007, represented approximately 4.9% and
5.8%, respectively, of our total revenues. Although we recently extended our
contract with Kaiser for three years, we cannot assure you that Kaiser or other
large customer accounts will continue to purchase our products. The loss of any
of these customers could have a material adverse impact on our results of
operations.




Our
strategy of providing a broad array of products to the breast care market may be
difficult to achieve, given our size and limited resources.




We aim to
be an attractive and convenient supplier for integrated breast centers by
offering a broad product line of minimally-invasive devices for breast care
specialists. Commercializing several product lines simultaneously may be
difficult because we are a relatively small company. Additionally, offering a
broad product line will require us to manufacture, sell and support some
products that are not as profitable or in as high demand as some of our other
products, which could have a material adverse effect on our overall results of
operations. To succeed in our approach, we will need to grow our organization
considerably and enhance our relationships with third-party manufacturers and
suppliers. If we fail to make product introductions successfully or in a timely
manner because we lack resources, or if we fail to adequately manufacture, sell
and support our existing products, our reputation may be negatively affected and
our results of operations could be materially harmed.




We
believe that demand for minimally-invasive products for the diagnosis and
treatment of breast cancer must grow in order for our business to grow as
anticipated.




While
there have been trends in recent years that favor increased screening, diagnosis
and treatment of breast cancer, these trends may not continue. For example, the
incidence of breast cancer in the United States appears to have fallen from its
highest level over the last few years. Additionally, while the number of breast
biopsies performed annually has increased significantly since 1997 when the
American Cancer Society updated its guidelines for breast cancer screening,
recommending that women should begin annual screening at age 40 rather than the
previously recommended age 50, new guidance could be published that could
support a reversal of this trend. Some studies conclude that annual breast
cancer screening by mammography for women under age 50 may be more harmful, due
to increased radiation exposure, than beneficial. These factors, in addition to
possible future innovations in screening technologies or in breast cancer
treatment options, could result in a decline in breast biopsy procedures and
radiation therapy, which could reduce our overall market.




We
have limited sales and marketing experience and failure to build and manage our
sales force or to market and distribute our products effectively could have a
material adverse effect on our results of operations.




We rely
on a direct sales force to sell our products. In order to meet our anticipated
sales objectives, we expect to grow our sales organization significantly over
the next several years. There are significant risks involved in building and
managing our sales organization, including our ability to:




•
            hire
      and successfully integrate qualified individuals as
  needed;




•
            provide
      adequate training for the effective sale of our
  products;




•
            retain
      and motivate our sales employees;
and




•
            integrate
      our new brachytherapy sales professionals and successfully sell into the
      radiation oncology
      market.




-22-




We expect
that our Contura MLB will be a principal driver of future growth. However, our
sales force historically has primarily sold diagnostic products and therefore
has limited experience selling a therapeutic device. Our Contura MLB competes
with products that are well-established and with new entrants to the market.
Accordingly, it is difficult for us to predict how well our sales force will
perform.




Our
failure to adequately address these risks could have a material adverse effect
on our ability to sell our products, causing our revenues to be lower than
expected and harming our results of operations.




If
we are unable to obtain and maintain intellectual property protection covering
our products, others may be able to make, use or sell our products, which could
have a material adverse effect on our business and results of
operations.




We rely
on patent, copyright, trade secret and trademark laws and confidentiality
agreements to protect our technology, products and our competitive position in
the market. Additionally, our patent applications, including those covering our
EnCor system, may not result in patents being issued to us or, if they are
issued, may not be in a form that is advantageous to us. Any patents we obtain
may be challenged or invalidated by third parties. Competitors also may design
around our protected technology or develop their own technologies that fall
outside our intellectual property rights. In addition, we may not be able to
prevent the unauthorized disclosure or use of our technical knowledge or other
trade secrets by consultants, vendors, former employees or current employees,
despite the existence of confidentiality agreements and other contractual
restrictions. Monitoring unauthorized uses and disclosures of our intellectual
property is difficult, and we cannot be certain that the steps we have taken to
protect our intellectual property will be effective or that any remedies we may
have in these circumstances would be adequate. Moreover, the laws of foreign
countries may not protect our intellectual property rights to the same extent as
the laws of the United States.




We may
not have adequate intellectual property protection for some of our products and
products under development and consequently may need to obtain licenses from
third parties. If any such licenses are required, we may be unable to negotiate
terms acceptable to us and such failure could have a material adverse effect on
our future results of operations.




We
may be unsuccessful in our long-term goal of expanding our product offerings
outside the United States and Canada.




For the
year ended December 31, 2008, we derived approximately 90.8% of our net revenues
from sales within the United States and Canada. We have entered into
distribution agreements with third parties outside the United States and Canada,
but do not anticipate sales of our products through these distributors becoming
a significant portion of our revenues in the foreseeable future. If we do begin
to offer our products more broadly outside the United States and Canada, we
expect that we will remain dependent on third-party distribution relationships
and will need to attract additional distributors to increase the number of
territories in which we sell our products. Distributors may not commit the
necessary resources to market and sell our products to the level of our
expectations. If current or future distributors do not perform adequately, or we
are unable to locate distributors in particular geographic areas, our ability to
realize long-term international revenue growth could be materially adversely
affected.




Although
some of our products have regulatory clearances and approvals from jurisdictions
outside the United States and Canada, many do not. These products may not be
sold in these jurisdictions until the required clearances and approvals are
obtained. We cannot assure you that we will be able to obtain these clearances
or approvals on a timely basis, or at all. In Japan, recent changes in the laws
and regulations governing the approval process for medical devices has made it
unlikely that we will be able to obtain approvals for our products within the foreseeable
future.


-23-


We
are dependent on sole-source and single-source suppliers for certain of our
products and components, thereby exposing us to supply interruptions that could
have a material adverse effect on our business.




We have
one product and several components of other products that we obtain from sole
suppliers. We rely on one vendor for our Gamma Finder product, one vendor for
our biopsy probe motors, one vendor for a biopsy probe coating, two vendors for
the ultrasound technology used in SenoSonix with EnCor and one vendor for
circuit boards in the Encore hardware. Other products and components come from
single suppliers, but alternate suppliers are easier to identify. However, in
many of these cases we have not yet qualified alternate suppliers and rely upon
purchase orders, rather than longer-term supply agreements. We also do not carry
a significant inventory of most components used in our products and generally
could not replace our suppliers without significant effort and delay in
production. In addition, switching components may require product redesign and
new regulatory clearances by the FDA, either of which could significantly delay
or prevent production and involve substantial costs.




Reliance
on third-party vendors may lead to unanticipated interruptions in supply or
failure to meet demand on a timely basis. Any supply interruption from our
vendors or failure to obtain additional vendors for any of the components could
limit our ability to manufacture our products and fulfill customer orders on a
timely basis, which could harm our reputation and revenues.




We
have limited experience manufacturing certain components of our products in
significant quantities, which could adversely impact the rate at which we
grow.




We may
encounter difficulties in manufacturing relating to our products and products
under development for the following reasons:




•
            our
      limited experience in manufacturing such products in significant
      quantities and in compliance with the FDA’s Quality System
      Regulation;




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




•
            some
      of the components and materials that we use in our manufacturing
      operations are currently provided by sole and single sources of
      supply.




Our
limited manufacturing experience has in the past resulted in unexpected and
costly delays. For example, in 2006, as a part of our settlement of litigation
with Suros Surgical Systems, a wholly-owned subsidiary of Hologic, we
implemented a redesign to the EnCor system cutter. This effort resulted in a
short-term decrease in yields and a delay in implementing certain cost
improvements, which had an adverse effect on our costs of goods sold. In
addition, although we believe that our current manufacturing capabilities will
be adequate to support our commercial manufacturing activities for the
foreseeable future, we may be required to expand our manufacturing facilities if
we experience faster-than-expected growth. If we are unable to provide customers
with high-quality products in a timely manner, we may not be able to achieve
wide market adoption for our EnCor system or other products and products under
development. Our inability to successfully manufacture or commercialize our
devices could have a material adverse effect on our product sales.




We
are entering into a difficult economic period, and the uncertainty in the
economy may increase stock price volatility, reduce customer demand for our
products, and cause potential customers to delay their purchase
decisions.




Economic
conditions have recently deteriorated, and we may be entering, or already are
in, a global recession. This uncertainty may increase the volatility of our
stock price and may cause potential customers to delay their capital equipment
purchases, and may make it more difficult for potential customers to obtain
financing necessary to purchase our products, each of which can have a material
adverse effect on our revenue, profitability and business. Our capital equipment
revenues have historically ranged between 10% and 20% of annualized
revenues.  Credit constraints for institutions, distributors and
individual physicians may slow the purchase of EnCor systems and Gamma Finders
and may, as a result, have a negative effect on the purchase of disposables
related to delays in capital equipment purchases or lead to a reduction in the
overall number of biopsy procedures.  The number of mammograms
performed in the United States has declined since 2007, which in turn reduced
the number of number of biopsy procedures performed domestically.




-24-




We
rely on third-party manufacturers for certain components, and the loss of any of
these manufacturers, or their inability to provide us with an adequate supply of
high-quality components, could have a material adverse effect on our
business.




Although
we manufacture certain components and assemble some of our products at our
corporate headquarters in Irvine, California, we rely on third parties to
manufacture most of the components of our products and are in the process of
transferring additional manufacturing and assembly to our Thailand contract
manufacturer. Some of these relationships are new and we have not had experience
with their large commercial-scale manufacturing capabilities. For example, since
the end of 2005, we have been transferring a portion of our manufacturing
operations to a third party in Thailand. Because of the distance between
California and Thailand, we may have difficulty adequately supervising and
supporting its operations. There are several risks inherent in relying on
third-party manufacturers, including:




•
            failure
      to meet our requirements on a timely basis as demand grows for our
      products;




•
            errors
      in manufacturing components that could negatively affect the performance
      of our products, cause delays in shipment of our products, or lead to
      malfunctions or returns;




•
            inability
      to manufacture products to our quality specifications and strictly
      enforced regulatory
      requirements;




•
            inability
      to implement design modifications that we develop in the
      future;




•
            unwillingness
      to negotiate a long-term supply contract that meets our needs or to supply
      components on a short-term basis on commercially reasonable
      terms;




•
            prioritization
      of other customers orders over
ours;




•
            inability
      to fulfill our orders due to unforeseen events, including foreign
      political events, that result in a disruption of their operations;
      and




•
            continued
      fluctuations in the value of the U.S. dollar could impact our future
      third-party manufacturing
      costs.




If a
manufacturer fails to meet our needs with high-quality products on a timely
basis, we may be unable to meet customer demand, which could have a material
adverse effect on our reputation and customer relationships.




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




Breast
biopsy procedures and markers are typically reimbursed by third-party payors,
including Medicare, Medicaid and private healthcare insurance companies. These
payors may adversely change their coverage amounts and reimbursement policies.
Also, healthcare reform legislation or regulation may be proposed or enacted in
the future that adversely affects these policies and amounts. For example, the
Federal Deficit Reduction Act of 2006 may in the future affect future
reimbursement rates for our vacuum- assisted biopsy products and Contura MLB
products. We cannot assure you that the current scope of coverage or levels of
reimbursement will continue to be available or that coverage of, or
reimbursement for, our products will be available at all. If physicians,
hospitals and other providers are unable to obtain adequate reimbursement for
our current products or future products, or for the procedures in which such
products are used, they may be less likely to purchase the products, which could
have a material adverse impact on our market share. For example, in 2009, it is
expected that there will be an increase in reimbursement rates to non hospital
based Radiation Oncology centers for multiple-dwell radiation balloon catheter
procedures, which includes Contura MLB, relative to single catheter
procedures, but a decrease for non hospital based Radiology Oncology centers in
rates relative to whole breast radiation therapy.




Any
acquisitions that we make could disrupt our business and have an adverse effect
on our financial
condition.




We expect
that in the future we may identify and evaluate opportunities for strategic
acquisitions of complementary product lines, technologies or companies. We may
also consider joint ventures and other collaborative projects. However, we may
not be able to identify appropriate acquisition candidates or strategic
partners, or successfully negotiate, finance or integrate any businesses,
products or technologies that we acquire. Furthermore, the integration of any
acquisition and the management of any collaborative project may divert
management’s time and resources from our core business and disrupt our
operations. We do not have any experience with acquiring other product lines,
technologies or companies. We may spend time and money on projects that do not
increase our revenues. Any cash acquisition we pursue would diminish the funds
available to us for other uses, and any stock acquisition would be dilutive to
our stockholders.




-25-




Our
financial controls and procedures may not be sufficient to ensure timely and
reliable reporting of financial information, which, as a public company, could
materially harm our stock price and NASDAQ
listing.




As a
public company, we will require greater financial resources than we have had as
a private company. We will need to hire additional employees for our finance
department. We cannot provide you with assurance that our finance department has
or will maintain adequate resources to ensure that we will not have any future
material weakness in our system of internal controls. The effectiveness of our
controls and procedures may in the future be limited by a variety of factors
including:




•
            faulty
      human judgment and simple errors, omissions or
  mistakes;




•
            fraudulent
      action of an individual or collusion of two or more
  people;




•
            inappropriate
      management override of procedures;
and




•
            the
      possibility that any enhancements to controls and procedures may still not
      be adequate to assure timely and accurate financial
      information.




If we
fail to have effective controls and procedures for financial reporting in place,
we could be unable to provide timely and accurate financial information and be
subject to NASDAQ delisting, SEC investigation, and civil or criminal
sanctions.




Product
liability claims may lead to expensive and time-consuming litigation,
substantial damages, increased insurance rates, and may have a material adverse
effect on our financial condition.




Our
business exposes us to potential product liability claims that are inherent in
the manufacturing, marketing and sale of medical devices. For example, in the
past we experienced, and in the future could experience, an issue related to the
tip of our Gel Mark Ultra Biopsy Site Marker shearing off in the patient’s
breast during the biopsy procedure, which could lead to a claim of damages,
though none has previously been made. We may be unable to avoid product
liability claims, including those based on manufacturing defects or claims that
the use, misuse or failure of our products resulted in a misdiagnosis or harm to
a patient. Although we believe that our liability coverage is adequate for our
current needs, and while we intend to expand our product liability insurance
coverage to any products we intend to commercialize, insurance may be
unavailable, prohibitively expensive or may not fully cover our potential
liabilities. If we are unable to maintain sufficient insurance coverage on
reasonable terms or to otherwise protect against potential product liability
claims, we may be unable to continue to market our products and to develop new
products. Defending a product liability lawsuit could be costly and have a
material adverse effect on our financial condition, as well as significantly
divert management’s attention from conducting our business. In addition, product
liability claims, even if they are unsubstantiated, may damage our reputation by
raising questions about our products’ safety and efficacy, which could
materially adversely affect our results of operations, interfere with our
efforts to market our products and make it more difficult to obtain commercial
relationships necessary to maintain our business.




We
may be adversely affected by the impact of environmental and safety
regulations.




We are
subject to federal, state, local and foreign laws and regulations governing the
protection of the environment and occupational health and safety, including laws
regulating the disposal of hazardous wastes and the health and safety of our
employees. We may be required to obtain permits from governmental authorities
for certain operations. If we violate or fail to comply with these laws and
regulations, we could incur fines, penalties or other sanctions, which could
adversely affect our business and our financial condition and cause our stock
price to decline. We also may incur material expenses in the future relating to
compliance with future environmental laws. In addition, we could be held
responsible for substantial costs and damages arising from any contamination at
our present facilities or third-party waste disposal sites. We cannot completely
eliminate the risk of contamination or injury resulting from hazardous
materials, and we may incur material liability as a result of any contamination or
injury.


-26-




Our
success will depend on our ability to attract and retain key personnel,
particularly members of management and scientific staff.




We
believe our future success will depend upon our ability to attract and retain
employees, including members of management, engineers and other highly skilled
personnel. Our employees may terminate their employment with us at any time.
Hiring qualified personnel may be difficult due to the limited number of
qualified professionals and the fact that competition for these types of
employees is intense. If we fail to attract and retain key personnel, we may not
be able to execute our business plan.




Our
ability to use net operating loss carryforwards may be limited.




Section 382
of the Internal Revenue Code generally imposes an annual limitation on the
amount of net operating loss carryforwards that may be used to offset taxable
income when a corporation has undergone significant changes in its stock
ownership. We have internally reviewed the applicability of the annual
limitations imposed by Section 382 caused by previous changes in our stock
ownership and believe such limitations should not be significant. Future
ownership changes, including changes resulting from or affected by our IPO, may
adversely affect our ability to use our remaining net operating loss
carryforwards. If our ability to use net operating loss carryforwards is
limited, we may be subject to tax on our income earlier than we would otherwise
be had we been able to fully utilize our net operating loss
carryforwards.




RISKS
RELATED TO REGULATORY MATTERS




The
FDA may find that we do not comply with regulatory requirements and take action
against us.




Our
products and facilities are subject to periodic unannounced inspections by the
FDA and other regulatory bodies. In particular, we are required to comply with
the FDA’s Quality System Regulations, or QSRs, and other regulations, which
cover the methods and documentation of the design, testing, production, control,
quality assurance, labeling, packaging, storage, shipping and post-market
surveillance of our products.




We
underwent an inspection of our facilities by the FDA in April 2005, which
resulted in the issuance in July 2005 of a Warning Letter from the FDA related
to, among other things, our failure to adequately validate manufacturing changes
we undertook to prevent the tip of the Gel Mark Ultra Biopsy Site Marker from
shearing off in the patient’s breast during the biopsy procedure, which we had
experienced. The letter required us to take prompt action to strengthen our
Quality System and product engineering area. We responded to the FDA with a
comprehensive corrective action plan in August 2005. We believe we are in
compliance with the QSRs. However, during a future inspection, the FDA may
determine that we have failed to adequately or completely implement the
corrective action plan or may find additional material violations. Such a
determination could lead the FDA to commence an enforcement action against us,
which may include the following sanctions:




•
            injunctions,
      fines, other civil penalties or additional Warning
  Letters;




•
            the
      refusal of, or delay by, the FDA in granting further 510(k) clearances or
      approving further premarket approval
  applications;




•
            suspension
      or withdrawal of our FDA clearances or
  approvals;




•
            operating
      restrictions, including total or partial suspension of production,
      distribution, sales and marketing of our products;
  or




•
            product
      recalls, product seizures or criminal prosecution of our company, our
      officers or our employees.




Any of
these could have a material adverse effect on our reputation, results of
operation and financial
condition.




If
we fail to obtain or maintain necessary FDA clearances or approvals for
products, or if clearances or approvals are delayed, we will be unable to
commercially distribute and market our products in the United
States.




Our
products are medical devices, and as such are subject to extensive regulation in
the United States and in the foreign countries where we do business. Unless an
exemption applies, each medical device that we wish to market in the United
States must first receive 510(k) clearance or premarket approval from the FDA.
Either process can be lengthy and expensive. The FDA’s 510(k) clearance process
usually takes from three to twelve months from the date the application is
complete, but it may take longer. The premarket approval process is much more
costly, lengthy and uncertain. It generally takes from one to three years from
the date the application is completed or even longer. Achieving a completed
application is a process that may require numerous clinical trials and the
filing of amendments over time. We expect that our products in the foreseeable
future will be subject to 510(k) procedures and not premarket approval, or PMA,
applications. We may not be able to obtain additional FDA clearances or
approvals in a timely fashion, or at all. Delays in obtaining clearances or
approvals could adversely affect our revenues and profitability.




-27-




Modifications
to our devices may require new 510(k) clearances, which may not be
obtained.




The FDA
requires device manufacturers to initially make and document a determination of
whether or not a modification requires a new clearance; however, the FDA can
review a manufacturer’s decision. Any modifications to an FDA-cleared device
that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use would require a 510(k) clearance
or possibly a premarket approval.




We have
modified aspects of some of our products since receiving FDA clearance, but we
believe that new 510(k) clearances are not required. We may make additional
modifications, and in appropriate circumstances, determine that new clearance or
approval is unnecessary. The FDA may not agree with our decisions not to seek
new clearances or approvals. If the FDA requires us to seek 510(k) clearances or
approval for any modifications to a previously cleared product, we may be
required to cease marketing or recall the modified device until we obtain
clearance or approval. Also, in these circumstances we may be subject to adverse
publicity, regulatory Warning Letters and significant fines and
penalties.




Government
regulation imposes significant restrictions and costs on the development and
commercialization of our products.




Any
products cleared or approved by the FDA are subject to on-going regulation. Any
discovery of previously unknown or unrecognized problems with the product or a
failure of the product to comply with any applicable regulatory requirements can
result in, among other things:




•
            Warning
      Letters, injunctions, fines or other civil
  penalties;




•
            the
      refusal of, or delay by, the FDA in granting further 510(k) clearances or
      approving further premarket approval
  applications;




•
            suspension
      or withdrawal of our FDA clearances or
  approvals;




•
            operating
      restrictions, including total or partial suspension of production,
      distribution, sales and marketing of our products;
  or




•
            product
      recalls, product seizures or criminal prosecution of our company, our
      officers or our employees.




Any of
these could have a material adverse effect on our reputation and results of
operations.




RISKS
RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK




Our
common stock has been publicly traded for a short time and an active trading
market may not be
sustained.




Prior to
March 2007, there had been no public market for our common stock. An active
trading market may not be sustained. The lack of an active market may impair the
value of your shares and your ability to sell your shares at the time you wish
to sell them. An inactive market may also impair our ability to raise capital by
selling shares and may impair our ability to acquire other companies, products
or technologies by using our shares as
consideration.


-28-




If
our public guidance or our future operating performance does not meet investor
expectations, our stock price could decline.




As a
public company, we provide guidance to the investing community regarding our
anticipated future operating performance. Our business typically has a short
sales cycle, so that we do not have significant backlog of orders at the start
of a quarter, and our ability to sell our products successfully is subject to
many uncertainties. In light of these factors, it is difficult for us to
estimate with accuracy our future results. Our expectations regarding these
results will be subject to numerous risks and uncertainties that could make
actual results differ materially from those anticipated. If our actual results
do not meet our public guidance or our guidance or actual results do not meet
the expectations of third-party financial analysts, our stock price could
decline significantly.




We
expect that the price of our common stock will fluctuate
substantially.




The
market price of our common stock is likely to be highly volatile and may
fluctuate substantially due to many factors, including:




•
            volume
      and timing of sales of our
products;




•
            the
      introduction of new products or product enhancements by us or our
      competitors;




•
            disputes
      or other developments with respect to our intellectual property rights or
      the intellectual property rights of
others;




•
            our
      ability to develop, obtain regulatory clearance or approval for, and
      market, new and enhanced products on a timely
  basis;




•
            product
      liability claims or other
litigation;




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




•
            sales
      of large blocks of our common stock, including sales by our executive
      officers and directors;




•
            announcements
      of technological or medical innovations for the diagnosis and treatment of
      breast cancer;




•
            changes
      in governmental regulations or in the status of our regulatory approvals
      or applications;




•
            changes
      in the availability of third-party reimbursement in the United States or
      other countries;




•
            changes
      in earnings estimates or recommendations by securities
      analysts;




•
            general
      market conditions and other factors, including factors unrelated to our
      operating performance or the operating performance of our competitors;
      and




•
            limited
      liquidity and low trading volumes for our common
  stock.




These and
other factors may make the price of our stock volatile and subject to unexpected
fluctuation.




Our
directors, executive 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
officers, directors and principal stockholders that currently hold more than 5%
of our common stock together control nearly a majority of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
exercise significant influence over the management and affairs of our company
and all 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 have a material adverse effect on the market price of our common stock and
may not be in the best interest of our other stockholders.




A
sale of a substantial number of shares of our common stock may cause the price
of our common stock to
decline.




Following
the expiration of lock-up arrangements with our stockholders in September 2007
that were entered into in connection with our IPO, all shares of our common
stock that were outstanding before the IPO are now eligible for resale, subject
to compliance with Rule 144 under the Securities Act. If our stockholders sell
substantial amounts of our common stock, the market price of our common stock
could decline.




-29-




Our
Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law,
contain provisions that 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, and
might make it more difficult for an investor to acquire a substantial block of
our common stock. 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;




•
            limitations
      on stockholder actions by written consent;
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 our common stock and limit the price that
investors might be willing to pay in the future for shares of the common
stock.




We
do not intend to pay cash dividends.




We have
never declared or paid cash dividends on our capital stock. We currently intend
to retain all available funds and any future earnings for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. In addition, the terms of any future debt or credit
facility may preclude us from paying any dividends. As a result, we anticipate
that capital appreciation of our common stock, if any, will be your sole source
of potential gain for the foreseeable future.




ITEM 1B.
            UNRESOLVED
      STAFF COMMENTS




None.




ITEM 2.
            PROPERTIES




On
March 5, 2008, we entered into a Lease Agreement with The Irvine Company
LLC for the lease of approximately 41,402 square feet space at 3 Morgan,
Irvine, California. The term of the lease commenced on November 1, 2008 and
will expire on January 31, 2014. The lease provided for a period of
rent-free early occupancy before the commencement date. We believe our existing facility isadequate for our current and future needs for at least the next 12
months.




ITEM 3.
            LEGAL
      PROCEEDINGS




On
January 8, 2008, Hologic and its wholly-owned subsidiaries, including Cytyc
Corporation and Cytyc LP, filed a lawsuit against us in the United States
District Court, Northern District of California, San Jose Division. The
complaint generally alleges patent infringement of certain Hologic brachytherapy
patent claims, seeking unspecified monetary damages and an injunction against us
for infringement of those claims. On February 6, 2008, Hologic filed a motion
seeking a preliminary injunction in the case and requested that the Court stop
the sale of Contura MLB. On March 7, 2008, Hologic filed an amended complaint
restating its allegations regarding patent infringement, and adding new claims
related to unfair competition under the Lanham Act and California state unfair
competition and false advertising statutes. On April 25, 2008, the court denied
Hologic’s request for a preliminary injunction and ordered the parties to
schedule a trial within 60 to 90 days of such date. On May 22, 2008, the Court
issued an order scheduling the Markman claims construction hearing on the patent
counts for June 25, 2008, and the trial in the case to start July 14, 2008.
Pursuant to an agreement of the parties, the order also dismissed Hologic’s
unfair competition and false advertising claims under the Lanham Act and
California state law, without prejudice. On June 24, 2008, the Court granted a
joint request by the parties to stay all proceedings, including the previously
scheduled Markman claims construction hearing and the trial, until at least
August 22, 2008 in order to provide the parties time to discuss possible
resolution of the matter. On August 22, 2008, the Company and Hologic jointly
requested that the Court resume proceedings in the pending lawsuit. On October
15, 2008, a Markman claims construction hearing was held and a ruling was issued
on February 18, 2009.  Although we, together with our legal counsel,
continue to evaluate the court’s ruling in the Markman hearing, we expect that
nothing material or definitive in the matter will be decided before the trial,
the date for which has not yet been set by the Court. As a result, we have taken
the position that the probability of incurring any loss related to this
litigation is not determinable, nor is the amount of loss quantifiable at this
time. Accordingly, we have not accrued a loss related to this litigation as of
December 31, 2008. We intend to continue to vigorously defend ourselves in this
matter.




-30-




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




None.




PART
II




ITEM 5.
            MARKET
      FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Stock
Exchange Listing




Our
common stock has traded on the NASDAQ Global Market under the symbol “SENO”
since our initial public offering on March 29, 2007. Prior to that time, there
was no public market for our stock. On February 27, 2009, the closing sale price
of our common stock was $2.91 per share.




Common
Stockholders




As of
February 27, 2009 there were approximately 93 stockholders of record of our
common stock.




Stock
Prices




The
following table sets forth quarterly high and low closing sales prices of our
common stock for the indicated periods.




2008:
            
            High
            
            
            LowFourth
      Quarter
            
            $
            5.00
            
            
            $
            2.14Third
      Quarter
            
            $
            7.80
            
            
            $
            4.66Second
      Quarter
            
            $
            7.75
            
            
            $
            5.45First
      Quarter
            
            $
            9.06
            
            
            $
            6.082007:Fourth
      Quarter
            
            $
            9.67
            
            
            $
            8.00Third
      Quarter
            
            $
            10.55
            
            
            $
            7.94Second
      Quarter
            
            $
            10.85
            
            
            $
            7.95




Dividend
Policy




We have
never paid a cash dividend and have no present intention to pay cash dividends
in the foreseeable future. The Board of Directors currently intends to retain
any future earnings for use in our business.




Sale
of Unregistered Securities




We did
not sell any unregistered securities during the period covered by this Annual
Report on Form 10-K.




Stock
Performance Graph




The
following graph compares the cumulative total stockholder return on our common
stock with the cumulative total return of the NASDAQ Composite Index and the
NASDAQ Medical Equipment Index for the period beginning on March 29, 2007,
our first day of trading after our initial public offering, and ending on
December 31, 2008.




-31-












The graph
assumes that $100 was invested on March 29, 2007 in our common stock, the
NASDAQ Composite Index, and the NASDAQ Medical Equipment Index, and that all
dividends were reinvested. No dividends have been declared or paid on our common
stock. Stock performance shown in the above chart for the common stock is
historical and should not be considered indicative of future price performance.
This graph was prepared by Research Data Group, Inc.





Annual Percentage
Return





March
      29,
              2007
            
            
            December
      31,
              2007
            
            
            December
      31,
              2008SenoRx,
      Inc.
            
            100.00
            
            
            105.13
            
            
            28.61NASDAQ
      Composite
            
            100.00
            
            
            109.13
            
            
            63.58NASDAQ
      Medical Equipment
            
            100.00
            
            
            122.01
            
            
            67.21




-32-


ITEM 6.
            SELECTED
      FINANCIAL DATA




The
following table presents selected historical financial data. We derived the
selected statements of operations data for the years ended December 31,
2008, 2007, and 2006 and balance sheet data as of December 31, 2008 and
2007 from our audited financial statements and notes thereto that are included
elsewhere in this annual report. We derived the selected statements of
operations data for the years ended December 31, 2004 and the balance sheet data
as of December 31, 2004 and 2005 from our audited financial statements that do
not appear in this annual report.




You
should read the following financial information together with the information
under “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our financial statements and related notes included elsewhere
in this annual report.




Years Ended
      December 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(in
      thousands, except per share data)Statement
      of Operations Data:Net
      revenues
            
            
            $
            46,685
            
            
            $
            35,036
            
            
            $
            25,508
            
            
            $
            19,253
            
            
            $
            13,751Cost
      of goods sold (1)
            
            
            
            16,503
            
            
            
            15,124
            
            
            
            13,506
            
            
            
            10,105
            
            
            
            6,415Gross
      profit
            
            
            
            30,181
            
            
            
            19,912
            
            
            
            12,002
            
            
            
            9,148
            
            
            
            7,336Operating
      expenses:Selling
      and marketing (1)
            
            
            
            23,117
            
            
            
            19,023
            
            
            
            15,041
            
            
            
            10,148
            
            
            
            7,507Research
      and development (1)
            
            
            
            6,111
            
            
            
            6,354
            
            
            
            5,323
            
            
            
            4,903
            
            
            
            4,790General
      and administrative (1)
            
            
            
            10,094
            
            
            
            4,187
            
            
            
            2,050
            
            
            
            2,116
            
            
            
            1,709Total
      operating expenses
            
            
            
            39,322
            
            
            
            29,564
            
            
            
            22,414
            
            
            
            17,167
            
            
            
            14,006Loss
      from operations
            
            
            
            (9,141
            )
            
            
            (9,652
            )
            
            
            (10,412
            )
            
            
            (8,019
            )
            
            
            (6,670
            )Interest
      (income) expense, net
            
            
            
            (435
            )
            
            
            7
            
            
            
            850
            
            
            
            594
            
            
            
            148Loss
      on debt extinguishment
            
            
            
            —
            
            
            
            1,265
            
            
            
            197
            
            
            
            —
            
            
            
            —Change
      in fair value of convertible promissory notes
            
            
            
            —
            
            
            
            (991
            )
            
            
            3,960
            
            
            
            —
            
            
            
            —Loss
      before provision for income taxes
            
            
            
            (8,706
            )
            
            
            (9,933
            )
            
            
            (15,419
            )
            
            
            (8,613
            )
            
            
            (6,818
            )Provision
      for income taxes
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            10
            
            
            
            6Net
      loss
            
            
            $
            (8,706
            )
            
            $
            (9,933
            )
            
            $
            (15,419
            )
            
            $
            (8,613
            )
            
            $
            (6,818
            )Net
      loss per share—basic and diluted
            
            
            $
            (0.50
            )
            
            $
            (0.75
            )
            
            $
            (6.61
            )
            
            $
            (4.19
            )
            
            $
            (4.54
            )Weighted-average
      shares outstanding basic and diluted (2)
            
            
            
            17,250
            
            
            
            13,309
            
            
            
            2,332
            
            
            
            2,060
            
            
            
            1,504(1)Includes
      all non-cash stock-based compensation expense as follows:Cost
      of goods sold
            
            
            $
            95
            
            
            $
            110
            
            
            $
            52
            
            
            $
            34
            
            
            $
            17Selling
      and marketing
            
            
            
            863
            
            
            
            589
            
            
            
            409
            
            
            
            438
            
            
            
            184Research
      and development
            
            
            
            449
            
            
            
            509
            
            
            
            395
            
            
            
            286
            
            
            
            184General
      and administrative
            
            
            
            865
            
            
            
            883
            
            
            
            220
            
            
            
            563
            
            
            
            416Total
            
            
            $
            2,272
            
            
            $
            2,091
            
            
            $
            1,076
            
            
            $
            1,321
            
            
            $
            801


(2)
            See
      Note 1 of the notes to our audited financial statements included
      elsewhere in this annual report for an explanation of the determination of
      the number of shares used in computing per share
  data.


-33-




As of
      December 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(in
      thousands)Balance Sheet
      Data:Cash
      and cash equivalents
            
            $
            15,323
            
            
            $
            17,185
            
            
            $
            7,413
            
            
            $
            482
            
            
            $
            3,703Working
      capital
            
            
            27,837
            
            
            
            32,894
            
            
            
            7,386
            
            
            
            2,308
            
            
            
            4,578Total
      assets
            
            
            35,417
            
            
            
            42,062
            
            
            
            19,981
            
            
            
            8,163
            
            
            
            9,148Long
      term obligations, less current portion
            
            
            1,632
            
            
            
            27
            
            
            
            12,125
            
            
            
            2,741
            
            
            
            3,829Convertible
      promissory notes (at fair value)
            
            
            —
            
            
            
            —
            
            
            
            11,960
            
            
            
            —
            
            
            
            —Convertible
      preferred stock
            
            
            —
            
            
            
            —
            
            
            
            46,817
            
            
            
            46,817
            
            
            
            41,050Total
      stockholders’ equity (deficit)
            
            
            28,299
            
            
            
            34,363
            
            
            
            (13,582
            )
            
            
            658
            
            
            
            1,922




ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws. These statements are subject to risks
and uncertainties that could cause actual results and events to differ
materially from those expressed or implied by such forward-looking statements.
For a detailed discussion of these risks and uncertainties, see the “Risk
Factors” section in Item 1A of Part I of this Form 10-K. We
caution the reader not to place undue reliance on these forward-looking
statements, which reflect management’s analysis only as of the date of this
Form 10-K. We undertake no obligation to update forward-looking statements
to reflect events or circumstances occurring after the date of this
Form 10-K.




Overview




We
develop, manufacture and sell minimally-invasive medical devices that are used
in the diagnosis of breast cancer. We were incorporated in 1998. From our
inception until 2002, our principal activity was the development and regulatory
clearance of our initial products, primarily our biopsy tissue markers and our
first breast biopsy system, the EnCor 360. We launched our first biopsy tissue
markers in 2002 and our EnCor 360 in 2003. The EnCor 360 hardware subsequently
served as a platform to facilitate the later launch of the EnCor probes,
handpieces and other probes, which are compatible with the major imaging
modalities.




In 2004,
we received 510(k) clearance from the FDA to market our EnCor breast biopsy
system, our flagship product for use in breast biopsy procedures, conducting
market preference testing commencing in the fourth quarter of 2004. Over the
subsequent period ending in October 2005, we began selling the product on a
limited basis while we focused on enhancing certain components of the product to
optimize its performance, and we subsequently progressed with a full commercial
launch of our EnCor system in November 2005.




We have
and are continuing to develop minimally-invasive products for surgical excision
of lesions and for breast cancer treatment. We received 510(k) clearance for our
Contura Multi-Lumen Radiation Balloon Catheter, or Contura MLB, in May 2007 and
launched in January 2008. Contura MLB is one of a new class of devices designed
to reduce radiation treatment time to five days from six to eight weeks in
patients eligible for the treatment. We also believe that Contura MLB may
present radiation oncologists with opportunities to optimize dosing for certain
patients. We are also developing next generation tissue marker products,
additional EnCor line extensions, line extensions of Contura MLB, devices to
assist in lesion location and certain radio frequency based excision and
reconstructive tissue cutting devices.




Before
2007, we had historically derived our revenues primarily from our tissue marker
products. However, our EnCor system accounted for a majority of our revenue
growth in 2007. Our ability to continue to grow revenues is based upon a number
of assumptions, which may not ultimately occur, including retention of our sales
force, growth in the market for minimally-invasive breast biopsy procedures and
rapid adoption of the product by physicians who specialize in breast care. We
expect our Contura MLB to increasingly contribute to our revenues and we are
marketing this device as a compelling alternative to competing
devices.




For the
year ended December 31, 2008, we generated net revenues of $46.7 million
and a net loss of $8.7 million. As of December 31, 2008, our accumulated
deficit was $84.2 million. We have not been profitable since inception. We
expect our operating expenses to increase as we expand our business to meet
anticipated increased demand for our EnCor system, expand sales of our Contura
MLB and devote resources to our sales and marketing and research and development
activities.




-34-




Net
Revenues




We derive
our revenues primarily from the sales of our breast biopsy systems, breast
biopsy capital equipment, our tissue markers, and other products for breast
care. Our largest market for these products is in the United States and Canada,
where we employ a direct sales force. Our breast biopsy systems, the EnCor and
EnCor 360, consist of two primary components: reusable handpieces and disposable
probes, and are used in conjunction with our SenoRx Breast Biopsy Console. The
disposable probes form the basis of a recurring revenue stream and also
contribute to the sales of tissue markers. Diagnostic adjunct revenue consists
primarily of tissue marker sales, both used with our breast biopsy systems and
with competitor’s biopsy products. Our breast biopsy capital equipment includes
a reusable handpiece, a control module and vacuum source used in conjunction
with our disposable biopsy probe. We expect that the sales of biopsy disposable
and biopsy capital equipment will grow materially in 2009. We further expect
that the sales of our adjunct products, such as our tissue markers and Gamma
Finder, will grow modestly. We anticipate that Contura MLB will provide
meaningful revenue increases in 2009 versus 2008.




Cost
of Goods Sold




Our cost
of goods sold consists of the cost to manufacture and assemble our products,
primarily including materials, components and labor. We assemble and package all
of our finished products with the exception of our Gamma Finder product. We
expect that our cost of goods sold as a percentage of revenues will decrease,
and, correspondingly, gross profits will increase, as a percentage of net
revenues with increased sales volume, product enhancements and outsourced
manufacturing efficiencies. At the end of 2005, we entered into an agreement
with a contract manufacturer in Thailand and began to transfer a portion of our
manufacturing for certain components of our products to this site, and we
anticipate that we will transfer additional manufacturing to this site in order
to increase gross margins. We anticipate that our gross margin will continue to
increase in 2009 versus 2008 due to design and production process improvements,
changes in product mix, the manufacturing efficiencies that we expect to see
with increased production, and the continued successful transfer of
manufacturing of certain products and product components to our Thailand
contract manufacturer.




Operating
Expenses




Our
operating expenses consist of research and development, selling and marketing,
and general and administrative expenses. Stock-based compensation, a non-cash
item, is primarily included in these expenses.




Our
selling and marketing expenses consist of salaries and related expenses of our
direct sales team and sales management, travel, clinical education and training
expenses, marketing and promotional expenses, and costs associated with
tradeshows. We expect selling and marketing expenses to increase in absolute
terms as we expand our sales organization and promotional activities, although
at a rate less than our revenue growth rate.




Our
research and development expenses consist of salaries and related expenses of
our research and development personnel and consultants and costs of product
development, which include patent filing and maintenance costs, production
engineering, clinical and regulatory support and post-clearance clinical product
enhancements. We expense all our research and development costs as they are
incurred. We expect research and development expenses to increase in absolute
terms and as a percent of revenues in 2009 as we continue to develop, enhance,
obtain clinical results and commercialize existing and new
products.




Our
general and administrative expenses consist of the cost of corporate operations,
litigation and professional services. We expect general and administrative
expenses to increase in absolute dollars as we increase our infrastructure to
comply with the regulatory requirements associated with publicly-traded
companies and anticipated litigation expenses relating to the current Hologic
patent infringement lawsuit.  During 2008, we incurred $4.9 million in
patent litigation expenses related to alleged patent infringement by
Hologic.  On October 15, 2008, a Markman claims construction hearing
was held and a ruling was issued on February 18, 2009.  Although we,
together with our legal counsel, continue to evaluate the court’s ruling in the
Markman hearing, we expect that nothing material or definitive in the matter
will be decided before the trial, the date for which has not yet been set by the
Court. As a result, we believe that the probability of incurring any loss
related to this litigation is not determinable, nor is the amount of loss
quantifiable at this time. Accordingly, we have not accrued a loss related to
this litigation as of December 31, 2008.




-35-




We expect
to incur stock-based compensation expense for option grants, which will be
accounted for under SFAS No. 123R. We anticipate that non-cash expenses for
options accounted for under SFAS No. 123R will increase in 2009 based upon the
number of options granted. We also expect to incur stock-based compensation
expense related to the issuance of common stock under our employee stock
purchase plan.




Interest




Interest
income represents income generated from our cash and cash equivalents and
short-term investments that are invested generally in liquid money-market funds
and commercial paper. During 2008, debt obligations included a working capital
facility, and an equipment facility resulting in interest expense. Interest
expense also includes the fair value for any equity interests, such as warrants,
granted in conjunction with the debt obligations. The fair value of the equity
interests were amortized to interest expense over the term of the related debt
obligations. Interest expense has decreased due to the retirement of certain
debt obligations in 2007 and early 2008 and lower available interest
rates.




Income
Tax Expense




Due to
uncertainty surrounding the realization of deferred tax assets through future
taxable income, we have provided a full valuation allowance and no benefit has
been recognized for our net operating loss and other deferred tax assets. Income
tax expense relates to certain state taxes.




Results
of Operations




The
following table sets forth our results of operations expressed as percentages of
revenues for the years ended December 31, 2008, 2007and 2006:




For
      the Years Ended
              December 31,2008
            
            
            2007
            
            
            2006Net
      revenues
            
            
            100.0%
            
            
            
            100.0%
            
            
            
            100.0%Cost
      of goods sold
            
            
            35.4
            
            
            
            43.2
            
            
            
            52.9Gross
      profit
            
            
            64.6
            
            
            
            56.8
            
            
            
            47.1Operating
      expenses:Selling
      and marketing
            
            
            49.5
            
            
            
            54.3
            
            
            
            59.0Research
      and development
            
            
            13.1
            
            
            
            18.1
            
            
            
            20.9General
      and administrative
            
            
            21.6
            
            
            
            12.0
            
            
            
            8.0Total
      operating expenses
            
            
            84.2
            
            
            
            84.4
            
            
            
            87.9Loss
      from operations
            
            
            19.6
            
            
            
            27.5
            
            
            
            40.8Interest
      expense
            
            
            0.2
            
            
            
            4.7
            
            
            
            3.9Loss
      on debt extinguishment
            
            
            —
            
            
            
            3.6
            
            
            
            0.8Change
      in fair value of convertible promissory notes and warrant
      liability
            
            
            —
            
            
            
            (2.8
            )
            
            
            15.5Interest
      income
            
            
            (1.1
            )
            
            
            (4.7
            )
            
            
            (0.6
            )Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            
            (18.6%
            )
            
            
            (28.4%
            )
            
            
            (60.4%
            )




Year
ended December 31, 2008 Compared to year Ended December 31,
2007




Net
Revenues. Net revenues increased $11.6 million, or 33.2%, to $46.7
million in 2008 from $35.0 million in 2007. The increase primarily consisted of
$4.8 million in biopsy disposable revenues, an increase of 29.8% from 2007 due
to a larger installed base of EnCor systems. Biopsy capital equipment revenues
increased $1.4 million, or 42.1% in 2008 due to a greater number of customers
purchasing our breast biopsy systems as compared to those customers acquiring
the capital through a “product supply agreement” and increased equipment sales
to international distributors. Diagnostic adjunct revenues increased $798,000,
or 5.3%, primarily due to an increase in marker sales resulting from increased
EnCor disposable biopsy sales and sales of markers used with competitive biopsy
disposables and increased Gamma Finder sales. Therapeutic revenues increased
$4.6 million as we began sales of our Contura MLB to a limited number of
clinical sites in June 2007 following the May 2007 FDA 510(k) clearance, with
full commercialization in January 2008.




-36-




Cost of Goods
Sold and Gross Profit. Cost of goods sold increased $1.4 million, or
9.1%, to $16.5 million in 2008 from $15.1 million in 2007. The increase in total
cost of goods sold primarily consisted of an increase in direct labor,
manufacturing overhead and material costs associated with our increase in unit
sales. Gross profit increased $10.3 million or 51.6% to $30.2 million in 2008
from $19.9 in 2007. Gross profit as a percentage of net revenues increased by
7.8% to 64.6% in 2008 from 56.8% in 2007. The increase in gross profit as a
percentage of net revenues was primarily attributable to improved efficiencies
in the production of our disposable biopsy probe and gross margin contribution
from the sales of our Contura MLB. Additionally, gross margins continue to
benefit from the allocation of manufacturing overhead over greater product
revenues and inventory unit production.




Selling and
Marketing Expenses. Selling and marketing expenses increased $4.1
million, or 21.5%, to $23.1 million in 2008 from $19.0 million in 2007. The
increase primarily consisted of $3.5 million in salaries and related employee
costs due to the expansion of our sales organization, a $133,000 increase in
departmental related expenses, a $147,000 increase in selling and promotional
related expenses and a $274,000 increase in equity based compensation.




Research and
Development Expenses. Research and development expenses decreased
$242,000, or 3.8%, to $6.1 in 2008 from $6.4 million in 2006. The decrease in
these expenses consisted primarily of project costs, predominately for the
Contura MLB, which decreased $502,000 and a decrease of $60,000 in equity based
compensation. This decrease was partially offset by an increase of $62,000 for
salaries and the related employee costs, a $116,000 increase for patent related
expenses and an increase of $142,000 in departmental related
expenses.




General and
Administrative Expenses. General and administrative expenses increased
$5.9 million, or 141.1%, to $10.1 million in 2008 from $4.2 million in
2007.  The increase primarily consisted of $4.9 million in attorney
and related litigation costs incurred in connection with responding to the
allegations by Hologic of patent infringement relating to our Contura MLB,
$265,000 for public company related costs, including legal and reporting
expenses, which includes first year Sarbanes Oxley implementation costs, $275,000 for salaries and
the related employee costs, $287,000 for departmental costs and $173,000 for
increased professional fees.




Interest Expense.Interest expense decreased $1.6 million to $85,000 in 2008 from $1.6
million in 2007. The decrease was primarily due to the repayment of the December
2006 subordinated note.




Loss on Debt
Extinguishment.In November 2007, we incurred a $1.3 million expense on
the retirement of a December 2006 Subordinate Note facility that had an original
principal amount of $10.0 million outstanding under it, representing the
unamortized debt issuance and debt discounts which would have been otherwise
charged to interest expense over the term of the facility.  In 2008,
we did not incur any expense related to this item.




Change in Fair
Value of Convertible Promissory Notes and Warrant Valuation. In 2007, we
recorded income of $160,000 for the change in fair value of our May 2006
convertible promissory notes that had an original aggregate principal amount of
$8.0 million outstanding, in accordance with FAS No. 155, and income of $831,000
for the reduction in the fair value of a related warrant liability. In 2008, we
did not incur any expense related to this item.




Interest Income.Interest income decreased $1.1 million to $520,000 in 2008 from $1.6
million in 2007 primarily due to lower cash and short-term investment balances
resulting from the repayment of $10.3 million for the retirement of the December
2006 Subordinated Note, $2.0 million to repay a February 2003 convertible
subordinated note and 2002 note obligations owing to Century Medical, as well as
working capital needs.




Year
ended December 31, 2007 Compared to year Ended December 31,
2006




Net
Revenues. Net revenues increased $9.5 million, or 37.3%, to $35.0 million
in 2007 from $25.5 million in 2006. The increase primarily consisted of an
increase of $5.2 million in biopsy disposable revenues, or 47.8% from 2006, due
to a larger installed base of EnCor systems. Biopsy capital revenues increased
$2.1 million, or 165.2%, due to a greater number of customers purchasing our
breast biopsy systems as compared to those customers acquiring the capital
through a “product supply agreement” in 2006. Diagnostic adjunct revenues
increased $1.7 million, or 12.7%, primarily due to an increase in marker sales
resulting from increased EnCor disposable biopsy sales and sales of markers used
with competitive biopsy disposables and increased Gamma Finder sales. Diagnostic
therapeutic revenues increased $542,000 as we began sales of our Contura MLB to
a limited number of clinical sites in June 2007 following the May 2007 FDA
510(k) clearance.




-37-




Cost of Goods
Sold and Gross Profit. Cost of goods sold increased $1.6 million, or
12.0%, to $15.1 million in 2007 from $13.5 million in 2006. The increase in
total cost of goods sold primarily consisted of an increase in direct labor,
manufacturing overhead and material costs associated with our increase in
product sales. Gross profit increased $7.9 million or 65.9% in 2007 to $19.9
million from $12.0 million in 2006. Gross profit as a percentage of net revenues
increased by 9.7% to 56.8% in 2007 from 47.1% in 2006. The increase in gross
profit as a percentage of net revenues was primarily attributable to improved
efficiencies in the production of our disposable biopsy probe and allocating
manufacturing overhead over greater product revenues and inventory unit
production.




Selling and
Marketing Expenses. Selling and marketing expenses increased $4.0
million, or 26.5%, to $19.0 million in 2007 from $15.0 million in 2006. The
increase primarily consisted of $2.9 million in salaries and related employee
costs due to the expansion of our sales organization, $158,000 in equity based
compensation charges including deferred compensation and the discount associated
with shares purchased by employees under our Employee Stock Purchase Plan and
$947,000 increase in selling and promotional related expenses.




Research and
Development Expenses. Research and development expenses increased $1.0
million, or 19.4%, to $6.4 in 2007 from $5.3 million in 2006. The increase in
these expenses primarily consisted of $156,000 in salaries and the related
employee costs, $727,000 associated with project costs for the development of
the Contura MLB, SenoSonix and VisiLoc, and a $108,000 increase in equity based
compensation charges including deferred compensation and the discount associated
with shares purchased by employees under our Employee Stock Purchase
Plan.




General and
Administrative Expenses. General and administrative expenses increased
$2.1 million, or 104.2%, to $4.2 million in 2007 from $2.1 million in 2006. The
increase primarily consisted of $440,000 related to increased headcount and
increased compensation, $670,000 for public company related costs, including
legal and reporting expenses, $659,000 in equity based compensation charges
including deferred compensation and the discount associated with shares
purchased by employees under our Employee Stock Purchase Plan and $331,000 for
increased departmental costs. These increases were partially offset by a
$226,000 decrease in legal fees associated with the resolution of the Suros
litigation in May 2006.




Interest
Expense. Interest expense increased $649,000 to $1.6 million in 2007 from
$998,000 in 2006. The increase was due to the interest expense incurred on the
December 2006 Subordinated Note.




Loss on Debt
Extinguishment.In November 2007, we incurred a $1.3 million expense on
the retirement of the December 2006 Subordinate Note, representing the
unamortized debt issuance and debt discounts which would have been otherwise
charged to interest expense over the term of the note. In 2006, we incurred a
$200,000 expense related to the acceleration of the amortization of the debt
discount and issuance costs associated with the early repayment of a 2004
Subordinated Note payable.




Change in Fair
Value of Convertible Promissory Notes and Warrant Liability. In 2007, we
recorded income of $160,000 for the change in fair value of our May 2006 Notes
in accordance with FAS No. 155 and income of $831,000 for the reduction in
the fair value of the related warrant liability. In 2006, we recorded a $3.8
million expense for the changes in fair value of our May 2006
Notes.




Interest
Income. Interest income increased $1.5 million to $1.6 million in 2007
from $148,000 in 2006 primarily as a result of increased interest income from
higher cash and short-term investment balances resulting from our IPO, which
closed in April 2007.




-38-




Liquidity
and Capital Resources




General




We have
incurred losses since our inception in January 1998 and, as of December 31,
2008, we had an accumulated deficit of $84.2 million. From inception through
December 31, 2008, we generated cumulative gross profit from the sale of
our product offerings of $86.9 million. To date, our operations have been funded
primarily with proceeds from the issuance of our preferred stock and borrowings,
including our issuance of the May 2006 Notes and the December 2006 Subordinated
Note, and our IPO that closed in April 2007. Cumulative net proceeds from the
issuance of preferred stock totaled $46.8 million. Proceeds from the issuance of
the May 2006 Notes totaled $8.0 million. Proceeds from the issuance of the
December 2006 Subordinated Note was $10.0 million, of which $1.2 million was
used to repay the 2004 Subordinated Note payable. Net proceeds from our IPO,
including the sale of shares pursuant to the subsequent underwriters’
overallotment and after deducting total expenses, was $44.8 million. All of our
preferred stock converted into common stock upon the closing of the IPO. In
November 2007 we used $10.3 million to retire the December 2006 Subordinated
Note and in February 2008 we used $2.0 million to repay the February 2003
convertible subordinated note and 2002 note obligations owing to Century
Medical. In September 2008 we amended our existing loan agreement with Silicon
Valley Bank, or SVB, to among other items, increase the total maximum amount
available for borrowing from $4.0 million to $12.0 million. As of
December 31, 2008, $2.0 million has been drawn down under this
facility.




We
believe that our cash and cash equivalents, and our anticipated ability to draw
down on our working capital and equipment facilities, will be sufficient to meet
our projected operating requirements for at least the next 12 months. We
anticipate that we will continue to use cash in our operating activities and
investing activities for the foreseeable future as we grow our
business.




Net
Cash Used in Operating Activities—Year Ended 2008




Net cash
used in operating activities was $11.9 million, for the year ended December 31,
2008, which was primarily a function of an increase in inventory of $3.9
million, an increase in accounts receivable of $2.9 million, an increase in
other assets of $225,000, and a decrease in accounts payable and accrued
expenses of $560,000. These uses of cash were partially offset by a decrease in
prepaid expenses of $158,000 and an increase in deferred revenue of $68,000. The
aggregate increased investment in inventory of $3.9 million resulted primarily
from two major factors, including (i) our decision to build shelf stock for our
higher volume products in order to better service our customers as well as
accommodate our move to the new manufacturing facility in late August 2008, and
(ii) the need to purchase longer-term quantities of certain parts due to
long lead times. We expect inventory will modestly decrease in 2009. The
increase in accounts receivable was primarily due to an increase in net sales
and an increase in sales outside the United States, which include extended
payment terms for initial stocking orders. While we expect that the amount of
accounts receivable will fluctuate based on the timing of sales and collections,
we expect our ratio of overall investment in accounts receivable as compared to
revenues will continue to modestly increase. The $560,000 decrease in accounts
payable and accrued expenses resulted from the use of funds, including funds
borrowed under our bank loan facility with SVB that allowed us to reduce
outstanding accounts payable with certain vendors.




Net
Cash Provided by Investing Activities—Year Ended 2008




Net cash
provided by investing activities amounted to $9.8 million during the year ended
December 31, 2008, was primarily attributable to the maturities of short-term
investments which was partially offset by the $970,000 addition of new
manufacturing molds and equipment, business intelligence software, leasehold
improvements to our new Irvine facility and demonstration units.




Net
Cash Provided by Financing Activities—Year Ended 2008




Net cash
provided by financing activities was $242,000 during the year ended December 31,
2008, primarily attributable to $2.0 million advance on our term loan and
$370,000 related to the proceeds from the issuance of common stock from option
exercises and ESPP stock purchases. These proceeds were partially offset by the
repayment of $2.0 million for the Century Medical notes and $30,000 cash paid
for the annual renewal of the SVB working capital
facility.




-39-




Net
Cash Used in Operating Activities—Year Ended 2007




Net cash
used in operating activities was $10.3 million, for the year ended
December 31, 2007, which was a function of an increase in inventory of $2.7
million, an increase in accounts receivable of $1.2 million, a decrease in
accounts payable and accrued expenses of $748,000, and an increase in prepaid
expenses of $324,000. These uses of cash were partially offset by a decrease in
other assets of $384,000 and an increase in deferred revenue of $58,000. The
aggregate increased investment in inventory of $2.7 million resulted primarily
from two major factors, including our decision to build shelf stock of our
higher volume products in order to better service our customers, and the need to
purchase longer-term quantities of certain parts due to long lead times. We
expect inventory will continue to increase in 2008. The increase in accounts
receivable was primarily due to an increase in net sales. While we expect that
the amount of accounts receivable will fluctuate based on the timing of sales
and collections, we expect our ratio of overall investment in accounts
receivable as compared to revenues will remain constant as compared to 2007. The
$748,000 decrease in accounts payable and accrued expenses resulted from the use
of proceeds from our April 2007 IPO, which allowed us to reduce outstanding
accounts payable with certain vendors.




Net
Cash Used in Investing Activities—Year Ended 2007




Net cash
used in investing activities amounted to $11.3 million during the year ended
December 31, 2007, primarily attributable to the purchase of short-term
investments and the addition of demonstration units and new manufacturing
molds.




Net
Cash Provided by Financing Activities—Year Ended 2007




Net cash
provided by financing activities was $31.4 million during the year ended
December 31, 2007, primarily attributable to proceeds of $47.1 million from
our April 2007 IPO and underwriters’ overallotment, a $2.8 million advance on
our working capital facility and $61,000 related to the proceeds from the
issuance of common stock from option exercises. These proceeds were partially
offset by an aggregate of $17.8 million in repayments under our various debt
facilities and $941,000 in cash paid for deferred offering costs including
legal, accounting and printing fees, which were offset against offering proceeds
at the completion of our IPO in April 2007.




Net
Cash Used in Operating Activities—Years Ended 2006




Net cash
used in operating activities was $9.2 million for the year ended
December 31, 2006. The net cash used  primarily reflects the net
loss for the period, offset in part by depreciation, amortization of deferred
compensation and amortization of debt discounts and changes in operating assets
and liabilities.




Net cash
used in our operating activities increased from $7.5 million in 2005 to $9.2
million in 2006 due to changes in assets and liabilities, which was a function
of an increase in inventory of $2.1 million, an increase in accounts receivable
of $1.4 million and an increase in accounts payable and accrued expenses of $2.9
million. The aggregate increased investment in inventory of $2.1 million
resulted primarily from three major factors, including our requirement to
purchase inventory from a distributor earlier than needed, our decision to build
shelf stock of our higher volume products in order to better service our
customers, and the need to purchase longer-term quantities of certain parts due
to long lead times.




Net
Cash Used in Investing Activities—Years Ended 2006




Net cash
used in investing activities was $900,000 for the year ended December 31,
2006.




During
the year ended December 31, 2006, cash used consisted of $500,000 for new
molds, equipment and machinery, $150,000 for demonstration units, $100,000 for
new computers and software, $96,000 for a trade show booth and equipment, and
$29,000 for leasehold improvements.




Net
Cash Provided by Financing Activities—Years Ended 2006




Net cash
provided by financing activities was $17.0 million in 2006.




The
increase in 2006 as compared to 2005 was primarily attributable to the proceeds
of $10.0 million related to the December 2006 Subordinated Note, $8.0 million
related to the May 2006 convertible promissory notes, an aggregate of $3.1
million in borrowings under our various debt facilities and $100,000 related to
proceeds from the issuance of common stock from option exercises. These sources
of cash were offset by $2.7 million in scheduled debt repayments and the early
repayment of the 2004 Subordinated Note payable, $1.3 million in cash paid for
deferred offering costs including legal, accounting and printing fees, which
were at the time to be reclassified as additional paid-in capital at the
completion of the IPO, and $200,000 for payment of debt issuance
costs.




-40-




Accounts
Receivable




Our
accounts receivable days outstanding were 51 days at December 31, 2008, 47
days at December 31, 2007 and 42 days at December 31, 2006. Our
products are typically sold for terms net 30 days from shipment. We review our
accounts receivable balances and customers regularly to establish and maintain
an appropriate allowance for doubtful accounts. Our account analysis includes
reviewing the customer’s historical payment history, the amount and number of
days an account is outside of payment terms, the magnitude of the account
balance, historical order patterns and any specific knowledge about the
customer’s financial condition. Our allowance for doubtful accounts as a
percentage of gross receivables was 2.7%, 2.0% and 2.8% at December 31,
2008, 2007 and 2006, respectively. Our reserve requirements are based on our
review of every account and we place particular emphasis on each customer
account with an account receivable balance more than 90 days old and on that
customer’s specific payment history and other financial information. As our
revenues increase, we anticipate our days sales outstanding will fluctuate
moderately.




Contractual
Obligations




The
following summarizes our long-term contractual obligations at December 31,
2008:




Payments due
      by periodTotal
            
            
            Less than
              1 year
            
            
            1-3 years
            
            
            3-5 years
            
            
            More than
              5 yearsLong-term
      debt obligations
            
            $
            2,010,058
            
            
            $
            385,058
            
            
            $
            1,000,000
            
            
            $
            625,000
            
            
            $
            —Capital
      lease obligations
            
            
            13,781
            
            
            
            12,727
            
            
            
            1,054
            
            
            
            —
            
            
            
            —Operating
      lease obligations
            
            
            2,954,441
            
            
            
            534,912
            
            
            
            1,136,064
            
            
            
            1,231,298
            
            
            
            52,167Total
            
            $
            4,978,280
            
            
            $
            932,697
            
            
            $
            2,137,118
            
            
            $
            1,856,298
            
            
            $
            52,167




The
operating leases shown above reflect payments related to our real estate lease
in Irvine, California, which expire in January 2014 and will amount to $3.0
million over the 63 month duration of the lease commencing in November
2008.




Working Capital
Facility with Silicon Valley Bank. We have a working capital facility
with Silicon Valley Bank that, as a result of amendments to this facility in
February 2007 and September 2008, has an aggregate limit of $12.0
million.  In connection with the September 2008 amendment, we also
entered into an Export-Import Bank of the United States Working Capital
Guarantee Program Borrower Agreement, which helped increase the total maximum
amount available for borrowing under the facility, which is now $12.0 million.
Previously, the Company’s credit facility with SVB provided for a maximum
borrowing amount of $4.0 million.




Revolving Line.The SVB
facility provides for a domestic receivables-based revolving line of credit in
an aggregate amount of up to $10.0 million, or, if less, the sum of 80% of
eligible domestic accounts receivable plus 25% of eligible domestic inventory,
coupled with a foreign receivables-based revolving line of credit, guaranteed by
Export-Import Bank of the United States, in an aggregate amount of up to $2.5
million, or if less, the sum of 90% of eligible foreign accounts receivable plus
50% of eligible export-related inventory. No more than $10.0 million, in the
aggregate, will be available for combined draw-downs under these two revolving
lines of credit, a maturity date of September 2010 and bears interest at an
annual rate equal to the prime rate plus 0.25% (4.25% at December 31, 2008),
provided that the annual rate will increase to prime rate plus 1.00% if a
financial ratio relating to our liquidity falls below a specified level.
Interest is due monthly, with the balance due at the maturity date. The domestic
portion of revolving line is subject to a $1.0 million sublimit available for
cash management services provided by SVB, including the issuance of short-term
letters of credit and foreign exchange contracts. At December 31, 2008, there
was $7.8 million available to borrow on the revolving line.




Term Loan.The SVB facility
also provides for a term loan in an aggregate amount of up to $2.0 million, with
a maturity date of March 2013, provided that if the revolving line is not
renewed at its maturity date, all amounts outstanding under the term loan will
become due at such time. The term loan bears interest at an annual rate equal to
the prime rate plus 0.75% (4.75% at December 31, 2008), provided that the annual
rate applicable to the term loan increases to an annual rate equal to the prime
rate plus 1.50% if a financial ratio relating to our liquidity falls below a
specified level. A single advance is permitted and was drawn down in November
2008.  Monthly payments of interest only on the amount outstanding are
due through March 2009, followed by forty-eight (48) consecutive monthly
installments of amortized principal and interest through the maturity date. The
full $2.0 million was outstanding at December 31, 2008.




-41-




Loan Agreement Obligations.The obligations under the SVB facility are secured by security interest
on substantially all of our assets, excluding intellectual property for which we
gave a negative pledge against encumbering. The SVB facility contains certain
restrictive loan covenants, including, among others, financial covenants
requiring a minimum tangible net worth and a minimum liquidity ratio, and
covenants limiting our ability to dispose of assets, make acquisitions, be
acquired, incur indebtedness, grant liens or enter into negative pledge
agreements, make investments, make distributions in respect of our capital stock
(including repurchases of such capital stock) or enter into transactions with
affiliates. The SVB facility also contains events of default that include, among
others, failure to make payments when due, inaccuracy of representations and
warranties, violation of covenants, events constituting a material adverse
change, bankruptcy and insolvency events, material judgments, and cross defaults
to certain other agreements. The occurrence of an event of default could result
in the acceleration of our obligations and an increase to the applicable
interest rate, and would permit SVB to exercise remedies with respect to the
collateral.




Off-Balance
Sheet Arrangements




Since
inception, we have not engaged in material off-balance sheet activities,
including the use of structured finance, special purpose entities or variable
interest entities.




Income
Taxes




Realization
of our deferred tax assets is dependent upon the timing and amount of our future
earnings, if any. Accordingly, we have established full deferred tax asset
valuation allowances as of December 31, 2008, 2007 and 2006 to reflect
these uncertainties.




As of
December 31, 2008, we had federal and state net operating loss
carryforwards of approximately $66.1 million and $49.8 million, respectively,
and $1.6 million in federal tax credit carryforwards and $1.8 million in state
tax credit carryforwards. The federal net operating loss carryforwards and tax
credit carryforwards will begin to expire in 2018. The state net operating loss
carryforwards will begin to expire in 2009.  The state tax credit
carryforwards do not expire. The utilization of the net operating loss and tax
credit carryforwards may be subject to a substantial annual limitation due to
ownership change limitations provided by the Internal Revenue Code. This annual
limitation may result in the expiration of net operating loss and tax credit
carryforwards before we are able to utilize them.




Critical
Accounting Policies




We
prepare our financial statements in accordance with accounting principles
generally accepted in the United States. In doing so, we have to make estimates
and assumptions that affect our reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. To the extent actual results differ from
those estimates, our future results of operations may be affected.




While our
significant accounting policies are more fully described in Note 1 of the notes
to our audited financial statements, we believe that the following accounting
policies and estimates are most critical to a full understanding and evaluation
of our reported financial results.




-42-




Revenue
Recognition




Revenue
is recognized when (a) persuasive evidence of an arrangement exists;
(b) title has transferred; (c) the fee is fixed or determinable; and
(d) collectability is reasonably assured. Our recognition policy is
significant because our revenue is a key component of our operations and the
timing of revenue recognition determines the timing of certain expenses, such as
sales commissions. Revenue results are difficult to predict, and any shortfall
in revenues could cause our operating results to vary significantly from period
to period.




For those
sales that include multiple deliverables, we allocate revenue based on the
relative fair values of the individual components as determined in accordance
with EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables.” When more than one element, such as hardware and disposables, are
contained in a single arrangement, revenues are allocated between the elements
based on each element’s relative fair value, provided that each element meets
the criteria for treatment as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the customer on a
standalone basis and there is objective and reliable evidence of the fair value
of the undelivered items. Fair value is generally determined based upon the
price charged when the element is sold separately. In the absence of fair value
for a delivered element, we allocate revenue first to the fair value of the
undelivered elements and allocate the residual revenue to the delivered
elements. In the absence of fair value for an undelivered element, the
arrangement is accounted for as a single unit of accounting, resulting in a
deferral of revenue recognition for the delivered elements until all undelivered
elements have been fulfilled.




We place
certain equipment with customers in return for the customer purchasing a minimum
number of disposable devices during a specified contract period. Title to the
equipment passes to the customer at the end of the contract period if the
minimum purchase requirements are met. The cost of the equipment, which is
included in other long-term assets in the accompanying balance sheets, is
amortized to cost of goods sold based on the monthly disposable unit shipments
compared to the total purchase commitment of disposables. In the event the
customer does not fulfill the minimum purchase requirements, collection efforts
may be undertaken and we will attempt to recover the equipment. If the
collection efforts or recovery of the equipment is not successful, the
unamortized equipment cost would be expensed to cost of goods sold.




Deferred
Revenue




We also
account for a customer’s advance payment on product purchases as deferred
revenue. As product is purchased, the applicable sales value is recognized as
revenue.





Stock-Based
Compensation




Effective
January 1, 2006, we adopted SFAS 123R, which requires that all stock-based
compensation to employees, including grants of employee stock options, be
expensed in our financial statements based on their respective grant date fair
values. Under SFAS 123R, we estimate the fair value of each stock-based payment
award using the Black-Scholes option pricing model.




The
determination of the fair value of stock-based payment awards using the
Black-Scholes model is affected by our stock price and a number of assumptions,
including expected volatility, expected life, risk-free interest rate and
expected dividends. We did not have a history of market prices of our common
stock as we were not a public company until our April 2007 initial public
offering, and as such, we estimate volatility in accordance with SAB
No. 107 using historical volatilities of other publicly traded companies in
our industry. The expected life of the awards is based on the simplified method
as defined in SAB No. 107. The risk-free interest rate assumption is based
on observed interest rates appropriate for the terms of our awards. The dividend
yield assumption is based on our history and expectation of not paying any
dividends. Forfeitures are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. We recognized stock-based compensation expense in our financial
statements based on awards that are ultimately expected to
vest.


-43-




A summary
of significant assumptions used in determining the fair value of the options is
as follows:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Expected
      life (years)
            
            
            4.5 - 4.75
            
            
            
            4.75 - 6.25
            
            
            
            6.25Risk-free
      interest rate
            
            
            1.62% - 3.26%
            
            
            
            3.49% - 4.69%
            
            
            
            4.56% - 5.05%Volatility
            
            
            45% - 48%
            
            
            
            42% - 48%
            
            
            
            48% - 56%Dividend
      yield
            
            
            0%
            
            
            
            0%
            
            
            
            0%Forfeiture
      rate
            
            
            5%
            
            
            
            5%
            
            
            
            5%




If
factors change and we employ different assumptions, stock-based compensation
expense may differ significantly form what we recorded in the past. If there are
any modifications or cancellations of the underlying unvested securities, we may
be required to accelerate, increase or cancel any remaining unearned stock-based
compensation expense. Future stock-based compensation expense and unearned
stock-based compensation will increase to the extent that we grant addition
equity awards to employees or we assume unvested equity awards in connection
with acquisitions.




Inventories




We assess
the recoverability of our inventories at least quarterly through a review of
inventory levels in relation to foreseeable demand, generally over twelve
months. Foreseeable demand is based upon all available information, including
sales backlog and forecasts, product marketing plans and product life-cycle
information. When the inventory on hand exceeds the foreseeable demand, we write
down the value of those inventories which, at the time of our review, we expect
to be unable to sell. The amount of the inventory write-down is the excess of
historical cost over estimated realizable value. Once established, these
write-downs are considered permanent adjustments to the cost basis of the excess
inventory. Demand for our products may fluctuate significantly over time, and
actual demand and market conditions may be more or less favorable than those
projected by management. In the event that actual demand or product pricing is
lower than originally projected, additional inventory write-downs may be
required. Further, on a quarterly basis, we assess the net realizable value of
our inventories. When the estimated average selling price, plus costs to sell
our inventory, falls below our inventory cost, we adjust our inventory to its
current estimated market value.




Allowance
for Doubtful Accounts




We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. We use a specific
identification method for some items, and a percentage of aged receivables for
others. The percentages are determined based on our past experience. If the
financial condition of our customers were to deteriorate, our actual losses
might exceed our estimates, and additional allowances would be
required.




Software
Development




Certain
of our products incorporate software which is incidental to the product as a
whole. Software development costs incurred prior to the establishment of
technological feasibility are expensed as research and development costs. We
define the establishment of technological feasibility as the completion of a
final working model that has been incorporated into a product that has been
cleared by the FDA, at which time the product can be sold to third parties. As a
result, we have expensed all software development costs.




Impairment
of Long-lived Assets




Long-lived
assets, including fixed assets, are continually monitored and are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The determination of
recoverability is based on an estimate of undiscounted cash flows expected to
result from the use of an asset and its eventual disposition. The estimate of
cash flows is based upon, among other things, certain assumptions about expected
future operating performance, growth rates and other factors. Our estimates of
undiscounted cash flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to our business
model or changes in our operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset. We determine fair value by using available market data,
comparable asset quotes and/or discounted cash flow models.




-44-




Deferred
Income Taxes




We
evaluate the realizability of our deferred tax assets and assess the need for a
valuation allowance quarterly. We record a valuation allowance to reduce our
deferred tax assets to the net amount that is more likely than not to be
realized. Our assessment of the need for a valuation allowance is based upon our
history of operating results, expectations of future taxable income and the
ongoing prudent and feasible tax planning strategies available to us. In the
event that we determine that we will not be able to realize all or part of our
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged against income in the period such determination is made.
Likewise, in the event we were to determine that we will be able to realize our
deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax assets would increase income in the period such
determination is made.




Fair
Value of Financial Instruments




At each
reporting date, we were required to estimate the fair value of our May 2006
convertible promissory notes in its entirety with changes in fair value
recognized in the statement of operations. Our estimate of fair value was based
upon a valuation which encompasses the probability weighted scenarios of the
conversion features, as well as the timing and method of payment of interest
associated with our May 2006 notes.




At each
reporting date, we were also required to estimate the fair value of the warrant
issued in conjunction with our 2006 Subordinated Note. Our estimate of fair
value was determined using the Black-Scholes option pricing model, which
requires inputs for risk-free interest rate, dividend yield, volatility, the
life of the warrant and the fair value of the underlying security.




Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141—revised 2007, “Business Combinations”
(“SFAS 141R”). SFAS 141R establishes principles and requirements for
how an acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest; recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable financial statement users to evaluate the
nature and financial effects of the business combination. SFAS 141R applies
to business combinations for which the acquisition date is on or after
December 15, 2008. Early adoption is prohibited. We are currently
evaluating the effect, if any, that the adoption of SFAS 141R will have on
our results of operations, financial position and cash flows.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment to ARB No. 51
(“SFAS 160”). SFAS 160 requires all entities to report noncontrolling
(minority) interests in subsidiaries as equity in the consolidated financial
statements, but separate from the equity of the parent company. The statement
further requires that consolidated net income be reported at amounts
attributable to the parent and the noncontrolling interest, rather than
expensing the income attributable to the minority interest holder. This
statement also requires that companies provide sufficient disclosures to clearly
identify and distinguish between the interests of the parent company and the
interests of the noncontrolling owners, including a disclosure on the face of
the consolidated statements for income attributable to the noncontrolling
interest holder. This statement is effective for fiscal years beginning on or
after December 15, 2008. Early adoption is prohibited. We are currently
evaluating the effect, if any, that the adoption of SFAS 160 will have on
our results of operations, financial position and cash flows.




In
February 2008, the FASB issued FASB Staff Position No. 157-2, which
deferred the effective date for certain portions of SFAS 157 related to
nonrecurring measurements of nonfinancial assets and liabilities. That
provision of SFAS 157 will be effective for fiscal years beginning after
December 15, 2008 and for interim periods within those fiscal
years. We do not expect the adoption of SFAS 157-2 to have a material
effect our results of operations, financial position and cash
flows.




-45-




In April
2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Lives of
Intangible Assets(“FSP 142-3”), which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB No. 142, Goodwill and Other Intangible
Assets. The intent of FSP 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other U.S. generally accepted accounting principles.
FSP 142-3 is effective for fiscal years beginning after December 15, 2008
and for interim periods within those fiscal years. We do not expect the adoption
of FSP 142-3 to have a material effect on our results of operations, financial
position and cash flows.




In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
which addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing earnings per share under the
two-class method described in paragraphs 60 and 61 of FASB Statement
No. 128, Earnings per
Share. This FSP is effective for fiscal years beginning after
December 15, 2008 and for interim periods within those fiscal
years.  We do not expect the adoption of FSP EITF 03-6-1 to have a
material effect our results of operations, financial position and cash
flows.




In
October 2008, the FASB Issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP
No. 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP No. 157-3 is effective
upon issuance. We do not expect the adoption of FSP No. 157-3 to have a
material impact on our results of operations, financial position and cash
flows.




ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




The
primary objective of our investment activities is to preserve our capital for
the purpose of funding operations while at the same time maximizing the income
we receive from our investments without significantly increasing risk. To
achieve these objectives, our investment policy allows us to maintain a
portfolio of cash equivalents and investments in a variety of marketable
securities, including commercial paper, money market funds and corporate debt
securities and U.S. government securities. Our cash and cash equivalents as of
December 31, 2008, included liquid money market accounts. Due to the liquid
nature of our cash and cash equivalents, we believe we have no material exposure
to interest rate risk. Additionally, since the majority of our debt carries
interest at fixed rates, we also believe changes in interest rates will not
cause significant changes in our interest expense. Our revenues are denominated
in U.S. dollars. Accordingly, we have not had exposure to foreign currency rate
fluctuations. We expect to continue to realize our revenues in U.S.
dollars.  .




ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




The
Company’s Financial Statements as of December 31, 2008 and 2007 and for
each of the three years in the period ended December 31, 2008, together
with the reports of our independent registered public accounting firm, are
included under Part IV, Item 15 of this report.




ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




None.




ITEM 9A.
            CONTROLS
      AND PROCEDURES




Evaluation of Disclosure Controls and
Procedures. Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Exchange Act of 1934, as amended) as of the end of the period covered by this
Annual Report on Form 10-K. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to management as appropriate to
allow for timely decisions regarding required disclosure.




-46-




Management’s Report on Internal
Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange
Act of 1934, as amended. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
or procedures my deteriorate.





To
evaluate the effectiveness of internal control over financial reporting,
management used the criteria set forth in Internal Control-Integrated
Framework, issue by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its assessment using those criteria, management
has concluded that we maintained effective internal control over financial
reporting as of December 31, 2008.





The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been audited by Deloitte & Touche LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.




Changes in Internal Control Over
Financial Reporting. There was no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the
Exchange Act of 1934, as amended) that occurred during the fourth quarter ended
December 31, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




-47-


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Shareholders of


SenoRx,
Inc.


Irvine,
California




We have
audited the internal control over financial reporting of SenoRx, Inc.
(the “Company”) as of December 31, 2008, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial
reporting based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company,
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company, and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the financial statements as of and for the year
ended December 31, 2008, of the Company and our report dated March 4, 2009,
expressed an unqualified opinion on those financial statements.




/s/
DELOITTE & TOUCHE LLP




Costa
Mesa, California


March 4,
2009


-48-




ITEM 9B.
            OTHER
      INFORMATION




None.




PART
III




ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2009 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the end of our 2008
fiscal year (the “2009 Proxy Statement”).




ITEM 11.
            EXECUTIVE
      COMPENSATION




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.




ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.




ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.




ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




The
information required by this Item is incorporated by reference to the 2009 Proxy
Statement.




PART
IV




ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES




(1)
            The
      financial statements listed in the “Index to Financial Statements” at
      page 50 are filed as a part of this
report.




(2)
            All
      schedules are omitted because they are not applicable. All the required
      information is shown in the financial statements or notes
      thereto.




(3)
            Exhibits
      included or incorporated herein.  See Exhibit
    Index.


-49-




SENORX,
INC.


INDEX
TO FINANCIAL STATEMENTS




PageFinancial
      Statements:Report
      of Independent Registered Public Accounting Firm
            51Balance
      Sheets as of December 31, 2008 and 2007
            52Statements
      of Operations for the Years Ended December 31, 2008, 2007 and
      2006
            53Statements
      of Stockholders’ Equity (Deficit) for the Years Ended December 31,
      2008, 2007 and 2006
            54Statements
      of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006
            55Notes
      to Financial Statements
            57




-50-


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders of


SenoRx,
Inc.


Irvine,
California




We have
audited the accompanying balance sheets of SenoRx, Inc. (the “Company”) as of
December 31, 2008 and 2007, and the related statements of operations,
stockholders’ equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on the financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.




In our
opinion, such financial statements present fairly, in all material respects, the
financial position of SenoRx, Inc. as of December 31, 2008 and 2007, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 4, 2009, expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial
reporting.





/S/
DELOITTE & TOUCHE LLP
  Costa
Mesa, California
 March
4, 2009




-51-


SENORX,
INC.


BALANCE
SHEETS




December 31,2008
            
            
            2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            15,323,143
            
            
            $
            17,185,259Short-term
      investments
            
            
            —
            
            
            
            10,764,490Accounts
      receivable, net of allowance for doubtful accounts of $225,793, and
      $107,728, respectively
            
            
            8,179,099
            
            
            
            5,421,184Inventory
            
            
            9,433,184
            
            
            
            6,650,955Prepaid
      expenses and deposits
            
            
            386,594
            
            
            
            544,276Total
      current assets
            
            
            33,322,020
            
            
            
            40,566,164Property
      and equipment, net
            
            
            1,554,201
            
            
            
            1,071,435Other
      assets, net of accumulated depreciation of $259,469, and $436,380,
      respectively
            
            
            540,344
            
            
            
            424,649Total
      assets
            
            $
            35,416,565
            
            
            $
            42,062,248LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            2,039,280
            
            
            $
            2,580,249Accrued
      expenses, including accrued employee compensation of $1,598,338 and
      $1,137,889, respectively
            
            
            2,894,061
            
            
            
            2,904,603Deferred
      revenue
            
            
            161,915
            
            
            
            93,888Current
      portion of long-term debt
            
            
            390,246
            
            
            
            2,093,346Total
      current liabilities
            
            
            5,485,502
            
            
            
            7,672,086Long-term
      debt—less current portion
            
            
            1,632,410
            
            
            
            26,820Commitments
      and Contingencies (Note 11)Stockholders’
      Equity:Common
      stock, $0.001 par value—100,000,000 shares authorized; 17,327,191
      (2008) and 17,202,395 (2007) issued and
    outstanding
            
            
            17,327
            
            
            
            17,202Additional
      paid-in capital
            
            
            112,456,924
            
            
            
            109,815,612Accumulated
      deficit
            
            
            (84,175,598
            )
            
            
            (75,469,472
            )Total
      stockholders’ equity
            
            
            28,298,653
            
            
            
            34,363,342TOTAL
            
            $
            35,416,565
            
            
            $
            42,062,248




See
accompanying notes to financial statements.


-52-


SENORX,
INC.


STATEMENTS
OF OPERATIONS




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Net
      revenues
            
            $
            46,684,588
            
            
            $
            35,035,836
            
            
            $
            25,508,758Cost
      of goods sold
            
            
            16,503,327
            
            
            
            15,123,897
            
            
            
            13,506,272Gross
      profit
            
            
            30,181,261
            
            
            
            19,911,939
            
            
            
            12,002,486Operating
      expenses:Selling
      and marketing
            
            
            23,117,137
            
            
            
            19,022,994
            
            
            
            15,040,566Research
      and development
            
            
            6,111,225
            
            
            
            6,353,430
            
            
            
            5,322,557General
      and administrative
            
            
            10,093,882
            
            
            
            4,187,133
            
            
            
            2,050,450Total
      operating expenses
            
            
            39,322,244
            
            
            
            29,563,557
            
            
            
            22,413,573Loss
      from operations
            
            
            (9,140,983
            )
            
            
            (9,651,618
            )
            
            
            (10,411,087
            )Interest
      expense
            
            
            85,196
            
            
            
            1,646,670
            
            
            
            998,071Loss
      on debt extinguishment
            
            
            —
            
            
            
            1,264,777
            
            
            
            197,339Change
      in fair value of convertible promissory notes and warrant
      liability
            
            
            —
            
            
            
            (990,875
            )
            
            
            3,960,000Interest
      income
            
            
            (520,053
            )
            
            
            (1,639,194
            )
            
            
            (147,644
            )Loss
      before provisions for income taxes
            
            
            (8,706,126
            )
            
            
            (9,932,996
            )
            
            
            (15,418,853
            )Provisions
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            $
            (8,706,126
            )
            
            $
            (9,932,996
            )
            
            $
            (15,418,853
            ))Net
      loss per share-basic and diluted
            
            $
            (0.50
            )
            
            $
            (0.75
            )
            
            $
            (6.61
            )Weighted
      average shares outstanding-basic and diluted
            
            
            17,249,569
            
            
            
            13,308,790
            
            
            
            2,332,304




See
accompanying notes to financial statements.


-53-


SENORX,
INC.


STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT)






Series A
      Convertible
            
            
            Series B
      Convertible
            
            
            Series C
      Convertible
            
            
            
            
            
            Additional
            
            
            
            
            
            
            
            
            Total
              Stockholders’Preferred
      Stock
            
            
            Preferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            Deferred
            
            
            Accumulated
            
            
            EquityShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            (Deficit)Balance—December 31,
      2005
            
            
            3,000,000
            
            
            $
            3,000,000
            
            
            
            3,523,040
            
            
            $
            8,807,600
            
            
            
            17,861,899
            
            
            $
            35,009,323
            
            
            
            2,328,183
            
            
            $
            2,328
            
            
            $
            4,567,737
            
            
            $
            (611,407
            )
            
            $
            (50,117,623
            )
            
            $
            657,958Proceeds
      from exercise of common stock options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            42,819
            
            
            
            43
            
            
            
            103,820
            
            
            
            
            
            
            
            
            
            
            
            103,863Amortization
      of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            484,749
            
            
            
            
            
            
            
            484,749Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            590,837
            
            
            
            
            
            
            
            
            
            
            
            590,837Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (15,418,853
            )
            
            
            (15,251,853
            )Balance
      as of December 31, 2006
            
            
            3,000,000
            
            
            
            3,000,000
            
            
            
            3,523,040
            
            
            
            8,807,600
            
            
            
            17,861,899
            
            
            
            35,009,323
            
            
            
            2,371,002
            
            
            
            2,371
            
            
            
            5,262,394
            
            
            
            (126,658
            )
            
            
            (65,536,476
            )
            
            
            (13,581,446
            )Proceeds
      from initial public offering, net of offering costs of
      $2,266,158
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,325,000
            
            
            
            6,325
            
            
            
            44,785,517
            
            
            
            
            
            
            
            
            
            
            
            44,791,842Proceeds
      from exercise of common stock options and warrants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            112,116
            
            
            
            112
            
            
            
            758,986
            
            
            
            
            
            
            
            
            
            
            
            759,098Proceeds
      from purchase of shares under the employee stock purchase
    plan
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            34,708
            
            
            
            34
            
            
            
            235,980
            
            
            
            
            
            
            
            
            
            
            
            236,014Amortization
      of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            126,658
            
            
            
            
            
            
            
            126,658Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,818,206
            
            
            
            
            
            
            
            
            
            
            
            1,818,206Employee
      stock purchase plan compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            145,966
            
            
            
            
            
            
            
            
            
            
            
            145,966Conversion
      of promissory note
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            9,998,750
            
            
            
            
            
            
            
            
            
            
            
            10,000,000Conversion
      of preferred stock
            
            
            (3,000,000
            )
            
            
            (3,000,000
            )
            
            
            (3,523,040
            )
            
            
            (8,807,600
            )
            
            
            (17,861,899
            )
            
            
            (35,009,323
            )
            
            
            7,109,570
            
            
            
            7,110
            
            
            
            46,809,813
            
            
            
            
            
            
            
            
            
            
            
            —Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (9,932,996
            )
            
            
            (9,932,996
            )Balance
      as of December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            17,202,395
            
            
            
            17,202
            
            
            
            109,815,612
            
            
            
            —
            
            
            
            (75,469,472
            )
            
            
            34,363,342Proceeds
      from exercise of common stock options
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35,969
            
            
            
            36
            
            
            
            49,964
            
            
            
            
            
            
            
            
            
            
            
            50,000Proceeds
      from purchase of shares under the employee stock purchase
    plan
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            88,827
            
            
            
            89
            
            
            
            319,758
            
            
            
            
            
            
            
            
            
            
            
            319,847Stock-based
      compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,135,938
            
            
            
            
            
            
            
            
            
            
            
            2,135,938Employee
      stock purchase plan compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135,652
            
            
            
            
            
            
            
            
            
            
            
            135,652Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (8,706,126
            )
            
            
            (8,706,126
            )Balance
      as of December 31, 2008
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            17,327,191
            
            
            $
            17,327
            
            
            $
            112,456,924
            
            
            $
            —
            
            
            $
            (84,175,598
            )
            
            $
            28,298,653




See
accompanying notes to financial statements.




-54-


SENORX,
INC.


STATEMENT
OF CASH FLOWS




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Cash
      Flows From Operating Activities:Net
      loss
            
            $
            (8,706,126
            )
            
            $
            (9,932,996
            )
            
            $
            (15,418,853
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            1,564,258
            
            
            
            1,400,195
            
            
            
            1,064,383Stock-based
      compensation
            
            
            2,271,590
            
            
            
            2,090,831
            
            
            
            1,075,586Loss
      on fixed asset abandonment
            
            
            32,692
            
            
            
            37,430
            
            
            
            5,652Provision
      for doubtful accounts
            
            
            124,387
            
            
            
            —
            
            
            
            46,540Provision
      for inventory obsolescence
            
            
            193,992
            
            
            
            45,205
            
            
            
            286,391Amortization
      of debt discounts
            
            
            —
            
            
            
            361,695
            
            
            
            208,303Loss
      on debt extinguishment
            
            
            —
            
            
            
            1,264,777
            
            
            
            197,339Accretion
      of back-end interest on long-term debt
            
            
            —
            
            
            
            —
            
            
            
            62,605Change
      in fair value of convertible promissory notes and warrant
      liability
            
            
            —
            
            
            
            (990,875
            )
            
            
            3,960,000Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (2,882,302
            )
            
            
            (1,179,877
            )
            
            
            (1,368,826
            )Inventory
            
            
            (3,937,211
            )
            
            
            (2,731,525
            )
            
            
            (2,141,515
            )Prepaid
      expenses and deposits
            
            
            157,682
            
            
            
            (323,617
            )
            
            
            (19,061
            )Other
      assets
            
            
            (225,213
            )
            
            
            384,196
            
            
            
            (7,710
            )Accounts
      payable
            
            
            (549,899
            )
            
            
            (1,545,224
            )
            
            
            1,890,421Accrued
      expenses
            
            
            (10,542
            )
            
            
            797,377
            
            
            
            1,049,822Deferred
      revenue
            
            
            68,027
            
            
            
            57,838
            
            
            
            (76,084
            )Net
      cash used in operating activities
            
            
            (11,898,665
            )
            
            
            (10,264,570
            )
            
            
            (9,185,007
            )Cash
      Flows From Investing Activities:Purchases
      of short-term investments
            
            
            —
            
            
            
            (24,071,842
            )
            
            
            —Maturities
      of short-term investments
            
            
            10,764,490
            
            
            
            13,307,352
            
            
            
            —Acquisition
      of property and equipment
            
            
            (970,278
            )
            
            
            (550,205
            )
            
            
            (887,517
            )Net
      cash provided by (used in) investing activities
            
            
            9,794,212
            
            
            
            (11,314,695
            )
            
            
            (887,517
            )Cash
      Flows From Financing Activities:Proceeds
      from issuance of common stock from stock option and warrant
      exercises
            
            
            50,000
            
            
            
            60,724
            
            
            
            103,863Proceeds
      from initial public offering
            
            
            —
            
            
            
            47,058,000
            
            
            
            —Proceeds
      from issuance of common stock under the ESPP plan
            
            
            319,847
            
            
            
            236,014
            
            
            
            —Proceeds
      from convertible promissory note
            
            
            —
            
            
            
            —
            
            
            
            8,000,000Proceeds
      from 2006 subordinated note payable
            
            
            —
            
            
            
            —
            
            
            
            10,000,000Payment
      of debt issuance costs
            
            
            (30,000
            )
            
            
            (49,497
            )
            
            
            (213,012
            )Payment
      of initial public offering costs
            
            
            —
            
            
            
            (941,027
            )
            
            
            (1,325,131
            )Proceeds
      from other borrowings
            
            
            2,000,000
            
            
            
            2,750,000
            
            
            
            3,131,039Repayment
      of other borrowings
            
            
            (2,088,158
            )
            
            
            (17,755,523
            )
            
            
            (2,693,508
            )Repayment
      of capital leases
            
            
            (9,352
            )
            
            
            (7,153
            )
            
            
            —Net
      cash provided by financing activities
            
            
            242,337
            
            
            
            31,351,538
            
            
            
            17,003,251Net
      increase (decrease) in cash and cash equivalents
            
            
            (1,862,116
            )
            
            
            9,772,273
            
            
            
            6,930,727Cash
      and cash equivalents—beginning of year
            
            
            17,185,259
            
            
            
            7,412,986
            
            
            
            482,259Cash
      and cash equivalents—end of year
            
            $
            15,323,143
            
            
            $
            17,185,259
            
            
            $
            7,412,986




See
accompanying notes to financial statements.




-55-




SENORX,
INC.


STATEMENT
OF CASH FLOWS (Continued)




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            18,384Cash
      paid for interest
            
            $
            67,060
            
            
            $
            1,241,449
            
            
            $
            632,614Deferred
      offering costs offset against offering proceeds of initial public
      offering
            
            $
            —
            
            
            $
            1,325,131
            
            
            $
            —Promissory
      note converted to common stock
            
            $
            —
            
            
            $
            10,000,000
            
            
            $
            —Preferred
      stock converted to common stock
            
            $
            —
            
            
            $
            46,809,813
            
            
            $
            —Warrant
      liability transferred to equity and subsequently exercised
            
            $
            —
            
            
            $
            698,374
            
            
            $
            —Net
      other assets transferred to fixed assets
            
            $
            90,949
            
            
            $
            —
            
            
            $
            —Net
      fixed assets transferred to other assets
            
            $
            —
            
            
            $
            26,512
            
            
            $
            —Property
      and equipment acquired included in accounts payable
            
            $
            8,930
            
            
            $
            2,996
            
            
            $
            34,089Other
      assets included in accounts payable and accrued expenses
            
            $
            —
            
            
            $
            —
            
            
            $
            304,580Issuance
      of preferred stock warrants recorded as debt discount
            
            $
            —
            
            
            $
            —
            
            
            $
            1,529,250Deferred
      revenue transferred to notes payable
            
            $
            —
            
            
            $
            —
            
            
            $
            953,015Capital
      leases
            
            $
            —
            
            
            $
            14,477
            
            
            $
            14,626Inventory
      transferred to fixed assets and other assets
            
            $
            960,990
            
            
            $
            1,024,060
            
            
            $
            335,076




See
accompanying notes to financial statements.




-56-




SENORX, INC.


NOTES TO FINANCIAL
STATEMENTS




1.
            GENERAL
      AND SIGNIFICANT ACCOUNTING POLICIES




Business—SenoRx,
Inc. (the “Company”) is a medical device company focused on developing,
manufacturing and selling minimally-invasive medical devices for the diagnosis
of breast cancer. The Company is also developing breast cancer products for use
in the treatment of breast cancer. The Company was incorporated on
January 21, 1998 as BiopSolation Medical, Inc. and subsequently changed its
name to SenoRx, Inc.




Basis of
Presentation—The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America.




Cash and Cash
Equivalents—All highly liquid investments purchased with a maturity, at
date of purchase, of three months or less are considered to be cash equivalents.
Cash equivalents, in the accompanying financial statements, include money market
funds and commercial paper.




Short-term
Investments—The Company’s short-term investments consist of commercial
paper issued by major U.S. financial institutions with a credit rating of A1/P1
and maturities of three to six months. The Company accounts for its investments
in marketable securities under FASB No. 115 “Accounting for Certain
Investments in Debt and Equity Securities”. Investments are recorded at
amortized cost, which approximates fair value, and are classified as held to
maturity based on the Company’s intent and ability to hold such investments
until maturity.




Concentration of
Credit Risks—The Company’s cash and cash equivalents at December 31,
2008 are invested in money market accounts that can be withdrawn without penalty
at any time. The Company maintains cash balances in excess of federally insured
limits in a reputable financial institution. As such, there is nominal credit
risk with respect to cash and cash equivalents.




The
Company has one product and several component parts for other products which are
obtained from single-source suppliers. The Company has managed the risk
associated with single-source suppliers by closely monitoring existing supply
levels as compared to customer purchase orders. The Company is exposed to loss
of revenue from the sale of these products if the supplier cannot fulfill
demand.




The
Company’s customer base is diverse and consists of hospitals and physicians. No
single customer represents greater than 10% of net revenues during the years
ended December 31, 2008, 2007 and 2006. The Company is exposed to risks
associated with extending credit to its customers related to the sale of
products. Management believes that credit risks on trade accounts receivable are
mitigated by the diversity of its customers. The Company performs credit
evaluations on its customers’ financial condition, and to date, credit losses
have been within management’s expectations.




Following
is a summary of activity in the allowance for doubtful accounts:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Allowance
      for doubtful accounts, beginning
            
            $
            107,728
            
            
            $
            120,000
            
            
            $
            90,000Provision
      for doubtful accounts
            
            
            124,387
            
            
            
            —
            
            
            
            46,540Write-offs,
      net of recoveries
            
            
            (6,322
            )
            
            
            (12,272
            )
            
            
            (16,540
            )Allowance
      for doubtful accounts, ending
            
            $
            225,793
            
            
            $
            107,728
            
            
            $
            120,000




Inventory—Inventory
consists principally of raw materials, work-in-process and finished goods, and
is carried at the lower of standard cost or market. Standard costs are
determined using the first-in, first-out method and are updated at regular
intervals such that standard costs approximate actual costs. Provisions for slow
moving or obsolete inventory are charged to cost of sales and are permanent
reductions to the carrying value of inventory.




Property and
Equipment—Property and equipment are recorded at cost less accumulated
depreciation. Maintenance and repairs are expensed as incurred. Upon sale or
disposition of assets, any gain or loss is included in the statements of
operations.




-57-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


The cost
of property, plant and equipment is depreciated using the straight-line method
over the following estimated useful lives of the respective assets. Leasehold
improvements are depreciated over the lesser of the estimated useful lives of
the respective assets or the related lease terms.




Computers
      and software
            3
      yearsManufacturing
      molds
            3
      yearsMachinery
      and equipment
            3
      to 5 yearsDemonstration
      and evaluation equipment
            1
      yearOffice
      furniture and equipment
            3
      yearsTrade
      show booth and equipment
            1
      to 3 years




Long-Lived
Assets—The Company’s long-lived assets include property and equipment. In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,
the Company estimates the future undiscounted cash flows derived from an asset
to assess whether or not a potential impairment exists when events or
circumstances indicate the carrying value of a long-lived asset may be impaired.
An impairment loss is recognized when the undiscounted future cash flows are
less than its carrying amount and is equal to the amount the carrying value
exceeds the fair value of the asset or asset group. The Company periodically
reviews the carrying value of long-lived assets to determine whether or not an
impairment to such value has occurred and, based on its most recent assessment
at December 31, 2008, has determined that there was no material impairment
at December 31, 2008.




Fair Value of
Financial Instruments—SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments”, requires management to disclose the estimated fair value
of certain assets and liabilities defined by SFAS No. 107 as financial
instruments. Financial instruments are generally defined as cash, evidence of
ownership interest in an entity, or a contractual obligation that both conveys
to one entity a right to receive cash or other financial instruments from
another entity and imposes on the other entity the obligation to deliver cash or
other financial instruments to the first entity. At December 31, 2008,
management believes that the carrying value of cash and cash equivalents,
receivables and payables approximate fair value because of the short maturity of
these financial instruments. At December 31, 2008, management believes that
the fair value of the Company’s debt approximated its carrying value based on
interest rates available to the Company at the time.




Certain Hybrid
Financial Instruments—SFAS No. 155 “Accounting for Certain Hybrid
Financial Instruments” an amendment of FASB No. 133 and No. 140,
permits fair value remeasurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation. The
Company has made an irrevocable election to initially and subsequently measure
the 2006 convertible promissory notes and the embedded derivatives, in its
entirety, at fair value with subsequent changes in fair value recognized in the
statement of operations (See Note 7).




Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock—The Company accounted for free-standing warrants issued in
conjunction with certain derivative instruments in accordance with EITF Issue
No. 00-19 “Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company’s Own Stock” (EITF 00-19). EITF 00-19 requires that all contracts
be initially measured at fair value and subsequently accounted for based on the
current classification and the assumed or required settlement method. All
contracts that are classified as assets or liabilities are measured at fair
value with changes in fair value reported in earnings. The Company reevaluated
the classification at each balance sheet date to determine if the warrants
issued in connection with the debt instruments will continue to be recorded as a
liability or as equity (see Note 6).


-58-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


Net Loss Per
Share—Basic loss per share is based on the weighted-average number of
shares of common stock outstanding during the period. Diluted loss per share
also includes the effect of stock options, warrants and other common stock
equivalents outstanding during the period. In periods of a net loss position,
basic and diluted weighted average shares are the same.




The
following table sets forth the computation of denominator used in the
computation of net loss per share:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Weighted-average
      common stock outstanding
            
            
            17,252,550
            
            
            
            13,325,186
            
            
            
            2,357,622Less:
      Unvested common shares subject to repurchase
            
            
            (2,981
            )
            
            
            (16,396
            )
            
            
            (25,318
            )Total
      weighted-average number of shares used in computing net loss per
      share-basic and diluted
            
            
            17,249,569
            
            
            
            13,308,790
            
            
            
            2,332,304




Revenue
Recognition and Deferred Revenue—The Company recognizes revenues in
accordance with SEC Staff Accounting Bulletin, or SAB, No. 104, “Revenue
Recognition”. SAB No. 104 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) title has transferred; (3) the fee is fixed or
determinable; and (4) collectability is reasonably assured. The Company’s
terms of sales specify that title transfers at the time of shipment by the
Company. The Company generally uses contracts and purchase orders to determine
the existence of an arrangement. The Company assesses whether the fee is fixed
or determinable based upon the terms of the agreement associated with the
transaction. To determine whether collection is reasonably assured, the Company
assesses a number of factors, including past transaction history with the
customer and creditworthiness of the customer. The Company generally does not
provide any rights of return by the customer other than returns for product
warranty related issues. In addition to these product warranty related returns,
the Company occasionally accepts other returns at its discretion. Such returns
have historically been insignificant, and reserves for these returns are
established at the time of sale.




For those
sales that include multiple deliverables, the Company allocates revenue based on
the relative fair values of the individual components as determined in
accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple
Deliverables.” When more than one element, such as hardware and disposables, are
contained in a single arrangement, revenues are allocated between the elements
based on each element’s relative fair value, provided that each element meets
the criteria for treatment as a separate unit of accounting. An item is
considered a separate unit of accounting if it has value to the customer on a
standalone basis and there is objective and reliable evidence of the fair value
of the undelivered items. Fair value is generally determined based upon the
price charged when the element is sold separately. In the absence of fair value
for a delivered element, revenue is allocated first to the fair value of the
undelivered elements and the residual revenue is allocated to the delivered
elements. In the absence of fair value for an undelivered element, the
arrangement is accounted for as a single unit of accounting, resulting in a
deferral of revenue recognition for the delivered elements until all undelivered
elements have been fulfilled.




The
Company also places certain equipment with customers in return for the customer
purchasing a minimum number of disposable procedure devices during a specified
contract period. Title to the equipment passes to the customer at the end of the
contract period provided the minimum purchase requirement is met. The cost of
the equipment, which is included in other long-term assets in the accompanying
balance sheets is amortized to cost of goods sold based on the monthly
disposable unit shipments compared to the total purchase commitment of
disposables. In the event the customer does not fulfill the minimum purchase
requirements, collection efforts may be undertaken and the Company will attempt
to recover the equipment. If the collection efforts or recovery of the equipment
is not successful, the unamortized equipment cost would be expensed to cost of
goods sold.




Income
Taxes—Income taxes are accounted for in accordance with SFAS
No. 109, “Accounting for Income Taxes”. This statement requires the
recognition of deferred tax assets and liabilities to reflect the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Measurement of the deferred items is based on enacted
tax laws. In the event the future consequences of differences between financial
reporting bases and tax bases of the Company’s assets and liabilities result in
a deferred tax asset, SFAS No. 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by such
assets. A valuation allowance related to a deferred tax asset is recorded when
it is more likely than not that some portion or all of the deferred tax asset
will not be realized.




-59-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


Research and
Development—Research and development costs are charged to operations in
the year incurred. Research and development expense consists principally of
expenditures for equipment, parts, tooling costs and outside third-party
consultants, which are used in testing and the development of the Company’s
devices under development, and compensation to specific Company personnel. The
Company also expenses the costs of internally developed patents since
recoverability is uncertain. The cost of equipment used in research and
development activities which has alternative uses is capitalized as equipment.
Such equipment is depreciated over estimated useful lives of three to five
years.




Software
Development Costs—Certain of the Company’s products incorporate software
which is incidental to the product as a whole. Software development costs
incurred prior to the establishment of technological feasibility are expensed as
research and development costs. The Company defines the establishment of
technological feasibility as the completion of a final working model that has
been incorporated into a product that has been cleared by the U.S. Food and Drug
Administration, at which time the product can be sold to third parties. As a
result, all software development costs incurred by the Company to date have been
expensed as incurred given the short duration between technological feasibility
and sales to third parties.




Shipping and
Handling—In accordance with Emerging Issues Task Force (“EITF”) No.
00-10, “Accounting for Shipping and Handling Fees and Costs”, the Company
includes shipping and handling fees billed to customers in net revenues. Amounts
incurred by the Company for freight are included in cost of goods
sold.




Advertising—Advertising
costs are expensed as incurred and are included in selling and marketing
expense. Advertising costs have not been material for any period
presented.




Stock-Based
Compensation—Effective January 1, 2006, we adopted SFAS 123R, which
requires that all stock-based compensation to employees, including grants of
employee stock options, be expensed in the financial statements based on their
respective grant date fair values. The Company does not have a history of market
prices of its common stock as it did not become a public company until April
2007. Therefore, volatility was estimated in accordance with SAB No. 107
using historical volatilities of other publicly traded companies within the same
industry. The expected life of the awards is based on the simplified method as
defined in SAB No. 107. The risk-free rate assumption is based on observed
interest rates appropriate for the terms of the awards. The dividend yield
assumption is based on history and the expectation of not paying any dividends.
Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
Stock-based compensation expense is recognized in the financial statements based
on awards that are ultimately expected to vest. A summary of significant
assumptions used in determining the fair value of the options is as
follows:




Year Ended
      December 31,2008
            2007
            2006Expected
      life (years)
            4.5 - 4.75
            4.75 - 6.25
            6.25Risk-free
      interest rate
            1.62% - 3.26%
            3.49% - 4.69%
            4.56% - 5.05%Volatility
            45% - 48%
            42% - 48%
            48% - 56%Dividend
      yield
            0%
            0%
            0%Forfeiture
      rate
            5%
            5%
            5%




The Company had a choice of two
attribution methods for allocating compensation costs under SFAS No. 123R: the “straight-line”
method, which allocates expense on a straight-line basis over the requisite
service period of the last separately vesting portion of an award, or the
“graded vesting attribution method”, which allocates expense on a straight-line
basis over the requisite service period for each separately vesting portion of
the award as if the award was, in-substance, multiple awards. The Company chose
the latter method (i.e. graded vesting). The Company amortizes the fair value of
each option over each option’s vesting period (requisite service
period).




The
Company has not recognized any income tax benefit for the stock-based
compensation arrangements due to the fact that the Company does not believe it
is more likely than not it will recognize any deferred tax assets from such
compensation cost recognized in the current period.




-60-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


Stock-based
compensation included in the Company’s statement of operations under SFAS
No. 123R for the years ended December 31, 2008, 2007 and 2006
was:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Cost
      of goods sold
            
            $
            87,257
            
            
            $
            95,522
            
            
            $
            42,962Research
      and development expense
            
            
            766,954
            
            
            
            436,211
            
            
            
            251,532Selling
      and marketing expense
            
            
            429,618
            
            
            
            428,443
            
            
            
            181,274General
      and administrative expense
            
            
            852,109
            
            
            
            858,030
            
            
            
            115,069$
            2,135,938
            
            
            $
            1,818,206
            
            
            $
            590,837




Comprehensive
Loss—For the years ended December 31, 2008, 2007 and 2006, there was
no difference between the Company’s net loss and comprehensive
loss.




Use of
Estimates—The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of expenses and revenues during reporting periods. Actual results could
differ from these estimates.




Segment
Reporting—SFAS No. 131, “Disclosures about Segments of an Enterprise
and Related Information”, established standards for reporting information about
operating segments in financial statements. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief decision maker in deciding
how to allocate resources and in assessing performance. The Company’s chief
decision maker is the chief executive officer. The Company’s chief decision
maker reviews the results of operations based on one industry segment: the
production and sale of breast care products.




Recent Accounting
Pronouncements— In December 2007, the FASB issued SFAS
No. 141—revised 2007, “Business Combinations”
(“SFAS 141R”). SFAS 141R establishes principles and requirements for
how an acquirer in a business combination recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest; recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable financial statement users to evaluate the
nature and financial effects of the business combination. SFAS 141R applies
to business combinations for which the acquisition date is on or after
December 15, 2008. Early adoption is prohibited. The Company is currently
evaluating the effect, if any, that the adoption of SFAS 141R will have on
its results of operations, financial position and cash flows.




In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment to ARB No. 51
(“SFAS 160”). SFAS 160 requires all entities to report noncontrolling
(minority) interests in subsidiaries as equity in the consolidated financial
statements, but separate from the equity of the parent company. The statement
further requires that consolidated net income be reported at amounts
attributable to the parent and the noncontrolling interest, rather than
expensing the income attributable to the minority interest holder. This
statement also requires that companies provide sufficient disclosures to clearly
identify and distinguish between the interests of the parent company and the
interests of the noncontrolling owners, including a disclosure on the face of
the consolidated statements for income attributable to the noncontrolling
interest holder. This statement is effective for fiscal years beginning on or
after December 15, 2008. Early adoption is prohibited. The Company is
currently evaluating the effect, if any, that the adoption of SFAS 160 will
have on its results of operations, financial position and cash
flows.




In
February 2008, the FASB issued FASB Staff Position No. 157-2, which
deferred the effective date for certain portions of SFAS 157 related to
nonrecurring measurements of nonfinancial assets and liabilities. That
provision of SFAS 157 effective for fiscal years beginning after
December 15, 2008 and for interim periods within those fiscal
years. The Company is currently evaluating the effect, if any, that the
adoption of SFAS 157-2 will have on its results of operations, financial
position and cash flows.




-61-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


In April
2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful Lives of
Intangible Assets(“FSP 142-3”), which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB No. 142, Goodwill and Other Intangible
Assets. The intent of FSP 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(R) and other U.S. generally accepted accounting principles.
FSP 142-3 is effective for fiscal years beginning after December 15, 2008
and for interim periods within those fiscal years. The Company does not expect
the adoption of FSP 142-3 to have a material effect on its results of
operations, financial position and cash flows.




In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
which addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing earnings per share under the
two-class method described in paragraphs 60 and 61 of FASB Statement
No. 128, Earnings per
Share. This FSP is effective for fiscal years beginning after
December 15, 2008 and for interim periods within those fiscal years. The
Company does not expect the adoption of FSP EITF 03-6-1 to have a material
effect on its results of operations, financial position and cash
flows.




In
October 2008, the FASB Issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP
No. 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. FSP No. 157-3 is effective
upon issuance. Based on the Company’s evaluation of FSP No. 157-3, the
adoption of this standard is not expected to have a material impact on its
results of operations, financial position and cash flows.




2.
            INITIAL
      PUBLIC OFFERING




The
Company registered the initial public offering of its common stock, par value
$.001 per share, in a Registration Statement on Form S-1 (Registration
No. 333-134466), which was declared effective on March 28, 2007. The
Company completed its initial public offering (“IPO”) and sold 5,500,000 shares
at $8.00 per share on April 3, 2007. Additionally, on April 20, 2007,
the underwriters the IPO exercised their overallotment option to purchase an
additional 825,000 shares at $8.00. Total expenses from the offering were
approximately $5.8 million, which included underwriting discounts and
commissions of $3.5 million, and approximately $2.2 million in other
offering-related expense. Net offering proceeds, including the sale of shares
pursuant to the subsequent underwriters’ overallotment and after deducting total
expenses was $44.8 million. Upon the closing of the IPO, all of the outstanding
shares of the Company’s convertible preferred stock converted to 7,109,570
shares of the Company’s common stock. In addition, the May 2006 Notes were
converted into 1,249,999 shares of common stock.




3.
            PROPERTY
      AND EQUIPMENT




Property
and equipment consist of the following:




Year Ended
      December 31,2008
            
            
            2007Computers
      and software
            
            $
            627,330
            
            
            $
            607,367Manufacturing
      molds
            
            
            1,641,464
            
            
            
            1,603,759Machinery
      and equipment
            
            
            616,415
            
            
            
            588,086Demonstration
      equipment
            
            
            1,785,243
            
            
            
            763,623Office
      furniture and equipment
            
            
            130,173
            
            
            
            76,036Trade
      show booth and equipment
            
            
            157,196
            
            
            
            96,416Leasehold
      improvements
            
            
            183,482
            
            
            
            242,3305,141,303
            
            
            
            3,977,617Less
      accumulated depreciation
            
            
            (3,587,102
            )
            
            
            (2,906,182
            )$
            1,554,201
            
            
            $
            1,071,435




-62-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


4.
            INVENTORY




Inventories
consist of the following:




Year Ended
      December 31,2008
            
            
            2007Raw
      materials
            
            $
            4,261,809
            
            
            $
            3,051,800Work-in-process
            
            
            382,188
            
            
            
            391,431Finished
      goods
            
            
            4,789,187
            
            
            
            3,207,724$
            9,433,184
            
            
            $
            6,650,955




5.
            INCOME
      TAXES




On
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN
48). FIN 48 prescribes a comprehensive model of how a company should recognize,
measure, present, and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on a tax return. FIN 48
states that a tax benefit from an uncertain position may be recognized if it is
“more likely than not” that the position is sustainable, based upon its
technical merits. The tax benefit of a qualifying position is the largest amount
of tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement with a taxing authority having full knowledge of all
relevant information.




Upon
adoption of FIN 48, the Company would have decreased retained earnings $410,000,
except that the decrease was fully offset by the release of a valuation
allowance. In addition, future changes in the unrecognized tax benefit will have
no impact on the effective tax rate due to the existence of the valuation
allowance. The Company estimates that the unrecognized tax benefit will not
change significantly within the next twelve months. The Company will continue to
classify income tax penalties and interest as part of general and administrative
expense in its Statements of Operations. Accrued interest on uncertain tax
positions is not significant as of December 31, 2008. There are no
penalties accrued as of December 31, 2008.




The
following table summarizes the open tax years for each major
jurisdiction:




Jurisdiction
            Open
      Tax YearsFederal
            2005
      - 2007California
            2004
      - 2007




The
components of the federal and state income tax expense are as
follows:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Current:Federal
            
            $
            —
            
            
            $
            —
            
            
            $
            —State
            
            
            —
            
            
            
            —
            
            
            
            ——
            
            
            
            —
            
            
            
            —Deferred:Federal
            
            
            (1,999,514
            )
            
            
            (2,748,189
            )
            
            
            (3,409,010
            )State
            
            
            (736,813
            )
            
            
            (949,164
            )
            
            
            (672,364
            )(2,736,326
            )
            
            
            (3,697,353
            )
            
            
            (4,081,374
            )Valuation
      allowance
            
            
            2,736,326
            
            
            
            3,697,353
            
            
            
            4,081,374Total
            
            $
            —
            
            
            $
            —
            
            
            $
            —




-63-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


Taxes on
income vary from the statutory federal income tax rate applied to earnings
before taxes on income as follows:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Statutory
      federal income tax rate applied to earnings before income
      taxes
            
            $
            (3,047,144
            )
            
            $
            (3,476,549
            )
            
            $
            (5,396,596
            )State
      income taxes—net of federal benefit
            
            
            (486,296
            )
            
            
            (626,448
            )
            
            
            (443,760
            )Meals
      and entertainment
            
            
            96,568
            
            
            
            82,274
            
            
            
            71,293Research
      and development credit
            
            
            (158,645
            )
            
            
            (147,853
            )
            
            
            (139,462
            )Equity
      based compensation
            
            
            772,116
            
            
            
            708,738
            
            
            
            326,368Change
      in fair value of convertible promissory note
            
            
            —
            
            
            
            (336,898
            )
            
            
            1,346,400Other
            
            
            87,075
            
            
            
            99,383
            
            
            
            154,383Change
      in valuation allowance
            
            
            2,736,326
            
            
            
            3,697,353
            
            
            
            4,081,374$
            —
            
            
            $
            —
            
            
            $
            —




Deferred
income tax assets and liabilities arising from differences between accounting
for financial statement purposes and tax purposes, less valuation allowances,
are as follows:




December 31,2008
            
            
            2007Deferred
      tax assets:Net
      operating loss
            
            $
            26,468,355
            
            
            $
            24,272,020Property
      and equipment
            
            
            69,350
            
            
            
            94,808Capitalized
      assets
            
            
            1,804,320
            
            
            
            1,589,567Tax
      credits
            
            
            3,405,543
            
            
            
            2,953,598Accrued
      expenses
            
            
            1,056,065
            
            
            
            990,315Total
      deferred tax assets
            
            
            32,803,633
            
            
            
            29,900,308Deferred
      tax liabilities—state taxes
            
            
            (2,157,047
            )
            
            
            (1,949,599
            )Net
      deferred tax assets
            
            
            30,646,586
            
            
            
            27,950,709Valuation
      allowance
            
            
            (30,646,586
            )
            
            
            (27,950,709
            )Net
            
            $
            —
            
            
            $
            —




At
December 31, 2008, the Company has federal and state net operating loss
(“NOL”) carryforwards available to offset future taxable income of approximately
$66,130,000 and $49,800,000, respectively. These carryforwards will begin to
expire in 2018 and 2009, respectively.




As of
December 31, 2008, the Company's net operating loss carryforwards include
approximately $934,000 of potential tax deductions related to stock option
transactions that will be credited directly to additional paid in capital, if
realized.




The
Company has federal and state research credit carryforwards of approximately
$1,579,000 and $1,827,000 respectively.  The federal research credit
carryforwards will begin to expire in the year ending December 31, 2018 and the
state research credit will carry forward until exhausted.




Pursuant
to Section 382 of the Internal Revenue Code, use of the Company's NOL’s and
credit carryforwards may be limited if the Company experiences a cumulative
change in ownership of greater than 50% in a moving three-year
period.  Ownership changes could impact the Company's ability to
utilize NOL’s and credit carryforwards remaining at the ownership change
date.




-64-




SENORX, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)




6.        
LONG-TERM DEBT




A summary
of long-term debt follows:




December 31,2008
            
            
            2007Equipment
      facility
            
            $
            10,058
            
            
            $
            145,201Term
      loan
            
            
            2,000,000
            
            
            
            —2003
      Subordinated note
            
            
            —
            
            
            
            1,000,000Note
      Payable
            
            
            —
            
            
            
            953,015Capital
      leases
            
            
            12,598
            
            
            
            21,9502,022,656
            
            
            
            2,120,166Current
      portion of long-term debt
            
            
            (390,246
            )
            
            
            (2,093,346
            )Long-term
      debt
            
            $
            1,632,410
            
            
            $
            26,820




Silicon
Valley Bank and Working Capital Facility—On September 30, 2008, the
Company and Silicon Valley Bank (“SVB”) entered into an amendment to the Amended
and Restated Loan and Security Agreement dated February 20, 2007 (as so
amended, the “Domestic Loan Agreement”), a Loan and Security Agreement (Ex-Im
Loan Facility) (the “Export-Import Loan Agreement”), and an Export-Import Bank
of the United States Working Capital Guarantee Program Borrower Agreement (the
“Borrower Agreement,” and together with the Domestic Loan Agreement and the
Export-Import Loan Agreement, the “Loan Agreement”). The total maximum amount
available for borrowing under the Loan Agreement is $12.0 million.




Revolving
Line




The Loan
Agreement provides for a domestic receivables-based revolving line of credit in
an aggregate amount of up to $10.0 million, or, if less, the sum of 80% of
eligible domestic accounts receivable plus 25% of eligible domestic inventory
(the “Domestic Revolving Line”), coupled with a foreign receivables-based
revolving line of credit in an aggregate amount of up to $2.5 million, or if
less, the sum of 90% of eligible foreign accounts receivable plus 50% of
eligible export-related inventory (the “Export-Import Revolving Line,” and
together with the Domestic Revolving Line, the “Revolving Line”). No more than
$10.0 million, in the aggregate, will be available for combined draw-downs under
the Domestic Revolving Line and the Export-Import Revolving Line. The Domestic
Revolving Line is subject to a $1.0 million sublimit available for cash
management services provided by SVB, including the issuance of short-term
letters of credit and foreign exchange contracts. The Export-Import Revolving
Line is guaranteed by the U.S. Export-Import Bank. The Revolving Line maturity
date is September 30, 2010.




The
Revolving Line bears interest at an annual rate equal to the prime rate plus
0.25% (4.25% at December 31, 2008).  However, the annual rate
applicable to the Revolving Line increases to the prime rate plus 1.00% if a
financial ratio relating to the Company’s liquidity falls below a specified
level. Interest on the Revolving Line is due monthly, with the principal due at
the maturity date.  At December 31, 2008, there was $7.8 million
available to borrow on the revolving line.  No amounts have been
borrowed on the Revolving Line at December 31, 2008.




Term
Loan




The Loan
Agreement provides for a term loan in an aggregate amount of up to $2.0 million
(the “Term Loan”), with a maturity date of March 30, 2013, unless the Revolving
Line is not renewed at its maturity date in which case, all amounts outstanding
under the Term Loan will become due at such time. The Term Loan bears interest
at an annual rate equal to the prime rate plus 0.75% (4.75% at December 31,
2008). However, the annual rate applicable to the Term Loan increases to the
prime rate plus 1.50% if a financial ratio relating to the Company’s liquidity
falls below a specified level. The Loan Agreement allows for a single advance
under the Term Loan which was requested in November 2008. Monthly payments of
interest only on the amount outstanding on the Term Loan are due through March
31, 2009, followed by forty-eight (48) consecutive monthly installments of
amortized principal and interest through the maturity date of the Term Loan. The
full $2.0 million in principal was outstanding at December 31,
2008.




-65-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


Aggregate
annual maturities of long-term debt at December 31, 2008 are as
follows:




Years Ending December
      312009
            
            $
            375,0002010
            
            
            500,0002011
            
            
            500,0002012
            
            
            500,0002013
            
            
            125,000$
            2,000,000




Loan
Agreement Obligations




The
obligations under the Loan Agreement are secured by a security interest on
substantially all assets of the Company, excluding intellectual property. The
Loan Agreement contains certain restrictive loan covenants, including, among
others, financial covenants requiring a minimum tangible net worth and a minimum
liquidity ratio, and covenants limiting the Company’s ability to dispose of
assets, make acquisitions, be acquired, incur indebtedness, grant liens or enter
into negative pledge agreements, make investments, make distributions in respect
of the Company’s capital stock (including repurchases of such capital stock) or
enter into transactions with affiliates. At December 31, 2008, the Company was
in compliance with all covenants.




The Loan
Agreement contains events of default that include, among others, failure to make
payments when due, inaccuracy of representations and warranties, violation of
covenants, events constituting a material adverse change, bankruptcy and
insolvency events, material judgments, and cross defaults to certain other
agreements. The occurrence of an event of default could result in the
acceleration of the Company’s obligations under the Loan Agreement and an
increase to the applicable interest rate, and would permit SVB to exercise
remedies with respect to the collateral under the Loan Agreement.




2006 Subordinated
Note—On December 8, 2006, the Company entered into a subordinated
loan and security agreement with Escalate Capital, LLC for advances of up to
$10,000,000, which was fully advanced to the Company as of December 31,
2006 (the “December 2006 Subordinated Note”). This obligation bore interest at
the rate of 11.5% per annum and did not carry a prepayment
penalty.




In
connection with the committed line, the Company paid a non-refundable facility
fee of $100,000, and issued warrants to purchase up to 206,742 shares of the
Company’s Series C Preferred stock, vesting over one year, as defined, at an
exercise price of $6.86 per share. Upon completion of the IPO in April 2007, the
warrant converted into a warrant to purchase 206,742 shares of common stock at
an exercise price of $6.86 per share.




The
warrant was previously carried as a liability on the Company’s balance sheet at
its fair value with increases or decreases in fair value at each reporting date
recorded in the statement of operations. Upon completion of the IPO, the Company
had registered shares sufficient to settle the warrant upon exercise.
Accordingly, all requirements for equity classification of such warrant as
described in EITF 00-19 were met effective April 3, 2007. In accordance
with EITF 00-19, the warrant liability was reclassified to equity on
April 3, 2007 and the gains recorded to account for the contract at fair
value during the period the contract was classified as a liability were not
reversed. The Company recorded income related to the change in fair value of
$830,875 in the statement of operations for the year ended December 31,
2007. The fair value of the warrant as of April 3, 2007 was estimated using
the Black-Scholes option pricing method with the following assumptions: expected
volatility rate of 43%; risk free interest rate of 4.5%, a term of three years
and closing stock price on April 3, 2007 of $8.24. In addition, $1,529,250
was capitalized as part of debt discount costs as of the date of issuance and
was being recognized as additional interest expense over the life of the
loan.




On
November 19, 2007, the Company made a payment to Escalate in the amount of
$10,331,732 in full satisfaction of the outstanding principal balance and
accrued unpaid interest. The Company recorded a loss of $1,264,777 in the
statement of operations for the year ended December 31, 2007 related to the
unamortized debt discount and debt issuance costs that would have otherwise been
charged to interest over the term of the loan.




On
November 20, 2007, Escalate exercised their right to a cashless exercise of
their warrant and received 48,983 shares of the Company’s common
stock.




-66-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)




2003 Subordinated
Note— The 2003 subordinated note is uncollateralized and provided for a
five-year term (maturing in February 2008) requiring the payment of interest
only on a quarterly basis with an annual interest rate of 4%. At
December 31, 2007, the outstanding balance on the note was $1,000,000. In
February 2008 the Company made a payment in the amount of $1,006,633, in full
satisfaction of the outstanding principal balance and accrued unpaid
interest.




Note
Payable — In 2002, the Company entered into an arrangement with a
distributor whereby the distributor advanced a total of $1,000,000 cash to the
Company for the future purchase of product. The Company classified these
advances as deferred revenues in the 2005 balance sheet. As product was
purchased, the applicable sales value was recognized as revenues. Although the
Company was not obligated to refund any of these advances, effective
December 31, 2006, the Company agreed to terminate the distribution
agreement and repay the outstanding prepayment of $953,015 before
February 20, 2008. The obligation bore interest at 2% per annum
applied on a semi-monthly basis, not to exceed $19,060 per year. In February
2008, the Company made a payment in the amount of $954,634, in full satisfaction
of the outstanding principal balance and accrued unpaid interest.




7.
            CONVERTIBLE
      PROMISSORY NOTES




May 2006
Notes— On May 4, 2006, the Company sold convertible promissory notes
with an aggregate principal amount of $8,000,000 to one affiliated institutional
investor and two unrelated institutional investors (the “May 2006 Notes”). The
Company determined that the May 2006 Notes contained certain features that
required bifurcation as embedded derivatives under SFAS No. 133, such as
the IPO conversion feature. Therefore, in accordance with SFAS No. 155, the
Company made an irrevocable election to measure the May 2006 Notes and the
embedded derivatives, in their entirety, at fair value with subsequent changes
in fair value recognized in the statement of operations.




At the
date of the successful completion of the IPO on April 3, 2007, the fair
value of the May 2006 Notes were $11,800,000, comprised of the $8,000,000 face
value of the notes, $1,800,000 million in interest and $2,000,000 associated
with the stock discount. Consequently, the Company adjusted the fair value of
the May 2006 Notes to $11,800,000 and recorded the change in fair value of
$160,000 in the statement of operations for the year ended December 31,
2007. In connection with the IPO, the May 2006 Notes were converted to 1,249,999
shares of common stock.




8.
            STOCKHOLDERS’
      EQUITY




Capital
Stock—In March 2007, the Company amended its certificate of incorporation
to reflect a 1-for-3.5 reverse stock split of common stock. All share and per
share amounts relating to common stock and stock options included in the
accompanying financial statements and footnotes have been restated to reflect
the reverse stock split.




Preferred
Stock—At December 31, 2006, the Company had 3,000,000 shares of
Series A convertible preferred stock outstanding, 3,523,040 shares of Series B
convertible stock outstanding and 17,861,899 shares of Series C Convertible
preferred stock outstanding. Upon the closing of the IPO in April 2007, all the
outstanding shares of preferred stock converted to 7,109,570 shares of the
Company’s common stock.




Restricted Common
Stock—Certain options to purchase common stock have been exercised,
subject to restricted stock purchase agreements. The restricted shares are
subject to the risk of forfeiture, certain restrictions on transferability and
to the Company’s repurchase rights. The restrictions and repurchase options
generally lapse 25% per year over a four-year vesting period. The Company
has a repurchase option, exercisable upon discontinuance of the purchaser’s
service with the Company, to repurchase the unvested shares at the original
price paid by the purchaser. Vested shares are not subject to the Company’s
repurchase rights. However, before any vested shares may be sold or otherwise
transferred, the Company has a right of first refusal to purchase the shares at
the price offered by the proposed transferee or fair value. Holders of
restricted stock have the voting rights of a common
stockholder.


-67-




SENORX, INC.


NOTES TO FINANCIAL STATEMENTS
(Continued)




The
following summarizes information about aggregate number of chares of restricted
common stock issued pursuant to restricted stock purchase
agreements:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Unvested
      shares outstanding—beginning
            
            
            16,396
            
            
            
            25,318
            
            
            
            139,613Restricted
      shares issued upon exercise of stock options
            
            
            —
            
            
            
            —
            
            
            
            22,097Shares
      vested
            
            
            (13,415
            )
            
            
            (8,922
            )
            
            
            (136,392
            )Unvested
      common shares—ending
            
            
            2,981
            
            
            
            16,396
            
            
            
            25,318




9.
            STOCK
      OPTIONS, WARRANTS AND RESTRICTED STOCK
UNITS




The
Company’s 2006 Stock Option Plan (the “2006 Plan”), which was adopted by the
Company’s board of directors in May 2006 and approved by the Company’s
shareholders in June 2006 is designed to enable the Company to offer an
incentive-based compensation system to employees, officers and directors of the
Company and to consultants who do business with the Company. The 2006 Plan
provides for the grant of incentive stock options, nonqualified stock options
and restricted stock units to purchase up to an aggregate of 5,009,224 shares of
common stock. The 2006 plan will terminate in 2016 and also provides for annual
increases in the number of shares available for issuance thereunder on the first
day of each fiscal year, beginning with the 2007 fiscal year, equal to the
lesser of:




•
            3.5%
      of the outstanding shares of the Company’s common stock on the first day
      of the fiscal year;




•
            630,000
      shares; or




•
            Such
      other amount as the board of directors may
  determine.




Stock Options— As of
December 31, 2008, options to purchase a total of 1,605,952 shares of
common stock were outstanding under the 2006 Plan and options to purchase a
total of 1,406,442 shares were available for issuance under the 2006
Plan.




The
Company also has a 1998 Stock Option Plan (“1998 Plan”) which plan was approved
by the Company’s board of directors and shareholders in 1998. As of
December 31, 2008, options to purchase a total of 683,377 shares of common
stock were outstanding under the 1998 Plan and no options to purchase shares
were available for issuance under the 1998 Plan.




The 2006
Plan and the 1998 Plan are administered by a committee appointed by the board of
directors that determines the recipients and the terms of the options granted.
Options may be granted to eligible employees, directors and consultants to
purchase shares of the Company’s common stock at a price that is at least equal
to the fair market value of the common stock on the date of grant for incentive
stock options (or 110% of the fair market value in the case of an optionee who
holds more than 10% of the voting power of the Company on the date of grant).
Subject to termination of employment, options may expire up to ten years from
the date of grant.




The
exercise price, term and other conditions applicable to each option granted
under the 2006 and 1998 Plans are generally determined by the Administrator at
the time of grant of each option and may vary with each option granted. The
stock options granted generally vest 25% per year over a four-year period
and expire after seven to 10 years. The options are exercisable according to the
vesting schedule. Alternatively, the options may be exercised in whole or in
part at any time into restricted, unvested common shares which are subject to
the risk of forfeiture, and to the Company’s repurchase rights (see Note 8). The
restrictions and repurchase options on currently outstanding restricted stock
grants issued pursuant to the 1998 Plan generally lapse 25% per year over a
four-year period (consistent with the vesting period for the original stock
option grants).




The 1998
Plan also permits for the issuance of restricted stock pursuant to grants of
stock purchase rights. As of December 31, 2008, there were no outstanding
stock purchase rights.




-68-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)




During
the years ended December 31, 2008, 2007 and 2006, the Company recorded
stock-based compensation expense of $2,135,938, $1,944,864 and $1,075,586,
respectively, associated with employee performance-based and non-employee stock
option awards.




A summary
of stock option activity is as follows:




Number
      of
              Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Remaining
              Contractual
              Term (Years)
            
            
            Aggregate
              Intrinsic
              ValueOutstanding—December
      31, 2005
            
            
            464,156
            
            
            
            1.44Granted
      (weighted-average fair value of $6.52 per share)
            
            
            200,599
            
            
            
            6.59Exercised
            
            
            (42,819
            )
            
            
            2.43Forfeited
            
            
            (21,768
            )
            
            
            2.09Outstanding—December
      31, 2006
            
            
            600,168
            
            
            
            3.05Granted
      (weighted-average fair value of $4.64 per share)
            
            
            764,086
            
            
            
            9.67Exercised
            
            
            (47,583
            )
            
            
            1.14Forfeited
            
            
            (63,890
            )
            
            
            7.07Outstanding—December
      31, 2007
            
            
            1,252,781
            
            
            
            6.95Granted
      (weighted-average fair value of $1.97 per share)
            
            
            1,141,441
            
            
            
            4.60Exercised
            
            
            (35,969
            )
            
            
            1.39Forfeited
            
            
            (68,924
            )
            
            
            8.61Outstanding—December
      31, 2008
            
            
            2,289,329
            
            
            $
            5.82
            
            
            
            6.7
            
            
            $
            —Vested
      (exercisable)—December 31, 2008
            
            
            759,329
            
            
            $
            5.72
            
            
            
            6.2
            
            
            $
            —Unvested
      (unexercisable)—December 31, 2008
            
            
            1,530,000
            
            
            $
            5.86
            
            
            
            7.0
            
            
            $
            —




The
following table summarizes information with respect to stock options outstanding
and exercisable at December 31, 2008:




Exercise
              Price
            
            
            Number
              Outstanding
            
            
            Weighted-
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Number
              Exercisable
            
            
            Weighted-
              Average
              Exercise
              Price$
            0.60 –
      1.75
            
            
            
            265,177
            
            
            
            3.8
            
            
            $
            1.15
            
            
            
            260,634
            
            
            $
            1.14$
            2.28
      – 2.63
            
            
            
            665,753
            
            
            
            6.9
            
            
            $
            2.30
            
            
            
            40,944
            
            
            $
            2.52$
            3.71
      – 5.97
            
            
            
            131,368
            
            
            
            7.0
            
            
            $
            4.23
            
            
            
            69,882
            
            
            $
            3.82$
            6.98
      – 8.99
            
            
            
            886,082
            
            
            
            6.9
            
            
            $
            7.95
            
            
            
            231,358
            
            
            $
            8.20$
            9.55
      – 12.01
            
            
            
            340,949
            
            
            
            8.2
            
            
            $
            11.37
            
            
            
            156,511
            
            
            $
            11.352,289,329
            
            
            
            
            
            
            
            
            
            
            
            759,329




As of
December 31, 2008, there was unrecognized compensation expense of $2.3
million related to unvested stock options, which the Company expects to
recognize over a weighted average period of 2.0 years. The aggregate intrinsic
value of the options outstanding and options exercisable as of December 31,
2008 was $0. The weighted average grant date fair value of stock options granted
during the year ended December 31, 2008 was $1.97.




As of
December 31, 2008, the total number of outstanding options vested or
expected to vest (considering anticipated forfeitures) was 1,453,500 which had a
weighted average exercise price of $5.86. The average remaining life of these
options was 7.0 years and the aggregate intrinsic value was $0 at
December 31, 2008.




-69-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)




Warrants — Upon the
closing of the IPO in April 2007, the outstanding preferred stock warrants
converted into warrants to purchase 462,046 shares of common stock. A summary of
the activity of common stock purchase warrants is as follows:




Warrant
      PriceNumber
              of
      Shares
            
            
            Per
              Share
            
            
            TotalBalance
      outstanding, December 31, 2005
            
            
            255,304
            
            
            $
            6.86
            
            
            $
            1,751,385Warrants
      issued
            
            
            206,742
            
            
            
            6.86
            
            
            
            1,418,250Warrants
      exercised
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      outstanding, December 31, 2006
            
            
            462,046
            
            
            
            6.86
            
            
            
            3,169,635Warrants
      issued
            
            
            —
            
            
            
            —
            
            
            
            —Warrants
      exercised
            
            
            (243,446
            )
            
            
            6.86
            
            
            
            (1,670,039
            )Balance
      outstanding, December 31, 2007
            
            
            218,600
            
            
            
            6.86
            
            
            
            1,499,596Warrants
      issued
            
            
            —
            
            
            
            —
            
            
            
            —Warrants
      exercised
            
            
            —
            
            
            
            —
            
            
            
            —Balance
      outstanding, December 31, 2008
            
            
            218,600
            
            
            $
            6.86
            
            
            $
            1,499,596





Restricted Stock Units —
The 2006 Plan provides for awards of restricted shares of common stock.
Restricted stock units have time-based vesting and are subject to forfeiture if
employment terminates prior to the end of the service period. Restricted stock
units are valued at the grant date based upon the market price of the Company’s
common stock and the fair value of each award is charged to expense over the
service period.





In 2008,
the Company granted a total of 51,750 shares of restricted stock to employees.
The restricted stock units vest 50% per year over a 2 year
period.





Restricted
stock unit activity for the year ended December 31, 2008 is as
follows:





Number
      of Shares of
              Restricted
      Stock Units
            
            
            Weighted-
              Average
              Grant-Date
              Fair
      ValueOutstanding—December
      31, 2007
            
            
            —
            
            
            $
            —Granted
            
            
            51,750
            
            
            
            2.38Vested
            
            
            —
            
            
            
            —Canceled
      or forfeited
            
            
            —
            
            
            
            —Outstanding—December
      31, 2008
            
            
            51,750
            
            
            $
            2.38




As of
December 31, 2008, there was unrecognized compensation expense of $117,007
related to all unvested restricted stock units, which the Company expects to
recognize on a “graded vesting attribution method”, which allocates expense on a
straight-line basis over the requisite service period for each separately
vesting portion of the award as if the award was, in-substance, multiple awards
over a weighted average period of approximately
1.5 years.




10.
            EMPLOYEE
      STOCK PURCHASE PLAN




Effective
April 3, 2007, the closing date of the IPO, the Employee Stock Purchase
Plan (“Purchase Plan”) was established. The Company’s Purchase Plan was adopted
by the Company’s board of directors effective as of May 2006 and approved by the
Company’s stockholders in June 2006. The Purchase Plan provides eligible
employees of the Company with an incentive by providing a method whereby they
may voluntarily purchase common stock of the Company upon terms described in the
Purchase Plan. The Purchase Plan is designed to be operated on the basis of six
consecutive month offering periods commencing May 15 and November 15
of each year. The 2006 Purchase Plan terminates in 2016. The Purchase Plan
provides that eligible employees may authorize payroll deductions of up to 10%
of their salary to purchase shares of the Company’s common stock at 85% of the
fair market value of common stock on the first or last day of the applicable
purchase period. During 2008 and 2007, the Company recorded $135,652 and
$145,966, respectively, for compensation related to the discounted purchase
price and look back feature of the Purchase Plan. The 2008 fair value of these
discounts were estimated using a Black-Scholes pricing method with the following
assumptions: $6.16 and $2.08 strike price; $7.25 and $2.44 share price; 184 days
until expiration; 48% and 46.5% volatility and 1.89% and 0.87% interest rate on
May 16, 2008 and November 17, 2008, respectively.  The 2007 fair value
of these discounts were estimated using a Black-Scholes pricing method with the
following assumptions: $7.60 and $6.80 strike price; $8.94 and $8.00 share
price; 228 and 182 days until expiration; 44% and 43% volatility and 4.08% and
5.05% interest rate on October 1, 2007 and April 3, 2007,
respectively. As of December 30, 2008 and 2007, Purchase Plan participant
contributions of $84,925 and $132,141, respectively, are included in other
current liabilities in the accompanying balance sheets. A total of 550,000
shares of common stock are authorized for issuance under the Purchase Plan, and
as of December 31, 2008, 123,525 shares have been issued under the Purchase
Plan.




-70-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)


11.
            COMMITMENTS
      AND CONTINGENCIES




Leases—In
March 2008, the Company entered into an agreement to lease a new corporate and
manufacturing facility in Irvine, California consisting of 41,402 square feet of
space. The lease has an initial term of 63 months commencing November 1,
2008, with the Company’s right of earlier occupancy, and one five-year option to
extend. The monthly base rent is initially approximately $44,300 and increases
at a rate of 4% per annum. The lease agreement contains certain scheduled
rent increases which are accounted for on a straight-line basis.




The
Company has acquired computer equipment under capital leases that are payable in
various scheduled monthly installments through 2010.




Future
minimum lease payments are as follows:




Years
      Ending December 31,
            
            Operating
              Leases
            
            
            Capital
              Leases2009
            
            $
            534,912
            
            
            $
            12,7272010
            
            
            555,612
            
            
            
            1,0542011
            
            
            580,452
            
            
            
            —2012
            
            
            605,294
            
            
            
            —2013
            
            
            626,004
            
            
            
            —Thereafter
            
            
            52,167
            
            
            
            —Total
      minimum lease payments
            
            $
            2,954,441
            
            
            
            13,781Amount
      representing interest ranging from 14.4% to 31.3%
            
            
            
            
            
            
            (1,183
            )Present
      value of future minimum capital lease obligations
            
            
            
            
            
            
            12,598Current
      portion
            
            
            
            
            
            
            (5,188
            )$
            7,410




Rent
expense was $610,087, $447,741and $395,560, for the years ended
December 31, 2008, 2007and 2006, respectively.




Indemnities and
Guarantees—During its normal course of business, the Company has made
certain indemnities, commitments and guarantees under which it may be required
to make payments in relation to certain transactions. These indemnities include
those given to various lessors in connection with facility leases for certain
claims arising from such facility or lease and indemnities to directors and
officers of the Company to the maximum extent permitted under the laws of the
State of California. The duration of these indemnities, commitments and
guarantees varies. Some of these indemnities, commitments and guarantees do not
provide for any limitation of the maximum potential future payments the Company
could be obligated to make. The Company has not recorded any liability for these
indemnities, commitments and guarantees in the accompanying balance
sheets.




The
Company provides a limited warranty against manufacturer’s defects on its
products. Product warranty costs have not been significant.




-71-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)




Litigation—The Company may be
subject to legal proceedings, claims and litigation arising in the ordinary
course of business. While the amounts claimed may be substantial, the ultimate
liability cannot presently be determined because of considerable uncertainties
that exist. Therefore, it is possible the outcome of such legal proceedings,
claims and litigation could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period.




On
January 8, 2008, Hologic and its wholly-owned subsidiaries, including Cytyc
Corporation and Cytyc LP, filed a lawsuit against the Company in the United
States District Court, Northern District of California, San Jose Division. The
complaint generally alleges patent infringement of certain Hologic brachytherapy
patent claims, seeking unspecified monetary damages and an injunction against
the Company for infringement of those claims. On February 6, 2008, Hologic
filed a motion seeking a preliminary injunction in the case and requested that
the Court stop the sale of Contura MLB. On March 7, 2008, Hologic filed an
amended complaint restating its allegations regarding patent infringement, and
adding new claims related to unfair competition under the Lanham Act and
California state unfair competition and false advertising statutes. On
April 25, 2008, the court denied Hologic’s request for a preliminary
injunction and ordered the parties to schedule a trial within 60 to 90 days of
such date. On May 22, 2008, the Court issued an order scheduling the
Markman claims construction hearing on the patent counts for June 25, 2008,
and the trial in the case to start July 14, 2008. Pursuant to an agreement
of the parties, the order also dismissed Hologic’s unfair competition and false
advertising claims under the Lanham Act and California state law, without
prejudice. On June 24, 2008, the Court granted a joint request by Hologic
and the Company to stay all proceedings, including the previously scheduled
Markman claims construction hearing and the trial, until at least
August 22, 2008 in order to provide the parties time to discuss possible
resolution of the matter.  On August 22, 2008, the Company and Hologic
jointly requested that the Court resume proceedings in the pending lawsuit. On
October 15, 2008, a Markman claims construction hearing was held and a ruling
was issued on February 18, 2009.  Although the Company, together with
its legal counsel, continues to evaluate the court’s ruling in the Markman
hearing, it expects that nothing material or definitive in the matter will be
decided before the trial, the date for which has not yet been set by the Court.
As a result, the Company believes that the probability of incurring any loss
related to this litigation is not determinable, nor is the amount of loss
quantifiable at this time. Accordingly, the Company has not accrued a loss
related to this litigation as of December 31, 2008. The Company intends to
continue to vigorously defend itself in this matter.




12.
            SEGMENT
      INFORMATION




Net
revenues by geographic area are presented based upon the country of destination.
No foreign country represented 10% or more of net revenues for any period
presented. Net revenues by geographic area were as follows:




2008
            
            
            2007
            
            
            2006United
      States
            
            $
            41,209,560
            
            
            $
            32,321,888
            
            
            $
            24,320,070Canada
            
            
            1,200,218
            
            
            
            1,052,543
            
            
            
            661,792Rest
      of world
            
            
            4,274,810
            
            
            
            1,661,405
            
            
            
            526,896Total
            
            $
            46,684,588
            
            
            $
            35,035,836
            
            
            $
            25,508,758




No
customer accounted for 10% or more of net revenues for any period
presented.




At
December 31, 2008, the Company has four product classes. Biopsy disposable
products are the probes used with the Company’s EnCor systems. Biopsy capital
equipment products include the consoles and other pieces (non-disposable) of the
EnCor. Diagnostic adjunct products include the Marker product, the Gamma Finder
product and the Anchor Guide product. Therapeutic disposables include the
Company’s recently commercialized Contura Multi-Lumen Radiation Balloon (MLB)
Catheter, which received FDA 510(k) clearance in May 2007.


-72-


SENORX, INC.
 NOTES TO FINANCIAL STATEMENTS
(Continued)




Net
revenues by product class are as follows:




Year Ended
      December 31,2008
            
            
            2007
            
            
            2006Biopsy
      disposable products
            
            $
            21,041,449
            
            
            $
            16,215,740
            
            
            $
            10,972,421Biopsy
      capital equipment products
            
            
            4,692,778
            
            
            
            3,301,908
            
            
            
            1,245,279Diagnostic
      adjunct products
            
            
            15,774,788
            
            
            
            14,976,567
            
            
            
            13,291,058Therapeutic
      disposable products
            
            
            5,175,573
            
            
            
            541,621
            
            
            
            —Total
            
            $
            46,684,588
            
            
            $
            35,035,836
            
            
            $
            25,508,758




Substantially
all of the Company’s assets are in the United States.




13.
            EMPLOYEE
      BENEFIT PLANS




In
January 2003, the Company adopted a 401(k) retirement and savings plan which
provides for voluntary employee participation subject to a waiting period. The
plan provides for discretionary matching subject to the approval by the
Company’s Board of Directors. The Company did not make contributions to this
plan in the years ended December 31, 2008, 2007and 2006.




14.
            QUARTERLY
      FINANCIAL DATA (Unaudited)




A summary
of quarterly financial data (unaudited) is as follows:





Quarter
      EndedMarch
      31
            
            
            June
      30
            
            
            September
      30
            
            
            December
      31Year
      ended December 31, 2008Total
      revenues
            
            $
            10,682,775
            
            
            $
            11,186,118
            
            
            $
            11,264,471
            
            
            $
            13,551,224Gross
      profit
            
            
            6,629,325
            
            
            
            6,859,816
            
            
            
            7,321,549
            
            
            
            9,370,571Operating
      income (loss)
            
            
            (2,229,534
            )
            
            
            (5,265,563
            )
            
            
            (1,753,930
            )
            
            
            108,044Net
      income (loss)
            
            
            (1,994,537
            )
            
            
            (5,131,592
            )
            
            
            (1,677,021
            )
            
            
            97,024Net
      income (loss) per share, basic and diluted
            
            $
            (0.12
            )
            
            $
            (0.30
            )
            
            $
            (0.10
            )
            
            $
            0.01Year
      ended December 31, 2007Total
      revenues
            
            $
            7,700,076
            
            
            $
            8,121,285
            
            
            $
            8,906,086
            
            
            $
            10,308,389Gross
      profit
            
            
            4,162,732
            
            
            
            4,631,274
            
            
            
            5,350,448
            
            
            
            5,767,485Operating
      loss
            
            
            (2,388,501
            )
            
            
            (2,551,041
            )
            
            
            (1,789,253
            )
            
            
            (2,922,823
            )Net
      loss
            
            
            (2,109,484
            )
            
            
            (2,134,879
            )
            
            
            (1,690,635
            )
            
            
            (3,997,998
            )Net
      loss per share, basic and diluted
            
            $
            (0.90
            )
            
            $
            (0.15
            )
            
            $
            (0.10
            )
            
            $
            (0.23
            )




Earnings
per basic and diluted shares are computed independently for each of the quarters
presented based on diluted shares outstanding per quarter and, therefore, may
not sum to the totals for the year.




-73-


SIGNATURES




Pursuant
to the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K
to be signed on our behalf by the undersigned, thereunto duly
authorized.






Date:
      March 16, 2009
            
            SenoRx,
      Inc.By:
            /s/
      LLOYD H. MALCHOWLLOYD H. MALCHOWPresident
      and Chief Executive Officer
              (Principal
      Executive Officer)




KNOW ALL
MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Lloyd H. Malchow and Kevin J.
Cousins, his or her attorney-in-fact, with the power of substitution, for him or
her in any and all capacities, to sign any amendments to this annual report on
Form 10-K, and to file the same, with exhibits thereto and other documents
in connection therewith, with the U.S. Securities and Exchange Commission,
hereby ratifying and confirming all that said attorney-in-fact, or his
substitute, may do or cause to be done by virtue thereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated:




Signature
            Title
            Date/S/ LLOYD H. MALCHOW
            President,
      Chief Executive Officer and Director (Principal Executive
      Officer)
            March
      16, 2009Lloyd
      H. Malchow/S/ KEVIN J. COUSINS
            Chief
      Financial Officer (Principal Accounting Officer)
            March
      16, 2009Kevin
      J. Cousins/S/ VICKIE L. CAPPS
            Director
            March
      16, 2009Vickie
      L. Capps/S/ KIM D. BLICKENSTAFF
            Director
            March
      16, 2009Kim
      D. Blickenstaff/S/ FREDERICK J. DOTZLER
            Director
            March
      16, 2009Frederick
      J. Dotzler/S/ JOHN L. ERB
            Director
            March
      16, 2009John
      L. Erb/S/ A. Thomas
      Bender
            Director
            March
      16, 2009A.
      Thomas Bender/S/ GREGORY D. WALLER
            Director
            March
      16, 2009Gregory
      D. Waller


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EXHIBIT INDEX




Exhibit
              Number
            Description3.2(1)
            Amended
      and Restated Certificate of Incorporation.3.4(1)
            Bylaws.4.1(1)
            Specimen
      Common Stock certificate of the Registrant.4.2(1)
            Fourth
      Amended and Restated Investors’ Rights Agreement, dated May 3, 2006,
      by and among the Registrant and certain stockholders.10.1(1)
            Form
      of Indemnification Agreement for directors and executive
      officers.10.2(1)
            1998
      Stock Plan.10.3
            2006
      Equity Incentive Plan.10.4(1)
            Employee
      Stock Purchase Plan.10.5(1)
            Fourth
      Amended and Restated Investors’ Rights Agreement, dated May 3, 2006,
      by and among the Registrant and certain stockholders.10.6(1)
            Standard
      Industrial/Commercial Multi-Tenant Lease, dated September 15, 1999,
      as amended on March 28, 2003 and November 1, 2003, by and
      between the Registrant and Columbia Investors, LLC.10.7(1)
            Loan
      and Security Agreement, dated March 15, 2002, and various amendments
      thereto, by and between the Registrant and Silicon Valley
      Bank.10.7.1(1)
            Amended
      and Restated Loan and Security Agreement, dated February 20, 2007, by
      and between the Registrant and Silicon Valley Bank.10.8(1)
            Convertible
      Subordinated Note Agreement, dated May 9, 2002, by and between the
      Registrant and Century Medical, Inc.10.9(1)
            $2,500,000
      Loan and Security Agreement, dated December 27, 2004, by and between
      the Registrant and Venture Lending & Leasing IV,
  Inc.10.10(1)
            Note
      Purchase Agreement and Form of Subordinated Convertible Promissory Note,
      each dated May 4, 2006, by and between the Registrant and certain
      stockholders.10.11(1)†
            Agreement
      for Vacuum Assisted Breast Biopsy Needle, System, and Accessory Products,
      effective April 1, 2005 by and between the Registrant and KP
      Select.10.12(1)
            Executive
      Employment Agreement, dated May 1, 1999, by and between the
      Registrant and Lloyd Malchow.10.13(1)†
            Distribution
      Agreement, dated June 11, 2003, and various amendments thereto, by
      and among the Registrant, W.O.M. World of Medicine USA, Inc. and W.O.M.
      World of Medicine AG.10.14(1)
            Settlement
      Agreement, effective as of May 22, 2006, by and between the
      Registrant and Suros Surgical Systems, Inc.10.15(1)
            Loan
      and Security Agreement, dated December 8, 2006, by and between the
      Registrant and Escalate Capital I, L.P.10.16(2)
            Lease
      Agreement between The Irvine Company LLC and Registrant dated March 5,
      2008.10.17(3)
            Change
      in Control Agreement between Registrant and Lloyd
  Malchow.10.18(3)
            Change
      in Control Agreement between Registrant and Paul
  Lubock.




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Exhibit
              Number
            Description10.19(3)
            Change
      in Control Agreement between Registrant and Kevin
  Cousins.10.20(3)
            Change
      in Control Agreement between Registrant and William
    Gearhart.10.21(3)
            Change
      in Control Agreement between Registrant and Eben
Gordon.10.22(4)
            Amendment
      dated September 30, 2008, to the Amended and Restated Loan and Security
      Agreement dated February 27, 2007, by and between the Registrant and
      Silicon Valley Bank.10.23(4)
            Loan
      and Security Agreement (Ex-Im Loan Facility) dated September 30, 2008, by
      and between the Registrant and Silicon Valley Bank.10.24(4)
            Export-Import
      Bank of the United States Working Capital Guarantee Program Borrower
      Agreement dated September 30, 2008, by and between the Registrant and
      Silicon Valley Bank.23.1
            Consent
      of Deloitte & Touche LLP, Independent Registered Public Accounting
      Firm.31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Certification
      of Chief Executive Officer 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.


(1)
            Incorporated
      by reference from our Registration Statement on Form S-1 (Registration No.
      333-134466), which was declared effective on March 28,
    2007.




(2)
            Incorporated
      by reference from our Current Report on Form 8-K filed on March 10,
      2008.




(3)
            Incorporated
      by reference from our Current Report on Form 8-K filed on August 29,
      2008.




(4)
            Incorporated
      by reference from our Current Report on Form 8-K filed on October 2,
      2008.




†
            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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