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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2006

OR



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

For the transition period from  to

Commission file number 000-51066



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CONOR MEDSYSTEMS, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3350973                             
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification Number)

1003 Hamilton Court

Menlo Park, California 94025

(Address of Principal Executive Offices,
including Zip Code)

(650) 614-4100

(Registrants Telephone Number, Including Area Code)



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check one):

Large accelerated filer ̈Accelerated filer  x            Non-accelerated
filer ̈

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 registrant had 37,699,021 shares of Common Stock,
$0.001 par value per share, outstanding as of October 31, 2006.



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CONOR MEDSYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS



|                              |  |                                                                                       |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  | 3                                                                                    
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements                                                                  |  | 3 
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Balance Sheets                                                 |  | 3 
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Statements of Operations                                       |  | 4 
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5 
|                              |  |                                                                                      
|                              |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6 
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 26
|                              | 
|PART II. OTHER INFORMATION    |  | 26                                                                                   
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 26
|                              |  |                                                                                      
|Item 1A.                      |  | Risk Factors                                                                          |  | 26
|                              |  |                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 44
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 45
|                              | 
|SIGNATURE                     |  | 46                                                                                   



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Conor Medsystems, Inc.

Condensed Consolidated Balance Sheets

(In thousands)



|                                              |  |                   |          |   |                  |   |          |  
|--------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                              |  | September 30,2006 |          |   | December 31,2005 |  
|                                              |  | (unaudited)       |          |   | (Note 1)         |  
|Assets                                        |  |                   |          |   |                  |   |          |  
|Current assets:                               |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                     |  | $                 | 132,543  |   |                  | $ | 78,470   |  
|Accounts receivable                           |  |                   | 5,945    |   |                  |   | 1,168    |  
|Inventories, net                              |  |                   | 6,326    |   |                  |   | 1,886    |  
|Prepaid expenses and other current assets     |  |                   | 2,213    |   |                  |   | 1,002    |  
|                                              |  |                   |          |   |                  |   |          |  
|Total current assets                          |  |                   | 147,027  |   |                  |   | 82,526   |  
|Property and equipment, net                   |  |                   | 8,961    |   |                  |   | 5,027    |  
|Restricted cash                               |  |                   | 176      |   |                  |   | 173      |  
|Assets held for sale                          |  |                   | 267      |   |                  |   | 3,400    |  
|Other assets                                  |  |                   | 779      |   |                  |   | 944      |  
|                                              |  |                   |          |   |                  |   |          |  
|Total assets                                  |  | $                 | 157,210  |   |                  | $ | 92,070   |  
|                                              |  |                   |          |   |                  |   |          |  
|Liabilities and stockholders equity          |  |                   |          |   |                  |   |          |  
|Current liabilities:                          |  |                   |          |   |                  |   |          |  
|Accounts payable                              |  | $                 | 2,276    |   |                  | $ | 3,163    |  
|Accrued compensation                          |  |                   | 2,746    |   |                  |   | 2,007    |  
|Accrued clinical development liabilities      |  |                   | 2,536    |   |                  |   | 2,629    |  
|Accrued legal expenses                        |  |                   | 1,495    |   |                  |   | 2,248    |  
|Contingent expense recovery                   |  |                   | 1,316    |   |                  |   |         |  
|Other accrued liabilities                     |  |                   | 2,189    |   |                  |   | 2,966    |  
|                                              |  |                   |          |   |                  |   |          |  
|Total current liabilities                     |  |                   | 12,558   |   |                  |   | 13,013   |  
|Liability for early exercise of stock options |  |                   | 149      |   |                  |   | 250      |  
|Deferred rent                                 |  |                   | 90       |   |                  |   | 84       |  
|                                              |  |                  
|Commitments and contingencies (Note 6)        |  |                   |          |   |                  |   |          |  
|                                              |  |                  
|Stockholders equity:                         |  |                   |          |   |                  |   |          |  
|Preferred stock                               |  |                   |         |   |                  |   |         |  
|Common stock                                  |  |                   | 37       |   |                  |   | 33       |  
|Additional paid-in-capital                    |  |                   | 287,248  |   |                  |   | 196,973  |  
|Deferred stock compensation                   |  |                   |         |   |                  |   | (15,349  | )
|Accumulated other comprehensive income        |  |                   | 36       |   |                  |   | 203      |  
|Accumulated deficit                           |  |                   | (142,908 | ) |                  |   | (103,137 | )
|                                              |  |                   |          |   |                  |   |          |  
|Total stockholders equity                    |  |                   | 144,413  |   |                  |   | 78,723   |  
|                                              |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity    |  | $                 | 157,210  |   |                  | $ | 92,070   |  
|                                              |  |                   |          |   |                  |   |          |  

See accompanying notes



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Conor Medsystems, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                            |  | 2006                            |         |   | 2005                           |   |         | 2006 |  |   | 2005    |  
|Product sales                                               |  | $                               | 10,701  |   |                                | $ | 1,045   |      |  | $ | 26,420  |   |  | $ | 1,369   |  
|Cost of sales                                               |  |                                 | 4,786   |   |                                |   | 2,303   |      |  |   | 13,654  |   |  |   | 3,144   |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Gross margin                                                |  |                                 | 5,915   |   |                                |   | (1,258  | )    |  |   | 12,766  |   |  |   | (1,775  | )
|Operating expenses:                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                    |  |                                 | 11,181  |   |                                |   | 7,722   |      |  |   | 38,322  |   |  |   | 21,828  |  
|General and administrative                                  |  |                                 | 6,005   |   |                                |   | 6,375   |      |  |   | 17,236  |   |  |   | 16,544  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                    |  |                                 | 17,186  |   |                                |   | 14,097  |      |  |   | 55,558  |   |  |   | 38,372  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                        |  |                                 | (11,271 | ) |                                |   | (15,355 | )    |  |   | (42,792 | ) |  |   | (40,147 | )
|Interest income                                             |  |                                 | 1,256   |   |                                |   | 841     |      |  |   | 2,567   |   |  |   | 2,309   |  
|Other income (expenses), net                                |  |                                 | (43     | ) |                                |   | (49     | )    |  |   | 454     |   |  |   | (297    | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                    |  | $                               | (10,058 | ) |                                | $ | (14,563 | )    |  | $ | (39,771 | ) |  | $ | (38,135 | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                        |  | $                               | (0.28   | ) |                                | $ | (0.44   | )    |  | $ | (1.15   | ) |  | $ | (1.16   | )
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Shares used to compute basic and diluted net loss per share |  |                                 | 36,170  |   |                                |   | 33,170  |      |  |   | 34,436  |   |  |   | 32,903  |  
|                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

See accompanying notes



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Conor Medsystems, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                            |  |                                        |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | For the Nine Months EndedSeptember 30, |        
|                                                                            |  | 2006                                   |         |   | 2005 |  
|Cash flows from operating activities                                        |  |                                        |         |   |      |   |         |  
|Net loss                                                                    |  | $                                      | (39,771 | ) |      | $ | (38,135 | )
|                                                                            |  |                                       
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                        |         |   |      |   |         |  
|                                                                            |  |                                       
|Depreciation and amortization                                               |  |                                        | 1,123   |   |      |   | 683     |  
|Recognition of employee stock-based compensation                            |  |                                        | 11,158  |   |      |   | 7,147   |  
|Loss on disposal of property and equipment                                  |  |                                        | 5       |   |      |   | 66      |  
|Issuance of stock options to consultants for services                       |  |                                        | 1,757   |   |      |   | 1,990   |  
|Changes in operating assets and liabilities:                                |  |                                        |         |   |      |   |         |  
|Accounts receivable                                                         |  |                                        | (4,616  | ) |      |   | (1,028  | )
|Inventories                                                                 |  |                                        | (4,665  | ) |      |   | (1,447  | )
|Prepaid expenses and other current assets                                   |  |                                        | (1,205  | ) |      |   | (87     | )
|Other assets                                                                |  |                                        | 3,298   |   |      |   | (560    | )
|Accounts payable                                                            |  |                                        | (952    | ) |      |   | 1,374   |  
|Accrued compensation                                                        |  |                                        | 718     |   |      |   | 944     |  
|Accrued clinical development liabilities                                    |  |                                        | (93     | ) |      |   | 280     |  
|Accrued legal expenses                                                      |  |                                        | (752    | ) |      |   | 705     |  
|Contingent expense recovery                                                 |  |                                        | 1,316   |   |      |   |        |  
|Other accrued liabilities                                                   |  |                                        | (820    | ) |      |   | 1,735   |  
|Deferred rent                                                               |  |                                        | 6       |   |      |   | (59     | )
|                                                                            |  |                                        |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                        | (33,493 | ) |      |   | (26,392 | )
|                                                                            |  |                                        |         |   |      |   |         |  
|Cash flows from investing activities                                        |  |                                        |         |   |      |   |         |  
|Transfers to restricted cash                                                |  |                                        | (3      | ) |      |   | (2      | )
|Capital expenditures                                                        |  |                                        | (5,292  | ) |      |   | (3,109  | )
|                                                                            |  |                                        |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                                        | (5,295  | ) |      |   | (3,111  | )
|                                                                            |  |                                        |         |   |      |   |         |  
|Cash flows from financing activities                                        |  |                                        |         |   |      |   |         |  
|Proceeds from issuance of common stock                                      |  |                                        | 92,671  |   |      |   | 8,977   |  
|Repurchase of common stock                                                  |  |                                        | (32     | ) |      |   |        |  
|                                                                            |  |                                        |         |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                                        | 92,639  |   |      |   | 8,977   |  
|                                                                            |  |                                        |         |   |      |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                |  |                                        | 222     |   |      |   | (8      | )
|                                                                            |  |                                       
|Net increase (decrease) in cash and cash equivalents                        |  |                                        | 54,073  |   |      |   | (20,534 | )
|Cash and cash equivalents at beginning of period                            |  |                                        | 78,470  |   |      |   | 117,676 |  
|                                                                            |  |                                        |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                                      | 132,543 |   |      | $ | 97,142  |  
|                                                                            |  |                                        |         |   |      |   |         |  

See accompanying notes



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Conor Medsystems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Summary of Significant
Accounting Policies

Organization and Business

Conor Medsystems, Inc. (the Company) was incorporated on October 25, 1999 and develops innovative controlled vascular drug delivery
technologies. In 2005, the Company began commercializing its cobalt chromium paclitaxel-eluting coronary stent system, CoStar®, in certain countries outside of the United States, the European Union and Japan, and in the first quarter of 2006, the Company began commercializing its CoStar stent in many of the countries in the
European Union.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and
regulations of the Securities and Exchange Commission, or SEC. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of
management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations and cash
flows for the periods indicated.

The condensed consolidated balance sheet as of December 31, 2005 is derived from the Companys
audited consolidated financial statements as of December 31, 2005, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006, but does not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements.

The unaudited condensed
consolidated financial statements and the accompanying notes should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended December 31, 2005.

Risks and Uncertainties Related to Intellectual Property

The medical device industry in general and the stent sector of this industry in particular, are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent
infringement. The Company is aware of numerous patents issued to third parties that may relate to aspects of its business, including the design and manufacture of bare metal stents or drug-eluting stents as well as the use of catheters to place
stents. The owners of each of these patents could assert, with or without merit, that the manufacture, use, offer for sale or sale of the Companys CoStar, SymBio, Corio or other stents infringe one or more claims of their patents.
Each of these patents contains multiple claims, any one of which may be independently asserted against the Company, with or without merit.

All of the major companies in the stent and related markets, including Boston Scientific Corporation, Johnson & Johnson, Guidant Corporation (Guidant is now owned by Boston Scientific and Guidants vascular and endovascular
business were acquired by Abbott Laboratories) and Medtronic Inc., have repeatedly been involved in patent litigation relating to stents since at least 1997. The Company may pose a competitive threat to many of the companies in the stent and related
markets. Accordingly, a number of these companies, especially Boston Scientific and others against which the Company competes or would compete directly, have a strong incentive to take steps, through patent litigation or otherwise, to prevent the
Company from commercializing its CoStar, SymBio and Corio stents. In fact, the Company is currently involved in patent litigation in the United States, the United Kingdom, the Netherlands, Australia and Ireland, some of which involve, among other
things, claims that the Company is infringing patents of third parties. One or both of Boston Scientific, or a subsidiary thereof, and Angiotech Pharmaceuticals, Inc., which are large, well-capitalized companies, are adversarial to the Company in
these proceedings.

In addition to the lawsuits that the Company is involved in, there are currently well over 20 lawsuits pending in the
United States and Europe involving claims of patent infringement by Boston Scientific, Johnson & Johnson, Medtronic, Guidant, Medinol, Spectralytics or others. The Company could be sued on any of the patents now in third-party litigation or
on other patents. In the United States alone, there are currently over 3,000 stent patents and over 1,500 patents that include the terms catheter and stent in the claims. There are over 4,100 patents that include the terms
catheter and balloon in the claims. These numbers demonstrate that this is an area of technology characterized by a very large number of patents that are directed to almost every aspect of stent manufacture, design and use.
If the Company infringes any of these patents and the patents are found to be valid, the Company will not be able to commercialize its products without a license, which may not be available on acceptable terms or at all, and the Company may become
obligated to pay substantial damage awards with respect to prior sales of its products.



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A number of these patents are owned by very large and well-capitalized companies that are active
participants in the stent market, such as Boston Scientific, Johnson & Johnson, Cordis Corporation, Medtronic, Abbott, Medinol Ltd. and Guidant (Guidant is now owned by Boston Scientific and Guidants vascular and endovascular business
were acquired by Abbott). Several of these third-party patents have been or are being asserted in litigation against purported infringers, including against the Company, demonstrating a willingness by the patent owners to litigate their claims. In
addition, there is a large number of U.S. and foreign issued patents and pending patent applications owned by third parties that generally cover stents, catheters, balloons or enabling technologies that could be relevant to the Companys
technologies, products or product candidates, any number of which could be asserted against the Company in litigation. If the Company or its distributors are found to infringe these or other patents, it could have a material adverse effect on the
Companys business and financial results.

On February 1, 2005, Angiotech Pharmaceuticals, Inc. and Boston Scientific Corporation
(as Angiotechs licensee) initiated legal proceedings against the Company in the District Court in the Hague, Netherlands, seeking: a declaration that its CoStar stent infringes European Patent No. (EP) 0 706 376 B1 (which is owned by Angiotech
and licensed to Boston Scientific) in the Netherlands and other countries designated in EP 0 706 376 B1; an order that the Company and its affiliates cease any infringement of EP 0 706 376 B1 in the Netherlands and other designated European
countries; an order that the Company not use its CE marketing approval for three years or for a period of time which the District Court deems appropriate and/or at the choice of Boston Scientific and Angiotech; an order requiring the Company to
withdraw all information and documentation concerning the clinical trials it has conducted in the Netherlands from all relevant regulatory authorities worldwide; an order requiring the Company to pay 2,460 euros per sale of its CoStar stent in
Europe or, at the choice of Boston Scientific and Angiotech, 2,460 euros per day that the Company does not comply; an order that the Company indemnify Boston Scientific and Angiotech or surrender its profit on sales of its CoStar stent in countries
covered by EP 0 706 376 B1; and an order that the Company pay the costs of the proceedings. The Company intends to vigorously defend itself in these proceedings. In addition, on May 3, 2006, the District Court in The Hague, Netherlands handed
down its judgment in the legal proceedings initiated by Boston Scientific and Angiotech against Sahajanand Medical Technologies, Inc. (SMT) ruling that EP 0 706 376 B1 is valid, and that the SMT stent infringes the patent. This ruling
may adversely affect the Companys proceedings in the Netherlands. If the Company does not succeed in either invalidating EP 0 706 376 B1 or in establishing that the patent is not infringed by its CoStar stent, the Company will not be able to
commercialize its CoStar stent in the Netherlands without a license from Boston Scientific, which may not be available to the Company on acceptable terms, or at all. A trial on the merits in these proceedings is currently scheduled for June 8,
2007. The continuation of these proceedings, however, is largely dependent on the outcome of the nullity proceedings (described below) held on October 27, 2006 that were initiated by the Company against Angiotech and the University of British
Columbia in the District Court in The Hague, Netherlands seeking revocation of EP 0 706 376 B1. The Company is unable to predict the outcome of these proceedings.

On October 26, 2005, the Company initiated nullity proceedings against Angiotech and the University of British Columbia in the District Court in The Hague, Netherlands seeking revocation of the EP 0 706 376 B1
patent that is the subject of the legal proceedings asserted against the Company in the Netherlands by Boston Scientific and Angiotech. The Court has joined Boston Scientific as a defendant to this action at Boston Scientifics request.
Angiotech has counterclaimed for infringement of the patent. The Company is claiming that the patent is invalid based on prior art, the claims are not enabled by the patent specification and on other grounds. A trial on the merits in these
proceedings occurred on October 27, 2006. A decision on the merits in this case is expected on December 20, 2006. The Company is unable to predict the outcome of these proceedings.

On November 8, 2005, Boston Scientific and Boston Scientific Scimed, Inc. (Scimed) initiated legal proceedings against the Company in
the District Court for the District of Delaware seeking a judgment, among other things, that its CoStar stent infringes U.S. Patent No. 5,922,021, one of the Jang patents purportedly assigned to Scimed. In the suit, Boston Scientific and Scimed
are also seeking orders, among other things, that the Company has infringed the patent, preventing the Company from commercializing its CoStar stent in the United States, requiring the Company to pay damages, adjudging that the Companys
infringement was willful and trebling all damages awarded and requiring the Company to pay attorney fees, costs and expenses. The Company intends to vigorously defend itself in this proceeding. The motion to stay filed by the Company in January 2006
was denied, and a trial on the merits in these proceedings is currently scheduled for October 15, 2007. The Company is unable to predict the outcome of these proceedings.

On May 4, 2006, Schneider (Europe) GmbH (Schneider), one of the Boston Scientific group of companies, initiated legal proceedings
against Conor Medsystems Ireland Limited, or Conor Ireland, the Companys wholly-owned subsidiary, in the High Court of Ireland alleging that the Companys CoStar stent infringes the EP 0 650 740 B1 patent owned by



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Schneider. According to the summons filed in the High Court, Schneider is seeking, among other things, damages or an accounting of profit, costs and an
injunction restraining Conor Ireland from making, offering, putting on the market or stocking the Companys CoStar stent or any other products that infringe Schneiders patent in Ireland. Schneider is also seeking an order requiring Conor
Ireland to deliver all CoStar stents. The Company intends to vigorously defend Conor Ireland in these proceedings. No trial date has been set for these proceedings.

Based on litigations against the Company to date and the fact that the Company may pose a competitive threat to large and well-capitalized companies who own or control patents relating to stents and their use,
manufacture and delivery, and the prolific litigation that has occurred in the stent industry, the Company believes that it is highly likely that additional patent infringement claims will be asserted against it with respect to the manufacture, use,
offer for sale or sale of the Companys CoStar, SymBio, Corio or other stents based on one or more of these or other patents. The Company has received letters from third parties who have intellectual property rights in, or who have been
actively involved in litigation or oppositions relating to, coronary stents, asserting that they may have rights to patents that are relevant to the Companys operations or its stent platform and requesting the initiation of discussions. Any
lawsuit could seek to enjoin, or prevent, the Company from commercializing its CoStar, SymBio, Corio or other stents and may seek damages from the Company, and would likely be expensive for the Company to defend. In addition, a lawsuit could seek to
enjoin, or prevent the Companys distributors from commercializing the Companys CoStar, SymBio, Corio or other stents. If a third party brings suit against the Companys distributors it could materially affect the Companys
ability to generate revenue. The Company believes that it is unlikely that it would be able to obtain a license to any necessary patent rights controlled by companies, like Boston Scientific, against which the Company competes or would compete
directly. In addition, the Companys competitors have significant resources to devote to litigation against the Company, and the Company may need to expend significant resources to defend against such litigation. The Company could require
significant additional funds to bear the costs of this litigation, regardless of whether the Company prevails. The Companys ability to continue to operate under its current operating plan could be impaired if such funds are not available.
Since the Companys costs in connection with any such litigation will vary greatly depending on the nature and timing of the litigation, it is not possible for the Company to estimate the effect of such costs on its financial condition and
results of operations. Amounts ultimately payable, if any, resulting from an adverse outcome of any of these matters cannot be reasonably estimated at this time.

On February 24, 2006, the High Court of Justice in the United Kingdom rendered its decision in the proceedings initiated by the Company that an Angiotech European patent covering a paclitaxel-eluting
polymer-coated stent is invalid. As a result of the ruling, the Company received approximately $1.3 million in reimbursement of legal fees. Angiotech has appealed the decision to the Court of Appeal in the United Kingdom and the Company expects a
hearing to occur on this appeal in December 2006. The Company is unable to predict the outcome of the appellate proceedings. Until the appellate decision is rendered, the Company has deferred the recognition of any expense recovery and has recorded
a contingent expense recovery of $1.3 million on the unaudited condensed consolidated balance sheet.

Foreign Currency Translation

The functional currency of the Companys Ireland and United Kingdom subsidiaries are the euro and the pound sterling,
respectively. Foreign assets and liabilities are translated into U.S. dollars at the quarter-end exchange rates, while the statement of operations is translated using average exchange rates in effect during the reporting periods. Gains and losses
from foreign currency transactions are included in the unaudited condensed consolidated statements of operations. For the three months ended September 30, 2006 and 2005, gains from foreign currency transactions were $0.2 million and losses were
$49,000, respectively. For the nine months ended September 30, 2006 and 2005, gains from foreign currency transactions were $0.8 million and losses were $0.3 million, respectively. Foreign currency translation adjustments are included in
accumulated other comprehensive income as a separate component of stockholders equity.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles for interim financial reporting requires
management to make estimates and assumptions that affect amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results may differ from these estimates.

Revenue Recognition

The
Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. Product sales to date have been to the Companys
distributors and revenue from such product sales has been recognized in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). The Companys distributors have no price protection or rights
of return.



8



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##### Table of Contents

Assets Held for Sale

In November 2005, the Company purchased substantially all of the assets of Phytogen Life Sciences Inc., including its inventory of finished paclitaxel. As
of September 30, 2006, the Company had sold most of the assets acquired in the transaction and anticipates selling the remainder of the assets acquired in the transaction, except for certain laboratory equipment and an amount of finished
paclitaxel that it believes will be sufficient to meet its investigational and commercial needs. The Company accounted for this transaction as an acquisition of assets and is carrying these assets at their expected sales price (estimated fair
value), less direct costs to sell.

In September 2006, the Company recognized an asset impairment charge of $0.3 million on the assets held
for sale, which was included in other income (expenses), net, in the accompanying unaudited condensed consolidated statements of operations.

Follow-on Public Offering

On August 1, 2006, the Company completed the sale of 3,500,000 shares of its common
stock at a public offering price of $27.50 per share. Net cash proceeds from the public offering were $89.9 million, after deducting underwriting discounts and other offering expenses.

Comprehensive Loss

Comprehensive loss was comprised of net loss and foreign currency translation adjustments as follows:



|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                     |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                     |  | 2006                            |         |   | 2005                           |   |         | 2006 |  |   | 2005    |  
|Net loss                                             |  | $                               | (10,058 | ) |                                | $ | (14,563 | )    |  | $ | (39,771 | ) |  | $ | (38,135 | )
|Foreign currency translation adjustments, net of tax |  |                                 | 17      |   |                                |   | 30      |      |  |   | (168    | ) |  |   | 154     |  
|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                   |  | $                               | (10,041 | ) |                                | $ | (14,533 | )    |  | $ | (39,939 | ) |  | $ | (37,981 | )
|                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

2. Stock-Based Compensation

As of September 30, 2006, the Company had three share-based compensation plans: the 2004 Equity Incentive Plan, the 2004 Non-Employee Directors Stock Option Plan and the 2004 Employee Stock Purchase Plan,
each of which is described below. The compensation expense for those plans included in the unaudited condensed consolidated statements of operations was $3.9 million and $3.3 million for the three months ended September 30, 2006 and 2005,
respectively. The compensation expense for those plans included in the unaudited condensed consolidated statements of operations was $12.6 million and $9.1 million for the nine months ended September 30, 2006 and 2005, respectively. As of
September 30, 2006, $0.3 million of stock based compensation remained capitalized in inventory and is expected to be charged into cost of goods sold during the fourth quarter.

Prior to January 1, 2006, the Company accounted for its share-based compensation plans under the recognition and measurement provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for
Stock-Based Compensation (SFAS 123). For the periods prior to January 1, 2006, stock-based employee compensation expense related to stock option grants prior to the Companys initial public offering was recognized in the
statements of operations using the intrinsic value method in accordance with the provisions of APB 25. No compensation expense was recognized for stock options granted since the Companys initial public offering, as all stock options granted
had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123R, Share-Based
Payment (SFAS 123R), using the modified-prospective-transition method. Under this transition method, compensation expense recognized in the first quarter of 2006 included: (a) expense for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

As a result of adopting
SFAS 123R as of January 1, 2006, the Company reversed the remaining balance of deferred compensation of $15.3 million to additional paid-in-capital and began expensing share-based compensation. The Companys



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##### Table of Contents

net loss for the three months ended September 30, 2006 was $2.5 million higher than if the Company had continued to account for share-based compensation
under APB 25. The Companys net loss for the nine months ended September 30, 2006 was $6.7 million higher than if the Company had continued to account for share-based compensation under APB 25.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS
123 to options granted under the Companys share-based compensation plans during the three and nine month periods ended September 30, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using a
Black-Scholes option-pricing formula and amortized to expense over the vesting periods of the options. The Company recognized the compensation expense of all share-based awards on a straight-line basis over the vesting period of the award.



|                                                                                         |  |                                          |         |   |                                     |   |         |  
|---------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ----------------------------------- | - | ------- | -
|                                                                                         |  | Three Months EndedSeptember 30, 2005     |         |   | Nine Months EndedSeptember 30, 2005 |  
|                                                                                         |  | (in thousands, except per share amounts) |        
|Net loss - as reported                                                                   |  | $                                        | (14,563 | ) |                                     | $ | (38,135 | )
|Add: Stock-based employee compensation expense included in reported net loss             |  |                                          | 2,397   |   |                                     |   | 7,147   |  
|Deduct: Stock-based employee compensation expense determined under the fair value method |  |                                          | (3,176  | ) |                                     |   | (8,601  | )
|                                                                                         |  |                                          |         |   |                                     |   |         |  
|Net loss - pro forma                                                                     |  | $                                        | (15,342 | ) |                                     | $ | (39,589 | )
|                                                                                         |  |                                          |         |   |                                     |   |         |  
|Basic and diluted net loss per share - as reported                                       |  | $                                        | (0.44   | ) |                                     | $ | (1.16   | )
|                                                                                         |  |                                          |         |   |                                     |   |         |  
|Basic and diluted net loss per share - pro forma                                         |  | $                                        | (0.46   | ) |                                     | $ | (1.20   | )
|                                                                                         |  |                                          |         |   |                                     |   |         |  

Stock Option Plans

The 2004 Equity Incentive Plan (the 2004 Plan) permits the grant of options and other share-based awards to the Companys employees,
directors and consultants. Option awards are generally granted with an exercise price equal to the market price of the Companys stock at the date of grant, generally vest over a four-year period contingent upon continuous service and expire
ten years from the date of grant (or earlier upon termination of continuous service).

The Companys 2004 Non-Employee Directors
Stock Option Plan (the 2004 Directors Plan) provides for the automatic grant of nonstatutory options to non-employee directors of the Company. Option awards are generally granted with an exercise price equal to the market price of
the Companys stock at the date of grant, generally vest over a three-year period contingent upon continuous service and expire ten years from the date of grant (or earlier upon termination of continuous service).

The fair value of each option awarded to employees and directors is estimated on the date of grant using a Black-Scholes option valuation model that uses
the weighted-average assumptions noted in the following table.



|                        |  |                                 |  |                                |  |         |  |        
|----------------------- |  | ------------------------------- |  | ------------------------------ |  | ------- |  | -------
|                        |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                        |  | 2006                            |  | 2005                           |  | 2006    |  | 2005   
|Dividend yield          |  | 0%                              |  | 0%                             |  | 0%      |  | 0%     
|Risk-free interest rate |  | 4.81%                           |  | 3.92%                          |  | 4.53%   |  | 3.83%  
|Volatility              |  | 0.55                            |  | 0.7                            |  | 0.55    |  | 0.7    
|Expected life           |  | 5 Years                         |  | 5 Years                        |  | 5 Years |  | 5 Years



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##### Table of Contents

The fair value of each option awarded to non-employee service providers (other than non-employee directors) is estimated
on the date of grant using a Black-Scholes option valuation model that uses the weighted-average assumptions noted in the following table and is revalued through the vesting date.



|                        |  |                                 |  |                                |  |           |  |        
|----------------------- |  | ------------------------------- |  | ------------------------------ |  | --------- |  | -------
|                        |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|                        |  | 2006                            |  | 2005                           |  | 2006      |  | 2005   
|Dividend yield          |  | 0%                              |  | 0%                             |  | 0%        |  | 0%     
|Risk-free interest rate |  | 4.65%                           |  | 4.16%                          |  | 4.73%     |  | 4.04%  
|Volatility              |  | 0.55                            |  | 0.7                            |  | 0.55      |  | 0.7    
|Expected life           |  | 7.4 Years                       |  | 8 Years                        |  | 6.1 Years |  | 9 Years

The Companys common stock has limited historical information on its stock price volatility.
In accordance with the implementation guidance of SFAS 123R, the Company has calculated expected volatility based on the average volatilities of similar companies. For purposes of identifying similar entities, the Company has considered factors such
as industry, company age, stage of life cycle, and size. The expected term of options granted represents the period of time that options granted are expected to be outstanding. When establishing an estimate of the expected term of an award, the
Company considers the vesting period for the award, the historical experience of employee stock option exercises (including post-vesting forfeitures) and a comparison to relevant peer group data.

Compensation expense recognized in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30,
2006 was based on awards ultimately expected to vest and reflected estimated forfeitures based on an annual rate of 4.7%.

A summary of
option activity under the Companys stock option plans for the nine months ended September 30, 2006 is presented below (in thousands, except for year and per share amounts):



|                              |  |                 |   |  |                                     |   |  |                                            |                                                        |                          |   |        |  |    
|----------------------------- |  | --------------- | - |  | ----------------------------------- | - |  | ------------------------------------------ | ------------------------------------------------------ | ------------------------ | - | ------ |  | ---
|                              |  |                 |   |  | Options Outstanding and Exercisable |   |  |                                            | Weighted - Average RemainingContractual Life(in years)
|                              |  | SharesAvailable |   |  | Number ofShares                     |   |  | Weighted -Average -Per ShareExercise Price |                                                        | AggregateIntrinsic Value |  
|Balance at December 31, 2005  |  | 1,021           |   |  | 6,077                               |   |  | $                                          | 5.51                                                   |                          | $ | 79,167 |  | 8.5
|                              |  |                 |   |  |                                     |   |  |                                            |                                                        |                          |   |        |  |    
|Authorized                    |  | 1,748           |   |  |                                    |   |  |                                            |                                                        |                          |   |        |  |    
|Granted                       |  | (1,865          | ) |  | 1,865                               |   |  |                                            | 24.36                                                  |                          |   |        |  |    
|Exercised                     |  |                |   |  | (458                                | ) |  |                                            | 4.09                                                   |                          |   |        |  |    
|Repurchased                   |  | 48              |   |  |                                    |   |  |                                            |                                                       |                          |   |        |  |    
|Canceled                      |  | 528             |   |  | (528                                | ) |  |                                            | 14.54                                                  |                          |   |        |  |    
|                              |  |                 |   |  |                                     |   |  |                                            |                                                        |                          |   |        |  |    
|Balance at September 30, 2006 |  | 1,480           |   |  | 6,956                               |   |  | $                                          | 9.97                                                   |                          | $ | 94,987 |  | 8.2
|                              |  |                 |   |  |                                     |   |  |                                            |                                                        |                          |   |        |  |    
|Vested at September 30, 2006  |  |                 |   |  | 3,257                               |   |  | $                                          | 2.81                                                   |                          | $ | 66,584 |  | 7.4
|                              |  |                 |   |  |                                     |   |  |                                            |                                                        |                          |   |        |  |    

The weighted-average grant-date fair value of options granted during the nine months ended
September 30, 2006 and 2005 was $12.78 and $10.44, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $9.4 million and $2.9 million, respectively. Cash proceeds from
the exercise of stock options were $1.9 million and $0.1 million for the nine months ended September 30, 2006 and 2005, respectively.

As of September 30, 2006, there was $43.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees under the Companys stock option plans. The unrecognized
compensation cost is expected to be recognized over a weighted-average period of 2.79 years. The total fair value of shares vested during the nine months ended September 30, 2006 and 2005 was $9.6 million and $12.6 million, respectively.



11



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##### Table of Contents

2004 Employee Stock Purchase Plan

In November 2004, the Companys Board of Directors and stockholders approved the 2004 Employee Stock Purchase Plan (the 2004 Purchase
Plan). The 2004 Purchase Plan provides eligible employees of the Company the opportunity to purchase the Companys common stock during specified periods. The employees are able to purchase shares of the Companys common stock at a
price per share equal to the lower of: (a) 85% of the fair market value of a share of the Companys common stock on the first date of an offering period; or (b) 85% of the fair market value of a share of the Companys common
stock on the date of purchase.

The fair value of each offering under the 2004 Purchase Plan is estimated on the date on which the offering
begins using the same option valuation model used for options granted under the 2004 Plan. The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options fair value are the same as those noted in
the table related to options issued to employees under the 2004 Plan.

A summary of the activity under the 2004 Purchase Plan as of
September 30, 2006, and the change in shares available for issuance during the nine-month period then ended is presented in the table below (in thousands, except for per share amounts):



|                                             |  |                 |   |  |                                |      
|-------------------------------------------- |  | --------------- | - |  | ------------------------------ | -----
|Employee Stock Purchase Plan                 |  | SharesAvailable |   |  | AveragePer SharePurchase Price
|Available for issuance at December 31, 2005  |  | 443             |   |  |                                |      
|Increase in authorized for issuance          |  | 337             |   |  |                                |      
|Issued upon purchase                         |  | (72             | ) |  | $                              | 12.39
|                                             |  |                 |   |  |                                |      
|Available for issuance at September 30, 2006 |  | 708             |   |  |                                |      
|                                             |  |                 |   |  |                                |      

As of September 30, 2006, there was $0.6 million of total unrecognized compensation cost
related to share-based compensation arrangements granted under the 2004 Purchase Plan. The unrecognized compensation cost is expected to be recognized over a period of 2.0 years.

3. Recent Accounting Pronouncement

In July 2006, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation Number, or FIN, 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This interpretation will require
that the Company recognize the effect of a tax position in its financial statements, if there is a greater likelihood than not of the position being sustained upon audit, based on the technical merits of the position. The provisions of FIN 48
will be effective for the Company beginning January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of accumulated deficit. The Company is currently evaluating the
impact that FIN 48 will have on its consolidated financial statements.

4. Net Loss Per Share

Basic and diluted net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period,
less outstanding shares subject to repurchase. Diluted net income per share would be computed by dividing the net income by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock
method. For purposes of this calculation, common stock subject to repurchase by the Company, stock options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net income per share when their
effect is dilutive.



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##### Table of Contents

The following table presents the computation of basic and diluted net loss per share (in thousands,
except per share amounts):



|                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                            |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|Historical                                                                                  |  | 2006                            |         |   | 2005                           |   |         | 2006 |  |   | 2005    |  
|Numerator:                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                                                    |  | $                               | (10,058 | ) |                                | $ | (14,563 | )    |  | $ | (39,771 | ) |  | $ | (38,135 | )
|                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Denominator:                                                                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Weighted-average common shares outstanding                                                  |  |                                 | 36,368  |   |                                |   | 33,569  |      |  |   | 34,678  |   |  |   | 33,341  |  
|Less weighted average shares subject to repurchase                                          |  |                                 | (198    | ) |                                |   | (399    | )    |  |   | (242    | ) |  |   | (439    | )
|                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Denominator for basic and diluted net loss per share                                        |  |                                 | 36,170  |   |                                |   | 33,170  |      |  |   | 34,436  |   |  |   | 32,903  |  
|                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                                                        |  | $                               | (0.28   | ) |                                | $ | (0.44   | )    |  | $ | (1.15   | ) |  | $ | (1.16   | )
|                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Historical outstanding anti-dilutive securities not included in diluted net loss per share: |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Common shares subject to repurchase                                                         |  |                                 | 178     |   |                                |   | 371     |      |  |   | 178     |   |  |   | 371     |  
|Options to purchase common stock                                                            |  |                                 | 6,956   |   |                                |   | 5,901   |      |  |   | 6,956   |   |  |   | 5,901   |  
|                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|                                                                                            |  |                                 | 7,134   |   |                                |   | 6,272   |      |  |   | 7,134   |   |  |   | 6,272   |  
|                                                                                            |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

5. Balance Sheet Details

Inventories

Inventories consisted of the following (in thousands):



|                 |  |                   |       |                  |   |      
|---------------- |  | ----------------- | ----- | ---------------- | - | -----
|                 |  | September 30,2006 |       | December 31,2005
|Raw materials    |  | $                 | 2,578 |                  | $ | 851  
|Work-in-progress |  |                   | 3,748 |                  |   | 1,035
|                 |  |                   |       |                  |   |      
|Total Inventory  |  | $                 | 6,326 |                  | $ | 1,886
|                 |  |                   |       |                  |   |      

6. Commitments and Contingencies

Operating Leases

The Company
leases certain real and personal property under non-cancelable operating leases. Future minimum payments under these leases as of September 30, 2006 were as follows (in thousands):



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##### Table of Contents

|                          |  |   |      
|------------------------- |  | - | -----
|Years ending December 31, |  |  
|2006                      |  | $ | 298  
|2007                      |  |   | 1,378
|2008                      |  |   | 1,254
|2009                      |  |   | 816  
|2010                      |  |   | 812  
|Thereafter                |  |   | 1,765
|                          |  |   |      
|                          |  | $ | 6,322
|                          |  |   |      

In addition to these minimum lease payments, the Company is required to pay its share of operating
expenses related to property taxes, insurance and routine maintenance in connection with its facility leases. Rent expense under the operating leases was approximately $0.4 million and $0.2 million for the three months ended September 30, 2006
and 2005, respectively, and approximately $1.1 million and $0.7 million for the nine months ended September 30, 2006 and 2005, respectively.

Legal Contingencies

On February 1, 2005, Angiotech and Boston Scientific (as Angiotechs licensee)
initiated legal proceedings against the Company in the District Court in the Hague, Netherlands, seeking: a declaration that its CoStar stent infringes EP 0 706 376 B1 (which is owned by Angiotech and licensed to Boston Scientific) in the
Netherlands and other countries designated in EP 0 706 376 B1; an order that the Company and its affiliates cease any infringement of EP 0 706 376 B1 in the Netherlands and other designated European countries; an order that the Company not use its
CE marketing approval for three years or for a period of time which the District Court deems appropriate and/or at the choice of Boston Scientific and Angiotech; an order requiring the Company to withdraw all information and documentation concerning
the clinical trials it has conducted in the Netherlands from all relevant regulatory authorities worldwide; an order requiring the Company to pay 2,460 euros per sale of its CoStar stent in Europe or, at the choice of Boston Scientific and
Angiotech, 2,460 euros per day that the Company does not comply; an order that the Company indemnify Boston Scientific and Angiotech or surrender its profit on sales of its CoStar stent in countries covered by EP 0 706 376 B1; and an order that the
Company pay the costs of the proceedings. The Company intends to vigorously defend itself in these proceedings. In addition, on May 3, 2006, the District Court in The Hague, Netherlands handed down its judgment in the legal proceedings
initiated by Boston Scientific and Angiotech against SMT ruling that EP 0 706 376 B1 is valid, and that the SMT stent infringes the patent. This ruling may adversely affect the Companys proceedings in the Netherlands. If the Company does not
succeed in either invalidating EP 0 706 376 B1 or in establishing that the patent is not infringed by its CoStar stent, the Company will not be able to commercialize its CoStar stent in the Netherlands without a license from Boston Scientific, which
may not be available to the Company on acceptable terms, or at all. A trial on the merits in these proceedings is currently scheduled for June 8, 2007. The continuation of these proceedings, however, is largely dependent on the outcome of the
nullity proceedings (described below) held on October 27, 2006 that were initiated by the Company against Angiotech and the University of British Columbia in the District Court in The Hague, Netherlands seeking revocation of EP 0 706 376 B1.
The Company is unable to predict the outcome of these proceedings.

On October 26, 2005, the Company initiated nullity proceedings
against Angiotech and the University of British Columbia in the District Court in The Hague, Netherlands seeking revocation of the EP 0 706 376 B1 patent that is the subject of the legal proceedings asserted against the Company in the Netherlands by
Boston Scientific and Angiotech. The Court has joined Boston Scientific as a defendant to this action at Boston Scientifics request. Angiotech has counterclaimed for infringement of the patent. The Company is claiming that the patent is
invalid based on prior art, the claims are not enabled by the patent specification and on other grounds. A trial on the merits in these proceedings occurred on October 27, 2006. A decision on the merits of the case is expected on
December 20, 2006. The Company is unable to predict the outcome of these proceedings.

EP 0 706 376 B1, one of the Hunter patents, was
granted in May 1997 to Angiotech and was initially opposed at the European Patent Office, or EPO, by five parties in a proceeding that commenced in March 1998. The Opposition Division of the EPO issued a decision in August 2000 that revoked the
patent based on the unpatentability of a claim directed to the use of paclitaxel generally (without the reference to administration via a stent) to treat angiogenesis over certain prior art references, most notably Patent Cooperation Treaty
publication WO 93/11120 filed by Kopia, that generally described in



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##### Table of Contents

June 1993 that paclitaxel is an anti-proliferative that is useful in the treatment of restenosis. Angiotech appealed the decision of the Opposition Division
to the European Technical Boards of Appeal. In a decision dated April 25, 2003, the European Technical Boards of Appeal sent the proceeding back to the Opposition Division for further consideration of the claims directed to a stent coated with
a polymeric material that includes paclitaxel. On March 19, 2005, the Opposition Division rendered a decision allowing certain claims to a stent coated with paclitaxel or its analog or derivative and a polymer. If these proceedings are
considered final, the Company may be required to challenge the validity in each European country designated as covered by EP 0 706 376 B1 in which the Company seeks to commercialize its CoStar stent and are sued on this patent. The Company filed a
Notice of Intervention on April 28, 2005 and SMT filed a Notice of Intervention on June 17, 2005 seeking to become parties to an appeal of this decision. On November 18, 2005, the European Technical Board of Appeals gave a provisional
non-binding opinion that the appeal is inadmissible. The Company appealed the decision of the European Technical Board of Appeals. An oral hearing has been rescheduled for March 14, 2007 by the European Technical Board of Appeals to address
this appeal.

On November 8, 2005, Boston Scientific and Scimed initiated legal proceedings against the Company in the District Court
for the District of Delaware seeking a judgment, among other things, that the Companys CoStar stent infringes U.S. Patent No. 5,922,021, one of the Jang patents purportedly assigned to Scimed. In the suit, Boston Scientific and Scimed are
also seeking orders, among other things, that the Company has infringed the patent, preventing the Company from commercializing its CoStar stent in the United States, requiring the Company to pay damages, adjudging that the Companys
infringement was willful and trebling all damages awarded and requiring the Company to pay attorney fees, costs and expenses. The Company intends to vigorously defend itself in this proceeding. The motion to stay filed by the Company in January 2006
was denied, and a trial on the merits in these proceedings is currently scheduled for October 15, 2007. The Company is unable to predict the outcome of these proceedings.

On February 18, 2005, the Company initiated proceedings against Angiotech and the University of British Columbia in the High Court of Justice in the
United Kingdom requesting that the court invalidate EP 0 706 376 B1 based on the grounds that all claims of the patent either lack novelty or are obvious in light of the state of scientific knowledge at the priority date of the patent. The trial for
this proceeding began on October 4, 2005 and the High Court heard the parties closing arguments in mid-December. On February 24, 2006, the High Court of Justice rendered its decision that EP 0 706 376 B1 is invalid based on the
grounds that the patent was obvious in light of the state of scientific knowledge at the priority date of the patent. Angiotech appealed the decision to the U.K. Court of Appeals. The appeal is scheduled to be heard from December 11 through 13,
2006. The Company is unable to predict the outcome of the appellate proceedings.

On March 31, 2005, the Company filed an Application
to Revoke Australian Patent Nos. 771815, 728873 and 693797 owned by Angiotech and the University of British Columbia in the Federal Court of Australia (Victoria District Registry), on the basis, among others, that the patents are invalid in light of
the state of scientific knowledge as of the priority date of the patents and that they are not enabled for the claimed subject matter. The Company has also asserted that the patents are invalid because both Angiotech and the University of British
Columbia are designated as owners of the patent, whereas in the United States on correspondingly similar claims, Angiotech is designated as the sole owner. On February 2, 2006, the Federal Court issued an order allowing the Company to proceed
with its claim of invalidity on the basis that the University of British Columbia is not entitled to patents. Angiotech and the University of British Columbia appealed the order and a hearing on the appeal was heard on May 17 and 18, 2006. On
October 31, 2006, the Appeal Court set aside the judges order on entitlement and decided that the matter must be determined at trial, which is scheduled to begin on February 12, 2007. The Company is unable to predict the outcome of
these proceedings. The Company is not currently conducting clinical trials in Australia on its CoStar stent, but the Company may seek to commercialize its CoStar stent in Australia in the future. If the Federal Court of Australia rules that these
Australian patents are valid, and in the event that the Company does seek to commercialize its CoStar stent in Australia, then the Company may in the future need to litigate whether the Company infringes any of the valid claims. Alternatively, in
the event that the Company does seek to commercialize its CoStar stent in Australia prior to the trial on invalidity of these Australian patents, Angiotech and the University of British Columbia could request that, and the Court could grant that,
the issue of infringement be heard at the same trial as the issue of invalidity. If the Company is found to infringe one or more valid claims, then the Company may not be able to commercialize its CoStar stent in Australia without a license from
Boston Scientific, which may not be available to it on acceptable terms, or at all.

On May 4, 2006, Schneider initiated legal
proceedings against Conor Ireland, in the High Court of Ireland alleging that the Companys CoStar stent infringes the EP 0 650 740 B1 patent owned by Schneider. According to the summons filed in the High Court, Schneider is seeking, among
other things, damages or an accounting of profit, costs and an injunction restraining Conor Ireland from making, offering, putting on the market or stocking the Companys CoStar stent or any other products that infringe Schneiders patent
in Ireland. Schneider is also seeking an order requiring Conor Ireland to deliver all CoStar stents. The Company intends to vigorously defend Conor Ireland in these proceedings. The Company currently uses its facilities in Ireland to manufacture its
CoStar stent for commercial sale. No trial date has been set for these proceedings.

Amounts ultimately payable, if any, resulting from an
adverse outcome of any of these matters cannot be reasonably estimated at this time. As a result of the ruling of the High Court of Justice in the United Kingdom, the Company received



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approximately $1.3 million in reimbursement of legal fees. Until the appellate decision is rendered, the Company has deferred the recognition of any expense
recovery and has recorded a contingent expense recovery of $1.3 million on the unaudited condensed consolidated balance sheet.

7. Segment, Geographic
and Customer Information

The Company operates in one business segment, which primarily focuses on the development and commercialization
of controlled vascular drug delivery technologies. The Company currently has one product which accounts for all of its product sales.

Product sales were generated through the Companys wholly-owned subsidiary in Ireland and were attributed to geographic regions based on the location of the distribution partner as follows (in thousands):



|                    |  |                                 |        |                                |   |       |  |      |        |  |   |      
|------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ----- |  | ---- | ------ |  | - | -----
|                    |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                    |  | 2006                            |        | 2005                           |   | 2006  |  | 2005
|Geographic Sales    |  |                                 |        |                                |   |       |  |      |        |  |   |      
|Europe              |  | $                               | 9,563  |                                | $ |      |  | $    | 23,705 |  | $ |     
|Asia                |  |                                 | 1,138  |                                |   | 1,045 |  |      | 2,715  |  |   | 1,369
|                    |  |                                 |        |                                |   |       |  |      |        |  |   |      
|Total Product Sales |  | $                               | 10,701 |                                | $ | 1,045 |  | $    | 26,420 |  | $ | 1,369
|                    |  |                                 |        |                                |   |       |  |      |        |  |   |      

8. Subsequent Events

In October 2006, the Company entered into an agreement to execute a lease upon the completion of the build-out of certain leasehold improvements in a facility adjacent to the Companys current Athlone, Ireland
facilities. The lease will be for an additional 25,000 square feet of manufacturing and office space and will have a term of 20 years.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the
safe harbor created by those sections. Forward-looking statements are based on our managements beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking
statements by terms such as may, will, should, could, would, expect, plans, anticipates, believes, estimates,
projects, predicts, potential and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual
results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and
other factors in this Quarterly Report on Form 10-Q in greater detail under Part II, Item 1A below. Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these
forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially
different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual
results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

We develop innovative controlled vascular drug delivery technologies. We have primarily focused on the development
of drug-eluting stents to treat coronary artery disease. Specifically, our efforts have initially focused on the development and commercialization of our cobalt chromium paclitaxel-eluting coronary stent system, CoStar®, for the treatment of restenosis. In February 2006, our CoStar stent received
CE Mark approval in the European Union, and we have commercially launched our CoStar stent in many of the countries in the European Union through our distributor, Biotronik AG.

Historically, we have devoted substantially all of our resources to developing our stent platform, raising capital and preparing for the
commercialization of our CoStar stent. We have pursued a clinical development strategy of demonstrating that our CoStar stent is safe and effective, that the drug inlay design of our CoStar stent permits us to control drug release kinetics, and that
drug release kinetics can have a direct impact on clinical outcomes. Recently, our clinical development strategy has been focused on establishing the basis for regulatory approval of our CoStar stent in the United States and demonstrating that our
cobalt chromium pimecrolimus-eluting coronary stent system, Corio, and our cobalt chromium pimecrolimus- and paclitaxel-eluting coronary stent system, SymBio, are safe and effective.

With respect to potential U.S. regulatory approval of our CoStar stent, we submitted an investigational device exemption, or IDE, application to the U.S.
Food and Drug Administration, or FDA, in the first quarter of 2005 for our U.S. pivotal clinical trial, COSTAR II, and in March 2005, we received conditional approval of our IDE application. The first patient was enrolled in the trial in May 2005.
In December 2005, we received approval from the FDA to expand enrollment in the COSTAR II trial to the full cohort of 1,700 patients, and we completed enrollment of all 1,700 patients in April 2006. If the clinical trial proceeds as scheduled and
the outcome of this clinical trial is favorable, we anticipate submitting an application for marketing approval with the FDA in 2007 and, if the FDA agrees that we have established the safety and effectiveness of our CoStar stent, we expect to
receive regulatory approval for our CoStar stent in the United States in late 2007 or early 2008. We could be delayed by adverse results or regulatory complications, and we may never achieve U.S. regulatory approval.

If we obtain the necessary regulatory approvals, we plan to pursue commercialization of our CoStar stent in the United States with our own sales force
and internationally through distribution arrangements. Our wholly-owned subsidiary, Conor Medsystems Ireland Limited, or Conor Ireland, has entered into an agreement with Biotronik AG to distribute our CoStar stent in countries outside of the United
States, Japan, Australia, New Zealand and Korea and certain other countries. In April 2006, Conor Ireland entered into an agreement, which was amended in September 2006, with Interventional Technologies Limited, or IVT, under which IVT is the
exclusive distributor of the Companys CoStar stent in India, Pakistan, Bangladesh, Sri Lanka, Kenya, and Tanzania. This agreement supersedes and replaces the agreement entered into with IVT in July 2004. Conor Ireland has also entered into
agreements with affiliates of St. Jude Medical, Inc. to distribute our CoStar stent in Japan, Korea, New Zealand and Australia. A decision to seek regulatory approval of, or to sell, our CoStar stent has not yet been made in respect to all of these
countries.

In March 2006, pursuant to the terms of our agreement with Novartis Pharma AG, we exercised our option to obtain a worldwide,
non-exclusive license from Novartis to develop, manufacture and commercialize products that use our vascular



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delivery stent systems, including our drug-eluting reservoir-based cobalt chromium stent, for the local delivery of pimecrolimus. In May 2006, we initiated
the GENESIS trial, which is a multi-center, randomized, three-arm non-inferiority pivotal study designed to compare our Corio, our SymBio, and our CoStar stent, and we began enrollment in this trial in October 2006. In May 2006, we initiated the
RAPID trial, which is a prospective, open-label, multi-center registry designed to evaluate our Corio stent for safety and effectiveness, and we expect to begin enrollment in 2007. Patients enrolled in this trial will receive a reduced duration of
dual anti-platelet therapy. In addition, we entered into a feasibility agreement with Biotronik to evaluate a bioresorbable reservoir-based stent incorporating Biotroniks absorbable metal to enable tailored drug release kinetics for the
treatment of restenosis and other vascular disorders. We are also investigating the applicability of our stent technology to the treatment of an acute myocardial infarction, or AMI, commonly known as a heart attack.

We were incorporated in Delaware in October 1999 and have a limited operating history. We have incurred net losses each year. We anticipate that we will
continue to incur net losses for the next several years as we develop new products, expand our clinical development team and corporate infrastructure and, assuming we receive FDA approval, prepare for the potential U.S. commercialization of our
CoStar stent. We currently have no products approved for sale in the United States. We have financed our operations primarily through private placements of preferred stock and convertible promissory notes, as well as through our public offerings of
our common stock. On August 1, 2006, we completed a follow-on public offering of 3,500,000 shares of our common stock at a public offering price of $27.50 per share. Net cash proceeds from the public offering were $89.9 million, after deducting
underwriting discounts and other offering expenses.

Critical Accounting Policies and Significant Judgments and Estimates

Our managements discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial
statements, which have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting. The preparation of these financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate
estimates, including those related to stock-based compensation and clinical trial accruals. We base our estimates on historical experience and on various other factors that we believe are 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. Actual results may differ from these estimates under different assumptions or conditions. There has been no
significant change in our critical accounting policies or estimates from those policies or estimates disclosed under the heading Critical Accounting Policies and Significant Judgments and Estimates in Part II, Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006, except for employee stock-based compensation related to our adoption of a revision of SFAS No. 123, Accounting for Stock-Based
Compensation,or SFAS 123R.

Stock-Based Compensation  Adoption of SFAS 123R

We adopted SFAS 123R effective January 1, 2006 which requires the recognition of stock-based compensation at fair value in our statements of
operations. We adopted SFAS 123R under the modified prospective transition method and therefore we have not restated results for prior periods. The preparation of financial statements in accordance with U.S. generally accepted accounting principles
requires us to estimate the fair value of the stock options granted. While fair value may be readily determinable for awards of stock, market quotes are not available for long-term, nontransferable stock options because these instruments are not
traded. We currently use the Black-Scholes option pricing model to estimate the fair value of stock options. However, the Black-Scholes model was developed for use in estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. As of September 30, 2006, there was $43.5 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted to employees under our stock option plans. We expect to
recognize the unrecognized compensation cost over a weighted-average period of 2.79 years.

Under SFAS 123R, our estimate of compensation
expense requires a number of complex and subjective assumptions including our stock price volatility, employee exercise patterns, and future forfeitures. The most significant assumptions are our estimates of the expected volatility and the expected
term of the award. Because our initial public offering occurred on December 14, 2004, there is limited historical information available to support our estimate of certain assumptions required to value our stock options. The value of a stock
option is derived from its potential for appreciation. Therefore, the more volatile the stock, the more valuable the option becomes because of the greater possibility of significant changes in stock price. Our common stock has limited historical
information on its stock price volatility. In accordance with the implementation guidance in SFAS 123R, we have therefore calculated expected volatility based on the average volatilities of similar companies. For purposes of identifying similar
entities, we have considered factors such as industry, company age, stage of life cycle, and size. The expected term of options granted represents the period of time that options granted are



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expected to be outstanding. The expected option term also has a significant effect on the value of the option. The longer the term, the more time the option
holder has to allow the stock price to increase without a cash investment and thus, the more valuable the option. Further, lengthier option terms provide more opportunity to exploit market highs. However, empirical data shows that employees, for a
variety of reasons, typically do not wait until the end of the contractual term of a nontransferable option to exercise. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our historical
experience of employee stock option exercises (including post-vesting forfeitures) and a comparison to relevant peer group data. As a result of using estimates, if factors change and we use different assumptions, our stock-based compensation expense
could be materially different in the future. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, from time to time we will likely change the valuation assumptions we use to estimate the
value of stock based awards granted in future periods.

Results of Operations

Three and Nine Months Ended September 30, 2006 and 2005

Product Sales

In 2005, we began commercializing our CoStar stent in certain countries outside of the United States, the European Union and Japan. In February 2006,
our CoStar stent received CE Mark approval in the European Union, and we commercially launched our CoStar stent in many of the countries in the European Union through our distributor, Biotronik AG. As we continue to commercially launch in new
countries and expand our sales in existing countries, we expect product sales to increase in subsequent quarters over current levels. However, because our distributors have fluctuating inventory stocking patterns, product sales of our CoStar stent
may decrease from one quarter to another quarter.

Product sales were $10.7 million and $1.0 million for the three months ended
September 30, 2006 and 2005, respectively. Product sales were $26.4 million and $1.4 million for the nine months ended September 30, 2006 and 2005, respectively. The increases in both periods were primarily due to sales of our CoStar stent
in many of the countries in the European Union following commercial launch of our CoStar stent in February 2006.

Cost of Sales

Cost of sales is composed of the material, labor, non-cash stock-based compensation, overhead and transportation costs of
production and variances associated with inefficiencies in manufacturing. Our cost of sales has been and will continue to be affected by a variety of factors, including product manufacturing start-up costs, manufacturing efficiencies, pricing by
suppliers, yield and scrap, and production volumes. We expect that as our production processes mature and volumes increase, our cost of sales as a percentage of product sales will decline. Cost of sales was 45 percent and 220 percent of product
sales for the three months ended September 30, 2006 and 2005, respectively. Cost of sales was 52 percent and 230 percent of product sales for the nine months ended September 30, 2006 and 2005, respectively.

Cost of sales was $4.8 million and $2.3 million for the three months ended September 30, 2006 and 2005, respectively. Cost of sales was $13.7
million and $3.1 million for the nine months ended September 30, 2006 and 2005, respectively. During each of the three and nine months ended September 30, 2006, cost of sales grew as revenue increased primarily as a result of the
commercialization of our CoStar stent in the European Union. Cost of sales included non-cash stock-based compensation expense of $0.2 million and $0.6 million for the three and nine months ended September 30, 2006, respectively. There was no
non-cash stock-based compensation expense included in cost of sales for the three and nine months ended September 30, 2005. Cost of sales for the three and nine months ended September 30, 2006 and 2005 is representative of the production
costs and variances associated with the early commercialization of our CoStar stent. The cost of sales for the three and nine months ended September 30, 2006 is not necessarily indicative of production costs in future periods.

Research and Development Expenses

Our research and development expenses primarily consist of clinical and regulatory expenses, including pre-clinical and clinical trial costs and the cost of manufacturing clinical supplies. Research and development costs also consist of
employee compensation, supplies and materials, consultant services, facilities, and non-cash stock-based compensation. We expect our research and development expenses to increase significantly as we complete the development of our CoStar stent,
continue the development of our Corio and Symbio stents, develop new catheter systems, research new product opportunities, conduct additional clinical trials and hire additional employees. If our COSTAR II trial proceeds as currently planned, we
anticipate that it will cost at least $6.1 million to complete. As of September 30, 2006, we had expended $30.7 million in research and development expenses for our EuroSTAR and COSTAR II trials. In addition, in May 2006, we initiated
the GENESIS and RAPID clinical trials. The GENESIS trial is designed to compare our Corio, SymBio and CoStar stent systems, and we began enrollment in this trial in October 2006. The RAPID trial is designed to evaluate our Corio stent system for
safety and effectiveness, and we expect to begin enrollment in 2007. Patients enrolled in this trial will receive a reduced duration of dual anti-platelet therapy.



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Research and development expenses were $11.2 million and $7.7 million for the three months ended
September 30, 2006 and 2005, respectively. Research and development expenses included non-cash stock-based compensation expense of $2.0 million and $1.5 million for the three months ended September 30, 2006 and 2005, respectively. The $3.5
million increase was primarily due to increases in clinical trial expenses of $1.7 million, increases in payroll and related expenses of $1.0 million, increases in non-cash employee stock-based compensation expenses of $1.2 million, decreases in
non-cash non-employee stock-based compensation expenses of $0.7 million, and net increases in other expenses of $0.3 million.

Research and
development expenses were $38.3 million and $21.8 million for the nine months ended September 30, 2006 and 2005, respectively. Research and development expenses included non-cash stock-based compensation expense of $6.7 million and
$3.8 million for the nine months ended September 30, 2006 and 2005, respectively. The $16.5 million increase was primarily due to increases in clinical trial expenses of $9.7 million, increases in non-cash employee stock-based compensation
expenses of $3.1 million, increases in payroll and related expenses of $2.9 million, decreases in non-cash non-employee stock-based compensation expenses of $0.1 million, and net increases in other expenses of $0.9 million.

General and Administrative Expenses

Our general and administrative expenses consist primarily of compensation for executive, finance and administrative personnel and non-cash stock-based compensation. Other significant costs include professional fees for accounting and legal
services, including legal services associated with defending against patent litigation and our efforts to obtain and maintain protection for the intellectual property related to our proprietary technology. We expect our general and administrative
expenses to increase substantially due to the costs associated with the infrastructure necessary to support the commercialization of our CoStar stent, particularly in the U.S., assuming we receive regulatory approval, as well as the costs associated
with defending patent infringement claims asserted against us.

General and administrative expenses were $6.0 million and $6.4 million for
the three months ended September 30, 2006 and 2005, respectively. General and administrative expenses included non-cash stock-based compensation expense of $1.9 million and $1.8 million for the three months ended September 30, 2006
and 2005, respectively. The $0.4 million decrease was primarily due to decreases in professional services for legal, audit and other consulting services of $0.7 million and net decreases in trade show, promotional, franchise tax and other expenses
totaling $0.1 million. These decreases were partially offset by net increases in payroll expenses of $0.3 million and non-cash employee stock-based compensation expenses of $0.1 million.

General and administrative expenses were $17.2 million and $16.5 million for the nine months ended September 30, 2006 and 2005, respectively.
General and administrative expenses included non-cash stock-based compensation expense of $5.4 million and $5.3 million for the nine months ended September 30, 2006 and 2005, respectively. The $0.7 million increase was primarily due to
increases in payroll expenses of $1.0 million and increases in non-cash employee stock-based compensation expenses of $0.1 million. These increases were partially offset by decreases in professional services for legal, audit and other consulting
services of $0.4 million.

Interest Income

Interest income was $1.3 million and $0.8 million for the three months ended September 30, 2006 and 2005, respectively, and $2.6 million and $2.3 million for the nine months ended September 30, 2006 and
2005, respectively. The increases in both periods were primarily due to higher cash balances resulting from our follow-on public offering which closed in August 2006.

Other Income (Expenses), Net

Other (expenses), net was $43,000 compared to other (expenses),
net of $49,000 for the three months ended September 30, 2006 and 2005, respectively. The other (expenses), net for the three months ended September 30, 2006, was primarily due to an asset impairment charge of $0.3 million, partially offset
by foreign currency gains of $0.2 million.

Other income, net, was $0.5 million compared to other (expenses), net of $0.3 million for the
nine months ended September 30, 2006 and 2005, respectively. The change from other (expenses), net to other income, net for the nine months ended September 30, 2006, as compared to the nine months ended September 30, 2005, was
primarily due to foreign currency gains of $0.8 million, which were partially offset by an asset impairment charge of $0.3 million, which was included in other (expenses), net.



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Liquidity and Capital Resources

We have incurred losses since our inception in October 1999 and, as of September 30, 2006, we had an accumulated deficit of $142.9 million. We have funded our operations to date principally from proceeds from our
public offerings of common stock and private placements of equity securities and convertible promissory notes, raising aggregate net proceeds of $255.8 million through September 30, 2006.

On August 1, 2006, we completed a follow-on public offering of 3,500,000 shares of our common stock at a public offering price of $27.50 per share.
Net cash proceeds from the public offering were $89.9 million, after deducting underwriting discounts and other offering expenses.

As of
September 30, 2006, we did not have any outstanding or available debt financing arrangements, we had working capital of $134.5 million and our primary source of liquidity was $132.5 million in cash and cash equivalents. Pending their ultimate
use, we currently invest these funds in demand deposit and liquid money market accounts.

Net Cash Used in Operating Activities

Net cash used in operating activities was $33.5 million during the nine months ended September 30, 2006. Net cash used in
operating activities during the nine months ended September 30, 2006 primarily reflected the net loss of $39.8 million plus increased accounts receivable of $4.6 million, increased inventories of $4.7 million, increased prepaids and other
current assets of $1.2 million, decreased accounts payable of $1.0 million, decreased other accrued liabilities of $0.8 million and decreased accrued legal expenses of $0.8 million. The increases in net cash used in operating activities was
partially offset by non-cash employee stock-based compensation expense of $11.2 million, non-employee stock-based compensation expense of $1.8 million, depreciation and amortization of $1.1 million, decreased other assets of $3.3 million, a
contingent expense recovery of $1.3 million and increased accrued compensation of $0.7 million.

Net cash used in operating activities was
$26.4 million during the nine months ended September 30, 2005. The net cash used in operating activities during the nine months ended September 30, 2005 primarily reflected the net loss of $38.1 million, partially reduced by non-cash
employee stock-based compensation expense of $7.1 million and non-employee stock-based compensation expense of $2.0 million, increased accrued liabilities for legal expenses of $0.7 million, increased inventories of $1.4 million, net changes in
other operating assets and liabilities of $1.2 million, depreciation and amortization of $0.7 million, and increased clinical development liabilities of $0.3 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine
months ended September 30, 2006 and 2005 was $5.3 million and $3.1 million, respectively, which resulted primarily from capital expenditures for property and equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2006 was $92.6 million, primarily due to our follow-on public offering in August 2006. Net cash provided by financing activities
for the nine months ended September 30, 2005 was $9.0 million, primarily due to the exercise of the over-allotment option in January 2005 by the underwriters of our initial public offering.

Operating Capital and Capital Expenditure Requirements

As of September 30, 2006, we had not achieved profitability. We anticipate that we will continue to incur net losses for the next several years as we prepare for the potential U.S. commercialization of our CoStar
stent, develop new products and expand our clinical development team and corporate infrastructure. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need to
generate significant product revenues or raise additional capital to achieve profitability.

In February 2006, our CoStar stent received CE
Mark approval in the European Union, and we commercially launched our CoStar stent in many of the countries in the European Union through our distributor, Biotronik AG. As we continue to commercially launch in new countries and expand our sales in
existing countries, we expect product sales to increase in subsequent quarters over current levels. However, because our distributors have fluctuating inventory stocking patterns, product sales of our CoStar stent may decrease from one quarter to
another quarter. We believe that our current cash and cash equivalent balances, as well as the interest we earn on these balances and revenues from anticipated product sales, will be sufficient to meet our anticipated cash requirements through at
least the first half of 2008. However, we may seek to sell additional equity or debt securities or obtain a credit facility prior to this time. The sale of additional equity and debt securities may result in additional dilution to our stockholders.
If we raise additional funds through the issuance of debt



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securities, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may
require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we are unable to obtain additional financing, we may be required to liquidate some or
all of our assets or reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

We anticipate spending at least $4.1 million over the next year for clinical trials to seek to obtain regulatory approvals of our CoStar stent. We
estimate that the development of any new product candidates will cost between $15.0 million and $25.0 million per product candidate and will take up to four years or longer to complete. We expect to fund the development of potential product
candidates with our existing cash and cash equivalent balances, or with cash received from sales of our products and securities.

Our
forecasts of the period of time through which our financial resources will be adequate to support our operations and the costs to complete development of products are forward-looking statements that involve risks and uncertainties, and the actual
results could vary as a result of a number of factors, including the risk factors discussed under Part II, Item 1A below. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital
resources sooner than we currently expect.

Because of the numerous risks and uncertainties associated with the development of drug-eluting
stents, such as our CoStar, SymBio and Corio stents, we are unable to estimate the exact amounts of capital outlays and operating expenditures associated with our current and anticipated clinical trials. Our future funding requirements will depend
on many factors, including, but not limited to:



| |  |  | the scope, rate of progress and cost of our clinical trials and other research and development activities;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | future clinical trial results;
| | - |  | ------------------------------



| |  |  | the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of establishing clinical and commercial supplies of our CoStar stent and any other products or product candidates that we may develop;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of building additional commercial scale manufacturing capabilities;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the cost and timing of regulatory approvals;
| | - |  | --------------------------------------------



| |  |  | the cost and timing of establishing sales, marketing and distribution capabilities;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | licensing technologies for future development;
| | - |  | ----------------------------------------------



| |  |  | the effect of competing technological and market developments; and
| | - |  | ------------------------------------------------------------------



| |  |  | the terms and timing of any collaborative, licensing and other arrangements that we may establish.
| | - |  | --------------------------------------------------------------------------------------------------

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

The medical device industry in general and the stent sector
of this industry in particular, are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We are aware of numerous patents issued to third parties that may relate to aspects
of our business, including the design and manufacture of bare metal stents or drug-eluting stents as well as the use of catheters to place stents. The owners of each of these patents could assert, with or without merit, that the manufacture, use,
offer for sale or sale of our CoStar, SymBio, Corio or other stents infringe one or more claims of their patents. Each of these patents contains multiple claims, any one of which may be independently asserted against us, with or without merit.

All of the major companies in the stent and related markets, including Boston Scientific Corporation, Johnson & Johnson, Guidant
Corporation (Guidant is now owned by Boston Scientific and Guidants vascular and endovascular business were acquired by Abbott Laboratories) and Medtronic Inc., have repeatedly been involved in patent litigation relating to stents since at
least 1997. We may pose a competitive threat to many of the companies in the stent and related markets. Accordingly, a number of these companies, especially Boston Scientific and others against which we compete or would compete directly, have a
strong incentive to take steps, through patent litigation or otherwise, to prevent us from commercializing our CoStar, SymBio and Corio stents. In fact, we are currently involved in patent litigation in the United States, the United Kingdom, the
Netherlands, Australia and Ireland, some of which involve, among other things, claims that we are infringing patents of third parties. One or both of Boston Scientific, or a subsidiary thereof, and Angiotech Pharmaceuticals, Inc., which are large,
well-capitalized companies, are adversarial to us in these proceedings.



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In addition to the lawsuits that we are involved in, there are currently well over 20 lawsuits pending in
the United States and Europe involving claims of patent infringement by Boston Scientific, Johnson & Johnson, Medtronic, Guidant, Medinol, or others. We could be sued on any of the patents now in third-party litigation or on other patents.
In the United States alone, there are currently over 3,000 stent patents and over 1,500 patents that include the terms catheter and stent in the claims. There are over 4,100 patents that include the terms catheter
and balloon in the claims. These numbers demonstrate that this is an area of technology characterized by a very large number of patents that are directed to almost every aspect of stent manufacture, design and use. If we infringe any of
these patents and the patents are found to be valid, we will not be able to commercialize our products without a license, which may not be available on acceptable terms or at all, and we may become obligated to pay substantial damage awards with
respect to prior sales of our products.

A number of these patents are owned by very large and well-capitalized companies that are active
participants in the stent market, such as Boston Scientific, Johnson & Johnson, Cordis Corporation, Medtronic, Abbott, Medinol Ltd. and Guidant (Guidant is now owned by Boston Scientific and Guidants vascular and endovascular business
were acquired by Abbott). Several of these third-party patents have been or are being asserted in litigation against purported infringers, including against us, demonstrating a willingness by the patent owners to litigate their claims. In addition,
there is a large number of U.S. and foreign issued patents and pending patent applications owned by third parties that generally cover stents, catheters, balloons or enabling technologies that could be relevant to our technologies, products or
product candidates, any number of which could be asserted against us in litigation.

On February 1, 2005, Angiotech Pharmaceuticals,
Inc. and Boston Scientific Corporation (as Angiotechs licensee) initiated legal proceedings against us in the District Court in the Hague, Netherlands, seeking: a declaration that our CoStar stent infringes European Patent No. (EP) 0 706 376
B1 (which is owned by Angiotech and licensed to Boston Scientific) in the Netherlands and other countries designated in EP 0 706 376 B1; an order that we and our affiliates cease any infringement of EP 0 706 376 B1 in the Netherlands and other
designated European countries; an order that we not use our CE marketing approval for three years or for a period of time which the District Court deems appropriate and/or at the choice of Boston Scientific and Angiotech; an order requiring us to
withdraw all information and documentation concerning the clinical trials we have conducted in the Netherlands from all relevant regulatory authorities worldwide; an order requiring us to pay 2,460 euros per sale of our CoStar stent in Europe or, at
the choice of Boston Scientific and Angiotech, 2,460 euros per day that we do not comply; an order that we indemnify Boston Scientific and Angiotech or surrender our profit on sales of our CoStar stent in countries covered by EP 0 706 376 B1; and an
order that we pay the costs of the proceedings. We intend to vigorously defend ourselves in these proceedings. In addition, on May 3, 2006, the District Court in The Hague, Netherlands handed down its judgment in the legal proceedings initiated
by Boston Scientific and Angiotech against SMT ruling that EP 0 706 376 B1 is valid, and that the SMT stent infringes the patent. This ruling may adversely affect our proceedings in the Netherlands. If we do not succeed in either invalidating EP 0
706 376 B1 or in establishing that the patent is not infringed by our CoStar stent, we will not be able to commercialize our CoStar stent in the Netherlands without a license from Boston Scientific, which may not be available to us on acceptable
terms, or at all. A trial on the merits in these proceedings is currently scheduled for June 8, 2007. The continuation of these proceedings, however, is largely dependent on the outcome of the nullity proceedings (described below) held
October 27, 2006 that were initiated by us against Angiotech and the University of British Columbia in the District Court in The Hague, Netherlands seeking revocation of EP 0 706 376 B1. We are unable to predict the outcome of these
proceedings.

On October 26, 2005, we initiated nullity proceedings against Angiotech and the University of British Columbia in the
District Court in The Hague, Netherlands seeking revocation of the EP 0 706 376 B1 patent that is the subject of the legal proceedings asserted against us in the Netherlands by Boston Scientific and Angiotech. The Court has joined Boston Scientific
as a defendant to this action at Boston Scientifics request. Angiotech has counterclaimed for infringement of the patent. We are claiming that the patent is invalid based on prior art, the claims are not enabled by the patent specification and
on other grounds. A trial on the merits in these proceedings occurred on October 27, 2006. A decision on the merits of the case is expected on December 20, 2006. We are unable to predict the outcome of these proceedings.

On November 8, 2005, Boston Scientific and Boston Scientific Scimed, Inc., or Scimed, initiated legal proceedings against us in the District Court
for the District of Delaware seeking a judgment, among other things, that our CoStar stent infringes U.S. Patent No. 5,922,021, one of the Jang patents purportedly assigned to Scimed. In the suit, Boston Scientific and Scimed are also seeking
orders, among other things, that we have infringed the patent, preventing us from commercializing our CoStar stent in the United States, requiring us to pay damages, adjudging that our infringement was willful and trebling all damages awarded and
requiring us to pay attorney fees, costs and expenses. The motion to stay filed by us in January 2006 was denied, and a trial on the merits in these proceedings is currently scheduled for October 15, 2007. We are unable to predict the outcome
of these proceedings.



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On May 4, 2006, Schneider (Europe) GmbH, or Schneider, a part of the Boston Scientific group of
companies, initiated legal proceedings against Conor Medsystems Ireland Limited, or Conor Ireland, our wholly-owned subsidiary, in the High Court of Ireland alleging that our CoStar stent infringes the EP 0 650 740 B1 patent owned by Schneider.
According to the summons filed in the High Court, Schneider is seeking, among other things, damages or an accounting of profit, costs and an injunction restraining Conor Ireland from making, offering, putting on the market or stocking our CoStar
stent or any other products that infringe Schneiders patent in Ireland. Schneider is also seeking an order requiring Conor Ireland to deliver all CoStar stents. We intend to vigorously defend Conor Ireland in these proceedings. No trial date
has been set for these proceedings.

Based on litigations against us to date and the fact that we may pose a competitive threat to large
and well-capitalized companies who own or control patents relating to stents and their use, manufacture and delivery, and the prolific litigation that has occurred in the stent industry, we believe that it is highly likely that additional patent
infringement claims will be asserted against us with respect to the manufacture, use, offer for sale or sale of our CoStar, SymBio, Corio or other stents based on one or more of these or other patents. We have received letters from third parties who
have intellectual property rights in, or who have been actively involved in litigation or oppositions relating to, coronary stents, asserting that they may have rights to patents that are relevant to our operations or our stent platform and
requesting the initiation of discussions. Any lawsuit could seek to enjoin, or prevent, us from commercializing our CoStar, SymBio, Corio or other stents and may seek damages from us, and would likely be expensive for us to defend. In addition, a
lawsuit could seek to enjoin, or prevent our distributors from commercializing our CoStar, SymBio, Corio or other stents. If a third party brings suit against our distributors it could materially affect our ability to generate revenue. We believe
that it is unlikely that we would be able to obtain a license to any necessary patent rights controlled by companies, like Boston Scientific, against which we compete or would compete directly.

A finding that we infringe any valid claim in a patent held by a third party would have a material adverse effect on our results of operations, financial
condition and liquidity, and we may, among other things, be required to:



| |  |  | pay damages, including up to treble damages and the other partys attorneys fees, which may be substantial;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | cease the development, manufacture, use and sale of our products, including our CoStar stent, that infringe the patent rights of others through a court-imposed sanction such as an
injunction;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expend significant resources to redesign our technology so that it does not infringe others patent rights, or to develop or acquire non-infringing intellectual property, which
may not be possible;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | discontinue manufacturing or other processes incorporating infringing technology; and/or
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | obtain licenses to the infringed intellectual property, which may not be available to us on acceptable terms, or at all.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

An award of damages against us would adversely affect our results of operations and liquidity, and any delays or restrictions with respect to our
commercialization plans resulting from such litigation would adversely affect our ability to generate revenues. In addition, our competitors have significant resources to devote to litigation against us, and we may need to expend significant
resources to defend such litigation. We could require significant additional funds to bear the costs of this litigation, regardless of whether we prevail. Our ability to continue to operate under our current operating plan could be impaired if such
funds are not available. Since our costs in connection with any such litigation will vary greatly depending on the nature and timing of the litigation, it is not possible to estimate the effect of any such costs on our financial condition and
results of operations. Amounts ultimately payable, if any, resulting from an adverse outcome of any of these matters cannot be reasonably estimated at this time.

Contractual Obligations

The following table summarizes our outstanding contractual
obligations as of September 30, 2006 and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):



|                 |  |       |       |                        |   |          |  |          |       |                  |   |       |  |   |      
|---------------- |  | ----- | ----- | ---------------------- | - | -------- |  | -------- | ----- | ---------------- | - | ----- |  | - | -----
|.                |  |       |       | Payments Due by Period
|                 |  | Total |       | Less than1 Year        |   | 1-3Years |  | 3-5Years |       | More than5 Years
|Operating Leases |  | $     | 6,322 |                        | $ | 1,331    |  | $        | 2,215 |                  | $ | 1,515 |  | $ | 1,261



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The table above reflects only payment obligations that are fixed and determinable. Our commitments for
operating leases relate to the leases for our facilities in Menlo Park, California and Athlone, Ireland.

In February 2005, we entered into
a ten-year operating lease, which has an option for an additional ten years, for manufacturing facilities in Athlone, Ireland. The lease payments for our facilities in Ireland are denominated in euros and have been converted into U.S. dollars using
the exchange rate in effect as of September 30, 2006. Total future minimum lease payments are approximately $3.1 million.

In October
2006, we entered into an agreement to execute a lease upon the completion of the build-out of certain leasehold improvements in a facility adjacent to our current Athlone, Ireland facilities. The lease will be for an additional 25,000 square feet of
manufacturing and office space and will have a term of 20 years. Until the lease has been executed, we are unable to determine the total future minimum lease payments.

In March 2005, we entered into an amendment of the lease agreement for our current headquarters in Menlo Park, California. The amendment provides for an additional 26,000 square feet of space in a building adjacent to
our current headquarters and extends the term of our lease for an additional year to August 2008. In addition, in June 2006, we entered into two additional five-year leases for approximately 44,600 total square feet of manufacturing and office
facilities in Menlo Park, California. In July 2006, one of these leases was amended to include another 2,000 square feet of office facilities, bringing the total leased space in Menlo Park to approximately 101,200 square feet. Total future minimum
lease payments for all of our facilities in Menlo Park are approximately $3.2 million.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation Number, or FIN, 48,Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This interpretation will require that we recognize the effect of a tax position in our financial
statements, if there is a greater likelihood than not of the position being sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 will be effective for us beginning January 1, 2007, with the
cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of accumulated deficit. We are currently evaluating the impact that FIN 48 will have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the nine months ended
September 30, 2006, there were no material changes to the quantitative and qualitative disclosures about market risk related to our investment activities as disclosed under Part II, Item 7A of our Annual Report on Form 10-K for the year
ended December 31, 2005, filed with the SEC on March 16, 2006.

Foreign Currency Risk

We are exposed to foreign currency exchange risk as a result of product sales and manufacturing costs being predominantly denominated in the euro.
Decreases in the value of the euro against the U.S. dollar will result in lower revenues, but will also result in lower manufacturing costs. Conversely, increases in the value of the euro against the U.S. dollar will result in higher revenues, but
will also result in higher manufacturing costs. Because our manufacturing costs are expected to be lower than the related revenues, future decreases in the value of the euro against the U.S. dollar would be expected to have a net adverse affect on
our future operating results.

For example, a ten percent decrease in the value of the euro against the U.S. dollar during the three months
ended September 30, 2006, would have caused an 11 percent decrease in our product sales, a less than one percent decrease in our operating expenses, and a 4.4 percent increase in our net loss. Conversely, a ten percent increase in the value of
the euro against the U.S. dollar during the three months ended September 30, 2006, would have caused a ten percent increase in our product sales, a less than one percent increase in our operating expenses, and a 4.7 percent decrease in our net
loss.

We expect that our exposure to fluctuations in foreign exchange rates will increase in future periods, because we expect the number
of transactions in the euro and the euros involved in each transaction to increase as a result of the commercialization of our CoStar stent in new countries and the expansion of our sales in existing countries, the growth of our manufacturing
facility in Ireland, and additional clinical trials in Europe.

Historically, we have not hedged any of these foreign currency exchange
risks and do not intend to in the immediate future. Therefore, significant foreign exchange rate fluctuations within a short period of time may adversely affect our results of operations and financial condition.



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Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Based on
their evaluation as of September 30, 2006, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended) were effective to ensure, at the reasonable assurance level, that the information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.

Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

During the three months ended September 30, 2006, there were no material
developments in the litigation disclosed under Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006 and Part II, Item 1 of our Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2006 and June 30, 2006, filed with the SEC on May 10, 2006 and August 9, 2006, respectively.

Subsequent to September 30, 2006, the following developments in such litigations occurred:



| |  |  | A trial on the merits in the nullity proceedings we initiated against Angiotech Pharmaceuticals, Inc. and the University of British Columbia in the District Court in The Hague,
Netherlands seeking revocation of European Patent No. (EP) 0 706 376 B1, which is owned by Angiotech and licensed to Boston Scientific Corporation that is the subject of the legal proceedings asserted against us in the Netherlands by Boston
Scientific and Angiotech, occurred on October 27, 2006. A decision on the merits in this case is expected on December 20, 2006. The Court has previously joined Boston Scientific as a defendant to this action at Boston Scientifics
request. Angiotech has previously counterclaimed for infringement of the patent. We are unable to predict the outcome of these proceedings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An oral hearing has been rescheduled for March 14, 2007 by the European Technical Board of Appeals concerning EP 0 706 376 B1, one of the Hunter patents. The appeal will
address a provisional non-binding opinion that an appeal of the decision of the Opposition Division of the European Patent Office, or EPO, allowing the patentability of certain claims to a stent coated with paclitaxel or its analog or derivative and
a polymer was inadmissible. We are unable to predict the outcome of these proceedings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On October 31, 2006, the Appeal Court in Australia handed down its decision on Angiotechs appeal of the Federal Courts order allowing us to proceed with our claim
of invalidity on the basis that the University of British Columbia is not entitled to the Hunter patents in Australia. The Appeal Court set aside the Federal Courts order on entitlement and decided that the matter must be determined on trial,
which is scheduled to begin on February 12, 2007. We are unable to predict the outcome of these proceedings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 1A. Risk Factors

We have identified the following additional risks and uncertainties that may
have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we
face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could
decline due to any of these risks, and investors may lose all or part of their investment. We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described under Item 1A. Risk
Factors included in our Annual Report on Form 10-K filed with the SEC on March 16, 2006. In addition, the risks described under, and the caption entitled, Problems with the stent to be used in the control group could adversely
affect our U.S. pivotal clinical trial for our CoStar stent under Item 1A. Risk Factors included in our Annual Report on Form 10-K filed with the SEC on March 16, 2006 have been removed.

Risks Related to Intellectual Property

Intellectual
property rights, including in particular patent rights, play a critical role in the drug-eluting stent sector of the medical device industry, and therefore in our business. We face significant risks relating to patents, both as to our own patent
position as well as to patents held by third parties. For example, we are involved in substantial patent litigation with large, well-capitalized companies. These risks are summarized below. We have described in greater detail our patent position,
and patents held by third parties that could impact our business, under the caption Item 8.01. Other Events.  Business  Patents and Proprietary Rights in our Current Report on Form 8-K, filed with the SEC on July 25,
2006. You should consider carefully the matters discussed under that caption and in the risk factors below in considering an investment in our common stock.



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We are involved in substantial patent litigation with large, well-capitalized companies. If any
patent infringement or other intellectual property claims asserted against us are successful, we could be enjoined, or prevented, from commercializing our CoStar® stent, our cobalt chromium paclitaxel- and pimecrolimus-eluting coronary stent system, SymBio, our cobalt chromium pimecrolimus-eluting coronary stent system, Corio, or other product candidates.*

Since February 2005, we have become involved in six separate legal proceedings regarding patents. These proceedings are:



| |  |  | litigation initiated against us in The Hague, Netherlands by Angiotech Pharmaceuticals, Inc. and Boston Scientific Corporation seeking a declaration that our CoStar stent infringes
one of the Hunter patents and litigation brought by us in the same court against Angiotech, the University of British Columbia and Boston Scientific Corporation to obtain a declaration that one of the Hunter patents is invalid;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a litigation initiated against us in Delaware by Boston Scientific and Boston Scientific Scimed, Inc., or Scimed, seeking a judgment that our CoStar stent infringes one of the Jang
patents;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a litigation initiated against us in Ireland by Schneider (Europe) GmbH, or Schneider, a part of the Boston Scientific group of companies, seeking a judgment that our CoStar stent
infringes one of the Kastenhofer patents;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | legal proceedings initiated by us in the United Kingdom requesting that the courts invalidate one of the Hunter patents owned by Angiotech and licensed to Boston Scientific; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a proceeding initiated by us in Australia seeking to invalidate Australian patents in the Hunter patent family purportedly owned by Angiotech and the University of British Columbia.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The above patents, as well as others, are described below and under the caption Item 8.01. Other Events. 
Business  Patents and Proprietary Rights in our Current Report on Form 8-K, filed with the SEC on July 25, 2006. In these legal proceedings, Boston Scientific, Angiotech, Scimed and Schneider are seeking, among other things,
substantial damages from us as well as injunctions to prevent us from selling, manufacturing or stocking our CoStar stent. We are unable to predict the outcome of these legal proceedings. These legal proceedings are described in more detail under
the captions Item 3. Legal Proceedings in our Annual Report on Form 10-K for the year ended December 31, 2005, filed with the SEC on March 16, 2006 and Item 1. Legal Proceedings in Part II of our Quarterly Reports
on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006, filed with the SEC on May 10, 2006 and August 9, 2006, respectively.

In addition to the lawsuits that we are involved in, there are currently well over 20 lawsuits pending in the United States and Europe involving claims of patent infringement by Boston Scientific, Johnson &
Johnson, Medtronic, Guidant, Medinol, Spectralytics, or others that relate to, among other things:



| |  |  | the use of therapeutic agents including paclitaxel and rapamycin or their analogs or derivatives to treat restenosis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | stent structure;
| | - |  | ----------------



| |  |  | catheters, including balloons, used to deliver stents;
| | - |  | ------------------------------------------------------



| |  |  | composition of materials used in stents, catheters and balloons; and
| | - |  | --------------------------------------------------------------------



| |  |  | stent, catheter and balloon manufacturing processes.
| | - |  | ----------------------------------------------------

All
of the major companies in the stent and related markets, including Boston Scientific, Johnson & Johnson, Guidant and Medtronic, have repeatedly been involved in patent litigation relating to stents since at least 1997. We may pose a
competitive threat to many of the companies in the stent and related markets. Accordingly, a number of these companies, especially Boston Scientific and others against which we compete or would compete directly, have a strong incentive to take
steps, through patent litigation or otherwise, to prevent us from commercializing our CoStar stent.

We could be sued on any of the patents
now in third-party litigation or on other patents. In the United States alone, there are currently over 3,000 stent patents and over 1,500 patents that include the terms catheter and stent in the claims. There are over 4,100
patents that include the terms catheter and balloon in the claims. These numbers demonstrate that this is an area of technology characterized by a very large number of patents that are directed to almost every aspect of stent
manufacture, design and use. If we infringe any of these patents and the patents are found to be valid, we will not be able to commercialize our products without a license, which may not be available on acceptable terms or at all, and we may become
obligated to pay substantial damage awards with respect to prior sales of our products.



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A number of these patents are owned by very large and well-capitalized companies that are active
participants in the stent market, such as Boston Scientific Corporation, Johnson & Johnson, Cordis Corporation, Medtronic Inc., Abbott Laboratories, Medinol Ltd. and Guidant Corporation (Guidant is now owned by Boston Scientific and
Guidants vascular and endovascular business were acquired by Abbott). As discussed above, several of these third-party patents have been or are being asserted in litigation against purported infringers, including against us, demonstrating a
willingness by the patent owners to litigate their claims. For a description of patents that we consider to pose a material litigation risk to us, see the discussion under the caption Item 8.01. Other Events.  Business  Patents and
Proprietary Rights in our Current Report on Form 8-K, filed with the SEC on July 25, 2006. There may be patents in addition to those described under that caption that relate to aspects of our technology and that may materially and
adversely affect our business. Moreover, because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that pose a material risk to us.

Based on litigations against us to date and the fact that we may pose a competitive threat to large and well-capitalized companies who own or control
patents relating to stents and their use, manufacture and delivery, and the prolific litigation that has occurred in the stent industry, we believe that it is highly likely that additional patent infringement claims will be asserted against us with
respect to the manufacture, use, offer for sale or sale of our CoStar, SymBio, Corio or other stents based on one or more of these or other patents. We have received letters from third parties who have intellectual property rights in, or who have
been actively involved in litigation or oppositions relating to, coronary stents, asserting that they may have rights to patents that are relevant to our operations or our stent platform and requesting the initiation of discussions. Any lawsuit
could seek to enjoin, or prevent, us from commercializing our CoStar, SymBio, Corio or other stents and may seek damages from us, and would likely be expensive for us to defend. A court may determine that these patents are valid and infringed by us.
In addition, a lawsuit could seek to enjoin, or prevent our distributors from commercializing our CoStar stent. If a third party brings suit against our distributors it could materially affect our ability to generate revenue.

More specifically, there is a large number of U.S. and foreign issued patents and pending patent applications owned by third parties that generally cover
stents, catheters, balloons or enabling technologies that could be relevant to our technologies, products or product candidates, any number of which could be asserted against us in litigation. We describe many of these patents below. If we or our
distributors are found to infringe these or other patents, it could have a material adverse effect on our business and financial results. The fact that we list a patent or patent family below does not mean that we agree that the patent is valid or
that any of our products infringe the patent.

Boston Scientific, or its subsidiaries (including Schneider and Boston Scientific Scimed),
own or license a number of patents in the stent area, some of which they have litigated or are in current litigation. These include a series of patents, known as the Kastenhofer patents relating to catheter design; the Jang
patents relating to stent design; the Kunz patents, relating to the use of paclitaxel to treat restenosis generally and also to treat restenosis via a stent; the Forman patents relating to balloon laser welding; the
Keith patents relating to balloon dilation catheters; the Euteneuer patents relating to catheter balloons; the Euteneuer patents relating to catheter design; the Ding patents relating to stent
coatings; the Grainger patent pertaining to a method to treat restenosis with a compound that inhibits TGF-beta; the de Scheerder patents relating to stent design; the Forman patents relating to balloon welding;
and the Zhong patents relating to methods for coating stents. Angiotech is the owner of a number of patents, sometimes referred to as the Hunter patents, and has licensed from the U.S. government a number of other patents,
sometimes referred to as the Kinsella patents, that also claim the use of paclitaxel coated stents to treat angiogenesis and restenosis. Angiotech granted an exclusive license to Boston Scientific under these patents in the coronary
vascular field of use.

Johnson & Johnson, either itself or through a subsidiary such as Cordis Corporation, owns or licenses a
number of patents in the stent area, including the Wright, Morris, and Falotico patents relating to stents containing rapamycin or its analogs in a therapeutically beneficial amount to combat restenosis; the
Schatz patents relating to stent design; the Fischell and Gray patents relating to stent design; the Palmaz patents relating to stent design; the Pinchuk patents relating to nylon balloon
and catheter systems; and the Fontirroche patents relating to catheter design.

In addition, Advanced Cardiovascular Systems,
Inc., a subsidiary of Guidant, previously owned and controlled, and as a result of the recent acquisition of Guidant by Boston Scientific, Abbott now controls, a number of patents in this area, including the Yock family of patents that
are directed to rapid exchange catheters; the Lau family of patents which claim rapid exchange catheters for stent delivery; another Lau family of patents directed to stent structures; the Castro patents, which
are directed to a manufacturing process involving the application of a material to a stent; the Sirhan patents relating to catheter design; the Saunders patents relating to methods of laser cutting stents; and the
Fariabi patents relating to stents and medical devices formed of cobalt chromium alloys.



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Medtronic, Inc. owns or controls a number of patents, including the Enger patents relating to
balloon dilatation catheters; the Fitzmaurice patents directed to reinforced rapid exchange catheters; and the Anderson patents relating to dilatation balloons.

Medinol owns a number of patents, including those referred to as the Israel, Richter and Pinchasik patents, that
pertain to stent design.

Sorin Biomedica Cardio S.p.A. owns a number of patents known as the Rolando patents directed to stent
structures.

MicroCHIPS owns a number of patents known as the Santini patents directed to stent structures.

Spectralytics, Inc. owns a number of patents known as the Gustafson patents relating to methods of laser cutting stents.

Title 35 Section 271(e) of the United States Code is known as the clinical trial safe harbor that allows parties to use a patented invention in the
United States solely for uses reasonably related to developing information for submission to the FDA. While we believe that our clinical activities directed to collecting information for the FDA in the United States and outside of the United States
would be covered by the safe harbor, there is no way to confirm such belief until the case is litigated. In addition, the U.S. safe harbor may not cover our stent manufacturing or other activities in the United States if those activities are not
reasonably related to developing information for submission to the FDA, but instead, for example are for submissions to other governments. Development and clinical trial activities in other countries that are directed to regulatory submissions to
other governments may or may not be subject to experimental use or safe harbor-type protections from patent infringement, depending on the laws of that country.

Whether we infringe any patent claim will not be known (whether in our current or in future patent litigation) with certainty unless and until a court interprets the patent claim in the context of litigation. The
outcome of patent litigation is subject to substantial uncertainties, especially in medical device-related patent cases that may, for example, turn on the interpretation of claim language by the court which may not be to our advantage, the
jurys ability to understand and interpret the technical and legal issues and also the testimony of experts as to technical facts upon which experts may reasonably disagree. In infringement allegations made against us, we may seek to invalidate
the asserted patent claim, render the entire patent unenforceable and/or to allege non-infringement of the asserted patent claim. In Europe, individual country laws control the standard for patent invalidation, and the burden of proof to invalidate
a particular claim can vary among countries. In order for us to invalidate a U.S. patent claim in court, we must rebut the presumption of validity afforded to issued patents in the United States with clear and convincing evidence of invalidity,
which is a high burden of proof.

In the event that we are found, in our current, or in any future, patent litigation, to infringe any
valid claim in a patent held by a third party, we may, among other things, be required to:



| |  |  | pay damages, including up to treble damages and the other partys attorneys fees, which may be substantial;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | cease the development, manufacture, use and sale of our products, including our CoStar stent, that infringe the patent rights of others through a court-imposed sanction such as an
injunction;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | expend significant resources to redesign our technology so that it does not infringe others patent rights, or to develop or acquire non-infringing intellectual property, which
may not be possible;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | discontinue manufacturing or other processes incorporating infringing technology; and/or
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | obtain licenses to the infringed intellectual property, which may not be available to us on acceptable terms, or at all.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

Any development or acquisition of non-infringing products or technology or licenses could require the expenditure of substantial time and other resources
and could have a material adverse effect on our business and financial results. If we are required to, but cannot, obtain a license to valid patent rights held by a third party, we would likely be prevented from commercializing the relevant product.
We believe that it is unlikely that we would be able to obtain a license to any necessary patent rights controlled by companies, like Boston Scientific, against which we compete or would compete directly. If we need to redesign products to avoid
third-party patents, we may suffer significant regulatory delays associated with conducting additional studies or submitting technical, manufacturing or other information related to the redesigned product and, ultimately, in obtaining approval.

In addition, many of our agreements, including our distribution agreements with Biotronik AG and the St. Jude Medical affiliates, our
supply agreements for laser-cut stents and catheters and our license agreement with Novartis AG, require us to indemnify the other party in certain circumstances where our products have been found to infringe a patent or other proprietary rights of
others. An indemnification claim against us may require us to pay substantial sums to the indemnified party, including its attorneys fees.



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Intellectual property litigation against or by us could significantly disrupt our development and
commercialization efforts, divert our managements attention and quickly consume our financial resources.*

There has been
substantial litigation and other proceedings regarding patent and intellectual property rights in the medical device industry generally and the drug-eluting stent industry in particular. We are currently involved in a substantial amount of patent
litigation, some of which was initiated by third parties and some of which was initiated by us. It is likely that we will become involved in even more litigation. Our involvement in intellectual property litigation results in significant expense. We
expect that our patent litigation expense will remain substantial for the foreseeable future and is likely to increase. Some of our competitors, such as Boston Scientific, Johnson & Johnson, Medtronic and Guidant, have considerable
resources available to them and a strong economic incentive to undertake substantial efforts to stop or delay us from bringing our CoStar stent to market and achieving market acceptance. We, on the other hand, are a company with comparatively few
resources available to us to engage in costly and protracted litigation. Moreover, regardless of the outcome, intellectual property litigation against or by us could significantly disrupt our development and commercialization efforts, divert our
managements attention and quickly consume our financial resources.

In addition, during the discovery process of any of these
litigations, we may be required to disclose proprietary or confidential information and trade secrets. Although a court would likely issue a protective order covering the information disclosed in the discovery process, there is some risk that such
information could be disclosed to third parties, even if inadvertently. If proprietary and confidential information and trade secrets are disclosed to a third party, such party could try to use such information against us and to our detriment.

If third parties file patent applications or are issued patents claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings with the U.S. Patent and Trademark Office, which we refer to as the U.S. Patent Office, or in other proceedings outside the United States, including oppositions, to determine priority of invention
or patentability. For example, we have filed an application which preserves our right to seek to provoke an interference with a patent owned by MicroCHIPS, Inc. with claims directed to an implantable stent having reservoirs and a system for
releasing drugs contained in the reservoirs, as the priority date of the MicroCHIPS patent is after the priority date of our patent. Even if we are successful in these proceedings, we will incur substantial costs, and the time and attention of our
management and scientific personnel could be diverted in pursuit of these proceedings.

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 would adversely affect our market share and, therefore, our revenues.

Our ability to protect our drug-eluting stent technology from unauthorized or infringing use by third parties depends substantially on our ability to
obtain and maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents relating to medical devices and pharmaceutical inventions and the scope of claims made under
these patents, our ability to obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any of our issued patents may not provide us with commercially meaningful protection for our
drug-eluting stents or afford us a commercial advantage against our competitors or their competitive products or processes. In addition, patents may not issue from any pending or future patent applications owned by or licensed to us, and moreover,
patents that have issued to us or may issue in the future may not be valid or enforceable. Further, even if valid and enforceable, our patents may not be sufficiently broad to prevent others from marketing stents like ours, despite our patent
rights.

The validity of our patent claims depends, in part, on whether prior art references described or rendered obvious our inventions
as of the effective filing date of our patent applications. We may not have identified all prior art, such as U.S. and foreign patents or published applications or published scientific literature, that could adversely affect the validity of our
issued patents or the patentability of our pending patent applications. For example, patent applications in the United States are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain
confidential in the U.S. Patent Office for the entire time prior to issuance as a U.S. patent. Patent applications filed in countries outside the United States are not typically published until at least 18 months from their first filing date.
Similarly, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Therefore, we cannot be certain that we were the first to invent, or the first to file patent applications relating to our stent
technologies. In the event that a third party has also filed a U.S. patent application covering our stents or a similar invention, we may have to participate in an adversarial proceeding, known as an interference, declared by the U.S. Patent Office
to determine priority of invention in the United States. It is possible that we may be unsuccessful in an interference, resulting in a loss of some portion or all of our U.S. patent position. The laws of some foreign jurisdictions do not protect
intellectual property rights to the same extent as in the United States, and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties or we are
otherwise precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.



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

We also rely on trade secret protection to protect our interests in proprietary know-how and for processes for which patents are difficult to obtain
or enforce. We may not be able to protect our trade secrets adequately. In addition, we rely on non-disclosure and confidentiality agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary
technology. These agreements may be breached, and we may not have adequate remedies for any breach. Moreover, others may independently develop equivalent proprietary information, and third parties may otherwise gain access to our trade secrets and
proprietary knowledge. Any disclosure of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets and use the information in competition against us.

Risks Related to Our Business

We are depending
heavily on the success of our CoStar stent. If we are unable to successfully commercialize our CoStar stent in Europe, the United States or other major markets or experience significant delays in doing so, our ability to generate revenue will be
significantly delayed and our business will be harmed.*

We have invested all of our product development time and resources in our
drug-eluting stent technology, which we have initially commercialized in the form of our CoStar stent. We anticipate that our ability to generate meaningful revenues will depend on the successful commercialization of our CoStar stent in the European
Union and the receipt of regulatory approvals in the United States and other major markets.

The commercial success of our CoStar stent in
Europe will depend upon manufacturing commercial supplies, successfully launching the product and acceptance of the product by the medical community and third-party payors as clinically useful, cost-effective and safe. The results of ongoing and
future clinical trials such as our pivotal U.S. clinical trial, COSTAR II, could adversely affect our ability to commercialize our CoStar stent in Europe if the results of these trials are unsatisfactory. Although our CoStar stent has received CE
Mark approval in the European Union, if the data from our clinical trials is not satisfactory, we may not proceed with our planned filing of applications for regulatory approvals in the United States or other major markets, or we may be forced to
delay the filings. Even if we file an application for approval with satisfactory clinical data, the FDA or foreign regulatory authorities may not accept our filing, or may request additional information, including data from additional clinical
trials. The FDA or foreign regulatory authorities may also approve our CoStar stent for very limited purposes with many restrictions on its use, may delay approvals, or ultimately may not grant marketing approval for our CoStar stent. Even if we do
receive FDA or other foreign regulatory approval, we may be unable to successfully commercialize our CoStar stent in the United States or other major markets, and our ability to generate revenue will be significantly impaired.

We have limited manufacturing resources and experience, and if our manufacturing facilities are unable to provide an adequate supply of our stents,
our growth could be limited and our business could be harmed.*

We currently manufacture our CoStar, Corio and SymBio stents for our
clinical trials and for research and development purposes at our manufacturing facility in Menlo Park, California, and manufacture our CoStar stent for clinical trials and for commercial sale at our manufacturing facility in Athlone, Ireland. If
there were a disruption to our existing manufacturing facilities, we would have no other means of manufacturing our stents until we were able to restore the manufacturing capability at our current facilities or develop alternative manufacturing
facilities. If we are unable to produce sufficient quantities of our stents for use in our current and planned clinical trials or for commercialization, or if our manufacturing process yields substandard stents, our regulatory, development and
commercialization efforts would be delayed.

In order to produce our CoStar stent in the quantities that are required to meet our
distributors forecasts, we have increased, or scaled up, the production process over the previous level of production. If the scaled-up production process is not efficient or produces stents that do not meet quality and other
standards, we may be unable to meet market demand and our revenues, business and financial prospects would be adversely affected. Furthermore, since we are dependent on a number of suppliers to supply us with laser cut stents and catheters, if our
suppliers are unable to meet our requirements, our commercialization efforts would be impaired.

Additionally, any damage to or destruction
of our facilities or our equipment, prolonged power outage or contamination at our facilities would significantly impair our ability to produce our stents. For example, because our Menlo Park facilities are located in a seismic zone, we face the
risk that an earthquake may damage our facilities and disrupt our operations.



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We depend on third-party suppliers for our stent components and the manufacturing components used
in our stents. The loss of these suppliers could delay or prevent commercialization or delay our clinical trials of our stents.*

We
rely on third parties to supply us with the critical components used in our stents. We do not have long-term contracts with many of these third-party suppliers, including the suppliers of our stent delivery catheters, polymers or the cobalt chromium
tubing and laser-precision cutting process required to produce our stents. In addition, we do not have long-term contracts with our third-party suppliers of the equipment and components that are used in our manufacturing process. Except for the
suppliers of our laser-cut stents and stent delivery catheters, none of our suppliers have agreed to maintain a guaranteed level of production capacity. Furthermore, suppliers that have guaranteed a level of production capacity may still be unable
to satisfy our supply needs. If any of our suppliers are unable to meet our demand, our ability to manufacture our stents may be impaired. Furthermore, since some of these suppliers are located outside of the United States, we are subject to foreign
export laws and U.S. import and customs regulations, which complicate and could delay shipments to us.

Establishing additional or
replacement suppliers for these components may take a substantial amount of time. We may also have difficulty obtaining similar components from other suppliers that meet our specifications. Furthermore, we may be required to obtain regulatory
clearance from the FDA or foreign regulatory authorities to use different suppliers or components. As a result, regulatory approval of our stents may not be received on a timely basis or at all, which may delay completion of our clinical trials or
commercialization of our stents, including our CoStar stent.

Quality issues in our manufacturing processes could delay
commercialization of our CoStar stent and our clinical trials.*

The production of our stents must occur in a highly controlled,
clean environment to minimize particles and other yield- and quality-limiting contaminants. In spite of stringent quality controls, weaknesses in process control or minute impurities in materials may cause a substantial percentage of defective
products in a lot. In addition, we must meet certain lot release specifications before our stents can be shipped to our distributors or clinical trial sites, including, among other things, the amount of drug loaded on the stent, the rate the drug is
released in vitro, the level of impurities present in the drug polymer compositions and the mechanical performance of our stents. If a particular lot fails to meet these lot release specifications, we will not be able to ship that lot to our
distributors or our clinical trial sites. If we are not able to maintain stringent quality controls, if contamination problems arise or if we are not able to meet our lot release specifications, the commercialization of our CoStar stent and our
clinical trials could be delayed, which would harm our business and our results of operations.

Our CoStar stent may never achieve
market acceptance.*

Our CoStar stent may not gain market acceptance among physicians, patients, health care payors and the medical
community. We received CE mark approval to market our CoStar stent in early 2006, and we have commenced commercial sales, but we cannot predict accurately how well-accepted this product will be by the market. The degree of market acceptance of our
CoStar stent will depend on a number of factors, including:



| |  |  | the perceived effectiveness of our CoStar stent;
| | - |  | ------------------------------------------------



| |  |  | the prevalence and severity of any side effects;
| | - |  | ------------------------------------------------



| |  |  | potential advantages over alternative treatments;
| | - |  | -------------------------------------------------



| |  |  | the strength of marketing and distribution support; and
| | - |  | -------------------------------------------------------



| |  |  | the adequacy of third-party coverage or reimbursement.
| | - |  | ------------------------------------------------------

If our CoStar stent does not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate meaningful product revenue and we may not become profitable.

In addition, recent reports in the media and at medical conferences have highlighted blood clots that occur after the cessation of anti-platelet therapy
or late stent thrombosis as a serious complication resulting from the implantation of drug-eluting stents. If late stent thrombosis were to become recognized as a significant safety concern after drug-eluting stent implantation, then the
revenue opportunities for the sale of drug-eluting stent products could be reduced or eliminated.

The majority of drug-eluting stents sold
in the United States by Boston Scientific and Johnson & Johnson utilize rapid exchange catheters. If we are not able to develop a commercially acceptable rapid exchange catheter that does not infringe valid patent claims or if we are not
able to license the rapid exchange catheter technology on acceptable terms, or at all, we may not be able to access a significant portion of the drug-eluting stent market in the United States.



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We are dependent upon our distributors to market and sell our CoStar stent internationally, and if
our relationships with our distributors do not progress as anticipated or our agreements with our distributors are not renewed or are terminated, our commercialization efforts could be curtailed or delayed and our operations adversely affected.*

We do not have a sales organization and have no experience as a company in the sales, marketing and distribution of drug-eluting
stents or any other medical devices. To market and sell our CoStar stent internationally, we have entered into distribution agreements with third parties and have derived all of our product revenues to date from our distribution agreements. Our
existing distribution agreements are generally short-term in duration, and we or our distributors may elect not to renew the agreements. Under our distribution agreements, we are required to, among other things, obtain and maintain certain
regulatory approvals, meet a minimum shelf life for our CoStar stent, provide sufficient quantities of our CoStar stent to meet forecasts as well as to perform certain other commercial obligations and pay certain fees, costs and expenses. Our
failure to perform our obligations under our distribution agreements may result in our distributors electing to terminate their respective agreements with us. If our relationships with our distributors do not progress as anticipated or our
distribution agreements are not renewed or are terminated, our commercialization efforts could be curtailed or delayed and our operations adversely affected. In addition, we may not be successful in entering into distribution agreements with
alternative distributors on favorable terms, or at all, which could substantially impair our ability to generate product revenues.

For
example, the term of our distribution agreement with Biotronik is currently scheduled to expire on December 31, 2007. The term of this agreement has not been extended and may not be extended by the expiration date. If we are not able to renew
the term, we may have to find an alternative distributor of our CoStar stent in the territories covered by the Biotronik agreement or establish our own sales force to sell our CoStar stent directly in the territories covered by the Biotronik
agreement. We may not be able to enter into a distribution agreement with an alternative distributor on terms that are favorable to us, and we have no experience in developing a direct sales force.

If our distributors sales and marketing efforts are not successful or if we are unable to establish sales and marketing capabilities, our
business may be harmed.*

Under the terms of our distribution agreements, our distributors, or their sub-distributors, are
responsible for the marketing and selling of our CoStar stent in their respective territories. None of our distributors have prior experience marketing and selling drug-eluting stents. We do not know whether our distributors sales and
marketing efforts, or the sales and marketing efforts of any sub-distributors, will be successful. In addition, from one quarter to another quarter our product sales may decrease due to fluctuating inventory stocking patterns of our distributors or
our distributors sub distributors. Furthermore, some of our existing or future distributors may have products or product candidates that compete with ours, and they may have an incentive not to devote sufficient efforts to marketing our
products. If the sales and marketing strategies of our distributors are not successful, our business, financial condition and results of operations would be harmed.

If our CoStar stent is approved for commercial sale in the United States, we currently plan to establish our own sales force to market it in the United States. If we develop our own marketing and sales capabilities,
our sales force will be competing with the experienced and well-funded marketing and sales operations of our competitors. Developing a sales force is expensive and time consuming and could delay or limit the success of any product launch. We may not
be able to develop this capacity on a timely basis or at all. If we are unable to establish sales and marketing capabilities, we will need to contract with third parties to market and sell our CoStar stent in the United States. To the extent that we
enter into arrangements with third parties to perform sales, marketing and distribution services in the United States, our product revenues could be lower than if we directly marketed and sold our CoStar stent, or any other drug delivery device that
we may develop. Furthermore, to the extent that we enter into co-promotion or other marketing and sales arrangements with other companies, any revenues we receive will depend on the skills and efforts of others, and we do not know whether these
efforts will be successful. Some of our existing or future distributors may have products or product candidates that compete with ours, and they may have an incentive not to devote sufficient efforts to marketing our products. If we are unable to
establish and maintain adequate sales, marketing and distribution capabilities, independently or with others, we may not be able to generate product revenue and may not become profitable.

The medical device industry is highly competitive and subject to rapid technological change. If our competitors are better able to develop and
market products that compete with ours, our commercial opportunity will be reduced or eliminated.*

The medical device industry is
highly competitive and subject to rapid and profound technological change. Our success depends, in part, upon our ability to maintain a competitive position in the development of technologies and products in the drug delivery field. If physicians,
patients or hospitals opt to use our competitors products, our commercial opportunity will be reduced and our revenues will suffer.

We face competition from established medical technology, pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions in the United States and abroad.



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Our principal competitors have significantly greater financial resources and expertise in research and development, manufacturing, pre-clinical testing,
conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. In addition, our distributors will also face competition from established pharmaceutical and biotechnology companies with significantly greater
financial and marketing resources and expertise in commercializing drug-eluting stents.

For example, Johnson & Johnson and Boston
Scientific, two companies with far greater financial and marketing resources than we possess, have both developed, and are actively marketing, drug-eluting stents which have been approved by the FDA. In addition, in August 2005, Medtronic Inc.
commercially launched its Endeavordrug-eluting coronary stent in the European Union. We may be unable to
demonstrate that our CoStar stent or our other product candidates offer any advantages over Johnson & Johnsons CYPHERstent, Boston Scientifics TAXUSExpress2stent or Medtronics Endeavorstent. In addition, in September 2005, Boston Scientific announced that it had received CE Mark approval for commercial sale of its TAXUSLibertepaclitaxel-eluting coronary stent system. A number of other companies such as Biosensors International Group, Ltd.s Netherlands-based subsidiary, Occam International B.V., and Sorin Biomedica S.p.A. have also commercially launched drug-eluting
stents in Europe. In January 2006, Guidant announced that it received CE Mark approval for its XienceV
Everolimus-Eluting Coronary Stent System, and in October 2006, Abbott Laboratories announced the international launch of the Xience stent in a majority of the countries in Europe. Also in October 2006, Boston Scientific announced that the
PROMUSEverolimus-Eluting Coronary Stent System received CE Mark approval and that it expects to launch the
PROMUS stent in Europe in 2007. In addition, Guidant has announced that it completed enrollment in its SPIRIT II and SPIRIT III clinical trials. Smaller or early-stage companies may also prove to be significant competitors, particularly through
collaborative arrangements with, or mergers with or acquisitions by, large and established companies or through the development of novel products and technologies.

Our competitors may:



| |  |  | develop and patent processes or products earlier than we do;
| | - |  | ------------------------------------------------------------



| |  |  | obtain regulatory approvals for competing products more rapidly than we do; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | develop more effective, more innovative or less expensive products or technologies that render our technology or product candidates obsolete or non-competitive.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

The industry in which we operate has undergone, and is expected to continue to undergo, rapid and significant technological
change, and we expect competition to intensify as technical advances are made. Our competitors may develop and commercialize stents or other medical device or pharmaceutical products that are safer or more effective, have fewer side effects or are
less expensive than any products that we develop. For example, we are aware of companies that are developing various other less-invasive technologies for treating cardiovascular disease, which could make our stent platform obsolete. We also compete
in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or
advantageous to our business. In addition, as more drug-eluting stents are approved for sale in the major markets, the price paid for drug-eluting stents may decline. If the price paid for drug-eluting stents declines, our ability to generate
revenue will suffer.

If we fail to obtain an adequate level of reimbursement for our CoStar stent by third-party payors, there may
be no commercially viable markets for our CoStar stent or the markets may be much smaller than expected.*

The availability and
levels of reimbursement by governmental and other third-party payors affect the market for our CoStar stent. The efficacy, safety, performance and cost-effectiveness of our CoStar stent and of any competing products will determine the availability
and level of reimbursement. If we are not able to obtain an adequate level of reimbursement for our CoStar stent by government sponsored healthcare or private insurance, the market may be much smaller than we expect. In addition, reimbursement and
healthcare payment systems in international markets vary significantly by country, and include both government sponsored healthcare and private insurance. To obtain reimbursement or pricing approval in some countries, even those in the European
Union where our CoStar stent has received CE Mark approval, we may be required to produce additional clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our products to other available therapies. We
may not obtain international reimbursement or pricing approvals in a timely manner, if at all. For example, we do not yet have reimbursement approvals in France, and we may never obtain these approvals. Our failure to receive international
reimbursement or pricing approvals would negatively impact market acceptance of our CoStar stent in the international markets in which those approvals are sought, including in the European Union.

We believe that future reimbursement may be subject to increased restrictions both in the United States and in international markets. Future legislation,
regulation or reimbursement policies of third-party payors may adversely affect the demand for our CoStar stent and other products currently under development and limit our ability to sell our CoStar stent and other product candidates on a
profitable basis. In addition, third-party payors continually attempt to contain or reduce the



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costs of healthcare by challenging the prices charged for healthcare products and services. If reimbursement for our CoStar stent or other products is
unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, market acceptance of our CoStar stent or other products would be impaired and our future revenues would be adversely affected.

Our manufacturing facilities and the manufacturing facilities of our suppliers must comply with applicable regulatory requirements. If we fail to
achieve or maintain regulatory approval for these manufacturing facilities, our business and our results of operations would be harmed.*

Commercialization of our CoStar stent and completion of our clinical trials for our CoStar stent and other product candidates, including our Corio and SymBio stents, require the use of manufacturing facilities that meet applicable
regulatory standards to manufacture a sufficient supply of our CoStar stent and other product candidates. While our manufacturing facility in Ireland has received the requisite foreign regulatory approval, the FDA must also approve the facilities
that manufacture our CoStar stent and other product candidates for U.S. commercial purposes, as well as the manufacturing processes and specifications for our CoStar stent and other product candidates. Suppliers of components of, and products used
to manufacture, our CoStar stent and other product candidates must also comply with FDA and foreign regulatory requirements, which often require significant time, money and record-keeping and quality assurance efforts and subject us and our
suppliers to potential regulatory inspections and stoppages. Our suppliers may not satisfy these requirements. If we or our suppliers do not achieve or maintain required regulatory approval for our manufacturing operations, our commercialization
efforts could be delayed, which would harm our business and our results of operations. In addition, from time to time, suppliers are required to provide information to, and answer questions of, the regulatory authorities. If our suppliers are unable
to satisfactorily respond to the regulatory authorities requests for information, we may experience delays in obtaining, or may not maintain or obtain, regulatory approvals for our CoStar stent or other product candidates.

If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our stents, our stents could be subject
to restrictions or withdrawal from the market.*

Any product for which we obtain marketing approval, along with the manufacturing
processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the
approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of
previously unknown problems with our CoStar, Corio and SymBio stents, as well as other potential products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing problems or
failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product
seizures, injunctions or the imposition of civil or criminal penalties.

If we are unable to manage our expected growth, we may not
be able to successfully commercialize our CoStar stent and other product candidates.*

We expect to rapidly expand our operations
and grow our research and development, product development and administrative operations. This expansion has placed, and is expected to continue to place, a significant strain on our management and operational and financial resources. In particular,
the commencement of our U.S. pivotal clinical trial and our GENESIS and RAPID trials has consumed a significant portion of managements time and our financial resources, and we expect that our U.S. pivotal clinical trial in particular will
continue to consume a significant portion of managements time and our financial resources. To manage any further growth and to commercialize our CoStar stent in the European Union, the United States and other major markets, we will be required
to improve existing and implement new operational and financial systems, procedures and controls and expand, train and manage our growing employee base. Our current and planned personnel, systems, procedures and controls may not be adequate to
support our anticipated growth. If we are unable to manage our growth effectively, our business could be harmed.

Even though our
CoStar stent has received CE Mark approval, we do not have the necessary regulatory approvals to market our CoStar stent or any of our other product candidates in the United States or other major markets, and we may never obtain these regulatory
approvals.*

In February 2006, our CoStar stent received CE Mark approval, and we have commercially launched our CoStar stent in
many of the countries in the European Union through our distributor, Biotronik AG. We do not have the necessary regulatory approvals to market our CoStar stent or any other product candidates in the United States or major markets, other than the
European Union. Our stents and our operations are subject to extensive regulation in the United States by the FDA. The FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution and
production of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. Our CoStar stent is a combination product that will be regulated primarily as a class III



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medical device in the United States. The regulatory approval process for our CoStar stent in the United States involves, among other things, obtaining FDA
approval of an investigational device exemption, or IDE, application, successfully completing clinical trials and obtaining FDA approval of a premarket approval application, or PMA. In December 2005, we received approval to expand enrollment to the
full cohort of 1,700 patients, and we completed enrollment of all 1,700 patients in April 2006. The premarket approval process can be expensive and uncertain, requires detailed and comprehensive scientific and other data, generally takes several
years and may never result in the FDA granting premarket approval. We cannot assure you that we will obtain the necessary regulatory approvals to market our CoStar stent in the United States.

Our CoStar stent is currently marketed in the European Union and other international markets, and we intend to expand the markets in which our CoStar
stent is commercialized. To be able to market and sell our CoStar stent in other countries, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the
time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and although our CoStar stent has received CE Mark approval in the European Union, we cannot be certain that we
will receive regulatory approvals in all foreign countries in which we plan to market our CoStar stent or any of our other product candidates, including our Corio and SymBio stents. The foreign regulatory approval process may include all of the
risks associated with obtaining FDA approval in addition to other risks. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and
approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. If we fail to obtain regulatory approval in any foreign country in which we plan to market our CoStar stent or
any of our other product candidates, our ability to generate revenues will be harmed.

In addition to the European Union, we are currently
commercializing our CoStar stent in certain countries outside of the United States and Japan that do not require regulatory approval. These and other countries that do not currently require regulatory approval to market our products may in the
future require regulatory approval.

Before marketing our CoStar stent or any other product candidate in the United States or other
markets, we must successfully complete pre-clinical studies and clinical trials that demonstrate that the product is safe and effective. Product development, including pre-clinical studies and clinical testing, is a long, expensive and uncertain
process and is subject to delays. It may take us several years to complete our testing, if at all, and a clinical trial may fail at any stage. If our pre-clinical studies and clinical trials fail to demonstrate that our product candidates are safe
and effective, our ability to commercialize our product candidates will be substantially impaired.

We have designed the protocol of
our U.S. pivotal clinical trial for our CoStar stent based in part on prior clinical trials that used different stents. The results of these prior clinical trials may not be indicative of the clinical results we would obtain for our U.S. pivotal
clinical trial.*

Our clinical efforts are currently focused on the commercialization of our CoStar stent, which is a cobalt
chromium, paclitaxel-eluting stent. We have only limited clinical data on our CoStar stent, which we derived from the EuroSTAR and COSTAR I trials. Our other prior clinical trials used either a bare metal stainless steel stent or a stainless steel,
paclitaxel-eluting stent. In addition to using a different metal than used in our CoStar stent, the stainless steel stent had slightly different dimensions than our CoStar stent. We have designed the protocol, including the dosage formulations, for
our U.S. pivotal clinical trial based on the results of these prior clinical trials. This trial has been designed in large part based on the results of our PISCES study, which used a stainless steel, paclitaxel-eluting form of our stent technology,
as well as on the results of our COSTAR I and EuroSTAR trials. The results of these prior trials may not be indicative of the behavior of, and therefore the clinical results we will obtain with, our CoStar stent in our U.S. pivotal clinical trial.

The clinical results we have reported to date may not be indicative of future clinical results.*

The clinical results that we have reported to date are limited to four- and twelve-month follow-up data from our PISCES study, six- and twelve-month
follow-up data from our EuroSTAR trial, and four- and twelve-month follow-up data from our COSTAR I trial. Our U.S. pivotal clinical trial, COSTAR II, will require at least eight-month follow-up data. While the stainless steel, paclitaxel-eluting
stent has shown favorable results after twelve months in our PISCES study and our CoStar stent has shown favorable results after twelve months in our COSTAR I trial and our EuroSTAR trial, it is possible that the long-term results we obtain with our
CoStar stent in our U.S. pivotal clinical trial may not show similar effectiveness. Moreover, it is possible that the results we obtain with our Corio and SymBio stents, which incorporate pimecrolimus, may not show adequate levels of safety and
clinical effectiveness. In addition, any pre-clinical or clinical tests may fail to produce results satisfactory to the FDA or foreign regulatory authorities.



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Our current and planned clinical trials may not begin on time, or at all, and may not be completed
on schedule, or at all.*

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



| |  |  | the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the data and safety monitoring committee, or DSMC, of a clinical trial recommends that a trial be placed on hold or suspended;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | patients do not enroll in clinical trials at the rate we expect;
| | - |  | ----------------------------------------------------------------



| |  |  | patients are not followed-up at the rate we expect;
| | - |  | ---------------------------------------------------



| |  |  | clinical trial sites decide not to participate or cease participation in a clinical trial;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | clinical trial sites determine not to use or cease using the control stent;
| | - |  | ---------------------------------------------------------------------------



| |  |  | patients experience adverse side effects or events related to our products;
| | - |  | ---------------------------------------------------------------------------



| |  |  | patients die or suffer adverse medical effects during a clinical trial for a variety of reasons, including the advanced stage of their disease and medical problems, which may not be
related to our product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol and good clinical practices, or
other third-party organizations do not perform data collection and analysis in a timely or accurate manner;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulatory inspections of our clinical trials or manufacturing facilities, which may, among other things, require us to undertake corrective action or suspend or terminate our
clinical trials if investigators find us not to be in compliance with regulatory requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | third-party suppliers fail to provide us with critical components, including stent delivery catheters, cobalt chromium tubing and precision laser-cut stents, which conform to design
and performance specifications;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of our manufacturing process to produce finished products which conform to design and performance specifications;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in governmental regulations or administrative actions;
| | - |  | --------------------------------------------------------------



| |  |  | the interim results of the clinical trial are inconclusive or negative;
| | - |  | -----------------------------------------------------------------------



| |  |  | pre-clinical or clinical data is interpreted by third parties in different ways; or
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our trial design, although approved, is inadequate to demonstrate safety and/or efficacy.
| | - |  | -----------------------------------------------------------------------------------------

Clinical trials may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Patient
enrollment in clinical trials and completion of patient follow-up in clinical trials depend on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if the trial protocol requires them to undergo extensive post-treatment procedures to assess the safety and
effectiveness of our stents, or they may be persuaded to participate in contemporaneous trials of competitive products. Delays in patient enrollment or failure of patients to continue to participate in a study may cause an increase in costs and
delays or result in the failure of the trial.

We intend to initiate a direct stenting registry in the United States in the second half of
2007. The charter for the COSTAR II DSMC calls for the DSMC to review the 30-day outcomes for all patients enrolled into the single-vessel arm of the COSTAR II trial before the DSMC will provide a recommendation for initiation of the direct stenting
registry based on its review of patient data. The DSMC has reviewed data for all 1,675 enrolled patients in the COSTAR II trial and advised us that the rates of clinical events reported in the COSTAR II trial were within expectations. The DSMC also
indicated that the direct stenting registry should not be initiated at this time, and that the DSMC intends to provide a recommendation with respect to the registry with its next planned follow-up review, which is scheduled to occur once the DSMC
has received the 9-month outcomes for all patients enrolled in the trial. We cannot predict the timing or outcome of the DSMCs recommendations with respect to the U.S. direct stenting registry.

Our clinical trial costs will increase if we have material delays in our clinical trials or if we need to perform more or larger clinical trials than
planned. Adverse events during a clinical trial could cause us to repeat a trial, terminate a trial or cancel the entire program.



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If the third parties on whom we rely to conduct our clinical trials and to assist us with
pre-clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.

We do not have the ability to independently conduct clinical trials for our product candidates, and we must rely on third parties, such as contract
research organizations, medical institutions, clinical investigators and contract laboratories to conduct our clinical trials. In addition, we rely on third parties to assist with our pre-clinical development of product candidates. If these third
parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure
to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval
for or successfully commercialize our product candidates on a timely basis, if at all. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control. For instance, one
of our competitors is a major supplier of the intravascular ultrasound, or IVUS, catheters used in our clinical trials to measure percent volume obstruction, or the volume of the lumen, or the inner channel of the artery through which blood flows,
in the stent occupied by restenotic tissue. If the supply of IVUS catheters to our clinical trial sites is interrupted, our clinical trials may be delayed or terminated.

Our CoStar stent and our other product candidates are based on a new technology, and we have only limited experience in regulatory affairs, which may affect our ability or the time required to obtain necessary
regulatory approvals, if at all.*

Drug-eluting stents were introduced in the U.S. marketplace in 2003. To date, the FDA has
approved only Boston Scientifics TAXUSExpress2and Johnson & Johnsons CYPHERdrug-eluting stents for commercial sale. Because drug-eluting stents are relatively new, regulatory agencies, including the FDA, may be slower in evaluating product candidates. For example, there are
currently several measures of restenosis, including binary restenosis rate, in-stent late loss, in-segment late loss, percentage volume obstruction and percentage diameter loss. Treatments may exhibit a favorable measure using one of these metrics
and an unfavorable measure using another metric. It has not been settled which of these metrics, or another metric, is the ideal measure for evaluating the clinical effectiveness of stents. It is possible that a change in the accepted metrics may
result in reconfiguration and delays in our clinical trials or our stents being considered not to be clinically effective.

Furthermore,
unlike surface-coated stents, our product candidates are based on drug delivery polymer reservoirs and the use of a bioresorbable polymer. Because there are currently no approved products based on this technology, the regulatory requirements
governing this type of product may be more rigorous or less clearly established than those for already approved surface-coated stents or other vascular drug delivery devices. In addition, no drug-eluting stents that deliver pimecrolimus have
received regulatory approval or, to our knowledge, have been evaluated in human clinical trials. Moreover, our CoStar stent has not been approved for use as a bare stent, and we do not expect to obtain FDA approval for this stent as a bare stent
prior to filing our PMA with the FDA. We must provide the FDA and foreign regulatory authorities with pre-clinical and clinical data that demonstrate that our product candidates are safe and effective before they can be approved for commercial sale.
We have only limited experience in filing and prosecuting the applications necessary to gain regulatory approvals, and our clinical staff is limited. As a result, we may experience a longer regulatory process in connection with obtaining regulatory
approvals for our product candidates.

Pre-clinical development is a long, expensive and uncertain process, and we may terminate one
or more of our pre-clinical development programs.

We may determine that certain pre-clinical product candidates or programs do not
have sufficient potential to warrant the allocation of resources, such as the potential development of our stent technology for the treatment of acute myocardial infarction, or AMI. Accordingly, we may elect to terminate our programs for such
product candidates. If we terminate a pre-clinical program in which we have invested significant resources, our prospects will suffer, as we will have expended resources on a program that will not provide a return on our investment and will have
missed the opportunity to have allocated those resources to potentially more productive uses.

We may not be successful in our
efforts to expand our portfolio of products and develop additional drug delivery technologies.*

A key element of our strategy is to
discover, develop and commercialize a portfolio of new products in addition to our CoStar stent, including our Corio and SymBio stents. We are seeking to do so through our internal research and clinical programs and intend to explore strategic
collaborations for the development of new products utilizing our stent technology, such as the development of a bioresorbable drug-eluting stent for the treatment of restenosis and other vascular disorders.



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Research programs to identify new disease targets, product candidates and delivery techniques require substantial technical, financial and human resources,
whether or not any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including
the following:



| |  |  | the research methodology used may not be successful in identifying potential product candidates;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | competitors may develop alternatives that render our product candidates obsolete;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | our delivery technologies may not safely or efficiently deliver the drugs; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | product candidates may on further study be shown to have harmful side effects or other characteristics that indicate they are unlikely to be effective.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

Our strategy also includes exploring the use of compounds and drugs other than paclitaxel, such as pimecrolimus, for the treatment of restenosis and
other indications. We may not be able to obtain necessary licenses to promising compounds or drugs on reasonable terms, if at all. In addition, our strategy includes substantial reliance on strategic collaborations with others to develop new
products. If these collaborators do not prioritize and commit substantial resources to these collaborations, or if we are unable to secure successful collaborations on acceptable business terms, we may be unable to discover suitable potential
product candidates or develop additional delivery technologies and our business prospects will suffer. Even if we identify product candidates for clinical development, they may not be successful. For example, our Corio and SymBio stents, which are
in early stage clinical development, may not demonstrate safety or efficacy in humans.

We have incurred losses since inception and
anticipate that we will incur continued losses for the foreseeable future.*

We have a limited operating history. As of
September 30, 2006, we had an accumulated deficit of $142.9 million. We have incurred net losses in each year since our inception in 1999. We expect to continue to incur operating losses, in the aggregate and on a per share basis, for the next
several years. These losses, among other things, have had and will continue to have an adverse effect on our stockholders equity, net current assets and working capital.

Because of the numerous risks and uncertainties associated with developing medical devices, we are unable to predict the extent of any future losses or
when we will become profitable, if at all. To date, we have not generated significant product revenues. We have financed our operations and internal growth primarily through private placements of equity securities and convertible promissory notes,
as well as our public offerings of our common stock. We have devoted substantially all of our efforts to research and development, including clinical trials and to the commercialization of our CoStar stent.

We expect to incur substantial and increasing costs to defend against patent infringement lawsuits against us and to protect our intellectual property
position. We also expect our research and development expenses to increase in connection with the conduct of our clinical trials. As a public company, our general and administrative and legal costs have increased in part due to the additional
operational and regulatory burdens applicable to public companies. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations
implemented by the SEC and the Nasdaq, have created uncertainty for public companies, increased legal and financial compliance costs and made some activities more time consuming. These laws, regulations and standards are subject to varying
interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may continue to evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result
in increased general and administrative expenses and a diversion of managements time and attention from commercialization and product development activities to compliance activities. If our efforts to comply with new laws, regulations and
standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Moreover, as a result of our
CoStar stent receiving CE Mark approval, we have incurred and expect to continue to incur increased manufacturing expenses, and will incur significant sales and marketing expenses if our CoStar stent is approved by the FDA.

We may need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our
product development programs or commercialization efforts.*

We may need to raise substantial additional capital to:



| |  |  | fund our operations and clinical trials;
| | - |  | ----------------------------------------



| |  |  | continue our research and development;
| | - |  | --------------------------------------



| |  |  | scale up our manufacturing operations to meet increased demand;
| | - |  | ---------------------------------------------------------------



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| |  |  | defend, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | commercialize our CoStar stent and other product candidates, if any such product candidates receive regulatory approval for commercial sale.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

We believe that our current cash and cash equivalent balances, as well as the interest we earn on these balances and revenues from anticipated product
sales, will be sufficient to meet our anticipated cash requirements through at least the first half of 2008. However, our future funding requirements will depend on many factors, including:



| |  |  | the scope, rate of progress and cost of our clinical trials and other research and development activities;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | future clinical trial results;
| | - |  | ------------------------------



| |  |  | the cost of filing and prosecuting patent applications and defending and enforcing our patent and other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of defending, in litigation or otherwise, any claims that we infringe third-party patent or other intellectual property rights;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of establishing clinical and commercial supplies of our CoStar stent and any other products or product candidates that we may develop;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of building additional commercial scale manufacturing capabilities;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the cost and timing of regulatory approvals;
| | - |  | --------------------------------------------



| |  |  | the cost and timing of establishing sales, marketing and distribution capabilities;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | licensing technologies for future development;
| | - |  | ----------------------------------------------



| |  |  | the effect of competing technological and market developments;
| | - |  | --------------------------------------------------------------



| |  |  | the terms and timing of any collaborative, licensing and other arrangements that we may establish; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of
transactions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Until we can generate a sufficient amount of product revenue, we expect to finance future cash needs through
public or private equity offerings, debt financings or corporate collaboration and licensing arrangements, as well as through interest income earned on cash balances. We may never be able to generate sufficient amounts of product revenue to meet our
cash needs.

If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if
available, may involve restrictive covenants. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements
with third parties, it will be necessary to relinquish some rights to our technologies or our product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may be required to liquidate some
or all of our assets or delay, reduce the scope of or eliminate some or all of our planned research, development and commercial activities, which could harm our business.

We depend on our officers, and if we are not able to retain them or recruit additional qualified personnel, our business will suffer.

We are highly dependent on our Chairman and Chief Executive Officer, Dr. Frank Litvack, our Chief Technology Officer, John F. Shanley, our Chief
Operating Officer, Dr. Azin Parhizgar, our Vice President of Engineering and Pilot Production, Stephen H. Diaz and our other officers. Due to the specialized knowledge each of our officers possess with respect to interventional cardiology and
our operations, the loss of service of any of our officers could delay or prevent the successful completion of our clinical trials and the commercialization of our CoStar stent. Each of our officers may terminate their employment without notice and
without cause or good reason. We do not carry key person life insurance on our officers.

In addition, our growth will require hiring a
significant number of qualified scientific, commercial and administrative personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research
and academic institutions for qualified personnel in the areas of our activities particularly with respect to engineering, regulatory affairs and clinical. Our offices are located in the San Francisco Bay Area, where competition for personnel with
healthcare industry skills is intense. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.



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Changes in foreign currency exchange rates may increase our expenses or reduce our revenues.*

Our current distribution agreement with Biotronik AG provides for payments to us in euros. In addition, we have established a
manufacturing facility in Ireland, for which we incur expenses, including construction expenses, rental payments and employee salaries, denominated in euros. Our contracts for conducting certain of our clinical trials in Europe are also denominated
in euros. Accordingly, if the euro strengthens against the U.S. dollar, our expenses related to our foreign clinical trials and Ireland facilities will increase, and if the U.S. dollar strengthens against the euro, our payments from Biotronik will
decrease. For a further discussion of risks related to foreign currency exchange rates see Item 3. Quantitative and Qualitative Disclosures About Market Risk in Part I of this Quarterly Report on Form 10-Q.

We may become exposed to fluctuations in other foreign currencies in the future, and our exposure to foreign currency exchange rates may adversely affect
our results of operations.

Risks Related to Our Industry

Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.*

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the regulatory and healthcare systems in ways that could impact our ability to
sell our products profitably, if at all. In the United States in recent years, new legislation has been proposed at the federal and state levels that would effect major changes in the healthcare system. In addition, new regulations and
interpretations of existing healthcare statutes and regulations are frequently adopted. The potential for adoption of these proposals affects or will affect our ability to raise capital, obtain additional collaborators and market our products. We
expect to experience pricing pressures in connection with the future sale of our products due to the trend toward managed health care, the increasing influence of health maintenance organizations and additional legislative proposals. Our results of
operations could be adversely affected by future healthcare reforms.

Recently, the Centers for Medicare and Medicaid Services, the agency
responsible for Medicare funding in the U.S., has reduced reimbursement for drug-eluting stent procedures. Such reduction in reimbursement may materially reduce the revenue opportunities for the sale of drug-eluting stents.

We face the risk of product liability claims and may not be able to obtain insurance.

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices. We may be
subject to product liability claims if our stents cause, or merely appear to have caused, an injury. Claims may be made by consumers, healthcare providers, third-party strategic collaborators or others selling our products. Although we have product
liability and clinical trial liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. Our current product liability insurance may not continue to be available to us on acceptable terms,
if at all, and, if available, the coverage may not be adequate to protect us against any future product liability claims. In addition, if we obtain additional approvals for marketing our product candidates, we may seek additional insurance coverage.
If we are unable to obtain insurance at acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A
product liability claim or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of physicians,
nurses and other associated medical personnel to perform the medical procedure and related processes to implant our coronary stents into patients. If these medical personnel are not properly trained or are negligent, the therapeutic effect of our
stents may be diminished or the patient may suffer critical injury, which may subject us to liability. In addition, an injury that is caused by the activities of our suppliers, such as those who provide us with cobalt chromium tubing for our stents,
those that laser cut our stents or those that provide the polymer incorporated into our stents, may be the basis for a claim against us.

These liabilities could prevent or interfere with our commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the
withdrawal of, or inability to recruit, clinical trial volunteers or result in reduced acceptance of our products in the market.

If
we initiate a product recall, our ability to generate revenue will be significantly impaired.

There is a possibility that defects
in the structure or manufacture of our CoStar stent might necessitate a product recall. A recall could significantly impair our ability to generate revenue and could have a material adverse effect on our stock price. In addition, any claims arising
out of a recall with respect to uninsured liabilities or for amounts in excess of insured liabilities could have a material adverse effect on our business, financial condition and results of operations.



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Our operations involve hazardous materials, and we must comply with environmental laws and
regulations, which can be expensive.

Our research and development activities involve the controlled use of hazardous chemicals. Our
operations also produce hazardous waste products. We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of these materials. We generally contract with third parties for the disposal
of such substances. We cannot eliminate the risk of accidental contamination or injury from these materials. We may be required to incur substantial costs to comply with current or future environmental and safety regulations. If an accident or
contamination occurred, we would likely incur significant costs associated with civil penalties or criminal fines and in complying with environmental laws and regulations. We do not have any insurance for liabilities arising from hazardous
materials. Compliance with environmental laws and regulations is expensive, and current or future environmental regulation may impair our research, development or production efforts.

Risks Related to Our Common Stock

Failure to maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our stock price.

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent
registered public accounting firm attesting to and reporting on these assessments. If we fail to maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we
may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the
SEC. If we cannot favorably assess, or our independent registered public accounting firm is unable to provide an unqualified attestation report on our assessment of, the effectiveness of our internal control over financial reporting, investor
confidence in the reliability of our financial reports may be adversely affected, which could have a material adverse effect on our stock price.

Anti-takeover defenses that we have in place could prevent or frustrate attempts to change our direction or management.

Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These
provisions:



| |  |  | establish a classified board of directors, so that not all members of our board may be elected at one time;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | set limitations on the removal of directors;
| | - |  | --------------------------------------------



| |  |  | limit who may call a special meeting of stockholders;
| | - |  | -----------------------------------------------------



| |  |  | establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide our board of directors the ability to designate the terms of and issue a new series of preferred stock without stockholder approval.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

In addition, Section 203 of the Delaware General Corporation Law generally prohibits us from engaging in any business combination with certain
persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching
our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.



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Our principal stockholders and management own a significant percentage of our stock and are able to
exercise significant influence over our affairs.*

Our executive officers, current directors and holders of five percent or more of
our common stock, as of September 30, 2006, beneficially owned approximately 29.3% of our common stock. The interests of these stockholders may be different than the interests of other stockholders on these matters. This concentration of
ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.*

Our stock price is likely to be volatile. The stock market in general and the market for small healthcare companies in particular have experienced extreme
volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price they paid for our common stock.

There are many events that may influence the market price for our common stock, including:



| |  |  | results of our clinical trials;
| | - |  | -------------------------------



| |  |  | developments or disputes concerning patents or other intellectual property rights;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | litigation developments, including developments in our patent litigations;
| | - |  | --------------------------------------------------------------------------



| |  |  | competition in the drug-eluting stent market;
| | - |  | ---------------------------------------------



| |  |  | failure of our CoStar stent to achieve commercial success in the European Union;
| | - |  | --------------------------------------------------------------------------------



| |  |  | failure to meet analysts revenue or earnings projections or other estimates regarding our business or financial prospects;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | regulatory developments in the United States and foreign countries;
| | - |  | -------------------------------------------------------------------



| |  |  | ability to manufacture our products to commercial standards;
| | - |  | ------------------------------------------------------------



| |  |  | public concern over our products;
| | - |  | ---------------------------------



| |  |  | the departure of key personnel;
| | - |  | -------------------------------



| |  |  | future sales of our common stock;
| | - |  | ---------------------------------



| |  |  | variations in our financial results or those of companies that are perceived to be similar to us;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | changes in the structure of healthcare payment systems;
| | - |  | -------------------------------------------------------



| |  |  | investors perceptions of us; and
| | - |  | ---------------------------------



| |  |  | general economic, industry and market conditions.
| | - |  | -------------------------------------------------

In addition, from time
to time, we publicly announce (including in this Quarterly Report on Form 10-Q) the estimated timing of the accomplishment of various clinical, regulatory and other product development goals, which we sometimes refer to as milestones. These
milestones include the enrollment of patients in our clinical trials, the release of data from our clinical trials and other clinical and regulatory events, including the submission to the FDA of a PMA for our CoStar stent and estimated timing of
FDA approval. If we do not achieve our projected development goals in the time frames we announce and expect, our stock price may decline. In addition, during the course of our legal proceedings and lawsuits, we may publicly announce the results of
hearings, motions, and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial negative effect on the trading price of our stock. A decline
in the market price of our common stock could cause you to lose some or all of your investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action
lawsuits if the market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management.

If there are substantial sales of our common stock, our stock price could decline.*

If our
existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline significantly. As of
October 31, 2006, we had 37,699,021 shares of common stock outstanding, all of which shares were eligible for sale in the public market, subject in some cases to the volume, manner of sale and other limitations under Rule 144 or Rule 701 and
vesting in the case of early exercised options.



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In July 2006, we filed a shelf registration statement pursuant to which we may sell shares of our common
stock at such times as we have a need for additional capital and when we believe that sales of our common stock provide an appropriate means of raising capital. We have also filed registration statements covering the shares of common stock that are
authorized for issuance under our stock option plans and employee stock purchase plan, which can be freely sold in the public market upon issuance, subject to restrictions on our affiliates.

In addition, approximately 120 holders of our common stock that are parties to our investor rights agreement have rights with respect to the offering of
their shares of our common stock in the public market, subject to limitations and restrictions. If we file a registration statement with the SEC covering their shares of common stock, these holders can immediately sell their shares in the public
market without restriction. Under the investor rights agreement, if at any time we propose to file a registration statement covering the offering of our securities under the Securities Act, either for our account or for the account of other
securities holders, the holders of these shares are entitled to notice of the proposed filing and, subject to certain exceptions, are entitled to include, at our expense, their shares of our common stock in the registration statement. While we were
obligated under the investor rights agreement to provide notice to these holders of the filing of the shelf registration statement in July 2006 and to offer the right to these holders to include their shares in the shelf registration statement, we
did not provide the notice required under the investor rights agreement to all of the parties to the investor rights agreement and we did not generally offer to include the shares held by these holders in the shelf registration statement. Only 27 of
these holders waived their rights under the investor rights agreement, and, as a result, any holder of our common stock that is a party to the investor rights agreement who has not provided us with a waiver of their rights under the agreement may
request that we register such holders shares under the Securities Act at our expense.

If securities or industry analysts do
not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.*

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. Analyst publications include valuations regarding our stock
price and recommendations whether to buy, hold or sell our stock. Our stock price may be dependent upon these valuations and recommendations, and we do not have any control over these analysts or the valuations and recommendations they publish.
Analysts valuations and recommendations are based primarily on our reported results and their forecasts and expectations concerning our future results regarding, for example, expenses, revenues, earnings, clinical trials, regulatory approvals
and competition. Our future results are subject to substantial uncertainty, and we may fail to meet or exceed analysts forecasts and expectations as a result of a number of factors, including those discussed above. If our results do not meet
analysts forecasts and expectations, our stock price could decline as a result of analysts lowering their valuations and recommendations or otherwise, including downgrading our stock. In addition, if one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

We do not intend to pay cash dividends on our common stock in the foreseeable future.

We have never declared or paid any cash dividends on our common stock or other securities, and we currently do not anticipate paying any cash dividends in
the foreseeable future. Accordingly, our stockholders will not realize a return on their investment unless the trading price of our common stock appreciates.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds from the Sale of Registered
Securities

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File
No. 333-119174), that was declared effective by the SEC on December 13, 2004, and a Registration Statement on Form S-1 filed pursuant to Rule 462 (File No. 333-121224) on December 14, 2004, pursuant to which we and a selling
stockholder sold all 6,900,000 shares of our common stock that were registered. We did not receive any portion of the $3.1 million in net proceeds received by the selling stockholder in the offering. As of September 30, 2006, we had used all of
the $78.1 million in net proceeds from the initial public offering in funding our ongoing operations, including the development of our products and our clinical trials and research programs, and for working capital and other general corporate
purposes. This application of the net proceeds from our initial public offering represents our best estimate and does not represent a material change from the use of proceeds as described in the prospectus for our initial public offering. No such
payments were made to directors, officers or persons owning 10 percent or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries (and other employee
benefits) and to non-employee directors as compensation for Board or Board committee service.



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Item 6. Exhibits



|              |  |                                                                                                                                                                     
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                             
|              | 
|3.1(1)        |  | Amended and Restated Certificate of Incorporation.                                                                                                                  
|              | 
|3.2(2)        |  | Amended and Restated Bylaws.                                                                                                                                        
|              | 
|4.1           |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                          
|              | 
|4.2(3)        |  | Form of Common Stock Certificate.                                                                                                                                   
|              | 
|10.38(4)      |  | Amendment No. 1 to International Distribution Agreement, dated September 26, 2006, by and between Conor Medsystems Ireland Ltd. and Interventional Technologies Ltd.
|              | 
|31.1          |  | Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a).                                                                          
|              | 
|31.2          |  | Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).                                                                          
|              | 
|32.1(5)       |  | Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).                  

---

|(1) | Filed as the like numbered Exhibit to the Registrants Annual Report on Form 10-K (No. 000-51066), filed with the SEC on March 16, 2006, and incorporated herein by
reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Filed as Exhibit 3.6 to the Registrants Amendment No. 2 to Registration Statement on Form S-1 (No. 333-119174), filed with the SEC on November 24, 2004, and
incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed as the like numbered Exhibit to the Registrants Amendment No. 3 to Registration Statement on Form S-1 (No. 333-119174), filed with the SEC on December 10,
2004, and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the SEC.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Registrant under
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE

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



CONOR MEDSYSTEMS, INC.By:

/s/ MICHAEL BOENNIGHAUSENMichael BoennighausenVice President, Finance andAdministration and Chief Financial Officer(Duly Authorized and Principal Financialand Accounting Officer)


Dated: November 8, 2006



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