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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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**(MarkOne)**

 
| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | **For  the quarterly period ended September 30, 2008**                                              |
|       |       |                                                                                                     |
| **OR**     |
|       |       |                                                                                                     |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission File Number 001-33770**

 

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**Power Medical Interventions, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **23-3011410**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

**2021 Cabot Boulevard, Langhorne,Pennsylvania 19047**

(Address of principal executive offices)

 

**(267) 775-8100**

(Registrant’s telephone number, including area code)

 

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Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x    No  o.

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

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

 

Indicate the number ofshares outstanding of each of the Registrant’s classes of Common Stock.

 

As of November 14,2008, 17,124,313 shares of the Registrant’s Common Stock, $0.001 par value,were outstanding.

 

 

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**POWER MEDICAL INTERVENTIONS, INC.**

 
| ** **    | ** **                                                                                                                                | **PAGE** |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I:  | FINANCIAL INFORMATION                                                                                                                     | 1        |
|          |                                                                                                                                      |     |
| Item 1.  | Financial Statements                                                                                                                      | 1        |
|          |                                                                                                                                      |     |
|          | Condensed  Consolidated Balance Sheets as of September 30, 2008 and  December 31, 2007 (Unaudited)                              | 1        |
|          |                                                                                                                                      |     |
|          | Condensed  Consolidated Statements of Operations for the Three Months and Nine Months  Ended September 30, 2008 and 2007 (Unaudited) | 2        |
|          |                                                                                                                                      |     |
|          | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2008 and 2007 (Unaudited)                  | 3        |
|          |                                                                                                                                      |     |
|          | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                           | 4        |
|          |                                                                                                                                      |     |
| Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               | 12       |
|          |                                                                                                                                      |     |
| Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk                                                                               | 21       |
|          |                                                                                                                                      |     |
| Item 4.  | Controls and  Procedures                                                                                                                  | 22       |
|          |                                                                                                                                      |     |
| PART II: | OTHER INFORMATION                                                                                                                         | 22       |
|          |                                                                                                                                      |     |
| Item 1.  | Legal Proceedings                                                                                                                         | 22       |
|          |                                                                                                                                      |     |
| Item 1A. | Risk Factors                                                                                                                              | 22       |
|          |                                                                                                                                      |     |
| Item 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              | 43       |
|          |                                                                                                                                      |     |
| Item 3.  | Defaults Upon  Senior Securities                                                                                                          | 44       |
|          |                                                                                                                                      |     |
| Item 4.  | Submission of  Matters to a Vote of Security Holders                                                                                      | 44       |
|          |                                                                                                                                      |     |
| Item 5.  | Other Information                                                                                                                         | 44       |
|          |                                                                                                                                      |     |
| Item 6.  | Exhibits                                                                                                                                  | 44       |
|          |                                                                                                                                      |     |
|          | Signatures                                                                                                                                | 46       |

 

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PART I:          FINANCIALINFORMATION

 

**Item 1.            Financial Statements.**

 

**Power Medical Interventions, Inc.**

**Condensed Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                                                             | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                                                             |       |                         |       |                        |       |
| Current assets:                                                                                                                                                                                                                        |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                              |       | $                            | 15,883,961 |                        | $          | 36,592,220 |   |
| Restricted cash                                                                                                                                                                                                                        |       | 875,000                      |       | 1,750,000                   |       |
| Accounts receivable less allowance of $104,000 and $120,000 in 2008  and 2007, respectively                                                                                                                                            |       | 1,616,620                    |       | 1,514,776                   |       |
| Inventory                                                                                                                                                                                                                              |       | 9,008,727                    |       | 7,371,205                   |       |
| Prepaid expenses and other current assets                                                                                                                                                                                              |       | 1,428,519                    |       | 1,178,493                   |       |
| Total current assets                                                                                                                                                                                                                   |       | 28,812,827                   |       | 48,406,694                  |       |
| Property and equipment, net                                                                                                                                                                                                            |       | 4,696,139                    |       | 4,713,010                   |       |
| Intangible assets, net                                                                                                                                                                                                                 |       | 1,110,163                    |       | 965,303                     |       |
| Deferred financing fees                                                                                                                                                                                                                |       | 850,673                      |       | 1,276,010                   |       |
| Other assets                                                                                                                                                                                                                           |       | 232,711                      |       | 261,862                     |       |
| Restricted cash, long term                                                                                                                                                                                                             |       | 1,328,917                    |       | 2,350,071                   |       |
| Total assets                                                                                                                                                                                                                           |       | $                            | 37,031,430 |                        | $          | 57,972,950 |   |
| **Liabilities and shareholders’ equity (deficit)**                                                                                                                                                                                |       |                         |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                                                       |       | 3,380,525                    |       | $                           | 4,422,198  |   |
| Accrued expenses                                                                                                                                                                                                                       |       | 3,422,209                    |       | 4,506,748                   |       |
| Current portion of long-term debt                                                                                                                                                                                                      |       | 69,230                       |       | 69,230                      |       |
| Total current liabilities                                                                                                                                                                                                              |       | 6,871,964                    |       | 8,998,176                   |       |
|                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| Long-term debt                                                                                                                                                                                                                         |       | 24,877,939                   |       | 24,742,891                  |       |
| Deferred revenue                                                                                                                                                                                                                       |       | 12,500,000                   |       | —                      |       |
| Deferred rent, net of current portion                                                                                                                                                                                                  |       | 551,089                      |       | 691,873                     |       |
| Total liabilities                                                                                                                                                                                                                      |       | 44,800,992                   |       | 34,432,940                  |       |
|                                                                                                                                                                                                                                   |       |                         |       |                        |       |
| **Shareholders’ equity:**                                                                                                                                                                                                         |       |                         |       |                        |       |
| Common stock, $.001 par value:                                                                                                                                                                                                         |       |                         |       |                        |       |
| Authorized shares—200,000,000 at September 30, 2008 and  December 31, 2007, respectively; issued and outstanding shares  17,124,313 and 17,107,052 at September 30, 2008 and December 31,  2007, respectively |       | 17,124                       |       | 17,107                      |       |
| Additional paid-in capital                                                                                                                                                                                                             |       | 199,219,594                  |       | 197,733,981                 |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                   |       | (136,379                     | )          | (300,184                    | )          |
| Accumulated deficit                                                                                                                                                                                                                    |       | (206,869,901                 | )          | (173,910,894                | )          |
| Total shareholders’ equity (deficit)                                                                                                                                                                                              |       | (7,769,562                   | )          | 23,540,010                  |       |
| Total liabilities and shareholders’ equity (deficit)                                                                                                                                                                              |       | $                            | 37,031,430 |                        | $          | 57,972,950 |   |

 

*Seeaccompanying notes.*

 

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**Power Medical Interventions, Inc.**

**Condensed Consolidated Statements ofOperations (Unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended September  30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                             | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Sales**                                                  |       | $                                                    | 2,242,637  |                                                    | $          | 1,701,127 |   | $ | 6,626,248 |   | $ | 5,893,744 |   |
| **Cost of sales**                                          |       | 1,701,175                                            |       | 1,281,410                                               |       | 7,276,590 |   | 4,581,337 |   |
|                                                       |       | 541,462                                              |       | 419,717                                                 |       | (650,342 | ) | 1,312,407 |   |
| **Costs and expenses:**                                    |       |                                                 |       |                                                    |       |   |   |   |   |
| Research and development                                   |       | 1,539,139                                            |       | 1,820,676                                               |       | 4,629,670 |   | 4,373,862 |   |
| Sales and marketing                                        |       | 5,104,859                                            |       | 3,977,684                                               |       | 17,862,358 |   | 11,087,967 |   |
| General and administrative                                 |       | 2,578,688                                            |       | 2,005,227                                               |       | 8,214,130 |   | 6,331,109 |   |
|                                                       |       | 9,222,686                                            |       | 7,803,587                                               |       | 30,706,158 |   | 21,792,938 |   |
| Operating loss                                             |       | (8,681,224                                           | )          | (7,383,870                                              | )          | (31,356,500 | ) | (20,480,531 | ) |
|                                                       |       |                                                 |       |                                                    |       |   |   |   |   |
| **Other income (expense):**                                |       |                                                 |       |                                                    |       |   |   |   |   |
| Interest income                                            |       | 58,058                                               |       | 198,553                                                 |       | 342,568 |   | 564,051 |   |
| Interest expense                                           |       | (644,657                                             | )          | (1,084,034                                              | )          | (1,945,075 | ) | (2,176,348 | ) |
| **Total other income (expense)**                           |       | (586,599                                             | )          | (885,481                                                | )          | (1,602,507 | ) | (1,612,297 | ) |
| Net loss                                                   |       | $                                                    | (9,267,823 | )                                                       | $          | (8,269,351 | ) | $ | (32,959,007 | ) | $ | (22,092,828 | ) |
|                                                       |       |                                                 |       |                                                    |       |   |   |   |   |
| Accretion of preferred stock                               |       | —                                               |       | (2,259,411                                              | )          | — |   | (6,786,913 | ) |
| Net loss applicable to common shares                       |       | $                                                    | (9,267,823 | )                                                       | $          | (10,528,762 | ) | $ | (32,959,007 | ) | $ | (28,879,741 | ) |
| **Net loss per common share:**                             |       |                                                 |       |                                                    |       |   |   |   |   |
| Basic and diluted                                          |       | $                                                    | (0.54      | )                                                       | $          | (2.78 | ) | $ | (1.93 | ) | $ | (7.59 | ) |
| **Weighted average number of common shares  outstanding:** |       |                                                 |       |                                                    |       |   |   |   |   |
| Basic and diluted                                          |       | 17,124,313                                           |       | 3,782,405                                               |       | 17,113,665 |   | 3,805,800 |   |

 

*Seeaccompanying notes.*

 

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**Power Medical Interventions, Inc.**

**Condensed Consolidated Statements ofCash Flows (Unaudited)**

 
| ** **                                                                                        | ** ** | **Nine Months Ended September 30,** | ** **  |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                                                        | ** ** | **2008**                                                | ** **  | **2007** | ** ** |
| **Operating activities**                                                                          |       |                                                    |        |   |   |
| Net loss                                                                                          |       | $                                                       | (32,959,007 | ) | $ | (22,092,828 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                      |       |                                                    |        |   |   |
| Depreciation and amortization                                                                     |       | 1,461,382                                               |        | 1,649,268 |   |
| Amortization of debt discount and deferred financing fees                                         |       | 612,141                                                 |        | 124,536 |   |
| Loss on the disposal of property and equipment                                                    |       | 22,518                                                  |        | 3,492 |   |
| Stock-based compensation                                                                          |       | 1,413,006                                               |        | 395,978 |   |
| Changes in operating assets and liabilities:                                                      |       |                                                    |        |   |   |
| Accounts receivable                                                                               |       | (20,571                                                 | )           | 159,499 |   |
| Inventory                                                                                         |       | (1,578,052                                              | )           | (1,320,629 | ) |
| Prepaid expenses and other assets                                                                 |       | (417,543                                                | )           | (1,092,011 | ) |
| Accounts payable                                                                                  |       | (1,166,001                                              | )           | 1,039,006 |   |
| Accrued expenses                                                                                  |       | (1,002,001                                              | )           | 327,728 |   |
| Deferred revenue                                                                                  |       | 12,500,000                                              |        | — |   |
| Deferred rent                                                                                     |       | (140,784                                                | )           | (18,545 | ) |
| Net cash used in operating activities                                                             |       | (21,274,912                                             | )           | (20,824,506 | ) |
|                                                                                              |       |                                                    |        |   |   |
| **Investing activities**                                                                          |       |                                                    |        |   |   |
| Purchase of property and equipment                                                                |       | (1,318,579                                              | )           | (1,301,340 | ) |
| Patent application costs                                                                          |       | (293,879                                                | )           | (309,185 | ) |
| Change in restricted cash                                                                         |       | 1,890,690                                               |        | (2,484,311 | ) |
| Net cash provided by (used in) investing activities                                               |       | 278,232                                                 |        | (4,094,836 | ) |
|                                                                                              |       |                                                    |        |   |   |
| **Financing activities**                                                                          |       |                                                    |        |   |   |
| Repayments on long-term debt                                                                      |       | (51,757                                                 | )           | (62,914 | ) |
| Proceeds of long-term debt, net                                                                   |       | —                                                  |        | 23,577,054 |   |
| Net proceeds from the issuance of common stock and exercise of common  stock warrants and options |       | 72,626                                                  |        | 637,764 |   |
| Payment of deferred equity financing costs                                                        |       | —                                                  |        | (1,897,019 | ) |
| Net cash provided by financing activities                                                         |       | 20,869                                                  |        | 22,254,885 |   |
|                                                                                              |       |                                                    |        |   |   |
| Effect of exchange rate changes on cash and cash equivalents                                      |       | 267,552                                                 |        | (308,641 | ) |
| Net decrease in cash and equivalents                                                              |       | (20,708,259                                             | )           | (2,973,098 | ) |
| Cash and cash equivalents, beginning of period                                                    |       | 36,592,220                                              |        | 8,684,341 |   |
| Cash and equivalents, end of period                                                               |       | $                                                       | 15,883,961  |   | $ | 5,711,243 |   |
|                                                                                              |       |                                                    |        |   |   |
| **Supplemental disclosure of cash flow information**                                              |       |                                                    |        |   |   |
| Cash paid for interest                                                                            |       | $                                                       | 1,761,926   |   | $ | 898,759 |   |

 

*Seeaccompanying notes.*

 

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**Power Medical Interventions, Inc.**

 

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

**September 30, 2008**

 

**1. Business**

 

Power MedicalInterventions, Inc. (the Company), a Delaware corporation, is a medicaldevice company that designs, manufactures and markets the SurgASSIST® system ofcomputer-assisted, power-actuated endomechanical surgical instruments, referredto as Intelligent Surgical InstrumentsTM. Surgeons use Intelligent SurgicalInstruments for cutting, stapling and tissue manipulation in a variety ofprocedures in open surgery, minimally invasive surgery, or MIS, and in theemerging field of natural orifice translumenal endoscopic surgery, or NOTES. Todate, the majority of the Company’s efforts have been devoted to research anddevelopment, raising capital, recruiting personnel, and the commercializationof products and the commencement of manufacturing activities.

 

The Company has whollyowned subsidiaries in Germany, Power Medical Interventions Deutschland GmbH; inFrance, Power Medical Interventions France; and in Japan, Power MedicalInterventions Japan, which conduct sales and marketing operations. The Companyalso has a dormant U.S. subsidiary, Power Medical Vascular, Inc.

 

The Company believes thatits cash and cash equivalents will be sufficient to meet its anticipated cashrequirements through the fourth quarter 2009, however, there can be noassurance in this regard. The Company expects to achieve the developmentmilestone necessary to entitle it to receive the first milestone payment underits license and development agreement with Intuitive Surgical, Inc. duringthe first half of 2009.  The Company hasalso implemented plans to reduce its cash used in operations through reductionsin headcount and other spending programs throughout the Company.  Such costs include certain sales andmarketing costs, product development costs, clinical research costs, employeebonuses, professional education, and capital expenditures.  The Company’s future cash requirements willdepend on many factors, primarily including its ability to increase its salesand improve its gross margins, its ability to achieve development milestonesunder its agreement with Intuitive Surgical, Inc. and receive the relatedmilestone payments and the success of its recently announced restructuringinitiative in reducing its operating expenses. The Company’s ability to meet its obligations in the normal course ofbusiness beyond the fourth quarter of 2009 will be dependent on its increasingits customer and revenue base, continuing to control expenses and securingadditional external financing which it is actively pursuing through various structures.  The Company has no arrangements to obtainadditional financing, and there can be no assurance that such financing, ifrequired or desired, will be available in amounts or on terms acceptable to theCompany, if at all.  Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern.  The Company’s independentregistered public accounting firm modified its audit report on the Company’sconsolidated financial statements for the year ended December 31, 2007 toinclude an explanatory paragraph regarding this contingency.

 

**2. Summary of Significant Accounting Policies**

 

*Unauditedinterim financial data*

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesand the requirements of Form 10-Q and Regulation S-X.

 

The accompanyingcondensed consolidated balance sheet as of September 30, 2008, thecondensed consolidated statements of operations for the three and nine monthsended September 30, 2008 and 2007, and the condensed consolidatedstatements of cash flows for the nine months ended September 30, 2008 and2007 are unaudited. The unaudited interim financial statements have beenprepared on the same basis 

 

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as the annual financialstatements and, in the opinion of management, reflect all adjustments, whichinclude only normal recurring adjustments, necessary to state fairly theCompany’s financial position as of September 30, 2008 and the results ofits operations and cash flows for the three and nine months ended September 30,2008 and 2007. The financial data and other information disclosed in thesenotes to the financial statements are unaudited. The results for the three andnine months ended September 30, 2008 are not necessarily indicative of theresults to be expected for any future period.

 

*Revenuerecognition*

 

The Company’s SurgASSISTsurgical platform includes cutting and stapling devices in a variety of sizesand linear, right angle and circular configurations designed for differingsurgical needs. The Company’s Intelligent Surgical Instruments are available asdisposable, single-patient devices as well as in a reusable multiple-patientformat which can be autoclaved and used in multiple cases. The Company’sreusable Intelligent Surgical Instruments use disposable cutting and staplingcartridges in various sizes, which the Company refers to as reload cartridges.

 

In the originalconfiguration of the SurgASSIST system, Intelligent Surgical Instruments wereconnected through a flexible shaft, or FlexShaft, to a power console and, insome cases, a separate remote control unit. The Company’s next generationproducts, beginning with the i60 linear stapler that the Company introduced inthe fourth quarter of 2007, are self-contained hand held instruments that donot require a FlexShaft or separate power console.

 

Most of the Company’srevenue is derived from the sale of single-patient, disposable IntelligentSurgical Instruments and from the sale of reload cartridges for reusableIntelligent Surgical Instruments. Revenue related to the sale of such productsis recognized when persuasive evidence of an arrangement exists, delivery hasoccurred, the sale price is fixed and determinable, and collectibility isreasonably assured, which is generally at the time of shipment upon delivery toa common carrier.

 

The Company historicallyprovided power consoles, FlexShafts, remote control units and mobile cartsassociated with its first-generation SurgASSIST system to customers at no costas loaner equipment. In addition, the Company has in certain cases agreed totransfer title to such systems to the customer upon the customer’s purchase ofa specified number of disposable Intelligent Surgical Instruments although thecustomer is under no obligation to purchase the Intelligent SurgicalInstruments. In these instances, the Company recognizes revenue attributable tothe complete system as the Intelligent Surgical Instruments are delivered, inaccordance with EITF 00-21, *RevenueArrangements with Multiple Deliverables.*

 

In 2007, the Companyinstituted a program whereby it may provide reusable Intelligent SurgicalInstruments and FlexShafts to customers at no cost.  In certain cases, theCompany has offered such Intelligent Surgical Instruments and FlexShafts at nocost in exchange for higher unit pricing on the sale of reload cartridges overa specified period of time. In these cases, the Company recognizes the revenueratably over the period of delivery of the reload cartridges in accordance withthe guidance of EITF 00-21, as long as such revenue is not contingent on thedelivery of the undelivered products.

 

The Company currentlymakes its i60 and iDrive instruments available to customers at no charge underan “in service under evaluation” program and expects to derive recurringrevenues from sales of the reload cartridges necessary for the evaluationinstruments’ use.

 

Under multiple-elementarrangements involving the sale of multiple products, services and/or rights touse assets, the multiple elements are divided into separate units of accountingwhen certain criteria are met, including whether the delivered items have standalone value to the customer and whether there is objective and reliableevidence of the fair value of the undelivered items. When separate units ofaccounting exist, consideration is allocated among the separate elements basedon their respective fair values. If such evidence of fair value for eachundelivered element of the arrangement does not exist, all revenue from thearrangement is deferred until such time that evidence of fair value for eachundelivered element does exist or until all elements of the arrangement aredelivered.   See Note 3 for a descriptionof the Company’s arrangement with Intuitive Surgical, Inc., entered intoin September 2008.

 

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The Company’s customersgenerally order product using standard purchase orders and payment terms are 30days. The Company provides discounted pricing to its customers based on volumeand commitment levels. Allowance for product returns are estimated based onhistorical experience and provisions are recorded at the time of shipment. TheCompany also provides limited warranties to its customers against materialdefects in materials and workmanship. Such warranties are generally for a oneyear period from the date of shipment. Historically, warranty costs have notbeen material.

 

During the nine monthsended September 30, 2008, the Company’s revenues were from customers locatedin North America (76%), Europe (18%) and Asia (6%). During the nine monthsended September 30, 2007, the Company’s revenues were from customerslocated in North America (79%), Europe (20%) and Asia (1%).  Amounts billed to customers for shipping and handling of products are includedin sales. Costs incurred related to shipping and handling are included in costof sales.

 

*Stock-basedcompensation*

 

In December 2004,the Financial Accounting Standards Board (FASB) issued SFAS No. 123(revised 2004), *Share-Based Payment*(SFAS No. 123(R)), which replaces SFAS No. 123, *Accounting for Stock-Based Compensation*(SFAS 123), and supersedes Accounting Principles Board (APB) Opinion No. 25,*Accounting for Stock Issued to Employees*(APB 25). SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values beginning with the first annualperiod after December 15, 2005. SFAS No. 123(R) requires that anentity measure the cost of equity-based service awards based on the grant-datefair value of the award and recognize the cost of such award over the periodduring which the employee is required to provide service in exchange for theaward (vesting period). The pro forma disclosures previously permitted underSFAS No. 123 are no longer an alternative to financial statementrecognition. The Company adopted SFAS No. 123(R) on January 1,2006 using the prospective transition method, which required that all new stock-basedawards granted subsequent to adoption be recognized in the financial statementsat fair value. The Company accounts for equity issued to nonemployees inaccordance with EITF 96-18, *Accounting forEquity Investments that are Issued to Other Than Employees for Acquiring, or inConjunction with, Selling Goods or Services* (EITF 96-18).

 

*Netloss attributable to common shares*

 

The Company computes netloss per share in accordance with SFAS No. 128, *Earnings Per Share* (SFAS No. 128). Under SFAS No. 128,basic net loss per share is computed by dividing net loss per share availableto common stockholders by the weighted average number of common sharesoutstanding for the period and excludes the effects of any potentially dilutivesecurities. Diluted earnings per share, if presented, would include thedilution that would occur upon the exercise or conversion of all potentiallydilutive securities into common stock using the “treasury stock” and/or “ifconverted” methods as applicable.

 

The following summarizes thepotential outstanding common stock of the Company as of the end of each period:

 
| ** **                                  | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Convertible senior secured promissory notes |       | 2,686,882                    |       | 2,643,175                   |       |
| Common stock warrants                       |       | 1,033,861                    |       | 1,137,864                   |       |
| Common stock options outstanding            |       | 2,530,565                    |       | 1,728,844                   |       |
| Common stock options available for grant    |       | 769,742                      |       | 643,510                     |       |
| Total                                       |       | 7,020,050                    |       | 6,153,393                   |       |

 

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If the outstandingoptions, warrants, and convertible notes were exercised or converted intocommon stock, the result would be anti-dilutive. Accordingly, basic and dilutednet loss attributable to common stockholders per share are identical for allperiods presented in the accompanying consolidated statements of operations.

 

*Recent Accounting Pronouncements*

 

TheCompany adopted Financial Accounting Standards Board Statement No. 157, *Fair Value Measurements*, or SFAS 157, effectiveJanuary 1, 2008.  SFAS 157 defines fair value as the price that wouldbe received to sell an asset or paid to transfer a liability, referred to asthe exit price, in an orderly transaction between market participants at themeasurement date.  The standard outlines a valuation framework and createsa fair value hierarchy in order to increase the consistency and comparabilityof fair value measurements and the related disclosures.  In determiningfair value, the Company primarily uses prices and other relevant informationgenerated by market transactions involving identical or comparable assets,called the market approach. As of September 30, 2008, the fair value ofall of the Company’s financial assets are based on level one observableinputs.  The Company has determined that its fair value measurements arein accordance with the requirements of SFAS 157, therefore, the implementationof SFAS 157 did not have any impact on its consolidated financial condition orresults of operations.

 

**3.****             ****License, Development and SupplyAgreement with Intuitive Surgical**

 

On September 9,2008, the Company entered into two agreements with Intuitive Surgical, Inc.   The first is a License and DevelopmentAgreement under which Intuitive Surgical, Inc. expects to develop a surgicalstapling device that will attach to Intuitive’s da Vinci Surgical Systems andwill utilize the Company’s patented technology.  Once developed, thisattachment will enable Intuitive’s da Vinci Surgical Systems to cut and stapletissue in a broad array of surgical applications.  The second agreement isan exclusive Reload Supply Agreement whereby the Company will manufacture andbe the exclusive supplier to Intuitive of staple reloads for the newlydeveloped device at agreed upon prices. (The License and Development Agreement and the Reload Supply Agreementare referred to herein as the “Agreements”).

 

Under the terms of theAgreements, the Company received an up-front license payment of $12.5 millionin September 2008,  In addition, theCompany may receive additional payments of up to $7.5 million based upon theachievement of agreed upon development milestones. The Company will also beresponsible for providing at its expense up to an aggregate of 3,900 man hoursof engineering and technical support services to Intuitive to assist Intuitivein designing and developing the new device.

 

The Company hasidentified four deliverables within this arrangement: (i) the license toutilize its patented technology, (ii) consultative services duringIntuitive’s development of the new device, (iii) a six-year supplyarrangement to supply reload cartridges to Intuitive, including a minimumpurchase obligation during the first 18 months subsequent to the firstcommercial sale of the device to a third party, and (iv) a significant andincremental discount on the future purchases of reload cartridges.  The Company has concluded that thesedeliverables should be accounted for as a single unit of accounting, withrecognition of revenue for the single unit of accounting commencing upon thedelivery of the final element in the arrangement (i.e., commencement ofdelivery of the staple reload cartridges contemplated by the Reload SupplyAgreement).  Accordingly, the $12.5million up-front payment received in September 2008 has been deferred andis reported as deferred revenue as of September 30, 2008.  The $7.5 million of milestone payments, ifrealized, will also be deferred until the first commercial sale of the deviceto a third party.

 

Shouldthe project reach the state of the first commercial sale, the $20.0 million ofup-front and milestone payments, as well as the guaranteed minimum amount ofreload sales, will begin to be recognized as revenues over the term of theReload Supply Arrangement (i.e., the six-year period following the date of thefirst commercial sale of the device by Intuitive to a third party).  Revenues from the sale of additional reloadsbeyond the guaranteed minimum quantity will be recognized as such reloads areshipped.

 

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**4.**  **Long-Term Debt**

 

During March 2007,the Company sold $25.0 million of convertible senior secured promissorynotes due March 2010 (the “Convertible Notes”) which generated netproceeds to the Company of $23,298,654 ($25,000,000 less financing fees of$1,701,346). Of this amount, $3,500,000 was placed in escrow to fund the firstfour interest payments on the Convertible Notes. These notes are secured bysubstantially all of the Company’s assets and accrue interest at the rate of 7%per annum, payable semiannually in arrears.  Interest accruing on orbefore March 31, 2009 is payable in cash, while interest accruing after March 31,2009 is payable, at the Company’s option, in cash or paid-in-kind in the formof additional notes (“PIK Notes”). The principal amounts of such PIK Notes willhave the same maturity as the Convertible Notes. Should the Company elect topay interest on the Convertible Notes in PIK Notes, the interest rate on suchPIK Notes shall be equal to the then applicable interest rate plus 1.5%.

 

TheConvertible Notes also require the payment of a terminal value that (i) willbe due upon redemption or conversion of the Convertible Notes, (ii) willbe considered part of the conversion amount for purposes of determining theconversion rate (see below) or (iii) will be due upon maturity as part ofthe principal amount. In each case, the terminal value payment is defined as anamount equal to 7% per annum of the applicable principal from the closing dateof the Convertible Notes in March 2007 to October 31, 2007, the dateof the Company’s initial public offering. This amount equals $1.0 million. There is no possible future scenario inwhich the accrued terminal value would not be required to be paid to theholders of the Convertible Notes or realized by such holders upon conversion ofthe Convertible Notes.  The accruedterminal value of $1.0 million is included in accrued expenses in the accompanyingbalance sheets at September 30, 2008 and December 31, 2007.

 

Uponthe occurrence of the Company’s initial public offering, the Convertible Notesplus any accrued interest thereon as well as the accreted terminal value becameconvertible into the Company’s Common Stock at the option of the holder at anytime through the maturity date of the Convertible Notes. The conversion priceof the Convertible Notes was set at $10.01 per share upon the completion of theCompany’s initial public offering.

 

The Companymay, at its option, redeem the Convertible Notes in whole at any time or inpart from time to time, upon 15 days prior written notice to the holder, at aredemption price payable in cash, equal to the principal amount plus anyinterest (including the terminal value) accrued and unpaid, subject to thesatisfaction of the following conditions precedent:

 

(a)           thedeclaration of effectiveness of a registration statement filed with the SEC forthe resale of the underlying shares;

 

(b)           theaverage of the high and low sale price of the Common Stock, as reported on theprincipal securities exchange on which the Common Stock is listed, on each ofany 20 trading days during any period of 30 consecutive trading days endingwithin 45 days prior to the Redemption Date (so long as, during the entire 30trading day period, the aforementioned registration statement has beeneffective and there has been no suspension of trading of the Common Stock),having been equal to or greater than $15.40 (in each case, with prices adjustedfor stock splits, reverse splits, stock dividends, share combination and otherantidilution events);

 

(c)           nomore than $12,500,000 of outstanding Convertible Notes may be redeemed pursuantto this provision in any period of 30 consecutive trading days; and

 

(d)           anysuch redemption shall be effected on a pro rata basis with respect to all thenoutstanding Convertible Notes (including PIK Notes).

 

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**5.  Inventory**

 

Inventory is stated at the lower of cost or marketvalue, with cost being determined on a first-in, first-out (FIFO) basis andmarket value based on the lower of replacement cost, or the estimated netrealizable value, reduced by an allowance for normal profit margin. Inventory consists of the following:

 
| ** **      | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw Materials   |       | $                                | 5,027,925  |                            | $          | 3,861,162 |   |
| Work in process |       | 1,024,797                        |       | 1,066,864                       |       |
| Finished goods  |       | 2,956,005                        |       | 2,443,179                       |       |
|            |       | $                                | 9,008,727  |                            | $          | 7,371,205 |   |

 

During the three and ninemonths ended September 30, 2008, and for the year ended December 31,2007, the Company recorded inventory obsolescence charges in the amount ofapproximately $6,000, $507,000 and $506,000 respectively.  Such chargesare reflected in cost of sales in the accompanying condensed consolidatedstatements of operations.  Inventoryincludes $2.8 million and $2.4 million as of September 30, 2008 and December 31,2007, respectively, associated with i60 and iDrive instruments that the Companymakes available to customers at no cost under its “in service under evaluation”program.

 

**6. Comprehensive Loss**

 

The Company’s comprehensive loss was as follows:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                                |       | $                                                    | (9,267,823 | )                                                   | $          | (8,269,351 | ) | $ | (32,959,007 | ) | $ | (22,092,828 | ) |
| Foreign currency translation adjustment |       | (235,990                                             | )          | 46,707                                              |       | 163,805 |   | 45,830 |   |
| Comprehensive loss                      |       | $                                                    | (9,503,813 | )                                                   | $          | (8,222.644 | ) | $ | (32,795,202 | ) | $ | (22,046,998 | ) |

 

**7. Contingencies**

 

TheCompany has, on occasion, been named as a defendant in lawsuits allegingproduct failure, patent infringement, breach of contract and employment relatedclaims. Management has provided reserves for the estimated potential losses,when such losses are deemed probable and estimable.  The Company currentlyhas a patent infringement case outstanding.  The Company received afavorable ruling from the German courts on two of the patent infringement claimsand an unfavorable ruling on one of the claims.  However, the Company isin the process of appealing the unfavorable ruling.  The Company intendsto defend this claim vigorously and has concluded it is too early to determinewhether or not the Company will incur any loss under this claim.  As such,no amounts are accrued in the accompanying consolidated balance sheets relatedto this claim.

 

In August 2008,the Company’s former Belgian distributor, Duo-Med, S.A., initiated a breach ofcontract action against the Company in the Commercial Court of Brussels inBelgium. The complaint alleges that the Company breached its distributionagreement with Duo-Med by failing to provide proper notice when it terminatedthat agreement in May 2007 and that, as the result of problems with theCompany’s products, Duo-Med was unable to sell its existing inventory.  The complaint asserts damages totalingapproximately €460,000.The Company is reviewing the Duo-Med complaint and conducting a preliminaryassessment of the allegations.  TheCompany intends to defend this claim vigorously and has concluded it is tooearly to determine whether or not the Company will incur any loss under thisclaim.  As such, no amounts are accrued in the accompanying consolidatedbalance sheets related to this claim.

 

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TheCompany also has a product liability case outstanding which is currentlysuspended and the Company has continued to contest the claim.  The Companyhas accrued $100,000 related to this matter which represents its best estimateof the potential liability related to this claim.

 

**8. Stock-based Compensation**

 

As a private companyduring the first three quarters of 2007, the Company estimated the fair valueof its common stock by utilizing a contemporaneous third party valuation. Grants issued during the first, second and third quarters of 2008 were valuedat the closing price of the Company’s publicly traded stock. The per-shareweighted average fair values on the dates of grant of the options granted was$2.28 and $4.48, during the three months ended September 30, 2008 and2007, and $3.90 and $4.48 during the nine months ended September 30, 2008and 2007, using the Black-Scholes option-pricing model with the followingweighted average assumptions, which are based upon Company history or industrycomparative information:

 
| ** **               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected dividend yield  |       | 0                                                    | %          | 0                                                   | %          | 0 | % | 0 | % |
| Expected volatility      |       | 49.1                                                 | %          | 60.1                                                | %          | 49.8 | % | 60.1 | % |
| Risk-free interest rates |       | 3.45                                                 | %          | 4.58                                                | %          | 3.26 | % | 4.58 | % |
| Expected life            |       | 7  years                                             |       | 7  years                                            |       | 7  years |   | 7  years |   |

 

The expected volatility wascalculated for each date of grant based on an alternative method (defined as “calculatedvalue”). The Company identified similar public entities for which share priceinformation is available and considered the historical volatility of theseentities’ share prices in estimating expected volatility. The Company used theaverage volatility of these guideline companies over a seven year period,consistent with the expected term calculated pursuant to Staff AccountingBulletin No. 107.  Compensation expense under SFAS No. 123(R) andEITF 96-18 for the three months ended September 30, 2008 related toshare-based service awards was $513,436, of which $14,191 is included in costof sales, $53,854 is included in research and development, $93,634 is includedin sales and marketing and $351,757 is included in general and administrativeexpense in the accompanying statements of operations.  Compensationexpense under SFAS No. 123(R) and EITF 96-18 for the three monthsended September 30, 2007 related to share-based service awards was$159,152 , of which $894 is included in cost of sales, $8,793 is included inresearch and development,  $25,893 is included in sales and marketing and$123,572 is included in general and administrative expense in the accompanyingstatements of operations. Compensation expense under SFAS No. 123(R) andEITF 96-18 for the nine months ended September 30, 2008 related toshare-based service awards was $1,413,006, of which $36,521 is included in costof sales, $150,049 is included in research and development, $221,892 isincluded in sales and marketing and $1,004,544 is included in general andadministrative expense in the accompanying statements of operations. Compensation expense under SFAS No. 123(R) and EITF 96-18 for thenine months ended September 30, 2007 related to share-based service awardswas $395,978 of which $2,316 is included in cost of sales, $9,211 is includedin research and development, $59,531 is included in sales and marketing and$324,920 is included in general and administrative expense in the accompanyingstatements of operations. The Company recognizes the compensation expense ofsuch share-based service awards on a straight-line basis. Total unrecognizedcompensation cost of options granted but not yet vested as of September 30,2008 was $6,272,686, net of estimated forfeitures, which is expected to berecognized over the weighted average period of 2.04 years. The Company utilizedan estimated forfeiture rate of 15% for the 2007 and 2008 grants, based on theCompany’s historical forfeiture rate as well as an analysis of current marketconditions.

 

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The following table summarizes stock option activityfor the nine months ended September 30, 2008:

 
| ** **                           | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------------------------|------------|
| Outstanding, December 31, 2007  |       | 1,728,844              |       | $                                      | 8.69       |   |
| Options granted                      |       | 1,191,430              |       | 7.15                                   |       |
| Options cancelled/forfeited          |       | (372,448               | )          | 9.82                                   |       |
| Options exercised                    |       | (17,261                | )          | 4.90                                   |       |
| Outstanding, September 30, 2008 |       | 2,530,565              |       | $                                      | 7.76       |   |
| Exercisable, September 30, 2008 |       | 1,037,789              |       | $                                      | 7.40       |   |

 

**9.  Subsequent Event**

 

On November 6, 2008,the Company announced that its Board of Directors had authorized theimplementation of a restructuring plan to reduce operational expenses. Therestructuring plan has three principal elements.  The first is focused on reducing operationalexpenses in the near term so as to reduce our cash burn rate. The second elementinvolves a restructuring of our sales and marketing efforts to concentrate onthe iSeries family of wireless Intelligent Surgical Instruments. The finalelement of the restructuring will focus on allocating our research anddevelopment resources primarily to the Company’s agreement with IntuitiveSurgical, Inc., with the objective of accelerating the achievement of themilestones under that agreement and the commencement of revenue-generatingsales of the related reload cartridges.

 

The net effect of the restructuringactions, which are expected to be completed in the fourth quarter of 2008, willbe to reduce headcount by approximately 35% from 161 at September 30, 2008to approximately 107 on December 31, 2008, and to reduce the Company’s averagequarterly operating expense run rate for 2009 by approximately $3.5 million,compared with the third quarter of 2008, to approximately $5.5 million.  The Company expects to record a restructuringcharge in the fourth quarter of 2008 in connection with the planned restructuringactions. The Company is unable at this time to accurately estimate the amountof this charge, but anticipates that it will be material to its results ofoperations.

 

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**Item 2.**       **Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*You should read the followingdiscussion in conjunction with our consolidated financial statements and notesthereto appearing elsewhere in this report. In addition to historicalconsolidated financial information, the following discussion and analysiscontains forward-looking statements that involve risks, uncertainties andassumptions. Our actual results could differ materially from those anticipatedby these forward-looking statements as a result of many factors, includingthose discussed under “Risk Factors” and elsewhere in this report.*

 

**Overview**

 

We design, manufacture and market the SurgASSIST®system of computer-assisted, power-actuated endomechanical surgicalinstruments, which we refer to as Intelligent Surgical InstrumentsTM. Surgeonsuse our Intelligent Surgical Instruments for cutting, stapling and tissuemanipulation in a variety of procedures in open surgery, minimally invasivesurgery, or MIS, and in the emerging field of natural orifice translumenalendoscopic surgery, or NOTES. Our SurgASSIST system has been used in tens ofthousands of surgical procedures in more than 350 hospitals and medicalinstitutions worldwide.

 

Since our inception, we have devoted substantially allour resources to the development and commercialization of our SurgASSIST systemand, more recently, to the expansion of our manufacturing and direct sales andmarketing operations. We currently outsource the manufacture of components suchas machined and molded parts, mechanical sub-assemblies and circuit boards andperform the final assembly and testing of our products in our Langhorne,Pennsylvania facility. We sell our Intelligent Surgical Instruments through ourdirect sales force in the United States, parts of Europe and Japan and throughdistributors in other parts of Europe.

 

We have incurred net losses in each year since ourinception and have an accumulated deficit at September 30, 2008 of $206.9million. We expect our losses to continue through at least the first half of2009.  To date, we have financed ouroperations primarily through the initial public offering of our common stock,private placements of our preferred stock and the issuance of debt and, morerecently, the $12.5 million up-front license payment we received in September 2008under our license and development agreement with Intuitive Surgical, Inc.

 

The principal factor driving our results of operationsin 2008 has been the continuing roll-out of our next generation wirelesstechnology.  As often occurs during amajor release of a new technology platform, we have encountered challenges thathave slowed the rate of adoption of our new technology. This has resulted inpost-launch revenues that have been lower than expected and has negativelyaffected our gross margins during the first nine months of 2008. We believethat we have taken significant steps toward resolving these challenges.  During the first nine months of 2008 we alsocontinued to build out our i-Series product portfolio by introducing newIntelligent Surgical Instruments as well as enhanced and improved versions ofour existing i-Series products.

 

**Recent Developments**

 

*Arrangement with IntuitiveSurgical, Inc.*

 

On September 9,2008, we entered into a License and Development Agreement (“License Agreement”)and a Reload Supply Agreement (“Supply Agreement,” and together with theLicense Agreement, the “Intuitive Agreements”) with Intuitive Surgical, Inc.(“Intuitive”). Pursuant to the Intuitive Agreements, Intuitive desires toco-develop with us, and to market and sell, a new cutting and stapling deviceto be installed on Intuitive’s Da Vinci Surgical System. Intuitive will beresponsible for and control the development of the device. We will providetechnical assistance to Intuitive at our expense, for up to a maximum of 3,900man-hours.

 

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Under the LicenseAgreement, we granted to Intuitive a worldwide, perpetual, non-transferableroyalty-free license to all our intellectual property related to cutting andstapling devices and technology in the intended field of use of Intuitive, andIntuitive paid us in September 2008 an initial nonrefundable license fee of$12.5 million.

 

In addition to theinitial license fee, Intuitive will make milestone payments upon the occurrenceof specified events, as follows: $2.5 million upon the completion of thepreliminary design review of the device; $2.0 million upon the completion ofthe critical design review of the device; and $3.0 million upon the firstcommercial sale of the device by Intuitive to a third party.

 

Under the SupplyAgreement, we will manufacture and sell to Intuitive reload cartridges, asordered from time to time.  The reloadcartridges will be substantially identical to other staple reload products soldby us, with the addition of a key feature to make the reload cartridgecompatible only with the new device. During the first 18 month period beginningafter the first commercial sale of the device, Intuitive has committed topurchase at least 350 boxes of reload cartridges from us at a discounted price.

 

Revenue attributable toour arrangement with Intuitive, including the initial $12.5 million license feeand $7.5 million of milestone payments, will be deferred until the firstcommercial sale of a device to a third party. For a more complete discussion ofour accounting for the Intuitive arrangement, see “Critical Accounting Policiesand Estimates” below.

 

*Restructuring*

 

On November 6, 2008,we announced that our Board of Directors has authorized the implementation of arestructuring plan to reduce operational expenses. Our restructuring plan hasthree principal elements.  The first isfocused on reducing operational expenses in the near term so as to reduce ourcash burn rate. The second element involves a restructuring of our sales andmarketing efforts to concentrate on the iSeries family of wirelessIntelligent Surgical Instruments. The final element of the restructuring willfocus on allocating our research and development resources primarily to ouragreement with Intuitive Surgical, Inc., with the objective ofaccelerating the achievement of the milestones under that agreement and thecommencement of revenue-generating sales of the related reload cartridges.

 

The net effect of therestructuring actions, which are expected to be completed in the fourth quarterof 2008, will be to reduce our headcount by approximately 35% from 161 at September 30,2008 to approximately 107 on December 31, 2008, and to reduce our averagequarterly operating expense run rate for 2009 by approximately $3.5 million,compared with the third quarter of 2008, to approximately $5.5 million.  We expect to record a restructuring charge inthe fourth quarter of 2008 in connection with our planned restructuringactions. We are unable at this time to accurately estimate the amount of thischarge, but anticipate that it will be material to our results of operations.

 

As a result of these restructuringactions, the results of operations for the three and nine months ended September 30,2008 reported in this Quarterly Report on Form 10-Q are not indicative ofthe results to be expected for the balance of 2008 or any subsequent period.

 

**Financial Operations Overview**

 

The following is a description of the principalcomponents of our sales and expenses and of significant trends and challengesthat we believe are important to an understanding of our business and resultsof operations.

 

*Sales.*   Our SurgASSIST surgical platformincludes cutting and stapling devices in a variety of sizes and linear, rightangle and circular configurations designed for differing surgical needs. In theoriginal configuration of our system, our Intelligent Surgical Instruments areconnected through a flexible shaft, or FlexShaft, to a power console. Our nextgeneration products, beginning with the i60 linear stapler that we 

 

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introducedin the fourth quarter of 2007, are self-contained hand-held instruments that donot require a FlexShaft or separate power console. In December 2007, wealso introduced our self-contained, wireless handheld iDrive system, which canbe used to power and control our linear, right angle and circular staplers,without the need for a separate FlexShaft or power console.

 

Our Intelligent Surgical Instruments are available asdisposable, single-patient devices as well as in a reusable multiple-patientformat, using disposable cutting and stapling cartridges in various sizes,which we refer to as reload cartridges.

 

To date, most of our revenue has been derived from thesale of our single-patient, disposable Intelligent Surgical Instruments and, toa lesser extent, from the sale of reload cartridges for our reusableIntelligent Surgical Instruments. We expect that, as our installed base ofreusable, multiple-patient Intelligent Surgical Instruments grows, sales ofreload cartridges will become the largest component of our total sales.

 

We make power consoles and related accessories such asremote control units used with our first-generation SurgASSIST system availableto institutions at no charge. We instituted a program in 2007 to makeour PLC 60 instrument or FlexShaft available to the customer at no cost,in certain cases in exchange for a commitment by the customer to purchase aminimum number of reload cartridges at a higher unit price. We currently make ouri60 and iDrive instruments available to customers at no charge under an “inservice under evaluation” program and expect to derive recurring revenues fromsales of the reload cartridges necessary for their use.

 

Our future success will depend on our ability toachieve and sustain significant growth in our sales.  In the immediate term, our ability to growour revenues will depend on many factors, including:

 

·                  continued growth in market acceptance of our SurgASSIST system;

 

·                  increased usage of our installed base of multiple-use IntelligentSurgical Instruments, resulting in recurring purchases of our reloadcartridges;

 

·                  continued improvements in our supply chain and manufacturing operationsto assure the quality and adequate supply of our products; and

 

·                  achievement of the development milestonesunder our License Agreement with Intuitive and successful commercialization byIntuitive of the resulting device, enabling us to realize the benefits of theSupply Agreement whereby we will manufacture and be the exclusive supplier toIntuitive of staple reloads for the device.

 

*Cost of sales.*   Cost of sales includes the costof supplies, components and sub-assemblies that we purchase from third partiesand use in the assembly of our products. Cost of sales also includes personnelcosts and overhead related to our assembly and test operations, relatedoccupancy, equipment depreciation, shipping costs and charges for inventoryobsolescence.

 

Our future success will depend on our ability to makesignificant improvements in our cost of sales as a percentage of sales, orgross margins. Since the introduction of our SurgASSIST system in 2001, ourgross margins have ranged from a negative gross margin of (56.9)% in 2002 to apositive gross margin of 25.6% for the quarter ended March 31, 2007.  Our high cost of sales has been attributableto a number of factors, including product defects that have required rework byus and by our suppliers, a labor-intensive manual assembly process that hasresulted in high labor costs, and excess manufacturing capacity in relation toour sales, which has resulted in inefficient absorption of manufacturingoverhead.

 

Charges associated with write-offs of excess andobsolete inventory have also contributed to our high cost of sales. During thenine months ended September 30, 2008**,**we recordedinventory obsolescence 

 

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chargesof $507,000, constituting 7.0% of our cost of sales.  Our productdevelopment plans sometimes include introductions of new products that overlapfunctionally with existing products, while offering new or improvedcapabilities. We anticipate that in some cases, this may lead to a reduction indemand for, or discontinuation of, an existing product. In these circumstances,we must carefully manage our finished goods inventory to ensure that we havequantities of the existing product that are sufficient to meet customer demandpending introduction of the new product, but that do not leave us holdingexcess or obsolete inventory when a new product supplants the existingone.  Changes in the design of our products can also result in theobsolescence of our inventory of components that are not used in redesignedproducts.

 

Historically, our cost of sales has included thesubstantial cost of our power consoles and related accessories and more recentlyof Intelligent Surgical Instruments that we place with customers at no charge,which has had a significant adverse effect on our gross margins.  The costof the iSeries instruments that we make available to customers at nocharge is recorded as a charge to cost of sales when the units are shipped tothe customer.  Our gross margin in thethree months ended September 30, 2008 improved to 24%, compared withnegative gross margins of (40)% and (15)% in the second and first quarters of2008, respectively, due in part to a reduction in the number of iSeries instrumentsthat we placed with customers during the third quarter.

 

In order to achieve and sustain profitability, we willneed to devote substantial resources to improving our procurement and manufacturingprocesses, upgrading our management information systems, and implementing newquality assurance, inventory and cost controls in order to reduce the cost ofthe components we purchase from third party vendors and improve the efficiencyof our manufacturing operations. We also are taking steps to increase theintegration of our manufacturing operations, for example, by acquiring thecapital equipment necessary to enable us to more efficiently assemble criticalcomponents such as the reload cartridges that are used in our reusablemultiple-patient linear staplers.  Ournew automated reload cartridge assembly system became operational during October2008. Initial results of our new automated reload assembly process have beenencouraging, and we expect this system to have a favorable impact on our grossmargins beginning in the fourth quarter of 2008, as it will enable us toautomate the assembly of reload cartridges for our PLC60 and iSeries instruments,which we previously assembled using a costly manual process.  We believe this will enable us tosignificantly reduce the cost of these components, while also enabling us tobetter control their supply and quality. However, we cannot assure you thatmanufacturing yields or costs will not be adversely affected, at leastinitially, by the transition to in-house production or to new productionprocesses. Because we have limited experience in manufacturing our products incommercial quantities, increasing our manufacturing capacity whilesignificantly improving our gross margins and maintaining product quality willinvolve significant challenges.

 

*Research and development expenses.*   Research and development expensesconsist primarily of salaries and related expenses and overhead for ourresearch, development and engineering personnel, prototype materials andresearch studies. We expense our research and development costs as incurred.

 

Our research and development expenses have fluctuatedsignificantly in dollar amount and as a percentage of sales in the last five years,due primarily to the timing of research and development efforts associated withsignificant new product introductions. As a result of our recent restructuring initiative, we expect researchand development expenses to remain flat or decrease slightly in the near term.We will limit new product development activities other than high priorityproduct derivatives and enhancements that we expect to introduce in the nexttwo to three months, and focus our existing research and development resourcesprimarily on support of our License Agreement with Intuitive, with theobjective of accelerating the achievement of the payment milestones under thatagreement and the commencement of revenue-generating sales of the relatedreload cartridges.

 

*Sales and marketing expenses.*   Sales and marketing expensesconsist primarily of salaries and related expenses, sales commissions andoverhead for personnel performing sales and marketing functions. Othersignificant sales and marketing expenses include travel and entertainmentexpense, costs of attending 

 

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medicalconferences and trade shows, clinician training and other promotional costs andcosts of demonstration systems and samples.

 

Our sales and marketing expenses have substantiallyexceeded our sales in each year since 2004, as we have invested in building thesales and marketing organization and administrative infrastructure necessary tosupport our planned sales growth. During the first nine months of 2008, we tooksteps to reduce our sales and marketing expenses through a reduction in thenumber of our direct sales personnel.  Asa result of our recent restructuring initiative, we expect to effect furtherreductions in our international sales force and in our marketing programs, andto concentrate our sales and marketing resources primarily on the iSeries familyof wireless Intelligent Surgical Instruments*.*

 

*General and administrative expenses.*   General and administrativeexpenses consist primarily of salaries and related expenses and overhead forpersonnel performing executive, finance, information technology and humanresource functions. Other significant general and administrative expensesinclude consulting fees and professional fees for legal services (includingservices related to obtaining and maintaining protection of our intellectualproperty) and accounting services.

 

*Interest income.*   Interest income consists of interestearned on our cash and cash equivalents.

 

*Interest expense.*   Interest expense consists ofinterest expense on our term loans, convertible notes and equipment loans.

 

**Internal Control over Financial Reporting**

 

Our management determined that as of September 30,2008 and December 31, 2007 we had a material weakness in our internalcontrol over financial reporting related to our financial statement closeprocess that, until remediated, results in more than a remote likelihood that amaterial misstatement to the annual or interim consolidated financialstatements could occur and not be prevented or detected by our internalcontrols in a timely manner. We concluded that there is a material weakness inour internal control over financial reporting because we do not have asufficient number of personnel with the appropriate level of experience andtechnical expertise to appropriately resolve non-routine and complex accountingmatters or to evaluate the impact of new and existing accounting pronouncementson our consolidated financial statements while completing the financialstatement close process. The material weakness resulted in the identificationof adjustments during the financial statement close process during 2007 thathave been recorded in the consolidated financial statements.  In order toremediate this material weakness, we are taking the following actions:

 

·     we are activelyseeking additional accounting and finance staff members to augment our currentstaff and to improve the effectiveness of our financial statement closeprocess; and

 

·     we are expanding thetraining and education of our accounting and finance staff members in an effortto improve their effectiveness.

 

Our recent restructuring initiative does notcontemplate any reduction in headcount in our accounting or finance staff.

 

Notwithstanding the material weakness that existed asof September 30, 2008 and December 31, 2007, our management hasconcluded that the consolidated financial statements included presentfairly, in all material respects, our financial position, results of operationand cash flows in conformity with U.S. generally accepted accountingprinciples.

 

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**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. These estimates and judgments areinherently subject to uncertainty. On an ongoing basis, we re-evaluate ourjudgments and estimates, including those related to uncollectible accountsreceivable, inventories, recoverability of long-lived assets, stock-basedcompensation, accrued expenses and other contingencies. We base our estimatesand judgments on our historical experience and on other assumptions that webelieve are reasonable under the circumstances, the results of which form thebasis for making the judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from those estimates, and material effects on our operatingresults and financial position could result.

 

*Revenue Recognition—Arrangementwith Intuitive Surgical, Inc.*

 

                Under multiple-element arrangements involving thesale of multiple products, services and/or rights to use assets, we divide themultiple elements into separate units of accounting when certain criteria aremet, including whether the delivered items have stand alone value to thecustomer and whether there is objective and reliable evidence of the fair valueof the undelivered items. When separate units of accounting exist, we allocateconsideration among the separate elements based on their respective fairvalues. If such evidence of fair value for each undelivered element of thearrangement does not exist, all revenue from the arrangement is deferred untilsuch time that evidence of fair value for each undelivered element does exist oruntil all elements of the arrangement are delivered.

 

                On September 9, 2008, we entered into twoagreements with Intuitive Surgical, Inc. The first is a License and Development Agreement under which Intuitiveexpects to develop a surgical stapling device which will attach to Intuitive’sda Vinci Surgical Systems and will utilize our patented technology.  Once developed, this attachment will enableIntuitive’s da Vinci Surgical Systems to cut and staple tissue in a broad arrayof surgical applications.  The second agreement is an exclusive ReloadSupply Agreement whereby we will manufacture and be the exclusive supplier toIntuitive of staple reloads for the newly developed device at agreed uponprices.  We refer to the License andDevelopment Agreement and the Reload Supply Agreement collectively as the “IntuitiveAgreements.”

 

                Under the terms of the Intuitive Agreements,  we received an upfront license payment of$12.5 million in September 2008,  Inaddition, we may receive additional payments of up to $7.5 million based uponthe achievement of agreed upon development milestones. We will also beresponsible for providing at our expense up to an aggregate of 3,900 man hoursof engineering and technical support services to Intuitive to assist Intuitivein designing and developing the new device.

 

                We have identified four deliverables within thisarrangement: (i) the license to utilize our patented technology, (ii) consultativeservices during Intuitive’s development of the new device, (iii) asix-year supply arrangement to supply reload cartridges to Intuitive, includinga minimum purchase obligation during the first 18 months subsequent to thefirst commercial sale of the device by Intuitive to a third party, and (iv) asignificant and incremental discount on the future purchases of reloadcartridges.  We have concluded that thesedeliverables should be accounted for as a single unit of accounting, withrecognition of revenue for the single unit of accounting commencing upon thedelivery of the final element in the arrangement (i.e., commencement ofdelivery of the staple reload cartridges contemplated by the Reload SupplyAgreement).  Accordingly, the $12.5million upfront payment received in September 2008 has been deferred andis reported in the consolidated financial statements included in this Form 10-Qas deferred revenue as of September 30, 2008.  The $7.5 million of milestone payments, ifreceived, will also be deferred until the first commercial sale of the deviceto a third party.

 

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                Should the project reach the state of the firstcommercial sale, the $20.0 million of up-front and milestone payments, as wellas the guaranteed minimum amount of reload sales, will begin to be recognizedas revenues over the term of the Reload Supply Arrangement (i.e., the six-yearperiod following the date of the first commercial sale of the device to a thirdparty).  Revenues from the sale ofadditional reloads beyond the minimum guaranteed quantity will be recognized assuch reloads are shipped.

 

For a description of our other accounting policiesthat, in our opinion, involve the most significant application of judgment orinvolve complex estimation and which could, if different judgments or estimateswere made, materially affect our reported results of operations, see “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-Kfor the year ended December 31, 2007, filed with the SEC on March 31,2008.

 

**Recent Accounting Pronouncements**

 

We adopted Financial Accounting Standards BoardStatement No. 157, *Fair ValueMeasurements*, or SFAS 157, effective January 1, 2008. SFAS 157 defines fair value as the price that would be received to sellan asset or paid to transfer a liability, referred to as the exit price, in anorderly transaction between market participants at the measurement date. The standard outlines a valuation framework and creates a fair valuehierarchy in order to increase the consistency and comparability of fair valuemeasurements and the related disclosures.  In determining fair value, weprimarily use prices and other relevant information generated by markettransactions involving identical or comparable assets, called the marketapproach. As of September 30, 2008, the fair value of all of ourfinancial assets is based on Level 1 observable inputs.  We have determinedthat our fair value measurements are in accordance with the requirements ofSFAS 157, therefore, the implementation of SFAS 157 did not have any impact onour consolidated financial condition or results of operations.

 

**Results of Operations**

 

**Three month periods ended September 30, 2008 and September 30,2007**

 

*Sales.*   Our sales in the three monthsended September 30, 2008 increased by 31.8% to $2.2 million compared with$1.7 million during the corresponding period in 2007, and increased by 3.8%versus the second quarter of 2008. Included in the third quarter 2008 sales wasapproximately $950,000 of i60 reload revenues, compared with approximately$444,000 in the second quarter of 2008. Our third quarter sales were positivelyaffected by the commercial launch of the i45 and i60 products with the upgradedbanded articulation joint that is expected to extend their useful lives. Theenhanced i60 and i45 became available in July and September 2008,respectively.

 

*                Cost of sales and gross profit.*   Our cost of sales in the threemonths ended September 30, 2008 increased by 33%, to $1.7 million comparedwith $1.3 million during the corresponding period in 2007.  Our grossprofit was $0.5 million, or 24% of sales, in the three months ended September 30,2008 compared to $0.4 million, or 25% of sales, during the corresponding periodin 2007.  ** **Ourgross margin improved versus second quarter 2008 gross margin of (40%), as aresult of increased linear cutter reload revenues which have a higher grossprofit than our other products and a reduction in the number of iSeries instrumentsthat we placed with customers under our “in service under evaluation” programduring the third quarter of 2008, the cost of which is recorded to cost ofsales when the units are shipped to the customer. We believe that, beginning inthe fourth quarter of 2008, our gross margins will be affected positively bythe availability of our new automated reload cartridge assembly system, whichbecame operational in October 2008. However, gross margins are likely to fluctuate from period to perioduntil we are able to realize further economies of scale in our purchasing andmanufacturing process through increased manufacturing capacity utilization andautomation.

 

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*Research and development expenses.*   Our research and developmentexpenses in the three months ended September 30, 2008 decreased by 15% to$1.5 million compared with $1.8 million during the corresponding period in 2007due to a decrease in materials and components used for new productdevelopment.   Research and development costs decreased as apercentage of sales to 69% in the three months ended September 30, 2008,compared with 107% of sales during the corresponding period in 2007.  We expect the amount of our research anddevelopment expenses to remain flat or decrease slightly in the near term, as aresult of our recent restructuring initiative.

 

*Sales and marketing expenses.*   Our domestic and internationalsales and marketing expenses in the three months ended September 30, 2008increased by 28%, to $5.1 million, compared with $4.0 million during thecorresponding period in 2007, and decreased as a percentage of sales to 228% ofsales in the three months ended September 30, 2008.  This compares to234% of sales during the corresponding period in 2007.  The increase in dollar amount from 2007 to2008 was due to domestic and international sales force expansion, training andincreases in marketing expense associated with trade shows and conventions. Oursales and marketing expense in the third quarter of 2008 decreased by 15%compared with the second quarter of 2008, and decreased as a percentage of salesto 228%, compared with 276% in the second quarter.  The decrease in both dollar amount andpercentage of sales from the second quarter to the third quarter of 2008 wasdue primarily to a reduction in our sales force.  For the balance of 2008, we will continue totake steps to reduce our sales and marketing expenses as part of ourrestructuring initiative, and as a result we expect sales and marketing expensefor the fourth quarter of 2008 to be lower than third quarter 2008 levels.

 

*General and administrative expenses.*   Our general and administrativeexpenses in the three months ended September 30, 2008 increased by 29%, to$2.6 million compared with $2.0 million during the corresponding period in2007, and decreased as a percentage of sales to 116% in the three months ended September 30,2008, compared to 118% during the corresponding period in 2007. Theincrease in dollar amount was due to increased stock compensation expense,directors and officers insurance premiums and consulting fees.

 

*Interest income.* Our interest income in the three months ended September 30, 2008decreased by 71% to $58,000 compared with $199,000 during the correspondingperiod in 2007, due to lower average cash balances and lower interest rates.

 

*Interest expense.* Our interest expense in the three months ended September 30, 2008decreased to $0.6 million compared with $1.1 million during the correspondingperiod in 2007. The decrease was the result of lower interest expense relatedto our convertible debt issued in March 2007, as the 7% terminal valuepayment accruing on such convertible debt was charged to interest expense onlyprior to the completion of our initial public offering in October 2007.

 

**Nine month periods ended September 30,2008 and September 30, 2007**

 

*Sales.*   Our sales in the nine monthsended September 30, 2008 increased by 12% to $6.6 million compared with$5.9 million during the corresponding period in 2007, primarily due to theintroduction in late 2007 of our next generation i60 and iDrive products. Also, our sales in the first nine months of 2007 were negatively affected bylimited availability of demonstration units and sales collateral for the thennewly introduced PLC 60 linear stapler, and by the fact that in 2007 we had alimited inventory of the linear stapler products that the PLC 60 was intendedto replace.

 

*Cost of sales and gross profit.*   Our cost of sales in the ninemonths ended September 30, 2008 increased by 59%, to $7.3 million comparedwith $4.6 million during the corresponding period in 2007.  Our grossprofit decreased to $(0.7) million, or (9)% of sales, in the nine months ended September 30,2008 from $1.3 million, or 22% of sales, during the corresponding period in2007.  The decrease in our gross profit and our gross margin percentage isattributable to increased cost of sales, including approximately $1.2 millionof costs of the i60 and iDrive devices that we placed with hospitals during thenine month period, an increase of $1.1 million in cost of sales associated withthe write-off of components and finished 

 

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goodsinventory due to a design enhancement of the i60 device and as a result of the transitionto the new wireless platform, and an increase in cost of sales of $0.3 millionrelated to engineering samples used for validation testing.

 

*Research and development expenses.*   Our research and developmentexpenses in the nine months ended September 30, 2008 increased by 6% to$4.6 million compared with $4.4 million during the corresponding period in 2007due to an increase in personnel, stock compensation expense and prototype costsassociated with new product development.   Research and developmentcosts increased as a percentage of sales to 70% in the nine months ended September 30,2008, compared with 74% of sales during the corresponding period in 2007.

 

*Sales and marketing expenses.*   Our domestic and internationalsales and marketing expenses in the nine months ended September 30, 2008increased by 61%, to $17.8 million, compared with $11.1 million during thecorresponding period in 2007, and increased as a percentage of sales to 270% ofsales in the nine months ended September 30, 2008.  This compares to188% of sales during the corresponding period in 2007.  The increase inboth dollar amount and percentage of sales was due to domestic andinternational sales force expansion, training and increases in marketingexpense associated with trade shows and conventions.

 

*General and administrative expenses.*   Our general and administrativeexpenses in the nine months ended September 30, 2008 increased by 30%, to$8.2 million compared with $6.3 million during the corresponding period in2007, and increased as a percentage of sales to 124% in the nine months ended September 30,2008, compared to 107% during the corresponding period in 2007.  Theincrease in dollar amount and percentage of sales was due to higher,stock-based compensation expense and higher professional fees associated withbeing a public company.

 

*Interest income.*   Our interest income in the ninemonths ended September 30, 2008 decreased by 39% to $343,000 compared with$564,000 during the corresponding period in 2007, due to lower average cashbalances and lower interest rates.

 

*Interest expense.*   Our interest expense in the ninemonths ended September 30, 2008 decreased by 11% to $1.9 million comparedwith $2.2 million during the corresponding period in 2007. The decrease was theresult of lower interest expense related to our convertible debt issued in March 2007,as the 7% terminal value payment accruing on such convertible debt was chargedto interest expense only prior to the completion of our initial publicoffering.

 

**Liquidity and Capital Resources**

 

Since our inception, we have financed our operationsprimarily through private placements of our preferred stock, unsecuredborrowings from our stockholders, a credit facility, the issuance in March 2007of our convertible notes in the aggregate principal amount of$25.0 million and our initial public offering in October 2007, inwhich we received net proceeds, after underwriting discounts and offeringexpenses, of approximately $42 million. In September 2008, we also received $12.5 million in up-frontlicense fees from our agreement with Intuitive. An additional $7.5 million of milestone payments may become payable tous contingent upon the successful achievement of certain development milestones.  We expect to achieve the developmentmilestone necessary for us to receive the first $2.5 million milestone paymentduring the first half of 2009, and to receive the remaining milestone paymentsby mid-to late 2010.  Our principalsources of liquidity as of September 30, 2008 consisted of cash and cashequivalents of $15.9 million and our accounts receivable balance of $1.6million.

 

In the first nine months of 2008, our operatingactivities used $21.3 million in cash, due primarily to our net operating lossof $33.0 million offset by the $12.5 million of deferred revenue relating tothe Intuitive license fee. We used cash of $2.2 million to reduce accountspayable balances and accrued expenses and we used cash of $1.6 million toincrease inventory, primarily raw materials and components required forassembly of our newly introduced Intelligent Surgical Instruments and relatedreload cartridges to support expected demand for these products.  Our non-cash expenses wereapproximately $3.5 million 

 

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consistingof $1.4 million stock compensation expense, depreciation and amortization of$1.5 million, and the amortization of debt discount of $0.6 million. We used$278,000 in our investing activities, primarily consisting of purchases ofproperty and equipment of $1.3 million, related primarily to the purchase ofour automated reload machine and $294,000 for patent application costs, offsetby a decrease in restricted cash of $1.9 million primarily consisting of areduction in the funds held in escrow for the scheduled interest payments onour outstanding convertible notes.  Ourfinancing activities generated cash of $73,000 related to proceeds of optionexercises, offset by $52,000 used for repayment on our long-term debt.

 

                We believe that our cash and cash equivalents,together with the first milestone payment under our Intuitive agreement, whichwe expect to receive during the first half of 2009, will be sufficient to meetour anticipated cash requirements through the fourth quarter of 2009, however,there can be no assurance in this regard. We have implemented plans to reduceour cash used in operations through reductions in headcount and other spending programsthroughout the Company.  Such costsinclude certain sales and marketing costs, clinical research costs, employeebonuses, professional education, and capital expenditures.   Our future cash requirements will depend onmany factors, primarily including our ability to increase our sales and improveour gross margins, our ability to achieve the development milestones under ouragreement with Intuitive and receive the related milestone payments and thesuccess of our recently announced restructuring initiative in reducing ouroperating expenses.  Our ability to meetour obligations in the normal course of business beyond 2009 will be dependenton our increasing our customer and revenue base, continuing to control expensesand securing additional external financing which we are actively pursuingthrough various structures. We have no arrangements to obtain additionalfinancing, and there can be no assurance that such financing, if required ordesired, will be available in amounts or on terms acceptable to us, if at all.  These conditions raisesubstantial doubt about our ability to continue as a going concern. Ourindependent registered public accounting firm modified its audit report on ourconsolidated financial statements for the year ended December 31, 2007 toinclude an explanatory paragraph regarding this contingency.

 

 **Item 3.****           Quantitative and Qualitative Disclosures About Market Risk.**

 

We do not utilize derivative financial instruments,derivative commodity instruments or other market risk sensitive instruments,positions or transactions.

 

We are exposed to market risk in the ordinary courseof business, which consists primarily of interest rate risk associated with ourcash and cash equivalents and debt and foreign exchange rate risk.

 

*Interest rate risk.*   At September 30, 2008, wehad $15.9 million of cash and cash equivalents. These amounts were investedprimarily in certificates of deposit and U.S. treasury securities. The primaryobjective of our investment activity is to preserve principal, provideliquidity and maximize income without increasing risk.  Our investmentshave limited exposure to market risk. The interest rates are variable andfluctuate with current market conditions. The risk associated with fluctuatinginterest rates is limited to our investments in certificates of deposit, and wedo not believe that a 10% change in interest rates would have a material impacton our financial position or results of operations.

 

The interest rate on our 7% convertible senior securedpromissory notes is fixed and therefore exposes us to limited market risk.

 

*Foreign currency risk.*   To date, our internationalcustomer agreements have been denominated primarily in the local currency ofthe international customer.  The functional currency of our foreignoperations in Europe and Japan is the local currency and, as a result, anyfluctuation in the exchange rates of these net assets, denominated in localcurrency, would be reflected in the translation gains or losses, which areaccounted for in other comprehensive income in our statements of changes inequity. We do not believe that a change of 10% in foreign currency exchangerates would have a material impact on our financial position or results ofoperations.

 

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**Item 4.****           Controls and Procedures.**

 

(a)          Our chief executive officer and chief financial officer have performed anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures as of September 30, 2008.  Based on thatevaluation, our chief executive officer and chief financial officer concludedthat, as of September 30, 2008, our disclosure controls and procedureswere ineffective, due to the material weaknesses in our internal control overfinancial reporting previously described in our Annual Report on Form 10-Kfor the year ended December 31, 2007, which identified the followingmaterial weakness that has not been fully remediated as of September 30,2008:

 

Our management has determined that we have a materialweakness in our internal control over financial reporting related to ourfinancial statement close process that, until remediated, results in a reasonablepossibility that a material misstatement to the annual or interim consolidatedfinancial statements could occur and not be prevented or detected by ourinternal controls in a timely manner. We have concluded that there is amaterial weakness in our internal control over financial reporting because wedo not have a sufficient number of personnel with the appropriate level ofexperience and technical expertise to appropriately resolve non-routine andcomplex accounting matters or to evaluate the impact of new and existingaccounting pronouncements on our consolidated financial statements whilecompleting the financial statement close process. The material weaknessresulted in the identification of adjustments during the financial statementclose process during 2007 that have been recorded in the consolidated financialstatements. In order to remediate this material weakness, we are taking thefollowing actions:

 

· we are actively seeking additionalaccounting and finance staff members to augment our current staff and toimprove the effectiveness of our financial statement close process; and

 

· we are expanding the training andeducation of our accounting and finance staff members in an effort to improvetheir effectiveness.

 

(b)          There was no change in our internal control over financial reporting during ourmost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.`

 

**PART II:****                OTHERINFORMATION**

 

**Item 1:****  Legal Proceedings.**

 

In August 2008, our former Belgian distributor,Duo-Med, S.A., initiated a breach of contract action against us in theCommercial Court of Brussels in Belgium. The complaint alleges that we breachedour distribution agreement with Duo-Med by failing to provide proper noticewhen we terminated that agreement in May 2007 and that, as the result ofproblems with our products, Duo-Med was unable to sell its existinginventory.  The complaint asserts damagestotaling approximately €460,000. We are reviewing the Duo-Med complaint andconducting a preliminary assessment of the allegations.

 

**Item 1A.****           Risk Factors.**

 

In addition to the other information set forth in thisreport, you should carefully consider the Risk Factors discussed below, whichcould materially affect our business, financial condition or future results andcould cause actual events to differ materially from the forward-lookingstatements in this report. There has been no material change in the risk factorsdescribed in Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Qfor the quarter ended June 30, 2008, except as follows:

 

·                           The risk factor under the heading “*The success of our business is dependent on ourability to develop new and innovative products...”* has been revised todisclose the risk that the curtailment of our new product development effortsas part of our restructuring initiative may adversely affect the longer termdevelopment of our business.

 

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·                           The risk factor under the heading *“We may need substantial additional funding...”*has been revised to disclose the impact of our recent Intuitive transaction andrestructuring initiatives and to state that we believe that our capitalresources will be adequate to meet our anticipated cash requirements throughthe fourth quarter of 2009.

 

·                           The risk factors under the headings “*We must upgrade and correct deficiencies in ourregulatory compliance operations...”* and *“Our failure to meet strict regulatory requirements could require us topay fines, incur other costs or even close our facilities”* have beenexpanded to disclose that we received an FDA Warning letter as a result ofrecent FDA inspections of our facilities in Langhorne, Pennsylvania.

 

·                           The risk factors under the heading *“Risks Related to Ownership of Our Common Stock”* have beenexpanded to include a risk factor disclosing that we received a Nasdaq StaffDeficiency letter advising us that we were not in compliance with the listingrequirements of the Nasdaq Stock Market, and discussing risks relating to thepossible delisting of our common stock.

 

**Risks Related to Our Business**

 

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

 

We are a company with a limited operating history andhave sustained net losses since our inception, including a net loss of $36.8million for the year ended December 31, 2007 and a net loss of $33  million for the nine months ended September 30,2008. We have an accumulated deficit of $206.9 million at September 30, 2008. We expect to continue to incursignificant operating losses at least through 2008, as we invest in thedevelopment of our business. Our losses have had and will continue to have anadverse effect on our stockholders’ equity and working capital.

 

**We are dependent on the success of our SurgASSIST platformand, in particular, of the next generation wireless handheld technologyincorporated in our recently released i60 and iDrive products, and we cannot becertain that our technology and our products will achieve the broad market acceptancenecessary to develop a sustainable, profitable business.**

 

Historically, most of our revenue has been derivedfrom the sale of our single-patient, disposable Intelligent SurgicalInstruments and, to a lesser extent, from the sale of reload cartridges for ourreusable Intelligent Surgical Instruments. However, we expect that, as ourinstalled base of reusable, multiple-patient Intelligent Surgical Instrumentsgrows and the number of firings of our instruments increases, sales of reloadcartridges will become the largest component of our total sales. It isdifficult to predict the penetration, future growth rate or size of the marketfor our SurgASSIST platform or the rate at which our installed base ofinstruments will be fired.

 

The commercial success of our various IntelligentSurgical Instruments will require broad acceptance of the SurgASSIST platformby the surgeons who specialize in the procedures we target, a limited number ofwhom may be able to influence device selection and purchasing decisions. If theconcept of computer-assisted power-actuated devices for tissue manipulation,cutting and stapling is not broadly accepted and perceived as havingsignificant advantages over manually-actuated devices, then we will not meetour business objectives. Broad acceptance of our SurgASSIST platform willrequire a determination by hospitals and surgeons that our products are safe,cost-effective and represent acceptable methods of treatment. In addition,certain components of our SurgASSIST platform in its current configuration maybe considered to be capital purchases that require administrative proceduresand approvals from senior hospital management, the result of which can be anextended sales cycle requiring multiple individuals to believe in the advantagesof our products. We cannot assure that our existing relationships andarrangements with hospitals and surgeons can be maintained or that newrelationships will be established in support of our products. In addition, ourcompetitors may develop new technology for tissue manipulation, cutting andstapling that is more attractive to surgeons and hospitals. If surgeons do notconsider our 

 

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productsto be suitable for application in the procedures we are targeting and animprovement over the use of competing products, our business goals will not berealized.

 

**Thesuccess of our business is dependent on our ability to develop new andinnovative products and to enhance our existing products, and the recentcurtailment of our new product development activities as part of our expensereduction initiative may adversely affect our ability to perform thesefunctions, and diminish our prospects in the longer term.**

 

The success of ourbusiness and our competitive position are dependent on our ability to developinnovative new products and to introduce enhancements to our existing productson a timely basis. We have historically experienced difficulties in new productintroductions that have adversely affected our revenues and the rate ofadoption of our intelligent Surgical Instruments. For example, our ability togenerate revenue from the new i60 and iDrive products that we introduced inlate 2007 was adversely affected by delays in availability of green reloadcartridges and by problems with the initial quality of units delivered tocustomers and other issues.

 

As part of our recentlyannounced expense reduction initiative, we have determined that for at leastthe next several quarters, we will limit our new product development activitiesand devote our research and development resources primarily to our agreementwith Intuitive, with the objective of accelerating the achievement of thedevelopment milestones under that agreement and the commencement ofrevenue-generating sales of the related reload cartridges.

 

The redirection to ourIntuitive program of engineering resources that we would otherwise rely uponfor the development of new and enhanced products and technologies could, in thenear term, have a material adverse effect on our ability to deliver innovativenew products and to support, enhance and improve the quality of our existingproducts, either of which could slow the rate of adoption of our IntelligentSurgical Instruments. Our reputation for innovation may be diminished,customers may forego purchases of our existing products or purchase ourcompetitors’ products, and, in the longer term, our competitive position andour revenues and results of operations may be harmed.

 

**We have limited manufacturing experience, have experiencedsignificant manufacturing problems in the past, and may encounter difficultiesin increasing production to provide an adequate supply to customers.**

 

The manufacture of our products is a complex andcostly operation involving a number of separate processes and components. Todate, our manufacturing activities have consisted primarily of assemblinglimited quantities of our products. We have considered, and will continue toconsider as appropriate, manufacturing components that are currently providedby third parties, as well as implementing new production processes. We do nothave experience in manufacturing our products in the commercial quantities thatmight be required to market our products in the United States, Europe andJapan. We have experienced significant difficulties in our supply chain andmanufacturing operations, which have impaired our ability to ship our productson a timely basis and had a material adverse impact on our results ofoperations.  Manufacturing of our products in commercial quantitieswill require us to expand our manufacturing capabilities and to hire andtrain additional personnel. We expect that any expansion would be achievedthrough modified space utilization in our current leased facilities, improvedefficiencies, increased automation and acquisition of additional tooling andequipment. We may encounter difficulties in increasing our manufacturingcapacity and in manufacturing commercial quantities, including:

 

·                  maintaining product yields;

 

·                  maintaining quality control and assurance;

 

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·                  providing component and service availability;

 

·                  maintaining adequate control policies and procedures; and

 

·                  hiring and retaining qualified personnel.

 

Difficulties encountered in increasing ourmanufacturing capacity could impact our ability to adequately supply ourcustomers.

 

**In order to achieve and sustain profitability, we mustsubstantially improve our gross margins.**

 

The historical unit costs for our products, based onlimited manufacturing volumes, have been very high in relation to our sales,resulting in low or negative gross margins. It will be necessary for us toachieve substantial further reductions in our cost of sales as a percentage ofsales in order to become profitable. The transition to in-house production orto new production processes may initially have a negative effect on ourmanufacturing yields or costs, which would materially and adversely affect ourbusiness, financial condition and results of operations. Certain of ourmanufacturing processes are labor intensive, and achieving significant costreductions will depend in part upon reducing the time required to perform theseprocesses. We cannot assure you that we will be able to achieve the significantcost reductions in the manufacture of our products necessary for our businessto achieve profitability.

 

**If our products are not considered to be a safe and effectivealternative to existing technologies, we will not be commercially successful.**

 

Our Intelligent Surgical Instruments rely on newtechnology, and our success depends upon acceptance of this technology by themedical community as safe, clinically effective and cost effective and apreferred device as compared to products of our competitors. We have notcollected, and are not aware that others have collected, long-term dataregarding efficacy, safety and clinical outcomes associated with the use of ourproducts. Any data that is generated in the future may not be positive orconsistent with our current, largely anecdotal data, which would negativelyaffect market acceptance and the rate at which our Intelligent SurgicalInstruments are adopted. Equally important will be physicians’ perceptions ofthe safety of our products. Our technology is relatively new in surgery, andthe results of short-term clinical experience with our SurgASSIST system do notnecessarily predict long-term clinical benefits as compared to the products ofour competitors. If, over the long term, our SurgASSIST system does not meetsurgeons’ expectations as to safety, efficacy and ease of use, the SurgASSISTsystem may not become widely adopted.

 

Even if the data collected from future clinicalstudies or clinical experience indicates positive results, each surgeon’sactual experience with our device outside the clinical study setting may vary.Consequently, both short- and long-term results reported in any future clinicalstudies may be significantly more favorable than typical results of otherpracticing surgeons, which could negatively affect rates of adoption andnegatively affect our results.

 

**Because our markets are highly competitive, customers maychoose to purchase our competitors’ products, which would result in reducedsales and harm our financial results.**

 

Our SurgASSIST system is a new technology and mustcompete with the more established manual devices of our competitors, such asCovidien and Ethicon Endo-Surgery, Inc. Conventional manual devices arewidely accepted in the medical community, have a long history of use and do notrequire the purchase of additional, expensive capital equipment. We cannot becertain that surgeons will use our products to replace or supplementestablished treatments or that our products will be competitive with current orfuture products and technologies.

 

·                  Most of our competitors enjoy competitive advantages over us,including:

 

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·                  significantly greater name recognition;

 

·                  longer operating histories;

 

·                  established relationships with healthcare professionals, customers andthird-party payers;

 

·                  established distribution networks;

 

·                  additional lines of products and the ability to offer rebates or bundleproducts to offer higher discounts or incentives to gain a competitiveadvantage;

 

·                  greater experience in conducting research and development,manufacturing, clinical trials, obtaining regulatory clearance for products andmarketing approved products; and

 

·                  greater financial and human resources for product development, salesand marketing and patent litigation.

 

In addition, our SurgASSIST system in its originalconfiguration has certain perceived disadvantages compared to conventionalmanual endomechanical devices. Prior to the introduction of our new i60 linearstapler and our iDrive wireless handheld power and control system, ourIntelligent Surgical Instruments had to be tethered by a flexible shaft to apower console which is located outside the sterile field. Some surgeons andoperating room personnel found this to be cumbersome and not well suited forall procedures. This factor may initially have limited market acceptance of ourSurgASSIST platform. Our next generation untethered self-contained IntelligentSurgical Instruments are designed to eliminate this disadvantage of ourSurgASSIST system, but we may need to overcome an initial negative perceptionby clinicians of our first-generation tethered technology.

 

Our future success depends upon maintaining a competitiveposition in the development of products and technologies in our areas of focusand our recent cost reduction initiatives may make it more difficult to achievethis. Our competitors may:

 

·                  develop technologies and products that are more effective than ourproducts or that render our technologies or products obsolete ornoncompetitive;

 

·                  obtain patent protection or other intellectual property rights thatwould prevent us from developing or enhancing our products; or

 

·                  obtain regulatory approval for the commercialization of their productsmore rapidly or effectively than we do.

 

Additional competitors also may enter our market. As aresult, we cannot assure you that we will be able to compete successfullyagainst existing or new competitors. Our sales would be reduced or eliminatedif our competitors develop and market products that are more effective and lessexpensive than our products. Volatility in the demand for our products could,among other things, make it more difficult to gauge the manufacturing capacitynecessary to meet our demand, decrease our manufacturing efficiency andincrease our working capital requirements. If any of these occur, yourinvestment in our common stock may decrease in value.

 

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**We assemble our Intelligent Surgical Instruments using ourown customized equipment and are undertaking a new manufacturing process,making us vulnerable to production and supply problems that could negativelyimpact our sales.**

 

We engaged a third party to develop and fabricate anautomated system to enable us to assemble the reload cartridges forour PLC 60 and i60 linear staplers, a process which took longer than weexpected. The system has now been installed at our facility and becameoperational during October 2008.  Whilewe believe the use of this new system should reduce our risk of supplyproblems, the automated system must be capable of manufacturing at ouranticipated volume. However, there is no guarantee that the automated systemwill function at the capacity we require. The automated system is located atour facility in Langhorne, Pennsylvania, which requires us to be responsiblefor the day-to-day control and protection of the system. Delay in theavailability of, or unanticipated problems in our utilization of, thisautomated system could jeopardize our initiatives to improve our gross margins.

 

**We are dependent upon a number of key suppliers, includingsole source suppliers, the loss of which would materially harm our business.**

 

We rely upon sole source suppliers for a number of keycomponents and services used in manufacturing our products and, in general, wedo not have long-term contracts with these suppliers. We cannot assure you thatwe will be able to obtain sufficient quantities of such components or servicesin the future. Because we do not have long-term contracts, our suppliersgenerally are not required to provide us with any guaranteed minimum productionlevels.

 

In addition, our reliance on third parties involves anumber of risks, including, among other things:

 

·                  suppliers may fail to comply with regulatory requirements or makeerrors in manufacturing components that could negatively affect the efficacy orsafety of our products or cause delays in shipments of our products;

 

·                  we may not be able to respond to unanticipated changes and increases incustomer orders;

 

·                  we may be subject to price fluctuations due to a lack of long-term supplyarrangements for key components;

 

·                  we may experience delays in delivery by our suppliers due to changes indemand from us or their other customers;

 

·                  we may lose access to critical services and components, resulting in aninterruption in the manufacture, assembly and shipment of our systems;

 

·                  fluctuations in demand for products that our suppliers manufacture forothers may affect their ability or willingness to deliver components to us in atimely manner;

 

·                  our suppliers may wish to discontinue supplying components or servicesto us for risk management reasons;

 

·                  we may not be able to find new or alternative components or reconfigureour system and manufacturing processes in a timely manner if the necessarycomponents become unavailable; and

 

·                  our suppliers may encounter financial hardships unrelated to our demandfor components, which could inhibit their ability to fulfill our orders andmeet our requirements.

 

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If any of these risks materialize, it couldsignificantly increase our costs and impact our ability to meet demand for ourproducts.

 

We cannot quickly replace suppliers or establishadditional new suppliers for some of these components, due to both the complexnature of the manufacturing process used by our suppliers and the time andeffort that may be required to obtain regulatory clearance or approval to usematerials from alternative suppliers. Any significant supply interruption orcapacity constraints affecting our facilities or those of our suppliers wouldimpair our ability to manufacture our products.

 

**If we are unable to manage our expected growth, ourperformance may suffer.**

 

As of September 30, 2008, we had approximately161 employees, compared with 227 at December 31, 2007, and we expect thisnumber to decrease to approximately 107 by December 31, 2008 as a resultof recently announced restructuring initiative. Despite these reductions, we will need to maintain sufficientmanagerial, operational, financial and other resources to effectively manageour operations. Transitions in our senior management team have in the pastcomplicated the task of effectively managing our growing operations andimplementing required systems improvements. In March 2008, our chiefoperations officer, who was one of our three executive officers and wasresponsible for our manufacturing operations as well as for our regulatorycompliance operations, resigned. Following his departure, we undertook adetailed review of our operations. We concluded that gaps existed in qualitycontrol, quality assurance, and supply chain management. Due to the technicalnature of our manufacturing requirements and to provide focus at the functionallevel and to increase feedback from our customers into the manufacturingprocess, we determined that we would be better served to divide our operationsactivity into three functional areas, consisting of operations (includinginventory and supply chain management); manufacturing (comprising themanufacturing and assembly processes); and product development (the process oftransferring a product from R&D through manufacturing ramp-up, includingverification and validation). We assigned experienced senior executives todirectly manage each of these functional areas. We believe that thisreorganization of our operations functions, which was completed in the secondquarter of 2008, will result in improved efficiency, product quality and customersatisfaction. However, there can be no assurance that this reorganization willachieve its intended goals.  Although ourrecently announced restructuring initiative does not include reductions in thenumber of our finance or accounting staff or our regulatory compliance staff,it is possible that our management, finance, technical and regulatorypersonnel, systems and facilities currently in place may not be adequate tosupport our expected future growth. Our need to effectively manage ouroperations, growth and programs requires that we continue to improve oursystems and procedures and to attract and retain sufficient numbers of talentedemployees. We may be unable to successfully accomplish these tasks and,accordingly, may not achieve our research, development and growth goals.

 

**We must upgrade and correct deficiencies in our regulatorycompliance operations, and our failure to do so could impair our ability tomarket our products or lead to regulatory enforcement action against us.**

 

We are subject to extensive regulation in the UnitedStates and other countries, including by the United States Food and DrugAdministration, or FDA. We maintain an organization of managers, engineers andadministrative personnel whose responsibility it is to ensure that ourproducts, facilities and operations comply with applicable regulatoryrequirements. However, we have from time to time experienced shortages ofqualified regulatory compliance staff due to turnover and other factors, and weneed to upgrade and carefully manage our regulatory compliance operations inorder to accommodate our expected growth. The senior vice president ofregulatory affairs and quality assurance whom we hired in the fourth quarter of2007 resigned in January 2008, and we divided his responsibilities amongseveral of our current employees. Our chief operations officer, to whom oursenior vice president of regulatory affairs and quality assurance reported,also resigned in March 2008.

 

In May 2008, following an inspection of ourfacilities, the FDA issued a Notice of Inspectional Observations, or Form 483,which included ten inspectional observations relating to management controls, 

 

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medicaldevice reporting, design controls, and corrective and preventive action. We were also inspected by the FDA in 2002, 2003, 2005 and 2007, and some of theobservations in the FDA’s May 2008 Form 483 are similar to those wereceived in earlier inspections. As a result of these events, we concluded thatthere were significant deficiencies in our regulatory compliance operations,and have been taking steps to make needed improvements in our corrective andpreventive action, complaint handling and medical device reporting procedures,in our processes for compliance with other requirements of the FDA’s qualitysystem regulations and in our related controls and internal audit functions.

 

On October 22, 2008, we received from the FDA aWarning Letter notifying us that the FDA has determined that we are not incompliance with the Current Good Manufacturing Requirements of the FDA’sQuality System regulations and with the FDA’s Medical Device Reportingregulations. The specified violations related to each of the ten observationsnoted in the May 2008 Form 483. The FDA Warning Letter advised that failure to promptly correct thenoted violations could result in further regulatory action being taken by theFDA without notice, and that such actions could include, without limitation,seizure, injunction and/or civil money penalties.

 

If we are not successful in identifying and recruitingqualified personnel to manage and staff our regulatory compliance operations orin implementing necessary process improvements on a timely basis, we could besubject to regulatory enforcement actions which could damage our reputation,impair our ability to obtain regulatory clearances for new products, prevent usfrom manufacturing and selling our products and harm our business.

 

**We have a material weakness in our internal control overfinancial reporting, and if we are unable to achieve and maintain effectiveinternal control over financial reporting, investors could lose confidence inour financial statements and our company, which could have a material adverseeffect on our business and stock price.**

 

We have concluded that there is a material weakness inour internal control over financial reporting because we do not have asufficient number of personnel with the appropriate level of experience andtechnical expertise to appropriately resolve non-routine and complex accountingmatters or to evaluate the impact of new and existing accounting pronouncementson our consolidated financial statements while completing the financialstatement close process. The material weakness resulted in the identificationof adjustments during the financial statement close process in 2007 that havebeen recorded in our consolidated financial statements. A material weakness isa control deficiency, or a combination of control deficiencies, in internalcontrol over financial reporting, such that there is a reasonable possibilitythat a material misstatement of annual or interim financial statements wouldnot be prevented or detected. Until this design deficiency in our internalcontrol over financial reporting is remediated, there is reasonable possibilitythat a material misstatement to our annual or interim consolidated financialstatements could occur and not be prevented or detected by our internalcontrols in a timely manner.

 

Pursuant to Section 404 of the Sarbanes-Oxley Actof 2002, when we file our Annual Report on Form 10-K for the fiscal yearending December 31, 2008, we must assess the effectiveness of our internalcontrol over financial reporting as of the end of our 2008 fiscal year. Thisassessment must include disclosure of any material weaknesses in our internalcontrol over financial reporting that are identified by management. If we areunable at that time to assert that our internal control over financialreporting is effective because the material weakness identified above has notbeen remediated, or for any other reason, investors could lose confidence inthe accuracy and completeness of our financial reports, which could have anadverse effect on our stock price.

 

**Any failure in our training efforts could result in lowerthan expected product sales and potential liabilities.**

 

A critical component of our sales and marketingefforts is the training of a sufficient number of surgeons, other cliniciansand hospital staff to properly use our SurgASSIST system. In order to operateeffectively, our internal sales force must also be trained on the benefits andproper utilization of our technology, including newly introduced products. Inconnection with the introduction of our i60 and iDrive 

 

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products,we have found that it takes longer than we expected to adequately train ourinternal sales force and customers’ clinical personnel on the use and care ofthese instruments, due in part to their novelty and to the need to employ newsterilization techniques. Additionally, the number of i60 and iDrivedemonstration units available for use by our sales force was limited during theearly phases of our i60 product launch. As a result, it has taken longer forour sales force to become fully effective in selling these new products, and therate of adoption of our new technology has been adversely affected. Any furtherdelays in adequately training our internal sales force or our customers’clinical personnel on these or other products could harm our business.

 

Additionally, we rely on clinicians and hospital staffto devote adequate time to learn to use our products. If surgeons or hospitalstaff are not properly trained in the use of our Intelligent SurgicalInstruments, they may misuse or ineffectively use our products. For example,during 2007, we received reports of incomplete firings of our reusable PLC60 instrument that we believed were attributable to improper installation ofreload cartridges by our customers’ medical personnel. More recently, we havereceived similar reports relating to the seating of reload cartridges in ouri60 and PLC 75 linear staplers. We initiated improvements in our trainingprocedures to alert customers to the need to properly seat the reloadcartridges, and designed a new version of the reload cartridge to incorporate apositive locking feature to make this error less likely to occur. However, insufficient training may result in unsatisfactory patient outcomes,patient injury and related liability or negative publicity, which could have anadverse effect on our product sales.

 

It has always been a key component of our sales andmarketing strategy that for at least the first 18 to 24 months followingadoption by any institution of our next generation products we seek to have aPMI sales representative present in the operating room for every firing of theIntelligent Surgical Instrument. While this places an additional burden on thelimited resources of our internal sales force, we believe that it is importantto our ability to encourage the adoption of our Intelligent SurgicalInstruments and adequately train hospital staff in their use. Although webelieve that in the near term, we have a sufficient number of salesrepresentatives to carry out this strategy and support our current 2008 revenueplan, our restructuring initiative could adversely affect our ability toachieve our training objectives. Further, in the longer term, the implementation of this strategy willlikely require us to increase the size of our direct sales force, and ourinability or failure to do so could constrain our revenue growth and the rateof adoption of our Intelligent Surgical Instruments.

 

**The use of our products could result in product liabilityclaims that could be expensive, divert management’s attention and harm ourreputation and business.**

 

Our business exposes us to significant risks ofproduct liability claims that are inherent in the testing, manufacturing andmarketing of medical devices. The medical device industry has historically beensubject to extensive product liability litigation. We have in the past been,and in the future may be, subject to claims by consumers, healthcare providers,third-party payers or others selling our products if the use of our productswere to cause, or merely appear to cause, injury or death. We are currently thesubject of a product liability suit in Belgium. Any weakness in training andservice associated with our products may also result in product liabilitylawsuits. Additionally, we may be unable to maintain our existing productliability insurance in the future at satisfactory rates or adequate amounts. Aproduct liability claim, regardless of its merit or eventual outcome or theavailability of insurance coverage, could result in:

 

·                  decreased demand for our products;

 

·                  injury to our reputation;

 

·                  diversion of management’s attention;

 

·                  significant costs of related litigation;

 

·                  substantial monetary awards to patients;

 

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·                  product recalls or market withdrawals;

 

·                  loss of sales; and

 

·                  the inability to successfullycommercialize our products that are under development.

 

**If we deliver products with defects, our credibility may beharmed and market acceptance of our products may decrease.**

 

The manufacturing and marketing of our productsinvolve an inherent risk of product liability claims. In addition, our productdevelopment and production processes are complex and could expose our productsto defects. Additionally, problems experienced by our customers, such asimproper operation of the articulation joint or difficulty in consistentlyseating our reload cartridges, may be perceived by them as qualitydefects.  Our SurgASSIST system alsoincorporates sophisticated computer software. Complex software frequentlycontains errors, especially when first introduced. We cannot assure you thatour software will not experience errors or performance problems in the future.

 

We performed a thorough review of our operations in April 2008which resulted in a reorganization with the goal of enhancing our qualityprocesses and controls.  We determined that there were gaps in qualitycontrol, quality assurance and supply chain management, that once addressedwould increase customer satisfaction.  In order to address these issues,we hired several new senior level executives to enhance our inventory andsupply chain management, manufacturing and product development operations.* *Inaddition, to further support product quality, we have implemented our Qualityis Caring program, which is an internal quality assurance plan to ensurethat all of our products meet the rigorous expectations of the operating room.

 

If our products have, or are perceived to have,mechanical defects or software errors or have performance problems, we wouldlikely experience:

 

loss of sales;

 

delay in marketacceptance of our products;

 

damage to our reputation;

 

additional regulatoryfilings;

 

product recalls;

 

increased service orwarranty costs; or

 

product liability claims.

 

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

 

We believe that our existing cash and cash equivalentbalances, together with the first milestone payment under our Intuitiveagreement, which we expect to receive during the first half of 2009, will besufficient to meet our anticipated cash requirements through the fourth quarterof 2009. Our ability to meet our obligations in the normal course of businessbeyond 2009 will be dependent on our increasing our customer and revenue base,controlling expenses and securing additional external financing which we are 

 

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activelypursuing through various structures. We have no arrangements to obtainadditional financing, and there can be no assurance that such financing, ifrequired or desired, will be available in amounts or on terms acceptable to us,if at all. These conditions raise substantial doubt about our ability tocontinue as a going concern. Our independent registered public accounting firmhas modified its audit report on our consolidated financial statements toinclude an explanatory paragraph regarding this contingency. However, ouractual capital requirements will depend on many factors, many of which areoutside our control, including our ability to increase our sales and improveour gross margins, our ability to achieve the development milestones under ouragreement with Intuitive and receive the related milestone payments and thesuccess of our recently announced restructuring initiative in reducing ouroperating expenses, as well as the following:

 

·                  the cost of filing and prosecuting patentapplications and defending and enforcing our patent and other intellectualproperty rights;

 

·                  the cost of defending, in litigation orotherwise, any claims that we infringe third party patent or other intellectualproperty rights;

 

·                  the cost and timing of regulatoryapprovals;

 

·                  expenses of future clinical studies, ifany;

 

·                  the effect of competing technological andmarket developments;

 

·                  licensing technologies for futuredevelopment; and

 

·                  the extent to which we acquire or investin businesses, products and technologies, although we currently have nocommitments or agreements relating to any of these types of transactions.

 

Historically, we have financed our operations andinternal growth primarily through private placements of equity securities anddebt and, more recently, our initial public offering and the initial licensefee under our Intuitive agreement. We cannot be certain that additional publicor private financing will be available in amounts acceptable to us, or at all.If we raise additional funds by issuing equity securities, dilution may occur.Debt financing, if available, may involve restrictive covenants. Any debtfinancing or additional equity that we raise may contain terms that are notfavorable to us or our stockholders.

 

If we are unable to raise additional funds whenneeded, we may have to delay or reduce the scope of or eliminate some or all ofour development programs or we may be forced to seek protection underapplicable bankruptcy laws. Any restructuring or bankruptcy could materiallyimpair your investment.

 

**We sell our systems internationally and are subject tovarious risks relating to these international activities, which could adverselyaffect our business, financial condition and results of operations.**

 

During the three months ended September 30, 2008,60% of our sales were derived from customers located in North America and 40%were derived from customers in Europe and Asia. During the three months ended September 30,2007,  79% of our sales were derived fromcustomers located in North America and 21% were derived from customers inEurope and Asia.  For the nine months ended September 30, 2008 and2007, sales occurring in international markets were 24% and 21%,respectively.  By doing business in international markets, we are exposedto risks separate and distinct from those we face in our domestic operations.Our international business may be adversely affected by changing economicconditions in foreign countries. Because most of our international sales aredenominated in the functional currency of the country where the product isbeing shipped, increases or decreases in the value of the U.S. dollar relativeto foreign currencies could affect our results of operations. Engaging ininternational business inherently involves a number of other difficulties andrisks, including:

 

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·                  export restrictions and controls relatingto technology and government regulation;

 

·                  the availability and level ofreimbursement within prevailing foreign healthcare payment systems;

 

·                  pricing pressure that we may experienceinternationally;

 

·                  required compliance with existing andchanging foreign regulatory requirements and laws;

 

·                  laws and business practices favoringlocal companies;

 

·                  longer payment cycles;

 

·                  difficulties in enforcing agreements andcollecting receivables through certain foreign legal systems;

 

·                  political and economic instability;

 

·                  potentially adverse tax consequences,tariffs and other trade barriers;

 

·                  international terrorism and anti-Americansentiment;

 

·                  difficulties and costs of staffing andmanaging foreign operations; and

 

·                  difficulties in enforcing intellectualproperty rights.

 

Our exposure to each of these risks may increase ourcosts, impair our ability to market and sell our products and requiresignificant management attention. We cannot assure you that one or more ofthese factors will not harm our business.

 

**If we choose to acquire or invest in new and complementarybusinesses, products or technologies instead of developing them ourselves, suchacquisitions or investments could disrupt our business.**

 

We may attempt to expand our business throughacquisitions. To the extent we grow our business through acquisitions, ourfuture success may be partially dependent upon our ability to effectivelyintegrate acquired businesses with our own. There can be no assurance that ouracquisitions will be successfully integrated or that any such acquisitions willotherwise be successful. If our acquisitions are unsuccessful for any reason,our business may be harmed and the value of your investment may decline.

 

**We are dependent upon key personnel, the loss of any of whichcould harm our business.**

 

Our future business and operating results dependsignificantly on the continued contributions of our key technical personnel andsenior management, particularly those of our co-founder, Chief ExecutiveOfficer and President, Michael P. Whitman. These individuals and the servicesthey provide would be difficult or impossible to replace. While we are subjectto certain severance obligations to Mr. Whitman, either he or we mayterminate his employment at any time and for any lawful reason or for noreason. Our business and future operating results also depend significantly onour ability to attract and retain qualified management, manufacturing,technical, regulatory, marketing, sales and support personnel for ouroperations. Competition for such personnel is intense, and there can be noassurance that we will be successful in attracting or retaining such personnel.

 

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Although we have key-personlife insurance in the amount of $2.0 million on the life of Mr. Whitman,this amount would not fully compensate us for the loss of Mr. Whitman’sservices. The loss of key employees, the failure of any key employee to performor our inability to attract and retain skilled employees, as needed, could harmour business.

 

**Lack of third-party coverage andreimbursement for our products could delay or limit their adoption.**

 

We may experience limitedsales growth resulting from limitations on reimbursements made to purchasers ofour products by third-party payers, and we cannot assure you that our saleswill not be impeded and our business harmed if third-party payers fail toprovide reimbursement that hospitals view as adequate.

 

In the United States, ourproducts are purchased primarily by medical institutions, which then billvarious third-party payers, such as the Centers for Medicare and MedicaidServices, or CMS, which administers the Medicare program, and other governmentprograms and private insurance plans, for the healthcare services provided totheir patients. The process involved in applying for coverage and incrementalreimbursement from CMS is lengthy and expensive. Moreover, many private payerslook to CMS in setting their reimbursement policies and amounts. If CMS orother agencies limit coverage for procedures utilizing our SurgASSIST system ordecrease or limit reimbursement payments for doctors and hospitals, this mayaffect coverage and reimbursement determinations by many private payers.

 

If a medical device does notreceive incremental reimbursement from CMS, then a medical institution wouldhave to absorb the cost of our products as part of the cost of the procedure inwhich the products are used. Acute care hospitals are now generally reimbursedby CMS for inpatient operating costs under a Medicare hospital inpatientprospective payment system. Under the Medicare hospital inpatient prospectivepayment system, acute care hospitals receive a fixed payment amount for eachcovered hospitalized patient based upon the Diagnosis-Related Group, or DRG, towhich the inpatient stay is assigned, regardless of the actual cost of the servicesprovided. At this time, we do not know the extent to which medical institutionswould consider insurers’ payment levels adequate to cover the cost of ourproducts. Failure by hospitals and surgeons to receive an amount that theyconsider to be adequate reimbursement for procedures in which our products areused could deter them from purchasing our products and limit our sales growth.In addition, pre-determined DRG payments may decline over time, which coulddeter medical institutions from purchasing our products. If medicalinstitutions are unable to justify the costs of our products, they may refuseto purchase them, which would significantly harm our business.

 

**Our operations are currentlyconducted primarily at a single location that may be at risk from fire,earthquakes, terror attacks or other disasters.**

 

We currently conduct all ofour manufacturing and management activities and certain research anddevelopment activities at a single location in Langhorne, Pennsylvania. We havetaken precautions to safeguard our facilities, including insurance, health andsafety protocols and off-site storage of computer data. However, a casualty dueto fire or natural disaster, such as an earthquake, storm or terrorist attack,could cause substantial delays in our operations, damage or destroy ourequipment or inventory and cause us to incur additional expenses. A disastercould seriously harm our business and results of operations. Our insurance doesnot cover earthquakes and floods and may not be adequate to cover our losses inany particular case.

 

**Risks Related to Our IntellectualProperty**

 

**If we fail to adequately enforce ordefend our intellectual property rights, our business may be harmed.**

 

Much of the technology usedin the markets in which we compete is covered by patents, and our commercialsuccess will depend in large part on our ability to obtain and maintain patentand trade secret 

 

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protection for our products and methods. Wecurrently hold 24 issued United States patents, eight granted European patentsand four other foreign patents, more than 100 pending United States and foreignpatent applications and two licensed patents that cover key aspects of ourtechnology. Our issued patents expire at various dates beginning in 2019. Theloss of our patents could reduce the value of the related products. Inaddition, the cost to litigate infringements of our patents or the cost todefend ourselves against patent infringement actions by others could besubstantial.

 

Our ability to obtainadditional patents is uncertain and the legal protection afforded by thesepatents is limited and may not adequately protect our rights or permit us togain or keep any competitive advantage. In addition, the specific contentrequired of patents and patent applications that is necessary to support andinterpret patent claims is highly uncertain due to the complex nature of therelevant legal, scientific and factual issues. Changes in either patent laws orin interpretations of patent laws in the United States or elsewhere maydiminish the value of our intellectual property or narrow the scope of ourpatent protection. Even if patents are issued regarding our products andmethods, our competitors may challenge the validity of those patents. Patentsalso will not protect our products and methods if competitors devise ways ofmaking competitive products without infringing our patents.

 

Proprietary trade secretsand unpatented know-how are also very important to our business. We rely ontrade secrets to protect certain aspects of our technology, especially where wedo not believe that patent protection is appropriate or obtainable. However, tradesecrets are difficult to protect. Our employees, consultants, contractors,outside clinical collaborators and other advisors may unintentionally orwillfully disclose our confidential information to competitors, andconfidentiality agreements may not provide an adequate remedy in the event ofunauthorized disclosure of confidential information. Enforcing a claim that athird party illegally obtained and is using our trade secrets is expensive andtime consuming, and the outcome is unpredictable. Moreover, our competitors mayindependently develop equivalent knowledge, methods and know-how. Failure toobtain or maintain trade secret protection could adversely affect ourcompetitive business position.

 

**If we infringe intellectualproperty rights of third parties, it may increase our costs or prevent us frombeing able to sell our existing products or commercialize new products.**

 

There is a risk that we areinfringing the proprietary rights of third parties under patents and pendingapplications belonging to third parties that may exist in the United States andelsewhere in the world and that relate to the products we market and develop.Because the patent application process can take several years to complete,there may be currently pending applications, unknown to us, which may result inissued patents that cover the production, manufacture, commercialization or useof our products. In addition, the production, manufacture, commercialization oruse of our product candidates may infringe existing patents of which we are notaware.

 

There has been substantiallitigation and other proceedings regarding patent and other intellectualproperty rights in the medical device industry. Defending ourselves againstthird-party claims, including litigation in particular, would be costly andtime consuming and would divert management’s attention from our business, whichcould lead to delays in our development or commercialization efforts.Currently, we are involved in two appeal proceedings in Germany in connectionwith two of three patent-infringement lawsuits against us. The lawsuits allegedthat certain of our products infringe three European patents held by EthiconEndo-Surgery. We prevailed in two of the three infringement actions and theproducts in question were found not to infringe the Ethicon Endo-Surgerypatents, and Ethicon Endo-Surgery is appealing one of those decisions. We lostthe other infringement action and are appealing that decision. If third partiesare successful in their claims, we might have to pay substantial damages ortake other actions that are adverse to our business. As a result ofintellectual property infringement claims, or to avoid potential claims, wemight:

 

·be prohibited from selling or licensing any of our current products or anyproduct that we may develop unless the patent holder licenses the patent to us,which it is not required to do;

 

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· be required topay substantial royalties or grant a cross license to our patents to anotherpatent holder; or

 

·be required to redesign a product so it does not infringe, which may not bepossible or could require substantial funds and time.

 

**We may be subject to damagesresulting from claims that our employees or we have wrongfully used ordisclosed alleged trade secrets of their former employers.**

 

Many of our employees werepreviously employed at universities or other medical device companies,including our competitors or potential competitors. We could in the future besubject to claims that these employees, or we, have inadvertently or otherwiseused or disclosed trade secrets or other proprietary information of theirformer employers. Litigation may be necessary to defend against these claims.If we fail in defending against such claims, a court could order us to paysubstantial damages and prohibit us from using technologies or features thatare essential to our products, if such technologies or features are found toincorporate or be derived from the trade secrets or other proprietaryinformation of the former employers. In addition, we may lose valuableintellectual property rights or personnel. A loss of key research personnel ortheir work product could hamper or prevent our ability to commercialize certainpotential products, which could severely harm our business. Even if we aresuccessful in defending against these claims, such litigation could result insubstantial costs and be a distraction to management.

 

**Risks Related to RegulatoryCompliance**

 

**Our failure to meet strictregulatory requirements could require us to pay fines, incur other costs oreven close our facilities.**

 

Our facilities andmanufacturing techniques generally must conform to standards that areestablished by the United States Food and Drug Administration, or FDA, andother government agencies, including those of European and other foreigngovernments. These regulatory agencies may conduct periodic audits orinspections of our facilities or our processes to monitor our compliance withapplicable regulatory standards. If a regulatory agency finds that we havefailed to comply with the appropriate regulatory standards, it may impose fineson us, delay or withdraw pre-market clearances or other regulatory approvalsor, if such a regulatory agency determines that our non-compliance is severe,it may close our facilities. Any adverse action by an applicable regulatoryagency could impair our ability to produce our products in a cost-effective andtimely manner in order to meet our customers’ demands. We may also be requiredto bear other costs or take other actions that may have a negative impact onour future sales and our ability to generate profits.

 

Since 2002, the FDA has conducted five inspections of our facilities.Each of those inspections resulted in the issuance of a Notice of InspectionalObservations, or Form 483. The most recent inspection concluded in May 2008and resulted in ten observations related to management controls, medical devicereporting, design control and corrective and preventive action. For each Form 483,we have prepared and submitted a response to the FDA, which included ourproposed corrective actions to address the FDA’s observations. The FDA issuedan Establishment Inspection Report, or EIR, which officially closed the FDA’sinspection for inspections conducted between 2002 and 2005. As of this date theFDA has not provided an EIR for its 2007 or 2008 inspections.

 

On October 22, 2008, we received from the FDA a Warning Letternotifying us that the FDA has determined that we are not in compliance with theCurrent Good Manufacturing Requirements of the FDA’s Quality System regulationsand with the FDA’s Medical Device Reporting regulations. The specified violationsrelated to each of the ten observations noted in the May 2008 Form 483.The FDA Warning Letter advised that failure to promptly correct the notedviolations could result in further regulatory action being taken by the FDAwithout notice, and that such actions could include, without limitation,seizure, injunction and/or civil money penalties.  Whether the FDA will accept our response tothe 2007 and 2008 Form 483s is uncertain, particularly in light of thesimilar nature of the current inspectional observations to the previousobservations. If the FDA does not agree with our proposed 

 

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correctiveactions, or accepts them but finds that we have not implemented themadequately, if the FDA is concerned about the repetitive nature of theinspectional observations, or if we otherwise fail to comply with applicableregulatory requirements, the FDA could initiate an enforcement action,including any of the following sanctions:

 

· untitledletters, warning letters, fines, injunctions, consent decrees and civilpenalties;

 

· customernotifications or repair, replacement, refunds, recall, detention or seizure ofour products;

 

· operatingrestrictions or partial suspension or total shutdown of production;

 

· refusing ordelaying our requests for 510(k) clearance or premarket approval, or PMA,of new products or modified products;

 

· withdrawing 510(k) clearancesor PMA approvals that have already been granted;

 

· refusal togrant export approval for our products; or

 

· criminalprosecution.

 

**We may be subject, directly orindirectly, to federal and state healthcare fraud and abuse laws andregulations and could face substantial penalties if we are unable to fullycomply with such laws.**

 

The federal anti-kickbacklaws and several similar state laws prohibit payments that are intended toinduce physicians or others either to refer patients to acquire or arrange foror recommend the acquisition of healthcare products or services. These lawsaffect our sales, marketing and other promotional activities by limiting thekinds of financial arrangements and sales programs we may have with hospitals,physicians or other potential purchasers or users of medical devices. Inparticular, these laws influence how we structure our sales, customer support,education and training programs and physician consulting and other servicearrangements. Although we seek to structure such arrangements in compliancewith applicable requirements, these laws are broadly written and it isdifficult to determine precisely how these laws will be applied in specificcircumstances. We could be subject to a claim under these anti-kickback lawsfor our consulting arrangements with surgeons, grants for training and othereducation, grants for research and other interactions with doctors which havecome under scrutiny by federal and state regulators and law enforcemententities. Anti-kickback laws prescribe civil, criminal and administrativepenalties for noncompliance, which can be substantial. Due to the breadth ofthe statutory provisions and the lack of guidance in the form of regulations orcourt decisions addressing some industry activities, it is possible that oursales, marketing and promotional activities practices might be challenged underanti-kickback or related laws. Even an unsuccessful challenge to orinvestigation into our practices could cause adverse publicity and thus couldharm our business and results of operations.

 

Foreign sales of ourproducts also subject us to similar fraud and abuse laws, including applicationof the U.S. Foreign Corrupt Practices Act. If our operations, including anyconsulting arrangements we may enter into with physicians who use our products,are found to be in violation of these laws, we or our officers may be subjectto civil or criminal penalties, including large monetary penalties, damages,fines, imprisonment and exclusion from Medicare and Medicaid programparticipation. If enforcement action were to occur, our business and financialcondition would be harmed.

 

**Modifications to our products mayrequire new regulatory clearances or approvals or may require us to recall orcease marketing our products until clearances or approvals are obtained.**

 

Modifications to ourproducts may require new regulatory approvals or clearances, including 510(k) clearancesor premarket approvals, or require us to recall or cease marketing the modifieddevices until these clearances or approvals are obtained. The FDA requiresdevice manufacturers to initially make 

 

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and document a determination of whether or not amodification requires a new approval, supplement or clearance. A manufacturermay determine that a modification could not significantly affect safety orefficacy and does not represent a major change in its intended use, so that nonew 510(k) clearance is necessary. However, the FDA can review amanufacturer’s decision and may disagree. The FDA may also on its owninitiative determine that a new clearance or approval is required. We have mademodifications to our products in the past and may make additional modificationsin the future that we believe do not or will not require additional clearancesor approvals. If the FDA disagrees and requires new clearances or approvals forthe modifications, we may be required to recall and to stop marketing ourproducts as modified, which could require us to redesign our products and harmour operating results. In these circumstances, we may be subject to significantenforcement actions.

 

If a manufacturer determinesthat a modification to an FDA-cleared device could significantly affect itssafety or efficacy, or would constitute a major change in its intended use,then the manufacturer must file for a new 510(k) clearance or possibly apremarket approval application. Where we determine that modifications to ourproducts require a new 510(k) clearance or premarket approval application,we may not be able to obtain those additional clearances or approvals for themodifications or additional indications in a timely manner, or at all. Forthose products sold in the European Union, we must notify Orion Registrar, Inc.,or Orion, our E.U. Notified Body, if significant changes are made to theproducts or if there are substantial changes to our quality assurance systemsaffecting those products. Obtaining clearances and approvals can be a timeconsuming process, and failure to obtain or delays in obtaining required futureclearances or approvals would adversely affect our ability to introduce new orenhanced products in a timely manner, which in turn would harm our futuregrowth.

 

**There is no guarantee that the FDAwill grant 510(k) clearance or PMA approval of our emerging technologiesand failure to obtain necessary clearances or approvals for our future productswould adversely affect our ability to grow our business.**

 

Some of our new productswill require FDA clearance of a 510(k), or may even require FDA approval of aPMA. We are in the process of developing our regulatory strategies forobtaining clearance or approval of these new products. The FDA may not approve orclear these products for the indications that are necessary or desirable forsuccessful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearanceor premarket approval of new products, new intended uses or modifications toexisting products. Failure to receive clearance or approval for our newproducts would have an adverse effect on our ability to expand our business.

 

**If we or our contract manufacturersfail to comply with the FDA’s Quality System Regulations, our manufacturing operationscould be interrupted and our product sales and operating results could suffer.**

 

Our finished goodsmanufacturing processes, and those of some of our contract manufacturers, arerequired to comply with the FDA’s Quality System Regulations, or QSRs, whichcover the procedures and documentation of the design, testing, production,control, quality assurance, labeling, packaging, sterilization, storage andshipping of our devices. The FDA enforces its QSRs through periodic inspectionsof manufacturing facilities. We and our contract manufacturers have been, andanticipate in the future being, subject to such inspections.  As noted above, in October 2008, wereceived from the FDA a Warning Letter notifying us that the FDA has determinedthat we are not in compliance with the Current Good Manufacturing Requirementsof the FDA’s Quality System regulations. If our manufacturing facilities or those of any of our contractmanufacturers fail to take satisfactory corrective action in response to anadverse QSR inspection, the FDA could take enforcement action, including any ofthe following sanctions, which could have a material impact on our operations:

 

· untitledletters, warning letters, fines, injunctions, consent decrees and civilpenalties;

 

· customer notificationsor repair, replacement, refunds, recall, detention or seizure of our products;

 

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· operatingrestrictions or partial suspension or total shutdown of production;

 

· refusing ordelaying our requests for 510(k) clearance or premarket approval of newproducts or modified products;

 

· withdrawing 510(k) clearanceson PMA approvals that have already been granted;

 

· refusal togrant export approval for our products; or

 

· criminalprosecution.

 

**Our products may in the future besubject to product recalls that could harm our reputation, business andfinancial results.**

 

The FDA and similar foreigngovernmental authorities have the authority to require the recall ofcommercialized products in the event of material deficiencies or defects indesign or manufacture. In the case of the FDA, the authority to require arecall must be based on an FDA finding that there is a reasonable probabilitythat the device would cause serious injury or death. In addition, foreigngovernmental bodies have the authority to require the recall of our products inthe event of material deficiencies or defects in design or manufacture. Manufacturersmay, under their own initiative, recall a product if any material deficiency ina device is found. A government-mandated or voluntary recall by us or one ofour distributors could occur as a result of component failures, manufacturingerrors, design or labeling defects or other deficiencies and issues. Recalls ofany of our products would divert managerial and financial resources and have anadverse effect on our financial condition and results of operations. The FDArequires that certain classifications of recalls be reported to FDA within 10working days after the recall is initiated. Companies are required to maintaincertain records of recalls, even if they are not reportable to the FDA. We haveinitiated certain voluntary recalls involving products that have beendistributed to our customers and may take additional such actions in thefuture. We believe that certain of those recalls do not require notification ofthe FDA. If the FDA disagrees with our determinations, they could require us toreport those actions as recalls. A future recall announcement could harm ourreputation with customers and negatively affect our sales. In addition, the FDAcould take enforcement action, including any of the following sanctions forfailing to report the recalls when they were conducted:

 

· untitledletters, warning letters, fines, injunctions, consent decrees and civilpenalties;

 

· customernotifications or repair, replacement, refunds, recall, detention of seizure ofour products;

 

· operatingrestrictions or partial suspension or total shutdown of production;

 

· refusing ordelaying requests for 510(k) clearance or premarket approval of newproducts or modified products;

 

· withdrawing 510(k) clearancesor PMA approvals that have already been granted;

 

· refusal togrant export approval for our products; or

 

· criminalprosecution.

 

**If our products, or malfunction ofour products, cause or contribute to a death or a serious injury, we will besubject to medical device reporting regulations, which can result in voluntarycorrective actions or agency enforcement actions.**

 

Under the FDA medical devicereporting regulations, medical device manufacturers are required to report tothe FDA information that a device has or may have caused or contributed to adeath or serious 

 

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injury or has malfunctioned in a way that wouldlikely cause or contribute to a death or serious injury if the malfunction ofthe device or one of our similar devices were to recur. All manufacturersplacing medical devices in the market in the European Union are legally boundto report any serious or potentially serious incidents involving devices theyproduce or sell to the Competent Authority in whose jurisdiction the incidentoccurred. Were this to happen to us, the relevant Competent Authority wouldfile an initial report, and there would then be a further inspection orassessment if there are particular issues. This would be carried out either bythe Competent Authority or it could require that Orion, as the Notified Body,carry out the inspection or assessment.

 

Any such adverse eventinvolving our products could result in future voluntary corrective actions,such as recalls or customer notifications, or agency action, such as inspectionor enforcement action. Adverse events involving our products have been reportedto us in the past, and we cannot guarantee that they will not occur in thefuture. Any corrective action, whether voluntary or involuntary, as well asdefending ourselves in a lawsuit, will require the dedication of our time andcapital, distract management from operating our business, and may harm ourreputation and financial results. Failure to report such adverse events toappropriate government authorities on a timely basis, or at all, could resultin an enforcement action against us.

 

**Failure to obtain regulatoryapproval in additional foreign jurisdictions will prevent us from expanding thecommercialization of our products abroad.**

 

We intend to market ourproducts in a number of international markets. Although certain of our productshave been approved for commercialization in Japan and in the European Union, inorder to market our products in other foreign jurisdictions we must obtainseparate regulatory approvals. The approval procedure varies amongjurisdictions and can involve substantial additional testing. Approval orclearance by the FDA does not ensure approval by regulatory authorities inother jurisdictions, and approval by one foreign regulatory authority does notensure approval by regulatory authorities in other foreign jurisdictions or bythe FDA. The foreign regulatory approval process may include all of the risksassociated with obtaining FDA approval in addition to other risks. In addition,the time required to obtain foreign approval may differ from that required toobtain FDA approval, and we may not obtain foreign regulatory approvals on atimely basis, if at all. We may not be able to file for regulatory approvalsand may not receive necessary approvals to commercialize our products in anyforeign market other than in the European Union and Japan.

 

**We may be subject to fines,penalties or injunctions if we are determined to be promoting the use of ourproducts for unapproved or “off-label” uses.**

 

Our promotional materialsand training methods for surgeons must comply with FDA and other applicablelaws and regulations. Many of our products are cleared by the FDA for use invarious surgical applications. We believe that the specific surgical proceduresfor which our products are marketed fall within the scope of the surgicalapplications that have been cleared by the FDA. However, the FDA could disagreeand require us to stop promoting our products for those specific proceduresuntil we obtain FDA clearance or approval for them. In addition, if the FDAdetermines that our promotional materials or training constitutes promotion ofan unapproved use, it could request that we modify our training or promotionalmaterials or subject us to regulatory or enforcement actions, including theissuance of an untitled letter, a warning letter, injunction, seizure, civilfine and criminal penalties. It is also possible that other federal, state orforeign enforcement authorities might take action if they consider ourpromotional or training materials to constitute promotion of an unapproved use,which could result in significant fines or penalties under other statutoryauthorities, such as laws prohibiting false claims for reimbursement. In thatevent, our reputation could be damaged and adoption of the products would beimpaired.

 

**Federal regulatory reforms mayadversely affect our ability to sell our products profitably.**

 

From time to time,legislation is drafted and introduced in Congress that could significantlychange the statutory provisions governing the clearance or approval,manufacture and marketing of a medical device. In addition, FDA regulations andguidance are often revised or reinterpreted by the agency

 

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in ways that may significantly affect our businessand our products. It is impossible to predict whether legislative changes willbe enacted or FDA regulations, guidance or interpretations changed, and whatthe impact of such changes, if any, may be.

 

Without limiting thegenerality of the foregoing, Congress has recently enacted, and the Presidenthas signed into law, the Food and Drug Administration Amendments Act of 2007.The amendments require, among other things, that FDA propose, and ultimatelyimplement, regulations that will require manufacturers to label medical deviceswith unique identifiers unless a waiver is received from FDA. Once implemented,compliance with those regulations may require us to take additional steps inthe manufacture of our products and labeling. These steps may requireadditional resources and could be costly. In addition, the law, as amended,will require us to, among other things, pay annual establishment registrationfees to the FDA for each of our FDA registered facilities.

 

**Risks Related to Ownership of OurCommon Stock**

 

**We expect that the price of ourcommon stock will fluctuate substantially.**

 

Since our initial publicoffering in October 2007, the market price of our common stock has rangedfrom $14.79 to $0.64.  Recently, ourcommon stock, like that of many other small companies, has experienced evengreater than usual volatility due in part to macro-economic conditions thathave affected U.S. companies and securities markets generally.  The market price for our common stock islikely to continue to fluctuate as a result of a number of factors, including:

 

·                  actualor anticipated announcements of technological innovations;

 

·                  introductionby us or by others of new commercial products;

 

·                  actualor anticipated changes in laws and governmental regulations;

 

·                  disputesrelating to patents or proprietary rights;

 

·                  changesin business practices;

 

·                  developmentsrelating to our efforts to obtain additional financing to fund our operationsor our issuance of additional debt or equity securities;

 

·                  announcementsby us regarding transactions with potential strategic partners;

 

·                  changesin industry trends or conditions;

 

·                  tradingvolume of our common stock;

 

·                  changesin earnings estimates or recommendations by securities analysts, failure toobtain analyst coverage of our common stock or our failure to achieve analysts’earnings estimates;

 

·                  developmentsin our industry; and

 

·                  generalmarket conditions and other factors unrelated to our operating performance orthe operating performance of our competitors or potential competitors.

 

Stock prices of manycompanies in the medical device industry have experienced wide fluctuationsthat have often been unrelated to the operating performance of these companies.In the past, securities class action litigation often has been initiatedagainst a company following a period of volatility 

 

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in the market price of the company’s securities. Ifsecurities class action litigation is initiated against us, we will incursubstantial costs and our management’s attention will be diverted from ouroperations. All of these factors may materially and adversely affect the marketprice of our common stock, and you may lose some or all of your investment.

 

***Our common stock may not continue to trade on the Nasdaq Global Market,which could reduce the value of your investment and make your shares moredifficult to sell.***

 

In order for our commonstock to trade on the Nasdaq Global Market, we must continue to meet thelisting standards of that market. On October 22, 2008, we received fromthe Nasdaq Stock Market a Staff Deficiency Letter notifying us that we were notin compliance with the listing requirements of the Nasdaq Global Market becausethe market value of our listed securities had been below the minimum$50,000,000 requirement for continued listing set forth in Marketplace Rule 4450(b)(1)(A) forten consecutive trading days. Under applicable Nasdaq rules, if we are not ableto establish compliance with the minimum market value of listed securitiesrequirement by November 21, 2008, we will receive a notice that our commonstock will be delisted from the Nasdaq Global Market. If such a delistingnotification is issued, we will be entitled to appeal the Staff’s determinationto a Nasdaq Listing Qualifications Panel. A timely appeal would stay delistingpending the appeal. However, there can be no assurance that we will be able toreestablish or maintain compliance with the applicable Nasdaq listing criteriaor that any such appeal, if taken, would be successful.  If our common stock is delisted from theNasdaq National Market, we could seek to have our common stock listed on theNasdaq Capital Market or quoted on the OTB Bulletin Board. However, delistingof our common stock from the Nasdaq Global Market could hinder your ability tosell, or obtain an accurate quotation for the price of, your shares of ourcommon stock. Delisting could also adversely affect the perception amonginvestors of PMI and its prospects, which could lead to further declines in themarket price of our common stock. Delisting would also make it more difficultand expensive for us to raise capital. In addition, delisting might subject usto an SEC rule that could adversely affect the ability of broker-dealersto sell or make a market in our common stock, thus hindering your ability tosell your shares and could have the effect of limiting sales by you of ourcommon stock under the securities laws promulgated by various states andforeign jurisdictions, commonly referred to as “Blue Sky” laws.  In addition, if our common stock is no longerlisted on Nasdaq, persons holding shares of our common stock that are “restrictedsecurities” may have a more limited ability to effect sales of our common stockpursuant to Rule 144, as the market-based method for calculating volumelimitations will not be available.

 

**Securities analysts may notinitiate or continue coverage for our common stock or may issue negativereports, and this may have a negative impact on the market price of our commonstock.**

 

Securities analysts mayelect not to provide research coverage of our common stock, and if a sufficientnumber of securities analysts do not cover our common stock, the lack ofresearch coverage may adversely affect the market price of our common stock.The trading market for our common stock may be affected in part by the researchand reports that industry or financial analysts publish about us or ourbusiness. If one or more of the analysts who elect to cover us downgrades ourstock, our stock price could decline. If one or more of these analysts ceasescoverage of our company, we could lose visibility in the market, which in turncould cause our stock price to decline. In addition, rules mandated by theSarbanes-Oxley Act and a global settlement reached in 2003 between theSecurities and Exchange Commission, or SEC, other regulatory agencies and anumber of investment banks have led to a number of fundamental changes in howanalysts are reviewed and compensated. In particular, many investment bankingfirms will be required to contract with independent financial analysts fortheir stock research. It may be difficult for companies such as ours, withsmaller market capitalizations, to attract independent financial analysts thatwill cover our common stock. This could have a negative effect on the marketprice of our stock.

 

**Our principal stockholders,directors and management own a large percentage of our voting stock, whichallows them to exercise significant influence over matters subject tostockholder approval.**

 

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Our executive officers,directors and stockholders holding 5% or more of our outstanding common stockbeneficially own or control approximately 40.8% of the outstanding shares ofour common stock, assuming no exercise of outstanding options and warrants orconversion of our convertible notes. Accordingly, these executive officers,directors and principal stockholders, acting as a group, will have substantialinfluence over the outcome of corporate actions requiring stockholder approval,including the election of directors, any merger, consolidation or sale of allor substantially all of our assets or any other significant corporatetransaction. These stockholders may also delay or prevent a change of controlor otherwise discourage a potential acquirer from attempting to obtain controlof our company, even if such a change of control would benefit our otherstockholders. This significant concentration of stock ownership may adverselyaffect the trading price of our common stock due to investors’ perception thatconflicts of interest may exist or arise.

 

**Anti-takeover provisions in ourcharter documents and Delaware law could prevent or delay a change in controlof our company.**

 

Provisions in our amendedand restated certificate of incorporation and amended and restated bylaws, aswell as provisions of Delaware law, may discourage, delay or prevent a merger,acquisition or change of control. These provisions could also discourage proxycontests and make it more difficult for stockholders to elect directors andtake other corporate actions. These provisions include:

 

· advance noticerequirements for stockholder proposals and nominations;

 

· limitations onconvening stockholder meetings;

 

· the eliminationof stockholder action by written consent;

 

· the eliminationof cumulative voting; and

 

· a classifiedboard of directors.

 

In addition, we are subjectto Section 203 of the Delaware General Corporation Law, which imposescertain restrictions on mergers and other business combinations between us andany holder of 15% or more of our common stock.

 

**Sales of a substantial number ofshares of our common stock in the public market, or the perception that theymay occur, may depress the market price of our common stock.**

 

If our existing stockholderssell substantial amounts of our common stock in the public market, or the publicmarket perceives that existing stockholders might sell substantial shares ofcommon stock, the market price of our common stock could decline significantly.These sales might also make it more difficult for us to sell equity securitiesat a time and price that we deem appropriate.

 

Approximately 2.6 millionshares of our common stock that are issuable upon conversion of the convertiblenotes that we issued in March 2007 are now eligible for resale under Rule 144.Approximately 17.1 million additional shares of our common stock areoutstanding, assuming no exercise of outstanding options or warrants orconversion of our convertible notes.  If the holders of these shares sellthem or are perceived by the market as intending to sell them, the market priceof our common stock could drop significantly. Any substantial sale of commonstock pursuant to any resale registration statements or Rule 144 may havean adverse effect on the market price of our common stock by creating anexcessive supply.

 

**Item 2.****                                  ****Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

(a)                                  *Sales of UnregisteredSecurities:*

 

None.

 

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(b)                                     *Use of Proceeds from PublicOffering of Common Stock*

 

Our initial public offeringof common stock was effected through a Registration Statement on Form S-1(File No. 333-142926) that was declared effective by the Securities andExchange Commission on October 25, 2007. The net offering proceeds to us,after deducting underwriting discounts and offering expenses, wereapproximately $42 million.  Through September 30, 2008, we have usedall of the net proceeds from the offering for general working capital purposes.

 

(c)                                      *Purchases of EquitySecurities by the Issuer and Affiliated Purchasers:*

 

None.

 

**Item 3.****                                       ****Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4.****                                       ****Submission of Matters to aVote of Security Holders.**

 

None.

 

**Item 5.****                                       ****Other Information.**

 

None.

 

**Item 6.****                                       ****Exhibits.**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Filed with   this Form** | ** ** | **Incorporated by Reference** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|
| **No.**     | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **10-Q**                             | ** ** | **Form**                                | ** ** | **Filing Date** | ** ** | **Exhibit No.** |
| 3.1         |       | Fourth Amended and Restated Certificate of  Incorporation of the Company                                                                                                                                                                                                                                                                                                                                                                                |       |                                 |       | S-1/A                                   |   | October 9, 2007 |   | 3.2 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                 |       |                                    |   |   |   |   |
| 3.2         |       | Amended and Restated By-Laws of the Company                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                 |       | S-1/A                                   |   | October 9, 2007 |   | 3.4 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                 |       |                                    |   |   |   |   |
| 4.1         |       | Specimen certificate for common stock of Power  Medical Interventions, Inc.                                                                                                                                                                                                                                                                                                                                                                        |       |                                 |       | S-1/A                                   |   | October 9, 2007 |   | 4.1 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                 |       |                                    |   |   |   |   |
| 10.9        |       | License and Development Agreement and Reload  Supply Agreement between Power Medical Interventions, Inc. and Intuitive  Surgical, Inc. each dated September 9, 2008 (Exhibits omitted) (Confidential  treatment for portions of this Reload Supply Agreement has been requested  pursuant to Rule 24b-2. A copy of the agreement including the  confidential portions has been filed with the Securities and Exchange  Commission.) | ** ** | **X**                                |       |                                    |   |   |   |   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                 |       |                                    |   |   |   |   |
| 31.1        |       | Certification of Chief Executive Officer                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **X**                                |       |                                    |   |   |   |   |

 

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|   |   | Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                          |       |   |   |   |   |   |   |   |
|--------|--------|----------------------------------------------------------------------------------------------------------|------------|--------|--------|--------|--------|--------|--------|--------|
|   |   |                                                                                                     |       |   |   |   |   |   |   |   |
| 31.2   |   | Certification of Chief Financial Officer Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 | ** ** | **X**  |   |   |   |   |   |   |
|   |   |                                                                                                     |       |   |   |   |   |   |   |   |
| 32.1   |   | Certification of Chief Executive Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 | ** ** | **X**  |   |   |   |   |   |   |
|   |   |                                                                                                     |       |   |   |   |   |   |   |   |
| 32.2   |   | Certification of Chief Financial Officer Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 | ** ** | **X**  |   |   |   |   |   |   |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                   |   | POWER MEDICAL INTERVENTIONS, INC.     |   |
|------------------------|--------|---------------------------------------|--------|
|                   |   | (Registrant)                          |   |
|                   |   |                                  |
| November 14, 2008 | By:    | /s/ Michael P. Whitman                |
|                   |   | Michael P. Whitman                    |
|                   |   | President and Chief Executive Officer |
|                   |   |                                  |
|                   |   | POWER MEDICAL INTERVENTIONS, INC.     |   |
|                   |   | (Registrant)                          |   |
|                   |   |                                  |
| November 14, 2008 | By:    | /s/ John P. Gandolfo                  |
|                   |   | John P. Gandolfo                      |
|                   |   | Chief Financial Officer               |
|                        |        |                                       |        |  |

 

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**Exhibit Index**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Filed with  this Form** | ** ** | **Incorporated by Reference** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|
| **No.**     | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **10-Q**                            | ** ** | **Form**                                | ** ** | **Filing Date** | ** ** | **Exhibit No.** |
| 3.1         |       | Fourth Amended and Restated Certificate of  Incorporation of the Company                                                                                                                                                                                                                                                                                                                                                                                |       |                                |       | S-1/A                                   |   | October 9, 2007 |   | 3.2 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                |       |                                    |   |   |   |   |
| 3.2         |       | Amended and Restated By-Laws of the Company                                                                                                                                                                                                                                                                                                                                                                                                             |       |                                |       | S-1/A                                   |   | October 9, 2007 |   | 3.4 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                |       |                                    |   |   |   |   |
| 4.1         |       | Specimen certificate for common stock of Power  Medical Interventions, Inc.                                                                                                                                                                                                                                                                                                                                                                        |       |                                |       | S-1/A                                   |   | October 9, 2007 |   | 4.1 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                |       |                                    |   |   |   |   |
| 10.9        |       | License and Development Agreement and Reload  Supply Agreement between Power Medical Interventions, Inc. and Intuitive  Surgical, Inc. each dated September 9, 2008 (Exhibits omitted) (Confidential  treatment for portions of this Reload Supply Agreement has been requested  pursuant to Rule 24b-2. A copy of the agreement including the  confidential portions has been filed with the Securities and Exchange  Commission.) | ** ** | **X**                               |       |                                    |   |   |   |   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                |       |                                    |   |   |   |   |
| 31.1        |       | Certification of Principal Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                            | ** ** | **X**                               |       |                                    |   |   |   |   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                |       |                                    |   |   |   |   |
| 31.2        |       | Certification of Principal Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                            | ** ** | **X**                               |       |                                    |   |   |   |   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                |       |                                    |   |   |   |   |
| 32.1        |       | Certification of Principal Executive Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                            | ** ** | **X**                               |       |                                    |   |   |   |   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                |       |                                    |   |   |   |   |
| 32.2        |       | Certification of Principal Financial Officer  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                            | ** ** | **X**                               |       |                                    |   |   |   |   |

 

47

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