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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended June 30, 2007



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

For the transition period from  to

Commission File Number: 001-33382



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SENORX, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0787406                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

11 Columbia, Suite A

Aliso Viejo, California 92656

(Address of principal executive offices) (Zip
Code)

(949) 362-4800

(Registrants telephone number, including area code)



---

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

Indicate by check mark whether the registrant is a Large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check one):

Large accelerated Filer ̈Accelerated filer ̈Non-accelerated filer  x

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

As of July 31, 2007 17,092,091 shares of the registrants common stock were outstanding.



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SENORX, INC.

INDEX



|         |  |                                                                                               |  |     
|-------- |  | --------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                               |  | Page
|         |  |                                                                                              
|PART I   |  | FINANCIAL INFORMATION                                                                         |  |     
|         |  |                                                                                              
|ITEM 1.  |  | CONDENSED FINANCIAL STATEMENTS (unaudited)                                                    |  |     
|         |  |                                                                                              
|         |  | Condensed Balance Sheets as of June 30, 2007 and December 31, 2006                            |  | 3   
|         |  |                                                                                              
|         |  | Condensed Statements of Operations for the three and six months ended June 30, 2007 and 2006  |  | 4   
|         |  |                                                                                              
|         |  | Condensed Statements of Stockholders Equity (Deficit) for the six months ended June 30, 2007 |  | 5   
|         |  |                                                                                              
|         |  | Condensed Statements of Cash Flows for the six months ended June 30, 2007 and 2006            |  | 6   
|         |  |                                                                                              
|         |  | Notes to Unaudited Condensed Financial Statements                                             |  | 7   
|         |  |                                                                                              
|ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS          |  | 12  
|         |  |                                                                                              
|ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    |  | 17  
|         |  |                                                                                              
|ITEM 4T. |  | CONTROLS AND PROCEDURES                                                                       |  | 18  
|         |  |                                                                                              
|PART II  |  | OTHER INFORMATION                                                                             |  |     
|         |  |                                                                                              
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                             |  | 18  
|         |  |                                                                                              
|ITEM 1A. |  | RISK FACTORS                                                                                  |  | 18  
|         |  |                                                                                              
|ITEM 2.  |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                   |  | 27  
|         |  |                                                                                              
|ITEM 3.  |  | DEFAULTS UPON SENIOR SECURITIES                                                               |  | 27  
|         |  |                                                                                              
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                           |  | 27  
|         |  |                                                                                              
|ITEM 5.  |  | OTHER INFORMATION                                                                             |  | 28  
|         |  |                                                                                              
|ITEM 6.  |  | EXHIBITS                                                                                      |  | 28  
|         |  |                                                                                              
|         |  | SIGNATURES                                                                                    |  | 29  



2



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ITEM I: FINANCIAL INFORMATON

SENORX, INC.

CONDENSED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                                          |  | June 30, 2007 |             |   | December 31, 2006 |  
|ASSETS                                                                                                                                                                    |  |               |             |   |                   |   |             |  
|Current Assets:                                                                                                                                                           |  |               |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                                                                 |  | $             | 44,541,309  |   |                   | $ | 7,412,986   |  
|Accounts receivable, net of allowance for doubtful accounts of $113,169 and $120,000, respectively                                                                        |  |               | 4,477,568   |   |                   |   | 4,241,307   |  
|Inventory                                                                                                                                                                 |  |               | 5,419,672   |   |                   |   | 4,988,695   |  
|Prepaid expenses and deposits                                                                                                                                             |  |               | 456,087     |   |                   |   | 220,659     |  
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|Total current assets                                                                                                                                                      |  |               | 54,894,636  |   |                   |   | 16,863,647  |  
|Property and equipment, net                                                                                                                                               |  |               | 1,136,844   |   |                   |   | 1,100,599   |  
|Other assets, net of accumulated depreciation of $446,653, and $539,602, respectively                                                                                     |  |               | 433,146     |   |                   |   | 2,017,079   |  
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|TOTAL                                                                                                                                                                     |  | $             | 56,464,626  |   |                   | $ | 19,981,325  |  
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                            |  |               |             |   |                   |   |             |  
|Current Liabilities:                                                                                                                                                      |  |               |             |   |                   |   |             |  
|Accounts payable                                                                                                                                                          |  | $             | 1,846,838   |   |                   | $ | 4,122,477   |  
|Accrued expenses, including accrued employee compensation of $815,711 and$507,829, respectively                                                                           |  |               | 2,297,351   |   |                   |   | 2,109,226   |  
|Deferred revenuecurrent                                                                                                                                                  |  |               | 66,850      |   |                   |   | 36,050      |  
|Current portion of long-term debt                                                                                                                                         |  |               | 4,924,249   |   |                   |   | 3,209,621   |  
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|Total current liabilities                                                                                                                                                 |  |               | 9,135,288   |   |                   |   | 9,477,374   |  
|Long-term debtless current portion                                                                                                                                       |  |               | 8,752,676   |   |                   |   | 10,596,147  |  
|Warrant liability                                                                                                                                                         |  |               |            |   |                   |   | 1,529,250   |  
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|Total long-term liabilities                                                                                                                                               |  |               | 8,752,676   |   |                   |   | 12,125,397  |  
|Convertible promissory notes (at fair value)                                                                                                                              |  |               |            |   |                   |   | 11,960,000  |  
|Commitments and contingencies (Note 12)                                                                                                                                   |  |               |             |   |                   |   |             |  
|Stockholders Equity (Deficit):                                                                                                                                           |  |               |             |   |                   |   |             |  
|Series A convertible preferred stock$1.00 par value; 3,000,000 shares authorized,issued and outstanding (2007 and 2006) (aggregate
liquidation value of $3,000,000)      |  |               |            |   |                   |   | 3,000,000   |  
|Series B convertible preferred stock$2.50 par value; 3,532,040 shares authorized;3,523,040 issued and outstanding
(2006) (aggregate liquidation value of $8,807,600)     |  |               |            |   |                   |   | 8,807,600   |  
|Series C convertible preferred stock$1.96 par value; 19,500,000 shares authorized; 17,861,899 (2006) issued and outstanding
(aggregate liquidation value of $35,009,323) |  |               |            |   |                   |   | 35,009,323  |  
|Common stock, $0.001 par value100,000,000 shares authorized; 17,091,556 (2007)and 2,371,002 (2006) issued and
outstanding                                                |  |               | 17,091      |   |                   |   | 2,371       |  
|Additional paid-in capital                                                                                                                                                |  |               | 108,375,879 |   |                   |   | 5,262,394   |  
|Deferred compensation                                                                                                                                                     |  |               | (35,469     | ) |                   |   | (126,658    | )
|Accumulated deficit                                                                                                                                                       |  |               | (69,780,839 | ) |                   |   | (65,536,476 | )
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|Total stockholders equity (deficit)                                                                                                                                      |  |               | 38,576,662  |   |                   |   | (13,581,446 | )
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  
|TOTAL                                                                                                                                                                     |  | $             | 56,464,626  |   |                   | $ | 19,981,325  |  
|                                                                                                                                                                          |  |               |             |   |                   |   |             |  



3



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SENORX, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                          |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                          |  | 2007                        |            |   | 2006                      |   |            | 2007 |  |   | 2006       |  
|Net revenues                                                              |  | $                           | 8,121,285  |   |                           | $ | 6,324,875  |      |  | $ | 15,821,361 |   |  | $ | 12,162,023 |  
|Cost of goods sold                                                        |  |                             | 3,490,011  |   |                           |   | 3,054,140  |      |  |   | 7,027,355  |   |  |   | 6,140,289  |  
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                              |  |                             | 4,631,274  |   |                           |   | 3,273,735  |      |  |   | 8,794,006  |   |  |   | 6,021,734  |  
|Operating expenses:                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Selling and marketing                                                     |  |                             | 4,430,998  |   |                           |   | 3,947,727  |      |  |   | 8,731,491  |   |  |   | 7,099,560  |  
|Research and development                                                  |  |                             | 1,646,665  |   |                           |   | 1,312,682  |      |  |   | 3,114,869  |   |  |   | 2,442,371  |  
|General and administrative                                                |  |                             | 1,104,652  |   |                           |   | 512,629    |      |  |   | 1,887,188  |   |  |   | 1,159,155  |  
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                  |  |                             | 7,182,315  |   |                           |   | 5,773,038  |      |  |   | 13,733,548 |   |  |   | 10,701,086 |  
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Loss from operations                                                      |  |                             | (2,551,041 | ) |                           |   | (2,499,303 | )    |  |   | (4,939,542 | ) |  |   | (4,679,352 | )
|Interest expense                                                          |  |                             | 449,865    |   |                           |   | 216,127    |      |  |   | 926,735    |   |  |   | 381,239    |  
|Change in fair value of convertible promissory notesand warrant valuation |  |                             | (305,047   | ) |                           |   | 3,840,000  |      |  |   | (990,875   | ) |  |   | 3,840,000  |  
|Interest Income                                                           |  |                             | (560,980   | ) |                           |   | (56,515    | )    |  |   | (631,039   | ) |  |   | (60,708    | )
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Loss before provision for income taxes                                    |  |                             | (2,134,879 | ) |                           |   | (6,498,915 | )    |  |   | (4,244,363 | ) |  |   | (8,839,883 | )
|Provision for income taxes                                                |  |                             |           |   |                           |   | 3,000      |      |  |   |           |   |  |   | 5,000      |  
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                                  |  | $                           | (2,134,879 | ) |                           | $ | (6,501,915 | )    |  | $ | (4,244,363 | ) |  | $ | (8,844,883 | )
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss per share-basic and diluted                                      |  | $                           | (0.15      | ) |                           | $ | (2.87      | )    |  | $ | (0.45      | ) |  | $ | (4.06      | )
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average shares outstanding-basic and diluted                     |  |                             | 13,900,529 |   |                           |   | 2,200,205  |      |  |   | 9,388,107  |   |  |   | 2,180,145  |  
|                                                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



4



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SENORX, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

(Unaudited)



|                                                                           |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   |             |  |   |          |   |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------- |  | ------------------------------------ | - |  | ------------------------------------ | ---------- | - | ------------------------------------ | ---------- | - | ------------ | - | -------------------------- | ------ | --------------------- | ----------- | ------ | ------------------- | - | ----------- | ----------------------------------- | ------ | ---------- |  | - | ------ |  | - | ----------- |  | - | -------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                           |  | Series A Convertible Preferred Stock |   |  | Series B Convertible Preferred Stock |            |   | Series C Convertible Preferred Stock |            |   | Common Stock |   | Additional Paid-In Capital |        | Deferred Compensation |             |        | Accumulated Deficit |   |             | Total Stockholders Equity(Deficit) |       
|                                                                           |  | Shares                               |   |  | Amount                               |            |   | Shares                               |            |   | Amount       |   |                            | Shares |                       |             | Amount |                     |   | Shares      |                                     | Amount |            |  |   |       
|BalancesDecember 31, 2006                                                 |  | 3,000,000                            |   |  | $                                    | 3,000,000  |   |                                      | 3,523,040  |   |              | $ | 8,807,600                  |        |                       | 17,861,899  |        |                     | $ | 35,009,323  |                                     |        | 2,371,002  |  | $ | 2,371  |  | $ | 5,262,394   |  | $ | (126,658 | ) |  | $ | (65,536,476 | ) |  | $ | (13,581,446 | )
|Proceeds from initial public offering, net of offering costs of $2,266,158 |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        | 6,325,000  |  |   | 6,325  |  |   | 44,785,517  |  |   |          |   |  |   |             |   |  |   | 44,791,842  |  
|Proceeds from exercise of common stock options                             |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        | 35,985     |  |   | 35     |  |   | 44,714      |  |   |          |   |  |   |             |   |  |   | 44,749      |  
|Reclass of warrant liability to equity                                     |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   | 698,374     |  |   |          |   |  |   |             |   |  |   | 698,374     |  
|Amortization of deferred compensation                                      |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   |             |  |   | 91,189   |   |  |   |             |   |  |   | 91,189      |  
|Stock-based compensation                                                   |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   | 731,926     |  |   |          |   |  |   |             |   |  |   | 731,926     |  
|Employee stock purchase plan compensation                                  |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   | 44,391      |  |   |          |   |  |   |             |   |  |   | 44,391      |  
|Conversion of promissory note                                              |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        | 7,109,570  |  |   | 7,110  |  |   | 9,992,890   |  |   |          |   |  |   |             |   |  |   | 10,000,000  |  
|Conversion of preferred stock                                              |  | (3,000,000                           | ) |  |                                      | (3,000,000 | ) |                                      | (3,523,040 | ) |              |   | (8,807,600                 | )      |                       | (17,861,899 | )      |                     |   | (35,009,323 | )                                   |        | 1,249,999  |  |   | 1,250  |  |   | 46,815,673  |  |   |          |   |  |   |             |   |  |   |             |  
|Net loss                                                                   |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   |             |  |   |          |   |  |   | (4,244,363  | ) |  |   | (4,244,363  | )
|                                                                           |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   |             |  |   |          |   |  |   |             |   |  |   |             |  
|Balances June 30, 2007                                                    |  |                                     |   |  |                                      |           |   |                                      |           |   |              |   |                           |        |                       |            |        |                     |   |            |                                     |        | 17,091,556 |  | $ | 17,091 |  | $ | 108,375,879 |  | $ | (35,469  | ) |  | $ | (69,780,839 | ) |  | $ | 38,576,662  |  
|                                                                           |  |                                      |   |  |                                      |            |   |                                      |            |   |              |   |                            |        |                       |             |        |                     |   |             |                                     |        |            |  |   |        |  |   |             |  |   |          |   |  |   |             |   |  |   |             |  



5



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SENORX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                               |  |                           |            |   |      |   |            |  
|------------------------------------------------------------------------------ |  | ------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                               |  | Six Months Ended June 30, |           
|                                                                               |  | 2007                      |            |   | 2006 |  
|Cash Flows From Operating Activities:                                          |  |                           |            |   |      |   |            |  
|Net loss                                                                       |  | $                         | (4,244,363 | ) |      | $ | (8,844,883 | )
|Adjustments to reconcile net loss to net cash used in operating activities:    |  |                           |            |   |      |   |            |  
|Depreciation and amortization                                                  |  |                           | 720,281    |   |      |   | 404,178    |  
|Stock-based compensation                                                       |  |                           | 867,506    |   |      |   | 569,443    |  
|Loss on fixed asset abandonment                                                |  |                           | 28,871     |   |      |   |           |  
|Provision for doubtful accounts                                                |  |                           |           |   |      |   | 23,620     |  
|Amortization of debt discounts                                                 |  |                           | 204,239    |   |      |   | 106,948    |  
|Accretion of back-end interest on long-term debt                               |  |                           |           |   |      |   | 42,345     |  
|Change in fair value of convertible promissory notes and warrant debt discount |  |                           | (990,875   | ) |      |   | 3,840,000  |  
|Changes in operating assets and liabilities:                                   |  |                           |            |   |      |   |            |  
|Accounts receivable                                                            |  |                           | (236,261   | ) |      |   | (415,507   | )
|Inventory                                                                      |  |                           | (1,081,336 | ) |      |   | (989,906   | )
|Prepaid expenses and deposits                                                  |  |                           | (235,428   | ) |      |   | 48,050     |  
|Other assets                                                                   |  |                           | 443,691    |   |      |   | (264,632   | )
|Accounts payable                                                               |  |                           | (2,281,954 | ) |      |   | (167,121   | )
|Accrued expenses                                                               |  |                           | 190,125    |   |      |   | 438,986    |  
|Deferred revenue                                                               |  |                           | 30,800     |   |      |   | 79,869     |  
|                                                                               |  |                           |            |   |      |   |            |  
|Net cash used in operating activities                                          |  |                           | (6,584,704 | ) |      |   | (5,128,610 | )
|                                                                               |  |                           |            |   |      |   |            |  
|Cash Flows From Investing Activities:                                          |  |                           |            |   |      |   |            |  
|Acquisition of property and equipment                                          |  |                           | (251,640   | ) |      |   | (292,596   | )
|                                                                               |  |                           |            |   |      |   |            |  
|Net cash used in investing activities                                          |  |                           | (251,640   | ) |      |   | (292,596   | )
|                                                                               |  |                           |            |   |      |   |            |  
|Cash Flows From Financing Activities:                                          |  |                           |            |   |      |   |            |  
|Proceeds from issuance of common stock from stock option exercises             |  |                           | 44,749     |   |      |   | 102,292    |  
|Proceeds from initial public offering                                          |  |                           | 47,058,000 |   |      |   |           |  
|Payment of deferred offering costs                                             |  |                           | (941,027   | ) |      |   | (191,086   | )
|Proceeds from convertible promissory note                                      |  |                           |           |   |      |   | 8,000,000  |  
|Proceeds from other borrowings                                                 |  |                           | 2,750,000  |   |      |   | 2,781,039  |  
|Payment of debt issuance costs                                                 |  |                           | (49,496    | ) |      |   |           |  
|Repayment of other borrowings                                                  |  |                           | (4,894,447 | ) |      |   | (906,447   | )
|Repayment of capital leases                                                    |  |                           | (3,112     | ) |      |   |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Net cash provided by financing activities                                      |  |                           | 43,964,667 |   |      |   | 9,785,797  |  
|                                                                               |  |                           |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                      |  |                           | 37,128,323 |   |      |   | 4,364,591  |  
|Cash and cash equivalentsbeginning of period                                  |  |                           | 7,412,986  |   |      |   | 482,259    |  
|                                                                               |  |                           |            |   |      |   |            |  
|Cash and cash equivalentsend of period                                        |  | $                         | 44,541,309 |   |      | $ | 4,846,850  |  
|                                                                               |  |                           |            |   |      |   |            |  
|Supplemental Disclosure of Cash Flow Information:                              |  |                           |            |   |      |   |            |  
|Cash paid for income taxes                                                     |  | $                         | 8,146      |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Cash paid for interest                                                         |  | $                         | 559,568    |   |      | $ | 176,215    |  
|                                                                               |  |                           |            |   |      |   |            |  
|Inventory transferred to other assets                                          |  | $                         | 451,005    |   |      | $ | 256,708    |  
|                                                                               |  |                           |            |   |      |   |            |  
|Inventory transferred to fixed assets                                          |  | $                         | 199,354    |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Property and equipment acquired included in accounts payable                   |  | $                         | 6,315      |   |      | $ | 58,750     |  
|                                                                               |  |                           |            |   |      |   |            |  
|Other assets transferred to fixed assets                                       |  | $                         | 6,628      |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Deferred offering costs offset against proceeds of initial public offering     |  | $                         | 1,325,131  |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Deferred offering costs included in accounts payable and accrued expenses      |  | $                         |           |   |      | $ | 972,863    |  
|                                                                               |  |                           |            |   |      |   |            |  
|Equipment acquired under capital leases                                        |  | $                         | 14,477     |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Warrant liability transferred to equity                                        |  | $                         | 698,374    |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Promissory note converted to common stock                                      |  | $                         | 10,000,000 |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  
|Preferred stock converted to common stock                                      |  | $                         | 46,816,923 |   |      | $ |           |  
|                                                                               |  |                           |            |   |      |   |            |  



6



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SENORX, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS



BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by SenoRx, Inc. (the Company), pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes
that the disclosures included in these notes and the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed financial statements reflect all adjustments,
consisting only of normal recurring adjustments, that are, in the opinion of management, necessary to fairly state the financial position as of June 30, 2007 and the results of operations and cash flows for the related interim periods ended
June 30, 2007 and 2006. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or for any other period.

The accounting policies followed by the Company and other information are contained in the notes to the Companys audited financial
statements filed on February 21, 2007 as part of the Companys Registration Statement on Form S-1. This quarterly report should be read in conjunction with such report.

2. SIGNIFICANT ACCOUNTING POLICIES

The Companys significant accounting policies are disclosed
in our Registration Statement on Form S-1 for the year ended December 31, 2006 which was filed with the Securities and Exchange Commission. The Companys significant accounting policies have not materially changed as of June 30, 2007.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional
disclosures about fair value measurements. SFAS No. 157 applies only to fair value measurements that are already required or permitted by other accounting standards. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its financial position and results of operations

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115. SFAS 159 expands the
use of fair value accounting to many financial instruments and certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure
based on fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its financial position and results of operations.

4. INITIAL PUBLIC OFFERING

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



7



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SENORX, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS



5. INVENTORY

Inventories consist of the following:



|                |  |              |           |                  |   |          
|--------------- |  | ------------ | --------- | ---------------- | - | ---------
|                |  | June 30,2007 |           | December 31,2006
|Raw materials   |  | $            | 3,449,717 |                  | $ | 2,855,169
|Work-in-process |  |              | 224,104   |                  |   | 178,284  
|Finished goods  |  |              | 1,745,851 |                  |   | 1,955,242
|                |  |              |           |                  |   |          
|                |  | $            | 5,419,672 |                  | $ | 4,988,695
|                |  |              |           |                  |   |          

6. LONG-TERM DEBT

Working Capital Facility On February 20, 2007 the Company amended the terms of its working capital facility extending the expiration date to February 2009. The amendment provided for
increasing the aggregate limit on the working capital line from $3.5 million to $4.0 million and increased the advance rates on qualified accounts receivables from 75% to 80%. The working capital agreement, as amended, requires monthly interest
payments at the banks prime rate plus 1.25% (9.5% at June 30, 2007) subject to minimum interest rate of 9.0%. In addition, the existing quick ratio and net revenue covenants have been replaced with a minimum tangible net worth
requirement. At June 30, 2007, the outstanding balance was $2,750,000, $208,067 in borrowings were available and the Company was in compliance with all covenants.

2006 Subordinated NoteOn December 8, 2006, the Company entered into a subordinated loan and security agreement with Escalate Capital, LLC for advances of up to $10,000,000, which was fully
advanced to the Company as of December 31, 2006 (the December 2006 Subordinated Note). This obligation bears interest at the rate of 11.5% per annum and is repayable in monthly interest only installments beginning
November 30, 2006. However, at the option of the Company, 300 basis points of the accrued interest due through April 30, 2008, may be deferred until the maturity date of October 31, 2010. The Company has made this election and such
amount will be added to the principal amount due and will accrue interest at 11.5%. The aggregate advances outstanding on the expiration of the drawdown period of June 30, 2007, shall be repaid in thirty (30) equal principal installments
with the first installment due on May 30, 2008. The loan includes affirmative as well as negative covenants and is secured by substantially all of the Companys assets. At June 30, 2007 the Company was in compliance with these
covenants.

The Company shall have the option to prepay the loan prior to maturity with no premium or penalty. In connection with the
committed line, the Company paid a non-refundable facility fee of $100,000, and issued warrants to purchase up to 206,742 shares of the Companys Series C Preferred stock, vesting over one year, as defined, at an exercise price of $6.86 per
share. Upon completion of the IPO in April 2007, the warrant converted into a warrant to purchase 206,742 shares of common stock at an exercise price of $6.86 per share. The warrants expire on the third anniversary of the closing of the initial
public offering of the Companys common stock. The warrant allows for the exercise of the warrants after the one year anniversary of the issue date.

The warrant was previously carried as a liability on the Companys balance sheet at its fair value with increases or decreases in fair value at each reporting date recorded in the statement of operations. Upon
completion of the IPO, the company had sufficient registered shares to settle the warrant upon exercise. Accordingly, all requirements for equity classification of such warrant as described in EITF 00-19 had been met effective April 3, 2007. In
accordance with EITF 00-19, the warrant liability was reclassified to equity on April 3, 2007 and the gains recorded to account for the contract at fair value during the period the contract was classified as a liability were not reversed.` The
Company recorded income related to the change in fair value of $305,047 and $830,875 in the statement of operations for the three and six months ended June 30, 2007, respectively. During the three months ended June 30, 2007, the Company
recorded income related to the change in fair value during the period March 31, 2007 to April 3, 2007, the closing date of the IPO. The fair value of the warrant as of April 3, 2007 was estimated using the Black-Scholes option pricing
method with the following assumptions: expected volatility rate of 43%; risk free interest rate of 4.5%, a term of three years and closing stock price on April 3, 2007 of $8.24. In addition, $1,529,250 has been capitalized as part of debt
discount costs as of the date of issuance and is being recognized as additional interest expense over the life of the loan.



8



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SENORX, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS



7. CONVERTIBLE PROMISSORY NOTES

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

At the date of the successful completion of the IPO on April 3, 2007, the fair value of the May 2006 Notes were
$11,800,000, comprised of the $8,000,000 face value of the notes, $1,800,000 million in interest and $2,000,000 associated with the stock discount. Consequently, the Company adjusted the fair value of the May 2006 Notes to $11,800,000 and recorded
the change in fair value of $160,000 in the statement of operations for the six months ended June 30, 2007. In connection with the IPO, the May 2006 Notes were converted to 1,249,999 shares of common stock.

8. STOCKHOLDERS EQUITY

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

Authorized Shares of Common and Preferred Stock

Effective April 2, 2007, the Company amended and restated the certificate of incorporation to increase the authorized shares of common stock to
100,000,000 and create 10,000,000 shares of undesignated preferred stock.

9. STOCK OPTION PLANS

On February 16, 2007, the Companys board of directors approved increasing the number of shares of Common Stock authorized under the 1998 Stock
Option Plan by 214,285 shares to a new total of 1,992,856 shares. In addition, the Board of Directors approved, under the Companys 1998 stock option plan, the issuance of options to employees to purchase an aggregate of 212,981 shares of
common stock at an initial exercise price of $12.005 per share, which was the estimated fair market value of a share of common stock on the date of grant.

On May 7, 2007, the Companys board of directors approved, under the Companys 2006 equity incentive plan, the issuance of options to employees to purchase an aggregate of 82,605 shares of common stock
at an exercise price of $8.00 per share, which was the fair market value of a share of common stock on the date of grant.

On June 14,
2007, the Companys board of directors approved, under the Companys 2006 equity incentive plan, the issuance of options to employees and a director to purchase an aggregate of 76,500 shares of common stock at an exercise price of $10.36
per share, which was the fair market value of a share of common stock on the date of grant.

Employee Stock Purchase Plan

Effective April 3, 2007, the closing date of the IPO, the Employee Stock Purchase Plan (Purchase Plan) was established. The
Companys Purchase Plan was adopted by the Companys board of directors effective as of May 2006 and approved by the Companys stockholders in June 2006. The Purchase Plan was adopted to provide eligible employees of the Company with
an incentive to advance the best interests of the Company by providing a method whereby they may voluntarily purchase common stock of the Company upon terms described in the Purchase Plan. The Purchase Plan is designed to be operated on the basis of
six consecutive month offering periods commencing April 1 and October 1 of each year during the term of the Purchase Plan, except for the first such offering period, which will commence on the first trading day on or after March 28,
2007 and will end on the first trading day on or after September 30, 2007. In June 2007, the Companys board of directors amended the offering periods to May 15 and November 15 of each year from April 1 and October 1 of
each year commencing in 2008. The 2006 Purchase Plan terminates in 2016. The Purchase Plan provides that eligible employees may authorize payroll deductions of up to 10% of their salary to purchase shares of the Companys common stock at 85% of
the fair market value of common stock on the first or last day of the applicable purchase period. As of June 30, 2007, Purchase Plan participant contributions of $110,176 were included in other current liabilities in the accompanying condensed
balance sheet. A total of 550,000 shares of common stock are authorized for issuance under the Purchase Plan, and as of June 30, 2007, no shares had been issued under the Purchase Plan.

Director Compensation

Effective upon the closing of
the IPO, each outside director received, for his services on the board, $3,750 per meeting attended in person, or $1,500 per meeting attended telephonically. Each outside director who serves on the Companys audit committee or compensation
committee also receives, for his or her service on such committee, $1,000 per meeting attended



9



---

SENORX, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS



in person, or $500 per meeting attended telephonically. In addition, the chairpersons of the audit and compensation committee will each annually receive
$8,500 and $4,250, respectively, which will be paid on a quarterly basis, in consideration for their services in these respective roles. Directors may be reimbursed for expenses incurred in connection with their attendance at board and committee
meetings.

In addition, effective upon the closing of the IPO, each person who is an outside director, or who is elected or appointed for
the first time to be an outside director, will be granted an initial option on the date of the closing of the IPO or on the date of his or her election or appointment to the board, to purchase 20,000 shares of the Companys common stock. The
initial option grants become exercisable as to 1/36 of the shares each month following the date of grant, subject to the directors continued service on each relevant vesting date. Beginning in 2007, outside directors who have been directors
for at least six months will also receive a subsequent option to purchase 6,750 shares of the Companys common stock on June 1, 2007 and on the date of each annual shareholders meeting for each year thereafter. Such option will also
become exercisable as to 1/36 of the shares each month following the date of grant, subject to the directors continued service on each relevant vesting date. The Companys directors were issued options to purchase an aggregate of 120,000
shares of common stock at $8.00 per share as a result of the closing of the IPO, options to purchase 20,000 shares of common stock at $10.36 per share due to the subsequent appointment of a new director and options to purchase 40,500 shares of
common stock at $9.55 per share due to the automatic grant to directors with over six months service on June 1, 2007.

10. INCOME TAXES

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

Upon adoption of FIN 48, the Company would have decreased retained earnings $410,000, except that the decrease was fully offset by the release of a
valuation allowance. In addition, future changes in the unrecognized tax benefit will have no impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change
significantly within the next twelve months. The Company will continue to classify income tax penalties and interest as part of general and administrative expense in its Statements of Operations. Accrued interest on uncertain tax positions is not
significant as of June 30, 2007. There are no penalties accrued as of June 30, 2007. The following table summarizes the open tax years for each major jurisdiction:



|             |  |               
|------------ |  | --------------
|Jurisdiction |  | Open Tax Years
|Federal      |  | 1998 - 2006   
|California   |  | 1998 - 2006   

11. NET LOSS PER SHARE

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



10



---

SENORX, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS



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



|                                                                                              |  |                             |   |  |                           |   |  |           |   |  |           |  
|--------------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | --------- | - |  | --------- | -
|                                                                                              |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|                                                                                              |  | 2007                        |   |  | 2006                      |   |  | 2007      |   |  | 2006      |  
|Weighted-average common stock outstanding                                                     |  | 13,926,675                  |   |  | 2,354,468                 |   |  | 9,414,253 |   |  | 2,334,408 |  
|Less: Unvested common shares subject to repurchase                                            |  | (26,146                     | ) |  | (154,263                  | ) |  | (26,146   | ) |  | (154,263  | )
|                                                                                              |  |                             |   |  |                           |   |  |           |   |  |           |  
|Total weighted-average number of shares used incomputing net loss per share-basic and diluted |  | 13,900,529                  |   |  | 2,200,205                 |   |  | 9,388,107 |   |  | 2,180,145 |  
|                                                                                              |  |                             |   |  |                           |   |  |           |   |  |           |  

12. LITIGATION

The Company may be subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future
period. However, based on facts currently available, management is not aware of any matters that could have a material adverse effect on the Companys financial position, results of operations or cash flows.

13. SEGMENT INFORMATION

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



|                         |  |                             |           |                           |   |           |  |      |            |  |   |           
|------------------------ |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                         |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                         |  | 2007                        |           | 2006                      |   | 2007      |  | 2006
|United States and Canada |  | $                           | 7,888,100 |                           | $ | 6,032,114 |  | $    | 15,313,127 |  | $ | 11,816,359
|Rest of world            |  |                             | 233,185   |                           |   | 295,761   |  |      | 508,234    |  |   | 345,664   
|                         |  |                             |           |                           |   |           |  |      |            |  |   |           
|Total                    |  | $                           | 8,121,285 |                           | $ | 6,327,875 |  | $    | 15,821,361 |  | $ | 12,162,023
|                         |  |                             |           |                           |   |           |  |      |            |  |   |           

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

At June 30, 2007, the Company has four product classes. In June 2007, the Company revised its product classes to reflect the manner in which it is
now assessing the Companys performance and makes decisions. Biopsy disposable products include the Companys EnCor and SenoCor products. Biopsy capital equipment products include the consoles and other pieces (non-disposable) of the EnCor
and SenoCor products. Diagnostic adjunct products include the Marker product, the Gamma Finder product and the Anchor Guide product. Therapeutic disposables include the Companys recently commercialized brachytherapy Radiation Balloon, which
received FDA 510(k) clearance in May 2007.

Net revenues by product class are as follows:



|                                  |  |                             |           |                           |   |           |  |      |            |  |   |           
|--------------------------------- |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                  |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                                  |  | 2007                        |           | 2006                      |   | 2007      |  | 2006
|Biopsy disposable products        |  | $                           | 4,021,597 |                           | $ | 2,635,067 |  | $    | 7,541,181  |  | $ | 4,943,678 
|Biopsy capital equipment products |  |                             | 620,401   |                           |   | 409,434   |  |      | 1,101,229  |  |   | 725,464   
|Diagnostic adjunct products       |  |                             | 3,454,190 |                           |   | 3,283,374 |  |      | 7,153,854  |  |   | 6,492,881 
|Therapeutic disposables           |  |                             | 25,097    |                           |   |          |  |      | 25,097     |  |   |          
|                                  |  |                             |           |                           |   |           |  |      |            |  |   |           
|Total                             |  | $                           | 8,121,285 |                           | $ | 6,327,875 |  | $    | 15,821,361 |  | $ | 12,162,023
|                                  |  |                             |           |                           |   |           |  |      |            |  |   |           

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



11



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

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

Overview

We develop, manufacture and sell minimally invasive medical devices for the diagnosis of breast cancer. We were incorporated in 1998. From our inception until 2002, our principal activity was the development and regulatory clearance of our
initial products, primarily our biopsy tissue markers and our first breast biopsy system, the SenoCor 360. We launched our first tissue markers in 2002 and our SenoCor 360 in 2003.

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

We are currently
developing minimally invasive products for surgical excision of lesions and for breast cancer treatment. We received 510(k) clearance for our Radiation Balloon in May of 2007. We are also developing breast surgery and breast reconstruction devices,
our Single Step, Shape Select and GED, for which we respectively expect to enter limited launch phases in late 2008.

We have historically
derived our revenues primarily from our tissue marker products. However, our EnCor system accounted for a majority of our revenue growth in 2006, and we expect this to continue for the foreseeable future. Our ability to meet this expectation is
based upon a number of assumptions, which may not ultimately occur, including growth of our sales force, growth in the market for minimally invasive breast biopsy procedures and rapid adoption of the product by physicians who specialize in breast
care. We expect our Radiation Balloon to rapidly become a significant contributor to our revenues. We continue to develop and market this device as a compelling alternative to competing devices as we prepare for full commercialization.

For the six months ended June 30, 2007, we generated net revenues of $15.8 million and a net loss of $4.2 million. As of June 30, 2007, our
accumulated deficit was $69.8 million. We have not been profitable since inception. We expect our operating expenses to increase as we expand our business to meet anticipated increased demand for our EnCor system, seek regulatory clearance and
prepare for the full commercialization of our Radiation Balloon and devote resources to our sales and marketing and research and development activities.

In the second half of 2006, as a part of our settlement of litigation with Suros Surgical Systems (now a wholly-owned subsidiary of Hologic), we implemented a design modification to the EnCor system cutter. This
effort resulted in a short-term decrease in yields, the obsolescing of certain inventory and a delay in implementing certain cost improvements related to production and manufacturing, which had an adverse effect on our costs of goods sold for the
third and fourth quarters of 2006. Additionally, our third quarter 2006 revenues were adversely impacted by our efforts earlier in the year to integrate a large number of newly-hired sales representatives.

Net Revenues

We derive our revenues primarily
from the sales of our breast biopsy systems, breast biopsy capital, our tissue markers, and other products for breast care. Nearly all of our sales are generated in the United States and Canada, where we employ a direct sales force. Our breast
biopsy systems, the EnCor and SenoCor 360, consist of two primary components: reusable handpieces and disposable probes, and are used in conjunction with our SenoRx Breast Biopsy Console. The disposable probes form the basis of a recurring revenue
stream and also contribute to the sales of tissue markers. Diagnostic adjunct revenue consists primarily of tissue marker sales, both used with our breast biopsy systems and with competitors biopsy products. Our breast biopsy capital includes
a reusable handpiece, a control module and vacuum source used in conjunction with our disposable biopsy probe. We expect that the sales of biopsy disposable, biopsy capital and marker products will continue to grow in the second half of 2007. We
further expect that the sales of our adjunct and excision products will also grow, though at a slower rate.



12



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Cost of Goods Sold

Our cost of goods sold consists of the cost to manufacture and assemble our products, primarily including materials, components and labor. We assemble and package all of our finished products with the exception of our
Gamma Finder product. We expect that our cost of goods sold will decrease, and, correspondingly, gross profits will increase, as a percentage of net revenues with increased sales volume, product enhancements and outsourced manufacturing
efficiencies. At the end of 2005, we entered into an agreement with a contract manufacturer in Thailand and began to transfer a portion of our manufacturing for certain components of our products to this site, and we anticipate that we will transfer
additional manufacturing to this site in order to increase gross margins. We anticipate that our gross margin will continue to increase for the second half of 2007 due to design and production process improvements, the manufacturing efficiencies
that we expect to see with increased production, and the continued successful transfer of manufacturing of certain products and product components to our Thailand contract manufacturer.

Operating Expenses

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

Our research and development expenses consist of salaries and related expenses of our research and development personnel and consultants and costs of product development, which include patent filing and maintenance costs, production
engineering, clinical and regulatory support and post-clearance clinical product enhancements. We expense all our research and development costs as they are incurred. We expect research and development expenses to increase in absolute terms as we
continue to develop, enhance, obtain clinical results and commercialize existing and new products; however, for 2007, we believe that research and development expenses will remain approximately equivalent to the expenses incurred in 2006.

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

Our general and administrative expenses consist of the cost of corporate operations, litigation and professional services. We
expect general and administrative expenses to increase in absolute dollars as we increase our infrastructure to comply with the regulatory requirements associated with publicly-traded companies.

Over the next several years, we will incur non-cash expenses for employee stock-based compensation, decreasing quarterly, for stock options granted prior
to January 1, 2006 and determined to have been issued at less than estimated fair value. We expect to incur additional stock-based compensation expense, primarily for options granted subsequent to January 1, 2006, which will be accounted
for under SFAS No. 123R.

Interest

Interest represents income generated from our cash and cash equivalents which are invested generally in liquid money-market funds, offset by expense incurred on our debt obligations. These debt obligations include a working capital
facility, an equipment facility and long-term notes payable. Interest expense also includes the fair value for any equity interests, such as warrants, granted in conjunction with the debt obligations. The fair value of the equity interests are
amortized to interest expense over the term of the related debt obligations. We expect interest income to increase due to the receipt of proceeds from this offering.

Income Tax Expense

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



13



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Results of Operations

The following table sets forth our results of operations expressed as percentages of revenues for the three months ended June 30, 2007 and 2006:



|                                                                           |  |                                    |    |  |        |   
|-------------------------------------------------------------------------- |  | ---------------------------------- | -- |  | ------ | --
|                                                                           |  | For the Three Months EndedJune 30, |   
|                                                                           |  | 2007                               |    |  | 2006   |   
|Net revenues                                                               |  | 100.0                              | %  |  | 100.0  | % 
|Cost of goods sold                                                         |  | 43.0                               |    |  | 48.3   |   
|                                                                           |  |                                    |    |  |        |   
|Gross profit                                                               |  | 57.0                               |    |  | 51.7   |   
|Operating expenses:                                                        |  |                                    |    |  |        |   
|Selling and marketing                                                      |  | 54.6                               |    |  | 62.4   |   
|Research and development                                                   |  | 20.3                               |    |  | 20.7   |   
|General and administrative                                                 |  | 13.6                               |    |  | 8.1    |   
|                                                                           |  |                                    |    |  |        |   
|Total operating expenses                                                   |  | 88.4                               |    |  | 91.2   |   
|                                                                           |  |                                    |    |  |        |   
|Loss from operations                                                       |  | (31.4                              | )  |  | (39.5  | ) 
|Interest expense                                                           |  | 5.5                                |    |  | 3.4    |   
|Change in fair value of convertible promissory notes and warrant valuation |  | (3.8                               | )  |  |       |   
|Interest income                                                            |  | (6.9                               | )  |  | (0.9   | ) 
|Provision for income taxes                                                 |  |                                   |    |  |       |   
|                                                                           |  |                                    |    |  |        |   
|Net loss                                                                   |  | (26.3                              | )% |  | (102.8 | )%
|                                                                           |  |                                    |    |  |        |   

Three months ended June 30, 2007 and 2006

Net Revenues. Net revenues increased $1.8 million, or 28.3%, to $8.1 million for the three months ended June 30, 2007 from $6.3
million for the three months ended June 30, 2006. The increase primarily consisted of $1.4 million in biopsy disposable revenues, an increase of 52.6% from the three months ended June 30, 2006, 2006 due to a larger installed base of EnCor
systems. Biopsy capital revenues increased $210,000, or 51.5.0% due to a greater number of customers purchasing our breast biopsy systems as compared to those customers acquiring the capital through a product supply agreement in 2006.
Diagnostic adjunct revenues increased $171,000, or 5.2% primarily due to an increase in marker sales resulting from increased EnCor disposable biopsy sales and sales of markers used with competitive biopsy disposables. Therapeutic disposable
revenues increased $25,000 as we began selling our Radiation Balloon product in June 2007 following FDA 510(k) clearance in May 2007.

Cost of Goods Sold and Gross Profit. Cost of good sold increased $436,000, or 14.3%, to $3.5 million for the three months ended June 30, 2007 from $3.1 million for the three months ended June 30, 2006. The increase
in total cost of goods sold primarily consisted of an increase in direct labor, manufacturing overhead and material costs associated with our increase in product sales. Gross profit increased $1.3 million, or 41.5%, for the three months ended
June 30, 2007 to $4.6 from $3.3 million for the three months ended June 30, 2006. As a percentage of net revenues gross profit increased by 5.3% to 57.0% for the three months ended June 2007 from 51.7% in June 2006. The increase in gross
profit as a percentage of net revenues was primarily attributable to improved efficiencies in the production of our disposable biopsy probe and allocating manufacturing overhead over greater product revenues and inventory unit production.

Selling and Marketing Expenses. Selling and marketing expenses increased $483,000, or 12.2%, to $4.4 million for the three
months ended June 30, 2007 from $3.9 million for the three months ended June 30, 2006. The increase primarily consisted of $666,000 in salaries and related employee costs due to the expansion of our sales organization which was partially
offset by a $234,000 reduction in sales promotion related activities.

Research and Development Expenses. Research and
development expenses increased $334,000, or 25.4%, to $1.65 million for the three months ended June 30, 2007 from $1.3 million for the three months ended June 30, 2006. The increase in these expenses primarily consisted of $82,000 in
salaries and the related employee costs, $221,000 associated with project costs for the development of the Radiation Balloon, $176,000 in patent, legal and professional fees related to the Radiation Balloon development. These increases were
partially offset by a decrease in departmental expenses of $133,000 and reduced deferred compensation expenses of $12,000.



14



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General and Administrative Expenses. General and administrative expenses increased
$589,000, or 115.5%, to $1.1 million for the three months ended June 30, 2007 from $500,000 for the three months ended June 30, 2006. The increase primarily consisted of $133,000 related to increased headcount and increased compensation,
$172,000 in stock-based compensation charges, $161,000 for public company related costs including legal and reporting expenses, and $90,000 for departmental related expenses.

Interest Expense.Interest expense increased $234,000 to $450,000 for the three months ended June 30, 2007 from $216,000 for the three
months ended June 30, 2006. The increase was due to the December 2006 Subordinated Note payable and higher interest rates on our working capital facility.

Change in Fair Value of Convertible Promissory Notes and Warrant Valuation.For the three months ended June 30, 2007, we recorded an aggregate reduction of $305,000 for the change in fair value of
the warrant liability associated with the December 2006 Notes. For the three months ended June 30, 2006 we recorded a $3.8 million expense for the changes in fair value of our May 2006 Notes.

Interest Income.Interest income increased $504,000 to $561,000 for the three months ended June 30, 2007 from $57,000 for the three
months ended June 30, 2007 primarily as a result of increased interest income from the higher cash balances resulting from our IPO, which closed in April 2007.

Results of Operations

The following table sets forth our results of operations expressed as
percentages of revenues for the six months ended June 30, 2007 and 2006:



|                                                                           |  |                                  |    |  |       |   
|-------------------------------------------------------------------------- |  | -------------------------------- | -- |  | ----- | --
|                                                                           |  | For the Six Months EndedJune 30, |   
|                                                                           |  | 2007                             |    |  | 2006  |   
|Net revenues                                                               |  | 100.0                            | %  |  | 100.0 | % 
|Cost of goods sold                                                         |  | 44.4                             |    |  | 50.5  |   
|                                                                           |  |                                  |    |  |       |   
|Gross profit                                                               |  | 55.6                             |    |  | 49.5  |   
|Operating expenses:                                                        |  |                                  |    |  |       |   
|Selling and marketing                                                      |  | 55.2                             |    |  | 58.4  |   
|Research and development                                                   |  | 19.7                             |    |  | 20.1  |   
|General and administrative                                                 |  | 11.9                             |    |  | 9.5   |   
|                                                                           |  |                                  |    |  |       |   
|Total operating expenses                                                   |  | 86.8                             |    |  | 88.0  |   
|                                                                           |  |                                  |    |  |       |   
|Loss from operations                                                       |  | (31.2                            | )  |  | (38.5 | ) 
|Interest expense                                                           |  | 5.9                              |    |  | 3.1   |   
|Change in fair value of convertible promissory notes and warrant valuation |  | (6.3                             | )  |  | 31.6  |   
|Interest income                                                            |  | (4.0                             | )  |  | (0.5  | ) 
|Provision for income taxes                                                 |  |                                 |    |  |      |   
|                                                                           |  |                                  |    |  |       |   
|Net loss                                                                   |  | (26.8                            | )% |  | (72.7 | )%
|                                                                           |  |                                  |    |  |       |   

Six months ended June 30, 2007 and 2006

Net Revenues. Net revenues increased $3.7 million, or 30.1%, to $15.8 million for the six months ended June 30, 2007 from $12.2
million for the six months ended June 30, 2006. The increase primarily consisted of $2.6 million in biopsy disposable revenues, an increase of 52.5% from the six months ended June 30, 2006 due to a larger installed base of EnCor systems.
Biopsy capital revenues increased $400,000, or 51.8% due to a greater number of customers purchasing our breast biopsy systems as compared to those customers acquiring the capital through a product supply agreement in 2006. Diagnostic
adjunct revenues increased $661,000, or 10.2% primarily due to an increase in marker sales resulting from increased EnCor disposable biopsy sales and sales of markers used with competitive biopsy disposables. Diagnostic therapeutic revenues
increased $25,000 as we began selling our Radiation Balloon product in June 2007 following the May 2007 FDA 510(k) clearance.



15



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Cost of Goods Sold and Gross Profit. Cost of good sold increased $887,000, or 14.4%, to
$7.0 million for the six months ended June 30, 2007 from $6.1 million for the six months ended June 30, 2006. The increase in total cost of goods sold primarily consisted of an increase in direct labor, manufacturing overhead and material
costs associated with our increase in product sales. Gross profit increased $2.8 million or 46.0% for the six months ended June 30, 2007 to $8.8 from $6.0 million for the six months ended June 30, 2006. Gross profit as a percentage of net
revenues increased by 6.1% to 55.6% for the six months ended June 30, 2007 from 49.5% for the six months ended June 30, 2006. The increase in gross profit as a percentage of net revenues was primarily attributable to improved efficiencies in
the production of our disposable biopsy probe and allocating manufacturing overhead over greater product revenues and inventory unit production.

Selling and Marketing Expenses. Selling and marketing expenses increased $1.6 million, or 23.0%, to $8.7 million for the six months ended June 30, 2007 from $7.1 million for the six months ended June 30, 2006. The
increase primarily consisted of $1.6 million in salaries and related employee costs due to the expansion of our sales organization, $53,000 in stock-based compensation charges which were partially offset by a $51,000 reduction in departmental
expenses.

Research and Development Expenses. Research and development expenses increased $700,000, or 27.5%, to $3.1 million
for the six months ended June 30, 2007 from $2.4 million for the six months ended June 30, 2006. The increase in these expenses primarily consisted of $159,000 in salaries and the related employee costs, $222,000 associated with project
costs for the development of the Radiation Balloon, as well as $333,000 in patent, legal and professional fess related to the Radiation Balloon development.

General and Administrative Expenses. General and administrative expenses increased $723,000, or 62.8%, to $1.9 million for the six months ended June 30, 2007 from $1.2 million for the six months
ended June 30, 2006. The increase primarily consisted of $288,000 related to increased headcount and increased compensation, $242,000 for public company related costs, including legal and reporting expenses, $206,000 related to stock-based
compensation charges and $153,000 for increased departmental costs. These increases were partially offset by a $108,000 decrease in legal fees associated with the resolution of the Suros lawsuit in May 2006.

Interest Expense.Interest expense increased $546,000 to $927,000 for the six months ended June 30, 2007 from $381,000 for the six
months ended June 30, 2006. The increase was due to the December 2006 Subordinated Note payable and higher interest rates on our working capital facility.

Change in Fair Value of Convertible Promissory Notes and Warrant Valuation.For the six months ended June 30, 2007, we recorded an aggregate of $160,000 for the changes in fair value of our May 2006
Notes in accordance with FAS No.155 and $831,000 for the reduction in the fair value of the warrant liability. For the six months ended June 30, 2006, we recorded a $3.8 million expense for the changes in fair value of our May 2006 Notes.

Interest Income.Interest income increased $570,000 to $631,000 for the three months ended June 30, 2007 from $61,000
for the three months ended June 30, 2007 primarily as a result of increased interest income from higher cash balances resulting from our IPO, which closed in April 2007.

Liquidity and Capital Resources

General

We have incurred losses since our inception in January 1998 and, as of June 30, 2007, we had an accumulated deficit of $69.8 million. From inception
through June 30, 2007, we generated cumulative gross profit from the sale of our product offerings of $45.6 million. To date, our operations have been funded primarily with proceeds from the issuance of our preferred stock and borrowings,
including our issuance of the May 2006 Notes and the December 2006 Subordinated Note, as well as our IPO in April 2007. Cumulative net proceeds from the issuance of preferred stock totaled $46.8 million. Proceeds from the issuance of the May 2006
Notes totaled $8.0 million. Proceeds from the issuance of the December 2006 Subordinated Note were $10.0 million, of which $1.2 million was used to repay the 2004 subordinated note obligation. Net proceeds from our IPO, including the sale of shares
pursuant to the subsequent underwriters overallotment and after deducting total expenses, was $44.8 million. All of our preferred stock converted into common stock upon the closing of the IPO.

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



16



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Net Cash Used in Operating Activities

Net cash used in operating activities was $6.6 million, for the six months ended June 30, 2007, which was a function of a decrease in accounts
payable and accrued expenses of $2.1 million, an increase in inventory of $1.1 million, an increase in accounts receivable of $236,000 and an increase in prepaid expenses of $235,000. These uses of cash were partially offset by a decrease in other
assets of $444,000 and an increase in deferred revenue of $31,000. The $2.1 million decrease in accounts payable and accrued expenses resulted from the use of proceeds from the April 2007 IPO which allowed us to reduce outstanding vendor balances.
The aggregate increased investment in inventory of $1.1 million resulted primarily from two major factors, including (i) our decision to build shelf stock of our higher volume products in order to better service our customers, and (ii) the
need to purchase longer-term quantities of certain parts due to long lead times. We expect inventory will continue to increase during the remainder of 2007. The increase in accounts receivable was primarily due to an increase in net sales. While we
expect that the amount of accounts receivable will fluctuate based on the timing of sales and collections, we expect our ratio of overall investment in accounts receivable as compared to revenues will remain constant as compared to 2006.

Net Cash Used in Investing Activities

Net
cash used in investing activities amounted to $252,000 during the six months ended June 30, 2007, was primarily attributable to the addition of demonstration units and new manufacturing molds.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $44.0 million during the six months ended June 30, 2007 was primarily attributable to proceeds of $47.1 million from the April 2007 IPO and underwriters overallotment, the $2.8 million
advance on our working capital facility and $45,000 related to the proceeds from the issuance of common stock from option exercises. These proceeds were partially offset by an aggregate of $4.9 million in repayments under our various debt facilities
and $941,000 in cash paid for deferred offering costs including legal, accounting and printing fees, which were reclassified to additional paid-in capital at the completion of the IPO in April 2007.

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS No. 157 applies only to
fair value measurements that are already required or permitted by other accounting standards. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the effect that the adoption of SFAS
157 will have on our financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115. SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair value
option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. SFAS 159 is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the effect that the adoption of SFAS 159 will have on our financial position and results of operations.



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

The primary objective of our investment activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. To
achieve these objectives, our investment policy allows us to maintain a portfolio of cash equivalents and investments in a variety of marketable securities, including commercial paper, money market funds and corporate debt securities and U.S.
government securities. Our cash and cash equivalents as of June 30, 2007, included liquid money market accounts. Due to the short-term nature of our investments, we believe we have no material exposure to interest rate risk. Additionally, since
the majority of our debt carries interest at fixed rates, we also believe changes in interest rates will not cause significant changes in our interest expense. Our revenues are denominated in U.S. dollars. Accordingly, we have not had exposure to
foreign currency rate fluctuations. We expect to continue to realize our revenues in U.S. dollars.



17



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|ITEM 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

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

Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are not a party to any
material pending or threatened litigation.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

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

We have a
limited history of operations upon which you can evaluate our business. We began selling our first products in 2002 and fully launched our flagship product, the EnCor system, in November 2005. We incurred net losses of $8.6 million in 2005, $15.4
million in 2006, and $4.2 million in the six months ended June 30, 2007, and, as of that date, had an accumulated deficit of approximately $69.8 million. In addition, we expect our operating expenses to increase as we expand our business to
meet anticipated increased demand for our EnCor system, and prepare for the full commercialization of the Radiation Balloon and devote resources to our sales and marketing and research and development activities. In order for us to become
profitable, we believe that our EnCor system must be widely adopted. We cannot assure you that we will be able to achieve or sustain profitability even if we are able to generate significant revenues. Our failure to achieve and sustain profitability
would negatively impact the market price of our common stock and require us to obtain additional funding.

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

We have historically derived our revenue primarily from our
tissue marker products. However, our EnCor system, launched in November 2005, accounts for a majority of our revenue growth, and we expect this to continue for the foreseeable future. Our ability to meet this expectation is based upon a number of
assumptions, including:



| |  |  | the adequacy of third-party reimbursement for the minimally invasive procedures in which EnCor is used;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the market for minimally invasive breast biopsy procedures will continue to grow;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | we will be able to demonstrate compelling clinical data supporting EnCors safety and effectiveness;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | key features of EnCor will represent compelling technological advancements to potential users;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | EnCor will be endorsed by key opinion leaders; and
| | - |  | --------------------------------------------------



| |  |  | physicians who specialize in breast care will rapidly adopt EnCor.
| | - |  | ------------------------------------------------------------------

Even if we are able to present potential customers with compelling clinical data, technological advancements or influential user experiences, they may be reluctant to switch from a competing device to which they have
grown accustomed. We may not be successful in our near-term strategy of marketing EnCor to our existing customer base of tissue marker users, and users of our earlier vacuum-assisted breast biopsy system, our SenoCor 360. Our commercial success also
depends on the continued general market shift to less invasive biopsy procedures. Failure of EnCor to be widely adopted would significantly harm our future financial performance.

Our future success will depend in part upon our ability to successfully introduce our Radiation Balloon.

We expect our Radiation Balloon, which we received FDA 510(k) action clearance in May 2007, to rapidly become a significant contributor to our revenues. The Radiation Balloon is still under development and there remain significant
challenges that must be overcome before it can be commercialized, including:



| |  |  | developing it as a product that meets our design specifications, which involves creating a compelling alternative to competing devices;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | protecting it with intellectual property rights;
| | - |  | ------------------------------------------------



18



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| |  |  | obtaining adequate third-party reimbursement;
| | - |  | ---------------------------------------------



| |  |  | producing compelling clinical data on safety and effectiveness;
| | - |  | ---------------------------------------------------------------



| |  |  | partnering, as necessary, with suppliers; and
| | - |  | ---------------------------------------------



| |  |  | manufacturing it consistently within our specifications and in accordance with the FDAs Quality System Regulations.
| | - |  | --------------------------------------------------------------------------------------------------------------------

If we are able to overcome these challenges, we may nevertheless be unable to convince potential customers that the Radiation Balloon represents a compelling alternative
to competing products. Our commercial success will also depend on a general market shift from whole to partial breast radiation. Our commercialization of the Radiation Balloon could be significantly below expectations or not achieved at all, which
would have a material adverse effect on our future financial performance.

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

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

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

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



| |  |  | ease of use and performance;
| | - |  | ----------------------------



| |  |  | price;
| | - |  | ------



| |  |  | quality and scale of our sales and marketing efforts;
| | - |  | -----------------------------------------------------



| |  |  | our ability to offer a broad portfolio of products across the continuum of breast care;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | establishing a strong reputation through compelling clinical study publications and endorsements from influential physicians; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | brand and name recognition.
| | - |  | ---------------------------

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

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

The markets in which we compete involve rapid and substantial technological development and product innovations. There are few
barriers to prevent new entrants or existing competitors from developing or acquiring products or technological improvements that compete effectively against our products or technology. If we are unable to innovate successfully to anticipate or
respond to competitive threats, obtain regulatory approvals, or protect such innovation with defensible



19



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intellectual property, our revenues could fail to grow or could decline. Our business strategy is in part based upon our expectation that we will continue to
make frequent new product introductions and improvements to existing products that will be demanded by our target customers. If we are unable to continue to develop new products and technologies as anticipated, our ability to grow and our future
financial performance could be materially harmed.

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

We are focusing our sales efforts on becoming a preferred provider to integrated breast centers and other large customer accounts. We
cannot assure you that we will be able to secure or maintain these accounts or that this strategy will maximize our revenue growth. These targeted customers often have a rigorous and lengthy qualification process for approving new vendors and
products. Additionally, breast centers are in many cases not located at one physical location, but instead involve the coordinated efforts of various geographically dispersed offices and physicians, which may complicate the qualification process and
may strain our sales and support organizations. Further, these customers have not entered, and we do not expect them in the future to enter, long-term contracts to purchase our products. Therefore, obtaining approval from these potential customers
to sell them our products may not result in significant or long-term sales of our products to them. Our strategy of focusing on large institutions may result in relatively few customers contributing a significant amount to our revenues. For example,
Kaiser Permanente is our largest customer, and in the year ended December 31, 2006, and quarter ended June 30, 2007, represented approximately 7.6% and 5.3%, respectively, of our total revenues. We cannot assure you that Kaiser or other
customer accounts will continue to purchase our products. The loss of any of these customers could have a material adverse impact on our results of operations.

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

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

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

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

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

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



| |  |  | hire and successfully integrate qualified individuals as needed;
| | - |  | ----------------------------------------------------------------



| |  |  | provide adequate training for the effective sale of our products; and
| | - |  | ---------------------------------------------------------------------



| |  |  | retain and motivate our sales employees.
| | - |  | ----------------------------------------

We expect
our Radiation Balloon under development to be a principal driver of future growth. However, our sales force historically has primarily sold diagnostic products and therefore has limited experience selling a therapeutic device. Our Radiation Balloon
would compete with products that are well-established. Accordingly, it is difficult for us to predict how well our sales force will perform.



20



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

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

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

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

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

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

We may not have adequate intellectual property protection for some of our products and products under development and consequently may need to obtain licenses from third parties. For example, we believe that we may
need to obtain a third-party license related to our Guided Electrosurgical Dissection, or GED, device, which is currently under development. If we are unable to negotiate a license on terms acceptable to us, we may be unable to market our GED device
unless we redesign it, which could have a material adverse effect on our future results of operations.

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

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

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



21



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

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



| |  |  | our limited experience in manufacturing such products in significant quantities and in compliance with the FDAs Quality System Regulation;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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



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

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

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

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



| |  |  | failure to meet our requirements on a timely basis as demand grows for our products;
| | - |  | ------------------------------------------------------------------------------------



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



| |  |  | inability to manufacture products to our quality specifications and strictly enforced regulatory requirements;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | inability to implement design modifications that we develop in the future;
| | - |  | --------------------------------------------------------------------------



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



| |  |  | prioritization of other customers orders over ours; and
| | - |  | -------------------------------------------------------



| |  |  | inability to fulfill our orders due to unforeseen events, including foreign political events, that result in a disruption of their operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

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

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

Breast biopsy procedures and markers are typically
reimbursed by third-party payors, including Medicare, Medicaid and private healthcare insurance companies. These payors may adversely change their coverage amounts and reimbursement policies. Also, healthcare reform legislation or regulation may be
proposed or enacted in the future that adversely affects these policies and amounts. For example, the Federal Deficit Reduction Act of 2006 may in the future affect future reimbursement rates for our vacuum assisted biopsy products and Radiation
Balloon products. We cannot assure you that the current scope of coverage or levels of reimbursement will continue to be available or that coverage of, or reimbursement for, our products will be available at all. If physicians, hospitals and other
providers are unable to obtain adequate reimbursement for our current products or future products, or for the procedures in which such products are used, they may be less likely to purchase the products, which could have a material adverse impact on
our market share.



22



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

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

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

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



| |  |  | faulty human judgment and simple errors, omissions or mistakes;
| | - |  | ---------------------------------------------------------------



| |  |  | fraudulent action of an individual or collusion of two or more people;
| | - |  | ----------------------------------------------------------------------



| |  |  | inappropriate management override of procedures; and
| | - |  | ----------------------------------------------------



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

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

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

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

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

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



23



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

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

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

For
both the year ended December 31, 2006 and for the quarter ended June 30, 2007, we derived approximately 95% and 97%, respectively, of our net revenues from sales within the United States and Canada. We have entered into distribution
agreements with third parties outside the United States and Canada, but do not anticipate sales of our products through these distributors becoming a significant portion of our revenues in the foreseeable future. If we do begin to offer our products
more broadly outside the United States and Canada, we expect that we will remain dependent on third-party distribution relationships and will need to attract additional distributors to increase the number of territories in which we sell our
products. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations. If current or future distributors do not perform adequately, or we are unable to locate distributors in particular
geographic areas, our ability to realize long-term international revenue growth could be materially adversely affected.

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

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

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

Risks Related to Regulatory Matters

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

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

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



| |  |  | injunctions, fines, other civil penalties or additional Warning Letters;
| | - |  | ------------------------------------------------------------------------



24



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



| |  |  | suspension or withdrawal of our FDA clearances or approvals;
| | - |  | ------------------------------------------------------------



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



| |  |  | product recalls, product seizures or criminal prosecution of our company, our officers or our employees.
| | - |  | --------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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



| |  |  | Warning Letters, injunctions, fines or other civil penalties;
| | - |  | -------------------------------------------------------------



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



| |  |  | suspension or withdrawal of our FDA clearances or approvals;
| | - |  | ------------------------------------------------------------



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



| |  |  | product recalls, product seizures or criminal prosecution of our company, our officers or our employees.
| | - |  | --------------------------------------------------------------------------------------------------------

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



25



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Risks Related to the Securities Markets and Ownership of Our Common Stock

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

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

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

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

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

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



| |  |  | volume and timing of sales of our products;
| | - |  | -------------------------------------------



| |  |  | the introduction of new products or product enhancements by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | disputes or other developments with respect to our intellectual property rights or the intellectual property rights of others;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | product liability claims or other litigation;
| | - |  | ---------------------------------------------



| |  |  | quarterly variations in our or our competitors results of operations;
| | - |  | ----------------------------------------------------------------------



| |  |  | sales of large blocks of our common stock, including sales by our executive officers and directors;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | announcements of technological or medical innovations for the diagnosis and treatment of breast cancer;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | changes in governmental regulations or in the status of our regulatory approvals or applications;
| | - |  | -------------------------------------------------------------------------------------------------



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



| |  |  | changes in earnings estimates or recommendations by securities analysts; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Our officers, directors and principal stockholders that currently hold more than 5% of our common stock together control
nearly a majority of our outstanding common stock. As a result, these stockholders, if they act together, will be able to exercise significant influence over the management and affairs of our company and all matters requiring stockholder approval,
including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, might have a material adverse effect on the market price of
our common stock and may not be in the best interest of our other stockholders.



26



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

As of June 30, 2007, there are approximately 10,766,550 shares of common stock eligible for sale beginning approximately 180 days
after the date of our IPO upon the expiration of lock-up arrangements with our stockholders. If our stockholders sell substantial amounts of our common stock in the public upon the lock-up expiration, the market price of our common stock could
decline.

Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that could discourage a takeover.

Our Amended and Restated Certificate of Incorporation and Bylaws, and Delaware law, contain provisions that might enable our management to
resist a takeover, and might make it more difficult for an investor to acquire a substantial block of our common stock. These provisions include:



| |  |  | a classified board of directors;
| | - |  | --------------------------------



| |  |  | advance notice requirements to stockholders for matters to be brought at stockholder meetings;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | a supermajority stockholder vote requirement for amending certain provisions of our Amended and Restated Certificate of Incorporation and Bylaws;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limitations on stockholder actions by written consent; and
| | - |  | ----------------------------------------------------------



| |  |  | the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

These provisions might discourage, delay or prevent a change in control of our company or a change in our management. The existence of
these provisions could adversely affect the voting power of holders of our common stock and limit the price that investors might be willing to pay in the future for shares of the common stock.

We do not intend to pay cash dividends.

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



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

We did not sell any equity securities during the period covered by this report.

We registered for the initial public offering of
our common stock, par value $0.001 per share, on a Registration Statement on Form S-1 (Registration No. 333-134466), which was declared effective on March 28, 2007. On April 3, 2007 we completed the initial public offering of our
common stock by selling 5.5 million shares at $8.00 per share. Additionally, on April 20, 2007, the underwriters in the IPO exercised their overallotment option to purchase an additional 825,000 shares at $8.00 per share. Gross proceeds
from the offering were $50.6 million. Total expenses from the offering were $5.8 million, which included underwriting discounts and commissions of $3.5 million, and $2.3 million in other offering-related expenses. Net offering proceeds, after
deducting total expenses were $44.8 million.

Of the $44.8 million in net proceeds, through June 30, 2007, we have spent approximately
$1.8 million to repay interest owing on our May 2006 Notes, the repayment of which accelerated and became due as a result of the IPO. For the three months ended June 30, 2007 that we incurred $4.4 million in selling and marketing expenses, $1.6
million in research and development expenses and $1.1 million in general and administrative expenses for a total of $7.2 million in operating expenses. Of this amount, approximately $563,000 was non cash expenses associated with equity based
compensation. Our operating expenses were partially offset by gross profits of $4.6 million for the three months ended June 30, 2007. In addition, we invested the proceeds from the offering in U.S. government securities and investment-grade
marketable debt securities of financial institutions and corporations.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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

None.



27



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|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------



|            |  |                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                  
|3.2*        |  | Amended and Restated Certificate of Incorporation.                                                                                           
|            | 
|3.4*        |  | Bylaws.                                                                                                                                      
|            | 
|4.1*        |  | Specimen Common Stock Certificate.                                                                                                           
|            | 
|4.2*        |  | Fourth Amended and Restated Investors Rights Agreement, dated May 3, 2006, by and among the Registrant and certain stockholders.            
|            | 
|31.1        |  | Certification of Chief Executive Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|31.2        |  | Certification of Chief Financial Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|32.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S. C. 1350 and Securities Exchange Act Rule 13a-14(b).

---

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



28



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SIGNATURES

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



|                      |  |  |  |  |  |                                      
|--------------------- |  |  |  |  |  | -------------------------------------
|                      |  |  | 
|Date: August 14, 2007 |  |  |  |  |  | /s/ Lloyd H. Malchow                 
|                      |  |  |  |  |  | Lloyd H. Malchow                     
|                      |  |  |  |  |  | President and Chief Executive Officer
|                      |  |  |  |  |  | (Principal Executive Officer)        



|                      |  |  |  |  |  |                                             
|--------------------- |  |  |  |  |  | --------------------------------------------
|                      |  |  | 
|Date: August 14, 2007 |  |  |  |  |  | /s/ Kevin J. Cousins                        
|                      |  |  |  |  |  | Kevin J. Cousins                            
|                      |  |  |  |  |  | Chief Financial Officer                     
|                      |  |  |  |  |  | (Principal Financial and Accounting Officer)



29



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INDEX TO EXHIBITS



|            |  |                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                  
|3.2*        |  | Amended and Restated Certificate of Incorporation.                                                                                           
|            | 
|3.4*        |  | Bylaws.                                                                                                                                      
|            | 
|4.1*        |  | Specimen Common Stock Certificate.                                                                                                           
|            | 
|4.2*        |  | Fourth Amended and Restated Investors Rights Agreement, dated May 3, 2006, by and among the Registrant and certain stockholders.            
|            | 
|31.1        |  | Certification of Chief Executive Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|31.2        |  | Certification of Chief Financial Officer under Securities Exchange Act Rule 13a-14(a).                                                       
|            | 
|32.1        |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S. C. 1350 and Securities Exchange Act Rule 13a-14(b).

---

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



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