UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-Q





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




For the
quarterly period ended September 30, 2009




 ̈
            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


SENORX,
INC.


(Exact
name of registrant as specified in its charter)





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




3
Morgan


Irvine,
California 92618


(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  x
            Non-accelerated
      filer   ̈
            Smaller
      reporting company   ̈(Do
      not check if a smaller reporting company)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes   ̈  No   ̈




As of
October 31, 2009, 17,398,115 shares of the registrant’s common stock were
outstanding.










SENORX,
INC.


INDEX




PagePART
      I
            FINANCIAL
      INFORMATIONITEM
      1.
            CONDENSED
      FINANCIAL STATEMENTS (unaudited)Condensed
      Balance Sheets as of September 30, 2009 and December 31,
    2008
            3Condensed
      Statements of Operations for the three and nine months ended September 30,
      2009 and September 30, 2008
            4Condensed
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      September 30, 2008
            5Notes
      to Unaudited Condensed Financial Statements
            6ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            11ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            17ITEM
      4.
            CONTROLS
      AND PROCEDURES
            17PART
      II
            OTHER
      INFORMATIONITEM
      1.
            LEGAL
      PROCEEDINGS
            17ITEM
      1A.
            RISK
      FACTORS
            18ITEM
      2
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            28ITEM
      3
            DEFAULTS
      UPON SENIOR SECURITIES
            28ITEM
      4
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            28ITEM
      5
            OTHER
      INFORMATION
            28ITEM
      6.
            EXHIBITS
            29SIGNATURES
            31




2




ITEM
I: FINANCIAL INFORMATON


SENORX,
INC.


CONDENSED
BALANCE SHEETS


(Unaudited)





September
      30,
              2009
            
            
            December
      31,
              2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            17,217,731
            
            
            $
            15,323,143Accounts
      receivable, net of allowance for doubtful accounts of $251,148 and
      $225,793, respectively
            
            
            8,127,519
            
            
            
            8,179,099Inventory
            
            
            8,004,834
            
            
            
            9,433,184Prepaid
      expenses and deposits
            
            
            777,171
            
            
            
            386,594Total
      current assets
            
            
            34,127,255
            
            
            
            33,322,020Property
      and equipment, net
            
            
            1,110,473
            
            
            
            1,554,201Other
      assets, net of accumulated amortization of $277,474, and $259,469,
      respectively
            
            
            789,256
            
            
            
            540,344TOTAL
            
            $
            36,026,984
            
            
            $
            35,416,565LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            1,528,253
            
            
            $
            2,039,280Accrued
      expenses, including accrued employee compensation of $1,377,588 and $1,598,338,
      respectively
            
            
            3,457,927
            
            
            
            2,498,911Deferred
      revenue
            
            
            806,916
            
            
            
            557,065Current
      portion of long-term debt
            
            
            504,335
            
            
            
            390,246Total
      current liabilities
            
            
            6,297,431
            
            
            
            5,485,502Long-term
      debt—less current portion
            
            
            1,250,000
            
            
            
            1,632,410Total
      liabilities
            
            
            7,547,431
            
            
            
            7,119,912Commitments
      and contingencies (Note 7)Stockholders’
      Equity:Common
      stock, $0.001 par value—100,000,000 shares authorized; 17,395,258 (2009)
      and 17,327,191 (2008) issued and outstanding
            
            
            17,395
            
            
            
            17,327Additional
      paid-in capital
            
            
            114,511,279
            
            
            
            112,456,924Accumulated
      deficit
            
            
            (86,049,121
            )
            
            
            (84,175,598
            )Total
      stockholders’ equity
            
            
            28,479,553
            
            
            
            28,298,653TOTAL
            
            $
            36,026,984
            
            
            $
            35,416,565





3





SENORX,
INC.


CONDENSED
STATEMENTS OF OPERATIONS


(Unaudited)




Three Months
      Ended
              September
      30,
            
            
            Nine Months
      Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      revenues
            
            $
            13,718,264
            
            
            $
            11,264,471
            
            
            $
            40,097,177
            
            
            $
            33,133,364Cost
      of goods sold
            
            
            3,986,071
            
            
            
            3,942,922
            
            
            
            11,768,681
            
            
            
            12,322,674Gross
      profit
            
            
            9,732,193
            
            
            
            7,321,549
            
            
            
            28,328,496
            
            
            
            20,810,690Operating
      expenses:Selling
      and marketing
            
            
            5,475,863
            
            
            
            6,063,248
            
            
            
            18,115,474
            
            
            
            16,928,701Research
      and development
            
            
            1,878,664
            
            
            
            1,631,898
            
            
            
            5,524,522
            
            
            
            4,656,700General
      and administrative
            
            
            2,576,360
            
            
            
            1,380,333
            
            
            
            6,444,380
            
            
            
            8,474,316Total
      operating expenses
            
            
            9,930,887
            
            
            
            9,075,479
            
            
            
            30,084,376
            
            
            
            30,059,717Loss
      from operations
            
            
            (198,694
            )
            
            
            (1,753,930
            )
            
            
            (1,755,880
            )
            
            
            (9,249,027
            )Interest
      expense
            
            
            44,142
            
            
            
            22,334
            
            
            
            141,183
            
            
            
            59,160Interest
      income
            
            
            (7,393
            )
            
            
            (99,243
            )
            
            
            (23,540
            )
            
            
            (505,037
            )Loss
      before provision for income taxes
            
            
            (235,443
            )
            
            
            (1,677,021
            )
            
            
            (1,873,523
            )
            
            
            (8,803,150
            )Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            $
            (235,443
            )
            
            $
            (1,677,021
            )
            
            $
            (1,873,523
            )
            
            $
            (8,803,150
            )Net
      loss per share-basic and diluted
            
            $
            (0.01
            )
            
            $
            (0.10
            )
            
            $
            (0.11
            )
            
            $
            (0.51
            )Weighted
      average shares outstanding-basic and diluted
            
            
            17,417,417
            
            
            
            17,262,817
            
            
            
            17,360,104
            
            
            
            17,232,661











4





SENORX,
INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)




Nine Months
      EndedSeptember
      30,2009
            
            
            2008Cash
      Flows From Operating Activities:Net
      loss
            
            $
            (1,873,523
            )
            
            $
            (8,803,150
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            1,352,996
            
            
            
            1,191,487Stock-based
      compensation
            
            
            1,926,453
            
            
            
            1,735,295Loss
      on fixed asset abandonment
            
            
            11,633
            
            
            
            16,191Provision
      for bad debt
            
            
            51,254
            
            
            
            124,387Provision
      for inventory obsolescence
            
            
            716,717
            
            
            
            —Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            326
            
            
            
            (1,836,743
            )Inventory
            
            
            (148,915
            )
            
            
            (3,511,828
            )Prepaid
      expenses and deposits
            
            
            (390,577
            )
            
            
            (40,803
            )Other
      assets
            
            
            5,388
            
            
            
            (269,204
            )Accounts
      payable
            
            
            (511,027
            )
            
            
            (165,283
            )Accrued
      expenses
            
            
            959,016
            
            
            
            888,764Deferred
      revenue
            
            
            249,851
            
            
            
            49,171Net
      cash provided by (used in) operating activities
            
            
            2,349,592
            
            
            
            (10,621,716
            )Cash
      Flows From Investing Activities:Maturities
      of short-term investments
            
            
            —
            
            
            
            10,764,490Acquisition
      of property and equipment
            
            
            (314,653
            )
            
            
            (862,057
            )Net
      cash (used in) provided by investing activities
            
            
            (314,653
            )
            
            
            9,902,433Cash
      Flows From Financing Activities:Proceeds
      from issuance of common stock from stock option exercises
            
            
            12,441
            
            
            
            45,626Proceeds
      from issuance of common stock under the ESPP plan
            
            
            115,529
            
            
            
            207,851Payment
      of debt issuance costs
            
            
            —
            
            
            
            (30,000
            )Repayment
      of other borrowings
            
            
            (260,058
            )
            
            
            (2,073,072
            )Repayment
      of capital leases
            
            
            (8,263
            )
            
            
            (6,858
            )Net
      cash used in financing activities
            
            
            (140,351
            )
            
            
            (1,856,453
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            1,894,588
            
            
            
            (2,575,736
            )Cash
      and cash equivalents—beginning of period
            
            
            15,323,143
            
            
            
            17,185,259Cash
      and cash equivalents—end of period
            
            $
            17,217,731
            
            
            $
            14,609,523Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for income taxes
            
            $
            —
            
            
            $
            —Cash
      paid for interest
            
            $
            104,234
            
            
            $
            31,244Transfers
      between fixed assets and other assets
            
            $
            —
            
            
            $
            31,626Inventory
      transferred to fixed assets and other assets
            
            $
            860,548
            
            
            $
            1,004,297Property
      and equipment acquired included in accounts payable
            
            $
            —
            
            
            $
            12,263







5




SENORX,
INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS




1.
            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 (“SEC”). 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 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 September 30, 2009 and
the results of operations and cash flows for the related interim periods ended
September 30, 2009 and 2008. The results of operations for the three and nine
months ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2009 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 March 16,
2009 as part of the Company’s Annual Report on Form 10-K. The Company’s
significant accounting policies have not changed as of September 30,
2009.   This quarterly report should be read in conjunction with
such report.




The
Company reclassified $395,150 of warranty contracts at December 31, 2008 from
accrued expenses to deferred revenue to conform to the current presentation in
the September 30, 2009 condensed balance sheet.




The
Company evaluated subsequent events for recognition or disclosure through
November 3, 2009, which was the date the Company filed this form 10-Q with the
SEC.




2.
            RECENT
      ACCOUNTING PRONOUNCEMENTS





In August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Measuring Liabilities at Fair
Value, which amends the guidance in ASC 820, Fair Value Measurements and
Disclosures, to provide guidance on fair value measurement of
liabilities.   If a quoted price in an active market is not available
for an identical liability, ASU 2009-05 requires companies to compute fair value
by using quoted prices for an identical liability when traded as an asset,
quoted prices for similar liabilities when traded as an asset or another
valuation technique that is consistent with the guidance is ASC 820.  ASU
2009-05 will be effective for interim and annual periods beginning after its
issuance and is not expected to have a material impact on the Company’s
financial position or results of operations.




In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force, which
amends the guidance in ASC 605, Revenue Recognition. 
ASU 2009-13 eliminates the residual method of accounting for revenue on
undelivered products and instead, requires companies to allocate revenue to each
of the deliverable products based on their relative selling price.  In
addition, this ASU expands the disclosure requirements surrounding
multiple-deliverable arrangements.  ASU 2009-13 will be effective for
revenue arrangements entered into for fiscal years beginning on or after June
15, 2010.  The Company is currently evaluating the impact ASU 2009-13 will
have on its financial position and results of operations.




3.
            INVENTORY




Inventories
consist of the following:




September
      30,
              2009
            
            
            December
      31,
              2008Raw
      materials
            
            $
            3,611,098
            
            
            $
            4,261,809Work-in-process
            
            
            811,189
            
            
            
            382,188Finished
      goods
            
            
            3,582,547
            
            
            
            4,789,187$
            8,004,834
            
            
            $
            9,433,184




6





4.
            STOCK
      OPTION PLANS




The
Company’s 2006 Stock Option Plan (the “2006 Plan”), which was adopted by the
Company’s board of directors in May 2006 and approved by the Company’s
shareholders in June 2006 is designed to enable the Company to offer an
incentive-based compensation system to employees, officers and directors of the
Company and to consultants who do business with the Company. The 2006 Plan
provides for the grant of incentive stock options, nonqualified stock options
and restricted stock units (“RSU’s”) to purchase up to an aggregate of 5,600,944
shares of common stock. The 2006 plan will terminate in 2016 and also provides
for annual increases in the number of shares available for issuance thereunder
on the first day of each fiscal year, beginning with the 2007 fiscal year, equal
to the lesser of:




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




•
            630,000 shares;
      or





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





As of
September 30, 2009, options to purchase a total of 2,358,720 shares of common
stock were outstanding under the 2006 Plan and options to purchase a total of
1,314,032 shares were available for issuance under the 2006 Plan.




The
Company also has a 1998 Stock Option Plan (“1998 Plan”) which plan was approved
by the Company’s board of directors and shareholders in 1998. As of September
30, 2009, options to purchase a total of 653,965 shares of common stock were
outstanding under the 1998 Plan and no options to purchase shares were available
for issuance under the 1998 Plan.




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




The
exercise price, term and other conditions applicable to each option granted
under the 2006 and 1998 Plans are generally determined by the committee at the
time of grant of each option and may vary with each option granted. The stock
options granted generally vest 25% per year over a four-year period and expire
after seven to 10 years. The options are exercisable according to the vesting
schedule. The vesting of certain outstanding options will accelerate in the
event of a change in control.  Alternatively, the options may be
exercised in whole or in part at any time into restricted, unvested common
shares which are subject to the risk of forfeiture, and to the Company’s
repurchase rights.




As of
September 30, 2009, there was unrecognized compensation expense of $1.4
million  related to unvested stock options which the Company expects
to recognize over a weighted average period of 1.5 years. The weighted average
grant date fair value of stock options granted during the nine months ended
September 30, 2009 was $1.23.




As of
September 30, 2009, the total number of options exercisable was 1,222,602
shares, which had a weighted average exercise price of $5.80. The average
remaining life of these options was 5.9 years and the aggregate intrinsic value
was $0 at September 30, 2009.




As of
September 30, 2009, the total number of outstanding options vested or expected
to vest (considering anticipated forfeitures) was 1,458,643 shares, which had a
weighted average exercise price of $4.83. The average remaining life of these
options was 6.3 years and the aggregate intrinsic value was $868,000 at
September 30, 2009.




As of
September 30, 2009, there was unrecognized compensation expense of $420,000
related to unvested RSU’s which the Company expects to recognize over a weighted
average period of 1.0 year. The weighted average grant date fair value of RSU’s
granted during the nine months ended September 30, 2009 was $3.49.




5.
            INCOME
      TAXES





The
Company adjusts its effective tax rate each quarter to be consistent with the
estimated annual effective tax rate.  The Company also records the tax
impact of certain discrete items, unusual or infrequently occurring, including
changes in judgment about valuation allowances and effects of changes in tax
laws or rates, in the interim period in which they occur.  In
addition, jurisdictions with a projected loss for the year or a year-to-date
loss where no tax benefit can be recognized are excluded from the estimated
annual effective tax rate.  The impact of such an exclusion could
result in a higher or lower effective tax rate during a particular quarter,
based upon the mix and timing of actual earnings versus annual
projections.




7




The
Company evaluates whether a valuation allowance should be established against
its deferred tax assets based on the consideration of all available evidence
using a “more likely than not” standard.  As of September 30, 2009,
the Company has provided a full valuation allowance and no benefit has been
recognized for net operating losses and other deferred tax assets due to the
uncertainty of future utilization.




During
the second quarter, the Company experienced an“ownership change” as
defined by Internal Revenue Code Section 382.  The ownership change
limits the amount of pre ownership change net operating losses (NOLs) that can
be utilized to offset future taxable income.  While the Company is
still in the process of computing the amount of the NOL limitation, the Company
does not believe there is a material impact to the financial
statements.




As of September 30, 2009, the Company
had unrecognized tax benefits of $410,000.  The Company estimates that
the unrecognized tax benefit will not change significantly within the next
twelve months.  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 will continue to classify income tax penalties and
interest as part of interest expense in its Statements of Operations. Accrued
interest on uncertain tax positions is not material as of September 30, 2009.
There are no penalties accrued as of September 30, 2009.





Jurisdiction
            
            Open
      Tax YearsFederal
            
            1998
      - 2008California
            
            1998
      - 2008





6.
            NET
      LOSS PER SHARE




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




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




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Weighted-average
      common stock outstanding
            
            
            17,417,893
            
            
            
            17,268,348
            
            
            
            17,360,580
            
            
            
            17,238,192Less:
      Unvested common shares subjectto
      repurchase
            
            
            (476
            )
            
            
            (5,531
            )
            
            
            (476
            )
            
            
            (5,531
            )Total
      weighted-average number of shares used in computingnet
      loss per share-basic and diluted
            
            
            17,417,417
            
            
            
            17,262,817
            
            
            
            17,360,104
            
            
            
            17,232,661





7.
            COMMITMENTS
      AND CONTINGENCIES




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.




8




On
January 8, 2008, Hologic and its wholly-owned subsidiaries, including Cytyc
Corporation and Cytyc LP, filed a lawsuit against the Company in the United
States District Court, Northern District of California, San Jose Division. The
complaint generally alleges patent infringement of certain Hologic brachytherapy
patent claims, seeking unspecified monetary damages and an injunction against
the Company for infringement of those claims. On February 6, 2008, Hologic filed
a motion seeking a preliminary injunction in the case and requested that the
Court stop the sale of Contura MLB. On March 7, 2008, Hologic filed an amended
complaint restating its allegations regarding patent infringement, and adding
new claims related to unfair competition under the Lanham Act and California
state unfair competition and false advertising statutes. On April 25, 2008, the
court denied Hologic’s request for a preliminary injunction and ordered the
parties to schedule a trial within 60 to 90 days of such date. On May 22, 2008,
the Court issued an order scheduling the Markman claims construction hearing on
the patent counts for June 25, 2008, and the trial in the case to start July 14,
2008. Pursuant to an agreement of the parties, the order also dismissed
Hologic’s unfair competition and false advertising claims under the Lanham Act
and California state law, without prejudice. On June 24, 2008, the Court granted
a joint request by Hologic and the Company to stay all proceedings, including
the previously scheduled Markman claims construction hearing and the trial,
until at least August 22, 2008 in order to provide the parties time to discuss
possible resolution of the matter.  On August 22, 2008, the Company
and Hologic jointly requested that the Court resume proceedings in the pending
lawsuit. On October 15, 2008, a Markman claims construction hearing was held and
a ruling was issued on February 18, 2009.  In light of the Court's
Markman ruling, on May 20, 2009, the parties separately filed motions for
summary judgment as to certain of the patents and claims at
issue.  Hologic filed a motion seeking partial summary judgment of
infringement for certain claims.  SenoRx filed a motion seeking
partial summary judgment of non-infringement of certain claims, and also sought
summary judgment that certain claims were invalid.  Briefing on the
summary judgment motions was completed, and argument was held on August 21,
2009.  The Court has not yet issued a ruling on the
motions.  Trial in this case was set to begin on October 13, 2009, but
the trial date was post-poned by action of the Court.  Trial is now
set to begin December 1, 2009, and a pretrial hearing was held on November 2,
2009.  The Company believes that the probability of incurring any loss
related to this litigation is not determinable, nor is the amount of loss
quantifiable at this time. Accordingly, the Company has not accrued a loss
related to this litigation as of September 30, 2009. The Company intends to
continue to vigorously defend itself in this matter.




FDA
Inspection




The
Company recently underwent an inspection of the Irvine manufacturing facility by
the FDA, which resulted in the issuance on September 30, 2009 of an FDA Form
483, Notice of Inspectional Observations, from the FDA related to the Company’s
failure to properly implement and maintain adequate methods and documentation of
the design, testing, production, control, quality assurance, storage, shipping
and post-market surveillance for some products, including Contura MLB and Gel
Mark product line.  The Notice of Inspectional Observations will
require the Company to take prompt action to strengthen its quality
system.  The Company’s failure to adequately or timely implement or
complete a corrective action plan could have a material adverse effect on the
Company’s results of operations, cash flows and financial
position.  The Company believes that the probability of incurring any
loss related to this inspection is not determinable nor is the loss quantifiable
at this time.  Accordingly, the Company has not accrued a loss related
to matter as of September 30, 2009.




8.
            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
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008United
      States
            
            $
            11,994,250
            
            
            $
            10,383,884
            
            
            $
            35,647,216
            
            
            $
            29,595,532Canada
            
            
            397,018
            
            
            
            878
            
            
            
            928,315
            
            
            
            652,377Rest
      of world
            
            
            1,326,996
            
            
            
            879,709
            
            
            
            3,521,646
            
            
            
            2,885,455Total
            
            $
            13,718,264
            
            
            $
            11,264,471
            
            
            $
            40,097,177
            
            
            $
            33,133,364





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




At
September 30, 2009, the Company has four product classes. 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 Contura Multi-Lumen Balloon (MLB) Catheter,
which received FDA 510(k) clearance in May 2007.




9




Net
revenues by product class are as follows:




Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Biopsy
      disposable products
            
            $
            5,989,863
            
            
            $
            5,068,871
            
            
            $
            17,323,434
            
            
            $
            15,130,043Biopsy
      capital equipment products
            
            
            1,033,020
            
            
            
            979,922
            
            
            
            2,751,809
            
            
            
            3,330,531Diagnostic
      adjunct products
            
            
            3,954,738
            
            
            
            3,834,850
            
            
            
            11,405,583
            
            
            
            11,636,457Therapeutic
      disposables
            
            
            2,740,643
            
            
            
            1,380,828
            
            
            
            8,616,351
            
            
            
            3,036,333Total
            
            $
            13,
      718,264
            
            
            $
            11,264,471
            
            
            $
            40,097,177
            
            
            $
            33,133,364





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







10




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




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




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




Before
2007, we derived our revenues primarily from our tissue marker products.
However, our EnCor system accounted for a majority of our revenue growth in
2007and 2008. Our ability to continue to grow revenues is based upon a number of
assumptions, which may not ultimately occur, including retention of our sales
force, growth in the market for minimally-invasive breast biopsy procedures and
rapid adoption of the product by physicians who specialize in breast care. We
expect our Contura MLB to increasingly contribute to our revenues and we are
marketing this device as a compelling alternative to competing
devices.




For the
nine months ended September 30, 2009, we generated net revenues of $40.1 million
and a net loss of $1.9 million. As of September 30, 2009, our accumulated
deficit was $86.0 million. We have not been profitable since
inception.  We expect our operating expenses to increase as we expand
our business to meet anticipated increased demand for our EnCor system, expand
sales of our Contura MLB and devote resources to our sales and marketing and
research and development activities.




Net
Revenues




We derive
our revenues primarily from the sales of our breast biopsy systems, breast
biopsy capital equipment, our tissue markers, and other products for breast
care. Our largest market for these products is in the United States and Canada,
where we employ a direct sales force. Our breast biopsy systems, the EnCor and
EnCor 360, consist of two primary components: reusable handpieces and disposable
probes, and are used in conjunction with our SenoRx Breast Biopsy Console. The
disposable probes form the basis of a recurring revenue stream and also
contribute to the sales of tissue markers. Diagnostic adjunct revenue consists
primarily of tissue marker sales, both used with our breast biopsy systems and
with competitor’s biopsy products. Our breast biopsy capital equipment includes
a reusable handpiece, a control module and vacuum source used in conjunction
with our disposable biopsy probe. We expect that the sales of biopsy disposable
products will continue to grow for the remainder of 2009. Sales of biopsy
capital equipment and sales of our adjunct products, such as our tissue markers
and Gamma Finder, have begun to show signs of recovery as a result of the
improvement in the general economic environment and we expect additional growth
in the coming quarters. We have experienced significant revenue growth for
Contura MLB since its commercial launch in January 2008.Sequentially, revenue
from Contura MLB was nominally below that of the second quarter, primarily due
to seasonality and some impact on the average selling price as a result of
product discounting from competitors in the brachytherapy
category.  We anticipate that Contura MLB will again continue to
provide revenue increases quarter over quarter in the coming quarters. We
believe that overall placements of EnCor systems will continue to increase for
the remainder of 2009 but at a modestly slower rate than 2008 due to the
economic environment.




11




Cost
of Goods Sold




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




Operating
Expenses




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




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




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




In
addition, we recently underwent an inspection of our manufacturing facilities by
the FDA, which resulted in the issuance on September 30, 2009 of an FDA Form
483, Notice of Inspectional Observations, from the FDA related to our failure to
properly implement and maintain adequate methods and documentation of the
design, testing, production, control, quality assurance, storage, shipping and
post-market surveillance for some of our products, including Contura MLB and Gel
Mark product line.  The Notice of Inspectional Observations will
require us to take prompt action to strengthen our Quality System and result in
increased expenses.




Our
general and administrative expenses consist of the cost of corporate operations,
litigation and professional services. We expect general and administrative
expenses to increase in absolute dollars as we increase our infrastructure to
comply with the regulatory requirements associated with publicly-traded
companies and anticipated litigation expenses relating to the current Hologic
patent infringement lawsuit.  For the first nine months of 2009, we
incurred $2.5 million in patent litigation expenses related to alleged patent
infringement by Hologic. On October 15, 2008, a Markman claims construction
hearing was held and a ruling was issued on February 18, 2009.   In
light of the Court's Markman ruling, on May 20, 2009, the parties
separately filed motions for summary judgment as to certain of the patents
and claims at issue.  Briefing on the summary judgment motions was
completed, and arguments were held on August 21,
2009.  The Court has not yet issued a ruling on the motions. 
Trial in this case was set to begin on October 13, 2009, but the trial date
was post-poned by action of the Court.  Trial is now set to begin
December 1, 2009, and a pretrial hearing was held on November 2,
2009.




We expect
to incur stock-based compensation expense for option grants, which will be
accounted for under SFAS No. 123R. We anticipate that non-cash expenses for
options accounted for under ASC 718 (formerly SFAS No. 123R) will increase in
2009 based upon the number of options granted. We also expect to incur
stock-based compensation expense related to the issuance of common stock under
our employee stock purchase plan.




Interest




Interest
income represents income generated from our cash and cash equivalents and
short-term investments that are invested generally in liquid money-market funds
and commercial paper. During 2009, we had a term loan with Silicon Valley Bank,
resulting in interest expense. Interest expense also includes the fair value for
any equity interests, such as warrants, granted in conjunction with the debt
obligations. The fair value of the equity interests were amortized to interest
expense over the term of the related debt obligations. Interest expense has
decreased due to the retirement of certain debt obligations in 2007 and early
2008 and lower available interest rates.




12




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.


Results
of Operations




The
following table sets forth our results of operations expressed as percentages of
revenues:




For
      the Three Months Ended
              September
      30,2009
            
            
            2008Net
      revenues
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of goods sold
            
            
            29.1
            
            
            
            35.0Gross
      profit
            
            
            70.9
            
            
            
            65.0Operating
      expenses:Selling
      and marketing
            
            
            39.9
            
            
            
            53.8Research
      and development
            
            
            13.7
            
            
            
            14.5General
      and administrative
            
            
            18.8
            
            
            
            12.3Total
      operating expenses
            
            
            72.4
            
            
            
            80.6Loss
      from operations
            
            
            (1.4
            )
            
            
            (15.6
            )Interest
      expense
            
            
            0.3
            
            
            
            0.2Interest
      income
            
            
            (0.1
            )
            
            
            (0.9
            )Provision
      for income taxes
            
            
            —
            
            
            
            —Net
      loss
            
            
            (1.7
            )%
            
            
            (14.9
            )%




Three
months ended September 30, 2009 and 2008




Net
Revenues. Net revenues increased $2.5 million, or 21.8%, to $13.7 million
for the three months ended September 30, 2009 from $11.3 million for the three
months ended September 30, 2008. Therapeutic disposable revenues increased $1.4
million, or 98.5%, to $2.7 million for the three months ended September 30, 2009
when compared with the same period last year, resulting primarily from increased
adoption of our Contura MLB.  We began sales of the Contura MLB to a
limited number of clinical sites in June 2007 following the May 2007 FDA 510(k)
clearance, with full commercialization beginning in January
2008.  Biopsy disposable revenues increased $921,000, or 18.2%, from
the three months ended September 30, 2008 due to a larger installed base of
EnCor systems.  Disposable product sales, which includes Contura MLB,
increased 23.8% to 89.8% of net revenues for the three months ended September
30, 2009 from 88.4% of net revenues for the same period a year
ago.  Biopsy capital revenues increased $53,000, or 5.4% 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
2008.  Diagnostic adjunct revenues increased $120,000, or 3.1%,
primarily due to the sales of markers used with competitive biopsy disposables
and increased Gamma Finder sales.




Cost of Goods
Sold and Gross Profit. Cost of goods sold increased $43,000, or 1.1%, to
$4.0 million for the three months ended September 30, 2009 from $3.9 million for
the three months ended September 30, 2008. The increase in total cost of goods
sold primarily consisted of an increase of $282,000 in the provision for
inventory obsolescence, which was partially offset by a decrease in direct
labor, manufacturing overhead and material costs associated with our increase in
product sales. Gross profit increased $2.4 million, or 32.9% to $9.7 million or
70.9% of net revenues for the three months ended September 30, 2009 from $7.3
million or 65.0% for the three months ended September 30, 2008. Gross margins
continue to benefit from improved efficiencies in the production of our
disposable biopsy probe and leverage from the allocation of fixed manufacturing
overhead over greater product revenues and inventory unit
production.




13




Selling and
Marketing Expenses. Selling and marketing expenses decreased $587,000, or
9.7%, to $5.4 million for the three months ended September 30, 2009 from $6.1
million for the three months ended September 30, 2008. The decrease primarily
consisted of a $385,000 decrease in travel and related employee costs through
cost containment measures, a $212,000 decrease in departmental expenses and a
$71,000 decrease in equity based compensation charges including deferred
compensation and the discount associated with shares purchased by employees
under our Employee Stock Purchase Plan. These decreases were partially offset by
an $81,000 increase in selling and promotional related expenses.




Research and
Development Expenses. Research and development expenses increased
$247,000, or 15.1%, to $1.9 million for the three months ended September 30,
2009 from $1.6 million for the three months ended September 30, 2008. The
increase primarily consisted of $203,000 in project costs for the loc wire
replacement products development program; new products to be released in 2010
and 2011, and continued support related to the Contura MLB and existing product
lines.  In addition, headcount and related employee costs increased
$68,000 as well as a $40,000 increase in equity based compensation charges
including deferred compensation and the discount associated with shares
purchased by employees under our Employee Stock Purchase Plan.  These
increases were partially offset by a $38,000 decrease in professional services
and a $27,000 decrease in departmental costs.




General and
Administrative Expenses. General and administrative expenses increased
$1.2 million, or 86.6%, to $2.6 million for the three months ended September 30,
2009 from $1.4 million for the three months ended September 30, 2008. The
increase primarily consisted of a $1.36 million increase in attorney and
litigation costs incurred responding to the allegations by Hologic of patent
infringement relating to our Contura MLB, and an increase of $38,000 for public
company related costs, including legal, SOX and financial reporting
expenses.  These increases were partially offset by a decrease of
$103,000 in non-patent related legal and professional fees due to certain
strategic initiatives, a decrease of $56,000 in departmental related expenses, a
decrease of $22,000 in salaries and the related employee costs and a decrease of
$21,000 in equity based compensation charges including deferred compensation and
the discount associated with shares purchased by employees under our Employee
Stock Purchase Plan.




Interest
Expense.Interest expense increased $22,000 to
$44,000 for the three months ended September 30, 2009 from $22,000 for the three
months ended September 30, 2008. The increase is primarily due to the $2.0
million advance in November 2008 from our term loan with Silicon Valley
Bank.




Interest Income.Interest  income decreased $92,000 to $7,000 for the three
months ended September 30, 2009 from $99,000 for the three months ended
September 30, 2008 primarily due to lower interest rates and lower cash balances
resulting from working capital needs for operations and spending on the patent
litigation.




Results
of Operations




The
following table sets forth our results of operations expressed as percentages of
revenues:




For
      the Nine Months Ended
              September
      30,2009
            
            
            2008Net
      revenues
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of goods sold
            
            
            29.4
            
            
            
            37.2Gross
      profit
            
            
            70.6
            
            
            
            62.8Operating
      expenses:Selling
      and marketing
            
            
            45.2
            
            
            
            51.1Research
      and development
            
            
            13.8
            
            
            
            14.1General
      and administrative
            
            
            16.1
            
            
            
            25.6Total
      operating expenses
            
            
            75.0
            
            
            
            90.7Loss
      from operations
            
            
            (4.4
            )
            
            
            (27.9
            )Interest
      expense
            
            
            0.4
            
            
            
            0.2Interest
      income
            
            
            (0.1
            )
            
            
            (1.5
            )Provision
      for income taxes
            
            
            —
            
            
            
            —Net
      loss
            
            
            (4.7
            )%
            
            
            (26.6
            )%






14




Nine
months ended September 30, 2009 and 2008




Net
Revenues. Net revenues increased $7.0 million, or 21.0%, to $40.1 million
for the nine months ended September 30, 2009 from $33.1 million for the nine
months ended September 30, 2008. Therapeutic disposable revenues increased $5.6
million, or 183.8%, resulting from increased adoption of our Contura
MLB.  We began sales of the Contura MLB to a limited number of
clinical sites in June 2007 following the May 2007 FDA 510(k) clearance, with
full commercialization in January 2008.  Biopsy disposable revenues
increased $2.2 million, or 14.5%, from the nine months ended September 30, 2008
due to a larger installed base of EnCor systems. Disposable product sales, which
includes Contura MLB, increased 26.9% to 91.2% of net revenues for the nine
months ended September 30, 2009 from 87.0% of net revenues for the same period a
year ago.  These increases were off set by decreases in biopsy capital
revenues of $579,000, or 17.4%, and a decrease of diagnostic adjunct revenues of
$231,000, or 2.0%. We believe that the decreases in biopsy capital and Gamma
Finder sales are as a result of the global recession, tight credit markets and
currency fluctuations negatively impacting our global capital equipment
sales.




Cost of Goods
Sold and Gross Profit. Cost of goods sold decreased $554,000, or 4.5%, to
$11.8 million for the nine months ended September 30, 2009 from $12.3 million
for the nine months ended September 30, 2008. The decrease in total cost of
goods sold primarily consisted of a decrease in direct labor, manufacturing
overhead and material costs associated with our increase in product sales, which
was partially offset by an increase of $717,000 in the provision for inventory
obsolescence. Gross profit increased $7.5 million, or 36.1% to $28.3 million or
70.6% of net revenues for the nine months ended September 30, 2009 from $20.8
million or 62.8% for the nine months ended September 30, 2008. Gross margins
continue to benefit from improved efficiencies in the production of our
disposable biopsy probe and leverage from the allocation of fixed manufacturing
overhead over greater product revenues and inventory unit
production.




Selling and
Marketing Expenses. Selling and marketing expenses increased $1.2
million, or 7.0%, to $18.1 million for the nine months ended September 30, 2009
from $16.9 million for the nine months ended September 30, 2008. The increase
primarily consisted of $674,000 in salaries and related employee costs due to
the modest increases to our sales organization, a $50,000 increase in
professional services, a $419,000 increase in selling and promotional related
expenses and a $44,000 increase in equity based compensation charges including
deferred compensation and the discount associated with shares purchased by
employees under our Employee Stock Purchase Plan.




Research and
Development Expenses. Research and development expenses increased
$868,000, or 18.6%, to $5.5 million for the nine months ended September 30, 2009
from $4.7 million for the nine months ended September 30, 2008. The increase in
these expenses consisted primarily of $571,000 for programs related to the
Contura MLB, as well as new product development and support of existing product
lines, an increase of $118,000 for patent related professional fees, an increase
of  $115,000 in salaries and the related employee costs and an
increase of $64,000 in equity based compensation charges including deferred
compensation and the discount associated with shares purchased by employees
under our Employee Stock Purchase Plan.




General and
Administrative Expenses. General and administrative expenses decreased
$2.0 million, or 24.0%, to $6.4 million for the nine months ended September 30,
2009 from $8.5 million for the nine months ended September 30, 2008. The
decrease primarily consisted of a $1.9 million reduction in attorney and related
litigation costs incurred responding to the allegations by Hologic of patent
infringement relating to our Contura MLB, a decrease of $90,000 for
professional  services, including general legal fees, a decrease of
$64,000 for public company related costs, including legal, SOX and financial
reporting expenses, and a $44,000 decrease in salaries and the related employee
costs.  These decreases were partially offset by increases of $47,000
for departmental costs and $26,000 in equity based compensation charges
including deferred compensation and the discount associated with shares
purchased by employees under our Employee Stock Purchase Plan.




Interest
Expense.Interest expense increased $82,000 to
$141,000 for the nine months ended September 30, 2009 from $59,000 for the nine
months ended September 30, 2008. The increase is primarily due to the $2.0
million advance in November 2008 from our term loan with Silicon Valley
Bank.




Interest Income.Interest  income decreased $481,000 to $24,000 for the nine
months ended September 30, 2009 from $505,000 for the nine months ended
September 30, 2008 primarily due to lower interest rates and lower cash balances
resulting from working capital needs for operations and spending on the patent
litigation.




15




Liquidity
and Capital Resources




General




We have
incurred losses since our inception in January 1998 and, as of September 30,
2009, we had an accumulated deficit of $86.0 million.  From inception
through September 30, 2009, we generated cumulative gross profit from the sale
of our product offerings of $115.2 million.  To date, our operations
have been funded primarily with proceeds from the issuance of our preferred
stock, debt issuances and our IPO that closed in April 2007. Cumulative net
proceeds from the issuance of preferred stock totaled $46.8 million. Proceeds
from the issuance of promissory notes totaled $18.0 million. Net proceeds from
our IPO, including the sale of shares pursuant to the subsequent underwriters’
overallotment and after deducting total expenses, was $44.8 million. All of our
preferred stock converted into common stock upon the closing of the IPO. In
November 2007 we used $10.3 million to retire a December 2006 Subordinated Note
and in February 2008 we used $2.0 million to repay a February 2003 convertible
subordinated note and 2002 note obligations owing to Century Medical. In
September 2008 we amended our existing loan agreement with Silicon Valley Bank
to, among other items, increase the total maximum amount available for borrowing
from $4.0 million to $12.0 million. As of September 30, 2009, $2.0 million has
been drawn down under this facility, of which $1.75 million is outstanding, and
$6.8 million was available based on the borrowing formula for the
facility.




We
believe that our cash and cash equivalents, and our 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 may use cash to support ongoing patent litigation
costs.




Net
Cash Provided By Operating Activities




Net cash
provided by operating activities was $2.3 million, for the nine months ended
September 30, 2009, which was primarily a function of a net increase in accounts
payable and accrued expenses of $448,000 and an increase of $250,000 in deferred
revenue.  These sources of cash were partially offset by an increase
in prepaid expenses of $391,000 and an increase in inventory of
$149,000.




The
increase in accounts payable and accrued liabilities was primarily due to the
timing of payment obligations and the increase in deferred revenue was due to a
higher number of equipment service contracts.




Net
Cash Used in Investing Activities




Net cash
used in investing activities amounted to $315,000 during the nine months ended
September 30, 2009, which was attributable to the additions of new manufacturing
molds and demonstration units.





Net
Cash Used in Financing Activities




Net cash
used in financing activities was $140,000 during the nine months ended September
30, 2009, which was primarily attributable to the scheduled repayments of
$250,000 on our term loan with Silicon Valley Bank and the repayment of a
$10,000 equipment loan.  These uses of cash were offset by $128,000
related to proceeds from the issuance of common stock as a result of the
exercise of stock options and purchases of shares under our Employee Stock
Purchase Plan.




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 August
2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Measuring Liabilities at Fair
Value, which amends the guidance in ASC 820, Fair Value Measurements and
Disclosures, to provide guidance on fair value measurement of
liabilities.   If a quoted price in an active market is not available
for an identical liability, ASU 2009-05 requires companies to compute fair value
by using quoted prices for an identical liability when traded as an asset,
quoted prices for similar liabilities when traded as an asset or another
valuation technique that is consistent with the guidance is ASC 820.  ASU
2009-05 will be effective for interim and annual periods beginning after its
issuance and is not expected to have a material impact on our financial position
or results of operations.




16




In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues Task Force, which
amends the guidance in ASC 605, Revenue Recognition. 
ASU 2009-13 eliminates the residual method of accounting for revenue on
undelivered products and instead, requires companies to allocate revenue to each
of the deliverable products based on their relative selling price.  In
addition, this ASU expands the disclosure requirements surrounding
multiple-deliverable arrangements.  ASU 2009-13 will be effective for
revenue arrangements entered into for fiscal years beginning on or after June
15, 2010.  We are currently evaluating the impact ASU 2009-13 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
September 30, 2009, included liquid money market accounts. Due to the liquid
nature of our cash and cash equivalents, we believe we have no material exposure
to interest rate risk. Additionally, since the majority of our debt carries
interest at fixed rates, we also believe changes in interest rates will not
cause significant changes in our interest expense. Our revenues are denominated
in U.S. dollars. Accordingly, we have not had exposure to foreign currency rate
fluctuations. We expect to continue to realize our revenues in U.S.
dollars.




ITEM
      4.
            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) and 15d-15(f) of the Exchange
Act of 1934, as amended) 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





On
January 8, 2008, Hologic and its wholly-owned subsidiaries, including Cytyc
Corporation and Cytyc LP, filed a lawsuit against us in the United States
District Court, Northern District of California, San Jose Division. The
complaint generally alleges patent infringement of certain Hologic brachytherapy
patent claims, seeking unspecified monetary damages and an injunction against us
for infringement of those claims. On February 6, 2008, Hologic filed a motion
seeking a preliminary injunction in the case and requested that the Court stop
the sale of Contura MLB. On March 7, 2008, Hologic filed an amended complaint
restating its allegations regarding patent infringement, and adding new claims
related to unfair competition under the Lanham Act and California state unfair
competition and false advertising statutes. On April 25, 2008, the court denied
Hologic’s request for a preliminary injunction and ordered the parties to
schedule a trial within 60 to 90 days of such date. On May 22, 2008, the Court
issued an order scheduling the Markman claims construction hearing on the patent
counts for June 25, 2008, and the trial in the case to start July 14, 2008.
Pursuant to an agreement of the parties, the order also dismissed Hologic’s
unfair competition and false advertising claims under the Lanham Act and
California state law, without prejudice. On June 24, 2008, the Court granted our
joint request with Hologic to stay all proceedings, including the previously
scheduled Markman claims construction hearing and the trial, until at least
August 22, 2008 in order to provide the parties time to discuss possible
resolution of the matter.  On August 22, 2008, we jointly requested
with Hologic that the Court resume proceedings in the pending lawsuit. On
October 15, 2008, a Markman claims construction hearing was held and a ruling
was issued on February 18, 2009. In light of the Court's Markman ruling, on May
20, 2009, the parties separately filed motions for summary judgment as to
certain of the patents and claims at issue.  Hologic filed a motion
seeking partial summary judgment of infringement for claim 11 of the 813 patent,
claim 4 of the 204 patent and claims 1 and 8 of the 142
patent.  SenoRx filed a motion seeking partial summary judgment of
non-infringement of claims 11 and 12 of the 813 patent and claims 4 and 17 of
the 204 patent, and also seeking summary judgment that claims 1 and 8 of the 142
patent were invalid.  Briefing on the summary judgment motions was
completed, and argument was held on August 21, 2009.  The Court has
not yet issued a ruling on the motions.  Trial in this case was set to
begin on October 13, 2009, but the trial date was post-poned by action of the
Court.  Trial is now set to begin December 1, 2009, and a pretrial
hearing was held on November 2, 2009.  We believe that the probability
of incurring any loss related to this litigation is not determinable, nor is the
amount of loss quantifiable at this time. Accordingly, we have not accrued a
loss related to this litigation as of June 30, 2009. We intend to continue to
vigorously defend ourselves in this matter.




17




ITEM
      1A.
            RISK
      FACTORS




RISKS
RELATED TO OUR BUSINESS




We
have a limited history of operations and a history of net losses, therefore, we
may not be able to generate significant revenues or profitability.




We have a
limited history of operations upon which you can evaluate our
business.  We began selling our first products in 2002, fully launched
our flagship product for use in breast biopsy procedures, the EnCor system, in
November 2005, and launched our flagship radiation therapy product, the Contura
MLB, in January 2008.  We incurred net losses of $8.7 million in 2008,
$9.9 million in 2007 and, as of September 30, 2009, had an accumulated deficit
of approximately $86.0 million.  In order for us to become
increasingly profitable, we believe that our EnCor system and Contura MLB must
be widely adopted. We cannot assure you that we will be able to achieve or
sustain profitability even if we are able to generate significant revenues. Our
failure to sustain profitability would negatively impact the market price of our
common stock and require us to obtain additional funding. If our future funding
requirements increase beyond currently expected levels, as a result of our
failure to sustain profitability relating to sales, litigation expenses or
otherwise, we cannot make any assurance that additional funding will be
available on a timely basis on terms acceptable to us, or at all, particularly
in the short-term due to the current credit and equity market funding
environments.




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




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




•
              we
      have limited experience selling to radiological oncologists, the primary
      market for Contura MLB;




•
              attracting
      and retaining qualified sales professionals to sell
  it;




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




•
              protecting
      our products with intellectual property
rights;




•
              sustaining
      adequate third-party reimbursement
;




•
              producing
      compelling clinical data on safety and
  effectiveness;




•
              partnering,
      as necessary, with suppliers;
and




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




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




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




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





18


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.




Our
future success will depend in part upon our ability to continue to successfully
commercialize our




Contura
MLB.




Contura
MLB, which we received FDA 510(k) clearance in May 2007, has become a
significant contributor to our revenues. The Contura MLB commercialization
effort is fully engaged, but there remain significant challenges that must be
overcome before we can obtain significant revenues from this product,
including:




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




•
              attracting
      and retaining qualified sales professionals to sell
  it;




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




•
              protecting
      it with intellectual property
rights;




•
              obtaining
      adequate third-party
reimbursement;




•
              producing
      compelling clinical data on safety and
  effectiveness;




•
              partnering,
      as necessary, with suppliers;
and




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




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




19




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




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




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.




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.
Reimbursement may be impacted by the general national health care reform
initiatives that are currently proposed, and being discussed, by various
branches of the federal government. In addition, the Federal Deficit Reduction
Act of 2006 may in the future affect future reimbursement rates for our vacuum-
assisted biopsy products and Contura MLB products. We cannot assure you that the
current scope of coverage or levels of reimbursement will continue to be
available or that coverage of, or reimbursement for, our products will be
available at all. If physicians, hospitals and other providers are unable to
obtain adequate reimbursement for our current products or future products, or
for the procedures in which such products are used, they may be less likely to
purchase the products, which could have a material adverse impact on our market
share. For example, in 2009, it is expected that there will be an increase in
reimbursement rates to non hospital based Radiation Oncology centers for
multiple-dwell radiation balloon catheter procedures, which includes
Contura MLB, relative to single catheter procedures, but a decrease for non
hospital based Radiology Oncology centers in rates relative to whole breast
radiation therapy.




20





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




The
markets in which we compete involve rapid and substantial technological
development and product innovations. There are few barriers to prevent new
entrants or existing competitors from developing or acquiring products or
technological improvements that compete effectively against our products or
technology. If we are unable to innovate successfully to anticipate or respond
to competitive threats, obtain regulatory approvals, or protect such innovation
with defensible intellectual property, our revenues could fail to grow or could
decline. Our business strategy is in part based upon our expectation that we
will continue to make frequent new product introductions and improvements to
existing products that will be demanded by our target customers. If we are
unable to continue to develop new products and technologies as anticipated, our
ability to grow and our future financial performance could be materially
harmed.




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 nine months ended September 30, 2009 and year ended December 31, 2008,
represented approximately 4.7% and 4.9%, respectively, of our total
revenues.  We cannot assure you that Kaiser or other large customer
accounts will continue to purchase our products.  The loss of any of
these customers could have a material adverse impact on our results of
operations.




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




We aim to
be an attractive and convenient supplier for integrated breast centers by
offering a broad product line of minimally-invasive devices for breast care
specialists. Commercializing several product lines simultaneously may be
difficult because we are a relatively small company. Additionally, offering a
broad product line will require us to manufacture, sell and support some
products that are not as profitable or in as high demand as some of our other
products, which could have a material adverse effect on our overall results of
operations. To succeed in our approach, we will need to grow our organization
considerably and enhance our relationships with third-party manufacturers and
suppliers. If we fail to make product introductions successfully or in a timely
manner because we lack resources, or if we fail to adequately manufacture, sell
and support our existing products, our reputation may be negatively affected and
our results of operations could be materially harmed. Additionally, managing
such a large line of products may be challenging for an organization of our
size.  For example, we recently underwent an inspection of our
manufacturing facilities by the FDA, which resulted in the issuance on September
30, 2009 of an FDA Form 483, Notice of Inspectional Observations, from the FDA
related to our failure to properly implement and maintain adequate methods and
documentation of the design, testing, production, control, quality assurance,
storage, shipping and post-market surveillance for some of our products,
including the Contura MLB and Gel Mark product line. We have completed
responding to the observations and commenced implementation of the corrective
actions.




21




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




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





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




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




•
              hire
      and successfully integrate qualified individuals as
  needed;




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




•
              retain
      and motivate our sales employees;
and




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




We expect
that our Contura MLB will continue to be a key driver of future growth. However,
our sales force has historically sold diagnostic products and therefore has
limited experience selling a therapeutic device. Our Contura MLB competes with
products that are well-established and with new entrants to the market.
Accordingly, it is difficult for us to predict how well our sales force will
perform. Our failure to adequately address these risks could have a material
adverse effect on our ability to sell our products, causing our revenues to be
lower than expected and harming our results of operations.




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




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




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




22




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




For the
nine months ended September 30, 2009, we derived approximately 88.9% 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, others 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.




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




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




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




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




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




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




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




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




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




23




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




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




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




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




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




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




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




•
              prioritization
      of other customers orders over
ours;




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




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




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




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.




24




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.




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




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




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




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




RISKS
RELATED TO REGULATORY MATTERS




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




We
recently underwent an inspection of our manufacturing facilities by the FDA,
which resulted in the issuance on September 30, 2009 of an FDA Form 483, Notice
of Inspectional Observations, from the FDA related to our failure to properly
implement and maintain adequate methods and documentation of the design,
testing, production, control, quality assurance, storage, shipping and
post-market surveillance for some of our products, including the Contura MLB and
Gel Mark product line.  The Notice of Inspectional Observations will
require us to take prompt action to strengthen our Quality System.  We
have completed a comprehensive corrective action plan that has been presented to
the FDA outlining the steps and timing for coming into compliance with Quality
System regulations.  FDA may determine we have failed to adequately or
timely implement or complete the corrective action plan.  Such a
determination could lead to the FDA promptly commencing an enforcement action
against us without warning, which may include the following
sanctions:




1.
              injunctions,
      fines, other civil penalties or issuance of a Warning
    Letter;




25




2.
              the
      refusal of, or delay by, the FDA in granting further 510(k) clearances or
      approving further premarket approval
  applications;




3.
              suspension
      or withdrawal of our FDA clearances or
  approvals;




4.
              operating
      restrictions, including total or partial suspension of production,
      distribution, sales and marketing of our products;
  or




5.
              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.





26




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;




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




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




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




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




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




27


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




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




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.




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




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




None.





ITEM 5.
            OTHER
      INFORMATION




None.




28




ITEM
      6.
            EXHIBITS





Exhibit
              Number
            
            Description3.2(1)
            
            Amended
      and Restated Certificate of Incorporation.3.4(1)
            
            Bylaws.4.1(1)
            
            Specimen
      Common Stock certificate of the Registrant.4.2(1)
            
            Fourth
      Amended and Restated Investors’ Rights Agreement, dated May 3, 2006, by
      and among the Registrant and certain stockholders.10.1(1)
            
            Form
      of Indemnification Agreement for directors and executive
      officers.10.2(1)
            
            1998
      Stock Plan.10.3(5)
            
            2006
      Equity Incentive Plan.10.4(1)
            
            Employee
      Stock Purchase Plan.10.5(1)
            
            Fourth
      Amended and Restated Investors’ Rights Agreement, dated May 3, 2006, by
      and among the Registrant and certain stockholders.10.6(1)
            
            Standard
      Industrial/Commercial Multi-Tenant Lease, dated September 15, 1999, as
      amended on March 28, 2003 and November 1, 2003, by and between the
      Registrant and Columbia Investors, LLC.10.7(1)
            
            Loan
      and Security Agreement, dated March 15, 2002, and various amendments
      thereto, by and between the Registrant and Silicon Valley
      Bank.10.7.1(1)
            
            Amended
      and Restated Loan and Security Agreement, dated February 20, 2007, by and
      between the Registrant and Silicon Valley Bank.10.8(1)
            
            Convertible
      Subordinated Note Agreement, dated May 9, 2002, by and between the
      Registrant and Century Medical, Inc.10.9(1)
            
            $2,500,000
      Loan and Security Agreement, dated December 27, 2004, by and between the
      Registrant and Venture Lending & Leasing IV, Inc.10.10(1)
            
            Note
      Purchase Agreement and Form of Subordinated Convertible Promissory Note,
      each dated May 4, 2006, by and between the Registrant and certain
      stockholders.10.11(1)†
            
            Agreement
      for Vacuum Assisted Breast Biopsy Needle, System, and Accessory Products,
      effective April 1, 2005 by and between the Registrant and KP
      Select.10.12(1)
            
            Executive
      Employment Agreement, dated May 1, 1999, by and between the Registrant and
      Lloyd Malchow.10.13(1)†
            
            Distribution
      Agreement, dated June 11, 2003, and various amendments thereto, by and
      among the Registrant, W.O.M. World of Medicine USA, Inc. and W.O.M. World
      of Medicine AG.10.14(1)
            
            Settlement
      Agreement, effective as of May 22, 2006, by and between the Registrant and
      Suros Surgical Systems, Inc.10.15(1)
            
            Loan
      and Security Agreement, dated December 8, 2006, by and between the
      Registrant and Escalate Capital I, L.P.10.16(2)
            
            Lease
      Agreement between The Irvine Company LLC and Registrant dated March 5,
      2008.10.17(3)
            
            Change
      in Control Agreement between Registrant and Lloyd
  Malchow.10.18(3)
            
            Change
      in Control Agreement between Registrant and Paul
Lubock.10.19(3)
            
            Change
      in Control Agreement between Registrant and Kevin
  Cousins.10.20(3)
            
            Change
      in Control Agreement between Registrant and William
    Gearhart.10.21(3)
            
            Change
      in Control Agreement between Registrant and Eben
  Gordon.  29
  10.22(4)
            
            Amendment
      dated September 30, 2008, to the Amended and Restated Loan and Security
      Agreement dated February 27, 2007, by and between the Registrant and
      Silicon Valley Bank.10.23(4)
            
            Loan
      and Security Agreement (Ex-Im Loan Facility) dated September 30, 2008, by
      and between the Registrant and Silicon Valley Bank.10.24(4)
            
            Export-Import
      Bank of the United States Working Capital Guarantee Program Borrower
      Agreement dated September 30, 2008, by and between the Registrant and
      Silicon Valley Bank.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
            
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350 and Securities Exchange Act Rule
      13a-14(b).




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




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




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




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




(5)
            Incorporated
      by reference from our Annual Report on Form 10-K filed on March 16,
      2009.




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




30





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:
      November 3, 2009
            /s/
      Lloyd H. MalchowLloyd
      H. MalchowPresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:
      November 3, 2009
            /s/
      Kevin J. CousinsKevin
      J. CousinsChief
      Financial Officer(Principal
      Financial and Accounting Officer)





31





INDEX
TO EXHIBITS




Exhibit
                Number
              
              Description3.2(1)
              
              Amended
      and Restated Certificate of Incorporation.3.4(1)
              
              Bylaws.4.1(1)
              
              Specimen
      Common Stock certificate of the Registrant.4.2(1)
              
              Fourth
      Amended and Restated Investors’ Rights Agreement, dated May 3, 2006, by
      and among the Registrant and certain stockholders.10.1(1)
              
              Form
      of Indemnification Agreement for directors and executive
      officers.10.2(1)
              
              1998
      Stock Plan.10.3(5)
              
              2006
      Equity Incentive Plan.10.4(1)
              
              Employee
      Stock Purchase Plan.10.5(1)
              
              Fourth
      Amended and Restated Investors’ Rights Agreement, dated May 3, 2006, by
      and among the Registrant and certain stockholders.10.6(1)
              
              Standard
      Industrial/Commercial Multi-Tenant Lease, dated September 15, 1999, as
      amended on March 28, 2003 and November 1, 2003, by and between the
      Registrant and Columbia Investors, LLC.10.7(1)
              
              Loan
      and Security Agreement, dated March 15, 2002, and various amendments
      thereto, by and between the Registrant and Silicon Valley
      Bank.10.7.1(1)
              
              Amended
      and Restated Loan and Security Agreement, dated February 20, 2007, by and
      between the Registrant and Silicon Valley Bank.10.8(1)
              
              Convertible
      Subordinated Note Agreement, dated May 9, 2002, by and between the
      Registrant and Century Medical, Inc.10.9(1)
              
              $2,500,000
      Loan and Security Agreement, dated December 27, 2004, by and between the
      Registrant and Venture Lending & Leasing IV, Inc.10.10(1)
              
              Note
      Purchase Agreement and Form of Subordinated Convertible Promissory Note,
      each dated May 4, 2006, by and between the Registrant and certain
      stockholders.10.11(1)†
              
              Agreement
      for Vacuum Assisted Breast Biopsy Needle, System, and Accessory Products,
      effective April 1, 2005 by and between the Registrant and KP
      Select.10.12(1)
              
              Executive
      Employment Agreement, dated May 1, 1999, by and between the Registrant and
      Lloyd Malchow.10.13(1)†
              
              Distribution
      Agreement, dated June 11, 2003, and various amendments thereto, by and
      among the Registrant, W.O.M. World of Medicine USA, Inc. and W.O.M. World
      of Medicine AG.10.14(1)
              
              Settlement
      Agreement, effective as of May 22, 2006, by and between the Registrant and
      Suros Surgical Systems, Inc.10.15(1)
              
              Loan
      and Security Agreement, dated December 8, 2006, by and between the
      Registrant and Escalate Capital I, L.P.10.16(2)
              
              Lease
      Agreement between The Irvine Company LLC and Registrant dated March 5,
      2008.10.17(3)
              
              Change
      in Control Agreement between Registrant and Lloyd
  Malchow.10.18(3)
              
              Change
      in Control Agreement between Registrant and Paul
Lubock.10.19(3)
              
              Change
      in Control Agreement between Registrant and Kevin
  Cousins.10.20(3)
              
              Change
      in Control Agreement between Registrant and William
    Gearhart.10.21(3)
              
              Change
      in Control Agreement between Registrant and Eben
  Gordon.  32
  10.22(4)
              
              Amendment
      dated September 30, 2008, to the Amended and Restated Loan and Security
      Agreement dated February 27, 2007, by and between the Registrant and
      Silicon Valley Bank.10.23(4)
              
              Loan
      and Security Agreement (Ex-Im Loan Facility) dated September 30, 2008, by
      and between the Registrant and Silicon Valley Bank.10.24(4)
              
              Export-Import
      Bank of the United States Working Capital Guarantee Program Borrower
      Agreement dated September 30, 2008, by and between the Registrant and
      Silicon Valley Bank.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
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350 and Securities Exchange Act Rule
      13a-14(b).
  (1)
              Incorporated
      by reference from our Registration Statement on Form S-1 (Registration No.
      333-134466), which was declared effective on March 28,
    2007.
  (2)
              Incorporated
      by reference from our Current Report on Form 8-K filed on March 10,
      2008.
  (3)
              Incorporated
      by reference from our Current Report on Form 8-K filed on August 29,
      2008.
  (4)
              Incorporated
      by reference from our Current Report on Form 8-K filed on October 2,
      2008.
  (5)
              Incorporated
      by reference from our Annual Report on Form 10-K filed on March 16,
      2009.
  †
              Portions
      of the exhibit have been omitted pursuant to a request for confidential
      treatment. The confidential portions have been filed with the
      SEC.






33