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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-Q/A

Amendment No. 1







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

For the quarterly period ended September 30, 2008

Commission File Number: 001-33151





HANSEN MEDICAL,
INC.

(Exact name of registrant as specified in its charter)







|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 14-1850535                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

800 East Middlefield Road, Mountain View, CA 94043

(Address of Principal Executive Offices)

(650) 404-5800

(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, a non-accelerated filer or a smaller
reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



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

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

The number of shares outstanding of the registrants common stock as of October 28, 2008 was 25,187,949.









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EXPLANATORY NOTE

Hansen Medical, Inc. (the Company) previously announced its intention to restate its consolidated financial statements for the
years ended December 31, 2007 and 2008, for each of the quarters of the year ended December 31, 2008, and for the first two quarters of the year ending December 31, 2009 as a result of the improper recognition of revenue with regard
to sales of Sensei Robotic Catheter Systems. Through June 30, 2009, the Company shipped 68 systems based on valid customer purchase orders for which revenue previously had been recognized. As of November 10, 2009, the Company had received
full payment for all but one of these systems.

The Company is filing this Quarterly Report on Form 10-Q/A (the
Form 10-Q/A) for the quarter ended September 30, 2008 to reflect the restatement of its condensed consolidated financial statements, the notes thereto and related disclosures for the quarter ended September 30, 2008. The
Company is concurrently filing an amendment to the Companys annual report on Form 10-K for the year ended December 31, 2008, in order to restate its consolidated financial statements as of December 31, 2007 and 2008, and filing
amendments to its quarterly reports on Form 10-Q for the quarters ended March 31, 2008, June 30, 2008, March 31, 2009 and June 30, 2009 to restate its condensed consolidated financial statements for such periods.

In August 2009, the Company received an anonymous whistleblower report alleging a single irregularity that resulted in
improper revenue recognition in the quarter ended December 31, 2008. The Companys audit committee, with the assistance of independent outside counsel, undertook an investigation into the allegation and a review of the Companys
historical revenue recognition practices. The audit committees investigation determined that information was withheld from the Companys accounting department and independent auditors, documentation related to certain revenue transactions
was falsified, and there was not an effective control environment in the Companys sales, clinical and field service departments. This led to incomplete information regarding temporary installations, unfulfilled training obligations, the
inability of distributors to independently install systems and train end users, and undisclosed side arrangements. As a result, there were instances where revenue was recognized prior to the completion of all of the elements required for revenue
recognition under the Companys revenue recognition policy. All of the irregularities that were identified during the investigation occurred outside of the accounting department. The Company is implementing revised controls and procedures
designed to prevent a recurrence of the improper recognition of revenue. For more information on these matters, please refer to Note 3 of the Notes to the Condensed Consolidated Financial Statements, Item 2, Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 4, Controls and Procedures.

This Form 10-Q/A has not been updated except as required to reflect the effects of the restatement. This amendment and restatement includes changes to Part I, Items 1, 2, 3 and 4. No other items included in the original Form
10-Q have been amended, and such items remain in effect as of the filing date of the original Form 10-Q. Additionally, this Form 10-Q/A does not purport to provide an update or a discussion of any other developments at the Company
subsequent to the original filing. Accordingly, this Form 10-Q/A should be read in conjunction with our periodic filings made with the Securities and Exchange Commission.



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INDEX



|           |  |                                                                                                                             |  |   
|---------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | --
|           |  | PART I - FINANCIAL INFORMATION                                                                                              |  |   
|           |  |                                                                                                                            
|Item 1.    |  | Condensed Consolidated Financial Statements (unaudited)                                                                     |  |   
|           |  |                                                                                                                            
|           |  | Condensed Consolidated Balance Sheets as of September 30, 2008 (restated) and December 31, 2007 (restated)                  |  | 1 
|           |  |                                                                                                                            
|           |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 (restated)
 and 2007 |  | 2 
|           |  |                                                                                                                            
|           |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 (restated) and
 2007           |  | 3 
|           |  |                                                                                                                            
|           |  | Notes to Condensed Consolidated Financial Statements (restated)                                                             |  | 4 
|           |  |                                                                                                                            
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
(restated)                            |  | 15
|           |  |                                                                                                                            
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk (restated)                                                       |  | 25
|           |  |                                                                                                                            
|Item 4.    |  | Controls and Procedures (restated)                                                                                          |  | 25
|           |  |                                                                                                                            
|Item 4T.   |  | Controls and Procedures                                                                                                     |  | 26
|           |  |                                                                                                                            
|           |  | PART II - OTHER INFORMATION                                                                                                 |  |   
|           |  |                                                                                                                            
|Item 1.    |  | Legal Proceedings                                                                                                           |  | 26
|           |  |                                                                                                                            
|Item 1A.   |  | Risk Factors                                                                                                                |  | 26
|           |  |                                                                                                                            
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                 |  | 51
|           |  |                                                                                                                            
|Item 3.    |  | Defaults Upon Senior Securities                                                                                             |  | 51
|           |  |                                                                                                                            
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                         |  | 51
|           |  |                                                                                                                            
|Item 5.    |  | Other Information                                                                                                           |  | 51
|           |  |                                                                                                                            
|Item 6.    |  | Exhibits                                                                                                                    |  | 52
|           | 
|Signatures |  | 53                                                                                                                         



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Restated)

HANSEN MEDICAL, INC.

Condensed Consolidated
Balance Sheets

(Unaudited)

(In thousands, except share and per share data)



|                                                                                                           |  |                   |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                           |  | September 30,2008 |          |   | December 31,2007 |  
|                                                                                                           |  | As Restated       |          |   | As Restated      |  
|ASSETS                                                                                                     |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                            |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                  |  | $                 | 25,885   |   |                  | $ | 30,404   |  
|Short-term investments                                                                                     |  |                   | 19,683   |   |                  |   | 18,148   |  
|Accounts receivable, net                                                                                   |  |                   | 10,893   |   |                  |   | 4,003    |  
|Inventories                                                                                                |  |                   | 5,093    |   |                  |   | 2,982    |  
|Deferred cost of goods sold                                                                                |  |                   | 1,244    |   |                  |   | 130      |  
|Prepaids and other current assets                                                                          |  |                   | 2,083    |   |                  |   | 1,397    |  
|                                                                                                           |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                       |  |                   | 64,881   |   |                  |   | 57,064   |  
|                                                                                                           |  |                  
|Property and equipment, net                                                                                |  |                   | 18,564   |   |                  |   | 2,672    |  
|Restricted cash                                                                                            |  |                   | 105      |   |                  |   | 105      |  
|Other assets                                                                                               |  |                   | 174      |   |                  |   | 190      |  
|                                                                                                           |  |                   |          |   |                  |   |          |  
|Total assets                                                                                               |  | $                 | 83,724   |   |                  | $ | 60,031   |  
|                                                                                                           |  |                   |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                       |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                           |  | $                 | 4,080    |   |                  | $ | 2,956    |  
|Accrued liabilities                                                                                        |  |                   | 5,256    |   |                  |   | 4,030    |  
|Current portion of deferred revenue                                                                        |  |                   | 5,934    |   |                  |   | 846      |  
|Current portion of long-term debt                                                                          |  |                   | 1,620    |   |                  |   | 2,101    |  
|                                                                                                           |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                  |  |                   | 16,890   |   |                  |   | 9,933    |  
|Deferred revenue, net of current portion                                                                   |  |                   | 224      |   |                  |   | 143      |  
|Long-term debt, net of current portion                                                                     |  |                   | 10,856   |   |                  |   | 1,208    |  
|Other long-term liabilities                                                                                |  |                   | 1,117    |   |                  |   | 121      |  
|                                                                                                           |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                          |  |                   | 29,087   |   |                  |   | 11,405   |  
|                                                                                                           |  |                   |          |   |                  |   |          |  
|Commitments and contingencies (Note 6)                                                                     |  |                   |          |   |                  |   |          |  
|                                                                                                           |  |                  
|Stockholders equity:                                                                                      |  |                   |          |   |                  |   |          |  
|Preferred stock, par value $0.0001:                                                                        |  |                   |          |   |                  |   |          |  
|Authorized: 10,000,000 shares                                                                              |  |                   |          |   |                  |   |          |  
|Issued and outstanding: none                                                                               |  |                   |         |   |                  |   |         |  
|Common stock, par value $0.0001:                                                                           |  |                   |          |   |                  |   |          |  
|Authorized: 100,000,000 shares                                                                             |  |                   |          |   |                  |   |          |  
|Issued and outstanding: 25,153,315 shares at September 30, 2008 and 21,961,811 shares at December 31,
2007 |  |                   | 3        |   |                  |   | 2        |  
|Additional paid-in capital                                                                                 |  |                   | 206,858  |   |                  |   | 158,607  |  
|Deferred stock-based compensation                                                                          |  |                   | (77      | ) |                  |   | (167     | )
|Accumulated other comprehensive income (loss)                                                              |  |                   | (287     | ) |                  |   | 57       |  
|Accumulated deficit                                                                                        |  |                   | (151,860 | ) |                  |   | (109,873 | )
|                                                                                                           |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                 |  |                   | 54,637   |   |                  |   | 48,626   |  
|                                                                                                           |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                 |  | $                 | 83,724   |   |                  | $ | 60,031   |  
|                                                                                                           |  |                   |          |   |                  |   |          |  

The accompanying notes are an integral part of these condensed consolidated financial
statements.



1



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HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)



|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ----------- |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                                            |  | 2008                            |         |   | 2007                           |   |         | 2008        |  |   | 2007    |  
|                                                            |  | As Restated                     |         |   |                                |   |         | As Restated |  |   |         |  
|Revenues                                                    |  | $                               | 9,573   |   |                                | $ | 3,455   |             |  | $ | 18,084  |   |  | $ | 5,889   |  
|Cost of goods sold                                          |  |                                 | 6,222   |   |                                |   | 3,266   |             |  |   | 14,940  |   |  |   | 4,919   |  
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Gross profit                                                |  |                                 | 3,351   |   |                                |   | 189     |             |  |   | 3,144   |   |  |   | 970     |  
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Operating expenses:                                         |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Research and development                                    |  |                                 | 7,249   |   |                                |   | 4,463   |             |  |   | 18,763  |   |  |   | 13,886  |  
|Selling, general and administrative                         |  |                                 | 8,931   |   |                                |   | 6,538   |             |  |   | 27,015  |   |  |   | 16,241  |  
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Total operating expenses                                    |  |                                 | 16,180  |   |                                |   | 11,001  |             |  |   | 45,778  |   |  |   | 30,127  |  
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Loss from operations                                        |  |                                 | (12,829 | ) |                                |   | (10,812 | )           |  |   | (42,634 | ) |  |   | (29,157 | )
|Interest income                                             |  |                                 | 317     |   |                                |   | 916     |             |  |   | 1,155   |   |  |   | 3,013   |  
|Interest and other expense, net                             |  |                                 | (345    | ) |                                |   | (115    | )           |  |   | (508    | ) |  |   | (377    | )
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Net loss                                                    |  | $                               | (12,857 | ) |                                | $ | (10,011 | )           |  | $ | (41,987 | ) |  | $ | (26,521 | )
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                        |  | $                               | (0.51   | ) |                                | $ | (0.46   | )           |  | $ | (1.76   | ) |  | $ | (1.23   | )
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Shares used to compute basic and diluted net loss per share |  |                                 | 25,063  |   |                                |   | 21,629  |             |  |   | 23,909  |   |  |   | 21,542  |  
|                                                            |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial
statements.



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HANSEN MEDICAL, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)



|                                                                            |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                            |  | Nine months endedSeptember 30, |        
|                                                                            |  | 2008                           |         |   | 2007 |  
|                                                                            |  | As Restated                    |         |   |      |  
|Cash flows from operating activities:                                       |  |                                |         |   |      |   |         |  
|Net loss                                                                    |  | $                              | (41,987 | ) |      | $ | (26,521 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                                | 1,653   |   |      |   | 954     |  
|Stock-based compensation                                                    |  |                                | 7,607   |   |      |   | 5,981   |  
|Loss on disposal of fixed assets                                            |  |                                | 55      |   |      |   |        |  
|Amortization of preferred stock warrants                                    |  |                                | 74      |   |      |   | 45      |  
|Changes in operating assets and liabilities:                                |  |                                |         |   |      |   |         |  
|Accounts receivable                                                         |  |                                | (7,138  | ) |      |   | (2,728  | )
|Inventories                                                                 |  |                                | (2,111  | ) |      |   | (2,165  | )
|Deferred cost of goods sold                                                 |  |                                | (1,114  | ) |      |   |        |  
|Prepaids and other current assets                                           |  |                                | (737    | ) |      |   | (409    | )
|Other long-term assets                                                      |  |                                |        |   |      |   | (162    | )
|Accounts payable                                                            |  |                                | 1,124   |   |      |   | 281     |  
|Accrued liabilities                                                         |  |                                | 868     |   |      |   | 2,013   |  
|Deferred revenue                                                            |  |                                | 5,169   |   |      |   | 36      |  
|Deferred rent                                                               |  |                                | 805     |   |      |   | (62     | )
|Other long-term liabilities                                                 |  |                                | 141     |   |      |   | 34      |  
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                | (35,591 | ) |      |   | (22,703 | )
|                                                                            |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                                |         |   |      |   |         |  
|Purchase of property and equipment                                          |  |                                | (17,168 | ) |      |   | (1,513  | )
|Proceeds from sales and maturities of short-term investments                |  |                                | 13,467  |   |      |   | 4,000   |  
|Purchase of short-term investments                                          |  |                                | (15,080 | ) |      |   | (23,309 | )
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                                | (18,781 | ) |      |   | (20,822 | )
|                                                                            |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                                |         |   |      |   |         |  
|Proceeds from loans payable                                                 |  |                                | 12,476  |   |      |   |        |  
|Repayments of loans payable                                                 |  |                                | (3,334  | ) |      |   | (1,438  | )
|Proceeds from issuance of common stock, net of issuance costs               |  |                                | 39,492  |   |      |   | (317    | )
|Proceeds from exercise of common stock options, net                         |  |                                | 142     |   |      |   | 119     |  
|Proceeds from employee stock purchase plan                                  |  |                                | 1,077   |   |      |   | 929     |  
|                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                         |  |                                | 49,853  |   |      |   | (707    | )
|                                                                            |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                                | (4,519  | ) |      |   | (44,232 | )
|Cash and cash equivalents at beginning of period                            |  |                                | 30,404  |   |      |   | 88,911  |  
|                                                                            |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                              | 25,885  |   |      | $ | 44,679  |  
|                                                                            |  |                                |         |   |      |   |         |  
|Supplemental schedule of non-cash investing activities:                     |  |                                |         |   |      |   |         |  
|Unbilled construction costs incurred                                        |  | $                              | 432     |   |      | $ |        |  

The accompanying notes are an integral part of these condensed consolidated financial
statements.



3



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##### Table of Contents

HANSEN MEDICAL, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business

Hansen Medical, Inc. (the Company) develops, manufactures and markets a new generation of medical robotics designed for accurate
positioning, manipulation and stable control of catheters and catheter-based technologies. The Company was incorporated in the state of Delaware on September 23, 2002 and is headquartered in Mountain View, California. In March 2007, the Company
established Hansen Medical UK Ltd., a wholly-owned subsidiary located in the United Kingdom and, in May 2007, the Company established Hansen Medical, GmbH, a wholly-owned subsidiary located in Germany. Both subsidiaries were established for the
purpose of marketing the Companys products in Europe.

From inception to September 30, 2008, the Company has
incurred losses totaling approximately $151.9 million and has not generated positive cash flows from operations. The Company expects such losses to continue into the foreseeable future as it continues to develop and commercialize its technologies.
On April 7, 2008, the Company sold 3,000,000 shares of its common stock, resulting in approximately $39.5 million of net proceeds to the Company. On August 25, 2008, the Company entered into a $25 million loan and security agreement with
Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million revolving credit line. As of September 30, 2008, the Company had drawn down approximately $12.5 million against the term equipment line under this
agreement. The Company can continue to draw down on the term equipment line until March 31, 2009. If the available cash, cash equivalents and investment balances and the amounts available under the Companys revolving credit line are
insufficient to satisfy future liquidity requirements, the Company may need to sell additional equity or debt securities or enter into additional credit facilities, and the Company may require additional capital beyond currently forecasted amounts.
However, the Company cannot guarantee that future equity or debt financing will be available in amounts or on terms acceptable to the Company, if at all. This could leave the Company without adequate financial resources to fund its operations as
presently conducted or as it plans to conduct them in the future.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company has prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States. The accompanying condensed
consolidated financial statements and notes thereto are unaudited. In the opinion of the Companys management, these statements include all adjustments, which are of a normal recurring nature, necessary to present a fair presentation. Interim
results are not necessarily indicative of results for a full year or any other interim period. The condensed consolidated balance sheet as of December 31, 2007 was derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States. The information included in this Form 10-Q/A should be read in conjunction with the Companys Annual Report on Form 10-K/A for the year ended December 31, 2008 as
filed with the Securities and Exchange Commission. The Companys fiscal year ends on December 31.

The accompanying
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.



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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In September 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes guidelines for measuring
fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective
for the Company beginning in the first quarter of 2008. In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2Effective Date of FASB Statement No. 157) which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The adoption
of SFAS 157 for financial assets and liabilities on January 1, 2008 did not have a material impact on the Companys condensed consolidated financial position, results of operations or cash flows. See Note 3.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
159). SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be
reported in earnings. SFAS 159 is effective for the Company beginning in the first quarter of fiscal year 2008. The adoption of SFAS 159 on January 1, 2008 did not have a material impact on the Companys condensed consolidated financial
position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business
Combinations (SFAS 141(R)). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that
obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date. SFAS 141(R) also requires that acquisition-related costs be recognized separately from the acquisition. SFAS 141(R) will become effective for the Company on January 1,
2009. The Company is currently evaluating the impact that SFAS 141(R) will have on its consolidated financial statements.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160
will become effective for the Company beginning in the first quarter of 2009. The Company is currently evaluating the impact that SFAS 160 will have on its consolidated financial statements.

In October 2008, the FASB issued FASB Staff Position No. 157-3, Determining Fair Value of a Financial Asset in a Market That Is Not
Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 for financial assets in an inactive market. It demonstrates how and when to use an entitys own assumptions, observable market inputs and market quotes in
measuring the fair value of a financial asset when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The adoption of this standard did
not have a material impact on the Companys condensed consolidated financial position, results of operations or cash flows.



5



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##### Table of Contents

3. Restatement of Financial Statements

In August 2009, the Company received an anonymous whistleblower report alleging a single irregularity that resulted in improper
revenue recognition in the quarter ended December 31, 2008. The Companys audit committee, with the assistance of independent outside counsel, undertook an investigation into the allegation and a review of the Companys historical
revenue recognition practices. The audit committees investigation determined that information was withheld from the Companys accounting department and independent auditors and documentation related to certain revenue transactions was
falsified. This led to incomplete information regarding temporary installations, unfulfilled training obligations, the inability of distributors to independently install systems and train end users, and undisclosed side arrangements. As a result,
there were instances where revenue was recognized prior to the completion of all of the elements required for revenue recognition under the Companys revenue recognition policy. All of the irregularities that were identified during the
investigation occurred outside of the accounting department.

The restatement of the Companys financial statements for
the three and nine months ended September 30, 2008 resulted from improper recognition of revenue prior to the completion of all of the elements required for revenue recognition under the Companys revenue recognition policy. Specifically, with
regard to one or more of these periods, improper revenue recognition resulted from recognition of revenue due to temporary installations of systems, unfulfilled training obligations and the inability of distributors to independently install systems
and train end users. The following table presents the impact of the restatement adjustments on the Companys Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007:



|                                     |  |                       |          |   |                      |   |        |          |  |   |          |  
|------------------------------------ |  | --------------------- | -------- | - | -------------------- | - | ------ | -------- |  | - | -------- | -
|                                     |  | September 30, 2008    |         
|                                     |  | As PreviouslyReported |          |   | Effect ofRestatement |   |        | Restated | 
|                                     |  | (In thousands)        |         
|Assets                               |  |                       |          |   |                      |   |        |          |  |   |          |  
|Deferred cost of goods sold          |  | $                     |         |   |                      | $ | 1,244  |          |  | $ | 1,244    |  
|                                     |  |                       |         
|Liabilities and Stockholders Equity |  |                       |          |   |                      |   |        |          |  |   |          |  
|Current liabilities:                 |  |                       |          |   |                      |   |        |          |  |   |          |  
|Accrued liabilities                  |  | $                     | 5,570    |   |                      | $ | (314   | )        |  | $ | 5,256    |  
|Current portion of deferred revenue  |  | $                     | 476      |   |                      | $ | 5,458  |          |  | $ | 5,934    |  
|Accumulated deficit                  |  | $                     | (147,960 | ) |                      | $ | (3,900 | )        |  | $ | (151,860 | )



|                                     |  |                       |          |   |                      |   |      |          |  |   |          |  
|------------------------------------ |  | --------------------- | -------- | - | -------------------- | - | ---- | -------- |  | - | -------- | -
|                                     |  | December 31, 2007     |         
|                                     |  | As PreviouslyReported |          |   | Effect ofRestatement |   |      | Restated | 
|                                     |  | (In thousands)        |         
|Assets                               |  |                       |          |   |                      |   |      |          |  |   |          |  
|Deferred cost of goods sold          |  | $                     |         |   |                      | $ | 130  |          |  | $ | 130      |  
|                                     |  |                       |         
|Liabilities and Stockholders Equity |  |                       |          |   |                      |   |      |          |  |   |          |  
|Accrued liabilities                  |  | $                     | 4,083    |   |                      | $ | (53  | )        |  | $ | 4,030    |  
|Current portion of deferred revenue  |  | $                     | 225      |   |                      | $ | 621  |          |  | $ | 846      |  
|Accumulated deficit                  |  | $                     | (109,435 | ) |                      | $ | (438 | )        |  | $ | (109,873 | )



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##### Table of Contents

The following table presents the impact of the restatement adjustments on the Companys
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2008:



|                                     |  |                                      |         |   |                      |   |        |          |  |   |         |  
|------------------------------------ |  | ------------------------------------ | ------- | - | -------------------- | - | ------ | -------- |  | - | ------- | -
|                                     |  | Three months endedSeptember 30,
2008 |        
|                                     |  | As PreviouslyReported                |         |   | Effect ofRestatement |   |        | Restated | 
|                                     |  | (In thousands)                       |        
|Revenues                             |  | $                                    | 10,864  |   |                      | $ | (1,291 | )        |  | $ | 9,573   |  
|Cost of goods sold                   |  | $                                    | 6,643   |   |                      | $ | (421   | )        |  | $ | 6,222   |  
|Gross profit                         |  | $                                    | 4,221   |   |                      | $ | (870   | )        |  | $ | 3,351   |  
|Net loss                             |  | $                                    | (11,987 | ) |                      | $ | (870   | )        |  | $ | (12,857 | )
|                                     |  |                                      |        
|Basic and diluted net loss per share |  | $                                    | (0.48   | ) |                      | $ | (0.03  | )        |  | $ | (0.51   | )



|                                     |  |                                     |         |   |                      |   |        |          |  |   |         |  
|------------------------------------ |  | ----------------------------------- | ------- | - | -------------------- | - | ------ | -------- |  | - | ------- | -
|                                     |  | Nine months endedSeptember 30,
2008 |        
|                                     |  | As PreviouslyReported               |         |   | Effect ofRestatement |   |        | Restated | 
|                                     |  | (In thousands)                      |        
|Revenues                             |  | $                                   | 22,921  |   |                      | $ | (4,837 | )        |  | $ | 18,084  |  
|Cost of goods sold                   |  | $                                   | 16,315  |   |                      | $ | (1,375 | )        |  | $ | 14,940  |  
|Gross profit                         |  | $                                   | 6,606   |   |                      | $ | (3,462 | )        |  | $ | 3,144   |  
|Net loss                             |  | $                                   | (38,525 | ) |                      | $ | (3,462 | )        |  | $ | (41,987 | )
|                                     |  |                                     |        
|Basic and diluted net loss per share |  | $                                   | (1.61   | ) |                      | $ | (0.15  | )        |  | $ | (1.76   | )

The following table presents the impact of the restatement adjustments on the
Companys Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2008:



|                   |  |                                      |         |   |                      |   |      |          |  |   |         |  
|------------------ |  | ------------------------------------ | ------- | - | -------------------- | - | ---- | -------- |  | - | ------- | -
|                   |  | Three months endedSeptember 30, 2008 |        
|                   |  | As PreviouslyReported                |         |   | Effect ofRestatement |   |      | Restated | 
|                   |  | (In thousands)                       |        
|Net loss           |  | $                                    | (11,987 | ) |                      | $ | (870 | )        |  | $ | (12,857 | )
|Comprehensive loss |  | $                                    | (12,314 | ) |                      | $ | (870 | )        |  | $ | (13,184 | )



|                   |  |                                     |         |   |                      |   |        |          |  |   |         |  
|------------------ |  | ----------------------------------- | ------- | - | -------------------- | - | ------ | -------- |  | - | ------- | -
|                   |  | Nine months endedSeptember 30, 2008 |        
|                   |  | As PreviouslyReported               |         |   | Effect ofRestatement |   |        | Restated | 
|                   |  | (In thousands)                      |        
|Net loss           |  | $                                   | (38,525 | ) |                      | $ | (3,462 | )        |  | $ | (41,987 | )
|Comprehensive loss |  | $                                   | (38,869 | ) |                      | $ | (3,462 | )        |  | $ | (42,331 | )

All adjustments relate to the deferral of revenue and the associated cost of goods
sold and warranty expenses and the recognition of revenue and the associated expenses related to sales deferred from earlier periods as a result of the restatement. The restatement adjustments did not impact the total net cash flows from operating,
financing, or investing activities in the Condensed Consolidated Statements of cash flows for the nine months ended September 30, 2008. All notes to the consolidated financial statements affected by the restatements have been labeled as
restated.



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##### Table of Contents

4. Investments and Fair Value Measurements

The amortized cost and fair value of cash equivalents and short-term investments, with gross unrealized gains and losses, were as follows (in
thousands):



|                                  |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       
|--------------------------------- |  | ------------- | ------ | -------------------- | - | --------------------- |  | --------------------- | ---------- | - | --------------------------- | - | ------ |  | - | ------ |  | - | ------
|                                  |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |                       | Fair Value |   | Balance SheetClassification
|                                  |  |               |        |                      |   | CashEquivalents       |  | Short-termInvestments
|As of September 30, 2008:         |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       
|Money market funds                |  | $             | 2,271  |                      | $ |                      |  | $                     |           |   |                             | $ | 2,271  |  | $ | 2,271  |  | $ |      
|U.S. government agency securities |  |               | 16,016 |                      |   |                      |  |                       | (34        | ) |                             |   | 15,982 |  |   | 5,027  |  |   | 10,955
|Corporate debt securities         |  |               | 22,737 |                      |   | 7                     |  |                       | (26        | ) |                             |   | 22,718 |  |   | 13,990 |  |   | 8,728 
|                                  |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       
|                                  |  | $             | 41,024 |                      | $ | 7                     |  | $                     | (60        | ) |                             | $ | 40,971 |  | $ | 21,288 |  | $ | 19,683
|                                  |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       
|                                  |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       
|As of December 31, 2007:          |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       
|Money market funds                |  | $             | 156    |                      | $ |                      |  | $                     |           |   |                             | $ | 156    |  | $ | 156    |  | $ |      
|U.S. government agency securities |  |               | 25,624 |                      |   | 11                    |  |                       |           |   |                             |   | 25,635 |  |   | 24,514 |  |   | 1,121 
|Corporate debt securities         |  |               | 18,489 |                      |   | 44                    |  |                       | (14        | ) |                             |   | 18,519 |  |   | 1,492  |  |   | 17,027
|                                  |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       
|                                  |  | $             | 44,269 |                      | $ | 55                    |  | $                     | (14        | ) |                             | $ | 44,310 |  | $ | 26,162 |  | $ | 18,148
|                                  |  |               |        |                      |   |                       |  |                       |            |   |                             |   |        |  |   |        |  |   |       

The Company considers all investments with maturities greater than three months and
less than one year at the time of purchase as short-term investments and classifies them as available-for-sale. The Company also considers certain investments with maturities greater than one year but which are also held for liquidity purposes and
are available for sale as short-term investments. Fixed income securities included in short-term investments above are summarized by their contractual maturities as follows (in thousands):



|                        |  |                   |        |                  |   |       
|----------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                        |  | September 30,2008 |        | December 31,2007
|Contractual maturities: |  |                   |        |                  |   |       
|Less than one year      |  | $                 | 18,196 |                  | $ | 11,979
|One to two years        |  |                   | 1,487  |                  |   | 6,169 
|                        |  |                   |        |                  |   |       
|                        |  | $                 | 19,683 |                  | $ | 18,148
|                        |  |                   |        |                  |   |       

The Company periodically assesses whether significant facts and circumstance have
arisen to indicate that an impairment, that is other than temporary, of the fair value of any investment has occurred. As of September 30, 2008, the investments held by the Company are high investment grade. The following table summarizes the
fair value and gross unrealized losses only of those investments classified as short-term investments which are in an unrealized loss position at September 30, 2008 (in thousands):



|                                 |  |            |        |                       |   |     |  
|-------------------------------- |  | ---------- | ------ | --------------------- | - | --- | -
|                                 |  | Fair Value |        | GrossUnrealizedLosses |  
|U.S government agency securities |  | $          | 10,956 |                       | $ | (34 | )
|Corporate debt securities        |  |            | 5,213  |                       |   | (26 | )
|                                 |  |            |        |                       |   |     |  
|                                 |  | $          | 16,169 |                       | $ | (60 | )
|                                 |  |            |        |                       |   |     |  



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Included in the above are investments of $1,487,000 which have contractual maturities of
more than one year and have associated gross unrealized losses of $5,000.

The gross unrealized losses on investments were due
primarily to changes in interest rates and other market conditions as well as to changes in the credit conditions of the underlying securities. These investments are not considered other-than-temporarily impaired as the Company has the ability to
hold substantially all of these investments until maturity or until a recovery of fair value occurs.

Fair Value
Measurements

SFAS 157, which the Company adopted in the first quarter of 2008, clarifies that fair value is an exit
price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:



|                        |  |                                                                                                                 
|----------------------- |  | ----------------------------------------------------------------------------------------------------------------
|        Level 1 Inputs |  | Quoted prices (unadjusted) in active markets for identical assets or liabilities.                               
|                        | 
|        Level 2 Inputs |  | Inputs other than quoted prices in active markets that are observable either directly or indirectly.            
|                        | 
|        Level 3 Inputs |  | Unobservable inputs in which there is little or no market data, which require us to develop our own assumptions.

This hierarchy requires the use of observable market data when available and to
minimize the use of unobservable inputs when determining fair value. The Companys cash equivalent and short-term investment instruments are classified using Level 1 or Level 2 inputs within the fair value hierarchy because they are valued
using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Investment instruments valued using Level 1 inputs include money market securities and U.S. government agency
securities. Investment instruments valued using Level 2 inputs include investment-grade corporate debts, such as bonds and commercial paper.

The fair value hierarchy of our cash equivalents and short-term investments at September 30, 2008 in connection with our adoption of SFAS 157 is as follows (in thousands):



|                                  |  |                                                                   |        |                                                   |   |        |  |   |       
|--------------------------------- |  | ----------------------------------------------------------------- | ------ | ------------------------------------------------- | - | ------ |  | - | ------
|                                  |  | Fair Value Measurements Using                                     |        |                                                  
|                                  |  | Quoted Prices inActive Marketsfor IdenticalAssets (Level
1Inputs) |        | Significant otherObservableInputs(Level 2 Inputs) |   | Total 
|Money market funds                |  | $                                                                 | 2,271  |                                                   | $ |       |  | $ | 2,271 
|U.S. government agency securities |  |                                                                   | 15,982 |                                                   |   |       |  |   | 15,982
|Corporate debt securities         |  |                                                                   |       |                                                   |   | 22,718 |  |   | 22,718
|                                  |  |                                                                   |        |                                                   |   |        |  |   |       
|                                  |  | $                                                                 | 18,253 |                                                   | $ | 22,718 |  | $ | 40,971
|                                  |  |                                                                   |        |                                                   |   |        |  |   |       



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5. Inventories (in thousands)



|                |  |                   |       |                  |   |      
|--------------- |  | ----------------- | ----- | ---------------- | - | -----
|                |  | September 30,2008 |       | December 31,2007
|Raw materials   |  | $                 | 1,690 |                  | $ | 1,704
|Work in process |  |                   | 2,387 |                  |   | 1,278
|Finished goods  |  |                   | 1,016 |                  |   |     
|                |  |                   |       |                  |   |      
|Inventories     |  | $                 | 5,093 |                  | $ | 2,982
|                |  |                   |       |                  |   |      

6. Commitments and Contingencies

Operating Commitments

The Company rents its office and laboratory facilities under operating leases which expire at various dates through November 2014. The Company has an option to extend its main lease until approximately
November 30, 2019. As of September 30, 2008, annual contractual commitments associated with lease obligations were as follows (in thousands):



|                  |  |   |       
|----------------- |  | - | ------
|Remainder of 2008 |  | $ | 444   
|2009              |  |   | 1,811 
|2010              |  |   | 1,743 
|2011              |  |   | 1,784 
|2012              |  |   | 1,838 
|Thereafter        |  |   | 3,676 
|                  |  |   |       
|Total             |  | $ | 11,296
|                  |  |   |       

Warranties

The Company generally provides a limited one-year warranty on its Sensei system. It accrues the estimated cost of warranties at the time
revenue is recognized. The Companys warranty obligation may be impacted by product failure rates, material usage and service costs associated with its warranty obligations. The Company periodically evaluates and adjusts the warranty reserve to
the extent actual warranty expense differs from the original estimates. Movement in warranty liability for the three and nine months ended September 30, 2008 and 2007 was as follows (in thousands):



|                                                 |  |                                 |      |   |                                |   |     |             |  |   |       |   |  |   |     |  
|------------------------------------------------ |  | ------------------------------- | ---- | - | ------------------------------ | - | --- | ----------- |  | - | ----- | - |  | - | --- | -
|                                                 |  | Three months endedSeptember 30, |      |   | Nine months endedSeptember 30, |  
|                                                 |  | 2008                            |      |   | 2007                           |   |     | 2008        |  |   | 2007  |  
|                                                 |  | As Restated                     |      |   |                                |   |     | As Restated |  |   |       |  
|Balance at beginning of period                   |  | $                               | 584  |   |                                | $ | 194 |             |  | $ | 488   |   |  | $ |    |  
|Accruals for warranties issued during the period |  |                                 | 694  |   |                                |   | 264 |             |  |   | 1,419 |   |  |   | 458 |  
|Warranty costs incurred during the period        |  |                                 | (340 | ) |                                |   | (84 | )           |  |   | (969  | ) |  |   | (84 | )
|                                                 |  |                                 |      |   |                                |   |     |             |  |   |       |   |  |   |     |  
|Balance at end of period                         |  | $                               | 938  |   |                                | $ | 374 |             |  | $ | 938   |   |  | $ | 374 |  
|                                                 |  |                                 |      |   |                                |   |     |             |  |   |       |   |  |   |     |  

Legal Proceedings

On June 22, 2007, the Company filed suit in Santa Clara Superior Court against Luna Innovations, Inc., (Luna) alleging that
Luna has, among other things, breached a 2006-2007 development and intellectual property agreement with the Company that the Company believes establishes its ownership of all intellectual property in medical robotics developed by the parties during
performance of the agreement, misappropriated the Companys trade secrets and has revealed confidential information of the Company to



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##### Table of Contents

other companies who might improperly benefit from it. Lunas Cross-Complaint against the Company asserts various claims including for misappropriation of trade secrets and breach of the
parties agreements and challenging the inventorship and the Companys ownership of several patent applications which the Company filed during that same time period. The parties engaged in a nonbinding arbitration process earlier in 2008.
The arbitrators nonbinding decision, which the Company believes was very favorable, was due to be published almost in its entirety but has been temporarily sealed at Lunas request while Luna attempts on appeal to prevent the decision
from becoming public. Discovery in the case is in its later stages and trial has been set for late March 2009. The Company is vigorously prosecuting its own claims and defending against Lunas counterclaims.

7. Long-term Debt

In
August 2008, the Company entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line due in installments from April 2009 through September 2012 bearing annual interest equal to the
U.S. Treasury note yield to maturity plus 3.5%, and a one-year $10 million revolving credit line, bearing interest at a floating per annum rate equal to the Prime Rate plus 1%. The interest rate on borrowings under the equipment line becomes fixed
for each borrowing at the time of the draw-down. The interest rate on borrowings under the revolving credit line adjusts with the banks Prime Rate. The loans are collateralized by all of Hansen Medicals assets, excluding intellectual
property and are subject to certain covenants, including liquidity restrictions, and reporting requirements. As of September 30, 2008, the Company had drawn down approximately $12.5 million against the term equipment line at an interest rate of
6.12% and was in compliance with all the related debt covenants. The Company can continue to draw down on the term equipment line until March 31, 2009. Upon the drawdown, the Company paid in full its then-existing debt. Future annual payments
due on the amounts outstanding as of September 30, 2008 are as follows (in thousands):



|                                   |  |   |        |  
|---------------------------------- |  | - | ------ | -
|Remainder of 2008                  |  | $ | 186    |  
|2009                               |  |   | 3,167  |  
|2010                               |  |   | 3,971  |  
|2011                               |  |   | 3,971  |  
|2012                               |  |   | 2,980  |  
|                                   |  |   |        |  
|                                   |  |   | 14,275 |  
|Less: Amount representing interest |  |   | (1,799 | )
|                                   |  |   |        |  
|                                   |  |   | 12,476 |  
|Less: Current portion              |  |   | (1,620 | )
|                                   |  |   |        |  
|Long Term Portion                  |  | $ | 10,856 |  
|                                   |  |   |        |  

8. Stockholders Equity

Stock-based Compensation

The Company recognizes compensation expense for its stock-based awards in accordance with SFAS No. 123  revised 2004, Share-Based Payment. Employee and non-employee stock-based
compensation expense for stock-based awards under the Companys 2002 Stock Option Plan, 2006 Equity Incentive Plan and 2006 Employee Stock Purchase Plan for the three and nine months ended September 30, 2008 and 2007 was allocated as
follows (in thousands):



|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                    |  | Three months endedSeptember 30, |       | Nine months endedSeptember 30,
|                                    |  | 2008                            |       | 2007                           |   | 2008  |  | 2007
|Cost of goods sold                  |  | $                               | 168   |                                | $ | 153   |  | $    | 500   |  | $ | 240  
|Research and development            |  |                                 | 668   |                                |   | 590   |  |      | 2,001 |  |   | 1,876
|Selling, general and administrative |  |                                 | 1,836 |                                |   | 1,768 |  |      | 5,106 |  |   | 3,865
|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Total                               |  | $                               | 2,672 |                                | $ | 2,511 |  | $    | 7,607 |  | $ | 5,981
|                                    |  |                                 |       |                                |   |       |  |      |       |  |   |      



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The Company uses the Black-Scholes pricing model to determine the fair value of stock
options. The determination of the fair value of stock-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock
price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends. The estimated grant date fair values of the employee stock options for the periods
presented were calculated using the Black-Scholes valuation model, based on the following assumptions:



|                         |  |                                 |  |                                |  |             |  |            
|------------------------ |  | ------------------------------- |  | ------------------------------ |  | ----------- |  | -----------
|                         |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|                         |  | 2008                            |  | 2007                           |  | 2008        |  | 2007       
|Expected volatility      |  | 49.0%                           |  | 52.8%                          |  | 48.0%-51.0% |  | 52.8%-55.0%
|Risk-free interest rate  |  | 3.3%                            |  | 4.0%-5.0%                      |  | 2.8%-3.7%   |  | 4.0%-5.0%  
|Expected term (in years) |  | 5.00                            |  | 5.00                           |  | 5.00        |  | 5.00-5.47  
|Expected dividend rate   |  | 0%                              |  | 0%                             |  | 0%          |  | 0%         

Stock-based compensation expense related to stock options granted to non-employees is
recognized on an accelerated basis as the stock options are earned. The Company believes that the fair value of the stock options is more reliably measurable than the fair value of the services received. The fair value of the stock options granted
to non-employees is calculated at each reporting date using the Black-Scholes option pricing model, using the following assumptions:



|                         |  |                                 |  |                                |  |             |  |            
|------------------------ |  | ------------------------------- |  | ------------------------------ |  | ----------- |  | -----------
|                         |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|                         |  | 2008                            |  | 2007                           |  | 2008        |  | 2007       
|Expected volatility      |  | 50.0%-59.0%                     |  | 56.2%-61.0%                    |  | 50.0%-61.0% |  | 56.2%-65.0%
|Risk-free interest rate  |  | 3.1%-3.6%                       |  | 4.3%-4.6%                      |  | 2.7%-4.1%   |  | 4.3%-5.0%  
|Expected term (in years) |  | 5.50-8.25                       |  | 6.25-9.25                      |  | 5.50-8.75   |  | 6.00-9.75  
|Expected dividend rate   |  | 0%                              |  | 0%                             |  | 0%          |  | 0%         

Stock Option and Equity Incentive Plans

Option activity under the Companys 2002 Stock Option Plan and 2006 Equity Incentive Plan was as follows (in thousands, except per share
data):



|                                     |  |                    |   |  |                                |       |                                          |      |                          |   |       
|------------------------------------ |  | ------------------ | - |  | ------------------------------ | ----- | ---------------------------------------- | ---- | ------------------------ | - | ------
|                                     |  | OptionsOutstanding |   |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractualTerm |      | AggregateIntrinsic Value
|                                     |  | (In thousands)     |   |  |                                |       | (In years)                               |      | (In thousands)          
|Balances, December 31, 2007          |  | 2,960              |   |  | $                              | 12.41 |                                          |      |                          |   |       
|Options granted                      |  | 1,617              |   |  | $                              | 16.94 |                                          |      |                          |   |       
|Options exercised                    |  | (93                | ) |  | $                              | 2.24  |                                          |      |                          |   |       
|Options cancelled                    |  | (92                | ) |  | $                              | 16.64 |                                          |      |                          |   |       
|                                     |  |                    |   |  |                                |       |                                          |      |                          |   |       
|Balances, September 30, 2008         |  | 4,392              |   |  | $                              | 14.20 |                                          | 6.52 |                          | $ | 14,077
|                                     |  |                    |   |  |                                |       |                                          |      |                          |   |       
|Options vested at September 30, 2008 |  | 1,379              |   |  | $                              | 9.26  |                                          | 6.45 |                          | $ | 8,425 
|                                     |  |                    |   |  |                                |       |                                          |      |                          |   |       

As of September 30, 2008, there was $22,271,000 of unrecognized compensation
costs, net of estimated forfeitures, related to unvested stock option awards which are expected to be recognized over a weighted average period of 2.97 years.



12



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##### Table of Contents

Restricted stock unit activity under the 2006 Equity Incentive Plan is as follows (in
thousands, except per share data):



|                                             |  |                                  |   |  |                                        |      
|-------------------------------------------- |  | -------------------------------- | - |  | -------------------------------------- | -----
|                                             |  | Restricted StockUnitsOutstanding |   |  | Weighted-AverageFair
Value WhenAwarded
|Restricted stock units at December 31, 2007  |  | 23                               |   |  | $                                      | 30.52
|Awarded                                      |  | 65                               |   |  | $                                      | 17.90
|Vested                                       |  | (13                              | ) |  | $                                      | 31.20
|                                             |  |                                  |   |  |                                        |      
|Restricted stock units at September 30, 2008 |  | 75                               |   |  | $                                      | 19.46
|                                             |  |                                  |   |  |                                        |      

As of September 30, 2008, there was $1,063,000 of unrecognized compensation
costs, net of estimated forfeitures, related to restricted stock units which are expected to be recognized over a weighted average period of 1.80 years.

As of September 30, 2008, 791,000 shares of common stock were available for grant under the 2006 Equity Incentive Plan.

9. Net Loss Per Share

Basic net loss per share is computed by dividing net
loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is based on the weighted-average common shares outstanding during the period plus dilutive potential common shares. Such potentially
dilutive shares are excluded when the effect would be to reduce a net loss per share. The Companys potential dilutive shares, which include outstanding common stock options, unvested restricted stock units and unvested common shares subject to
repurchase, have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share for the three and nine months ended September 30, 2008 and 2007 (in thousands, except per share data):



|                                                               |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ----------- |  | - | ------- | - |  | - | ------- | -
|                                                               |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                                               |  | 2008                            |         |   | 2007                           |   |         | 2008        |  |   | 2007    |  
|                                                               |  | As Restated                     |         |   |                                |   |         | As Restated |  |   |         |  
|Net loss                                                       |  | $                               | (12,857 | ) |                                | $ | (10,011 | )           |  | $ | (41,987 | ) |  | $ | (26,521 | )
|                                                               |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|                                                               |  |                                 |         |  
|Weighted-average common shares outstanding                     |  |                                 | 25,091  |   |                                |   | 21,731  |             |  |   | 23,953  |   |  |   | 21,675  |  
|Weighted-average unvested common shares subject to repurchase  |  |                                 | (28     | ) |                                |   | (102    | )           |  |   | (44     | ) |  |   | (133    | )
|                                                               |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Shares used to calculated basic and diluted net loss per share |  |                                 | 25,063  |   |                                |   | 21,629  |             |  |   | 23,909  |   |  |   | 21,542  |  
|                                                               |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                           |  | $                               | (0.51   | ) |                                | $ | (0.46   | )           |  | $ | (1.76   | ) |  | $ | (1.23   | )
|                                                               |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  



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The following table sets forth potential shares of common stock that are not included in the
calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented (in thousands):



|                                             |  |               |  |      
|-------------------------------------------- |  | ------------- |  | -----
|                                             |  | September 30,
|                                             |  | 2008          |  | 2007 
|Stock options outstanding                    |  | 4,392         |  | 2,638
|Unvested restricted stock units              |  | 75            |  |     
|Unvested common shares subject to repurchase |  | 22            |  | 91   

10. Comprehensive Loss

Total comprehensive loss for the three and nine months ended September 30, 2008 and 2007 was as follows (in thousands):



|                                                     |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ----------- |  | - | ------- | - |  | - | ------- | -
|                                                     |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                                     |  | 2008                            |         |   | 2007                           |   |         | 2008        |  |   | 2007    |  
|                                                     |  | As Restated                     |         |   |                                |   |         | As Restated |  |   |         |  
|Net loss                                             |  | $                               | (12,857 | ) |                                | $ | (10,011 | )           |  | $ | (41,987 | ) |  | $ | (26,521 | )
|Other comprehensive income (loss):                   |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Change in unrealized gains and losses on receivables |  |                                 | (225    | ) |                                |   | (14     | )           |  |   | (234    | ) |  |   | 7       |  
|Change in unrealized gains and losses on investments |  |                                 | (92     | ) |                                |   | 30      |             |  |   | (100    | ) |  |   | 4       |  
|Foreign currency translation adjustment              |  |                                 | (10     | ) |                                |   |        |             |  |   | (10     | ) |  |   |        |  
|                                                     |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  
|Comprehensive loss                                   |  | $                               | (13,184 | ) |                                | $ | (9,995  | )           |  | $ | (42,331 | ) |  | $ | (26,510 | )
|                                                     |  |                                 |         |   |                                |   |         |             |  |   |         |   |  |   |         |  

11. Income Taxes

A reconciliation of the beginning and ending balance of unrecognized tax benefits related to uncertain tax positions in the first nine months of 2008 is as follows (in thousands):



|                                                             |  |                                     |    
|------------------------------------------------------------ |  | ----------------------------------- | ---
|                                                             |  | Nine months endedSeptember 30, 2008
|Balance at December 31, 2007                                 |  | $                                   | 600
|Additions based on tax positions related to the current year |  |                                     | 158
|                                                             |  |                                     |    
|Balance at September 30, 2008                                |  | $                                   | 758
|                                                             |  |                                     |    

If the Company is able to eventually recognize these uncertain tax positions, all of
the unrecognized benefit would reduce the Companys effective tax rate. The Company currently has a full valuation allowance against its net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these
uncertain tax positions be favorably settled in the future.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Restated)

The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q/A.

Except for the historical information contained herein, the matters discussed in this Managements Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that involve
risks and uncertainties. In some cases, these statements may be identified by terminology such as may, will, should, expects, could, intends, might,
plans, anticipates, believes, estimates, predicts, potential, or continue, or the negative of such terms and other comparable terminology. These statements involve
known and unknown risks and uncertainties that may cause our results, levels of activity, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute
to such differences include, among others, those discussed in this report in Part II, Item 1A Risk Factors. Except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events after
the date of this report.

Overview

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in
this amended quarterly report on Form 10-Q/A, and gives effect to the restatement of our consolidated financial statements as discussed in Note 3 of the condensed consolidated financial statements.

We develop, manufacture and sell a new generation of medical robotics designed for accurate positioning, manipulation
and stable control of catheters and catheter-based technologies. Our SenseiTMRobotic Catheter System, or Sensei system, is designed to allow physicians to instinctively navigate flexible catheters with greater stability and control in interventional procedures. We believe our
Sensei system and its corresponding disposable ArtisanTMControl Catheter, or Artisan catheter, will enable physicians to perform procedures that historically have been too difficult or time consuming to accomplish routinely with previously existing catheters and catheter-based technologies, or that we
believe could be accomplished only by the most skilled physicians. We believe that our Sensei system has the potential to benefit patients, physicians, hospitals and third-party payors by improving clinical outcomes and permitting more complex
procedures to be performed interventionally.

We were incorporated in Delaware on September 23, 2002. In March 2007, we
established Hansen Medical UK Ltd, a wholly-owned subsidiary located in the United Kingdom and, in May 2007, we established Hansen Medical Deutschland, GmbH, a wholly-owned subsidiary located in Germany. In November 2007, we acquired AorTx, Inc., an
early stage company developing heart valves to be delivered by catheters through the skin and blood vessels, which is known as percutaneous delivery. Since inception, we have devoted the majority of our resources to the development and
commercialization of our Sensei system.

To date, we have incurred net losses in each year since our inception and, as of
September 30, 2008, we had an accumulated deficit of $151.9 million. We expect our losses to continue as we advance our development activities, expand the commercialization of our Sensei system and Artisan catheter and continue to develop new
products. We have financed our operations primarily through the sale of public and private equity securities and the issuance of debt. Most recently, on April 7, 2008, we sold 3,000,000 shares of our common stock, which resulted in
approximately $39.5 million of net proceeds. Additionally, on August 25, 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million
revolving credit line. As of September 30, 2008, we had drawn down approximately $12.5 million against the equipment line under this agreement.

We received CE Mark approval for our Sensei system in the fourth quarter of 2006 and made our first commercial shipments to the European Union in the first quarter of 2007. In May 2007, we received CE Mark approval for our Artisan catheter
and also received FDA clearance for the marketing of our Sensei system and Artisan catheter for manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. As a result, we recorded our first revenues in
the second quarter of 2007.



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We market our products in the United States through a direct sales force of regional sales
employees, supported by clinical account managers who provide training, clinical support and other services to our customers. Outside the United States, primarily in the European Union, we use a combination of a direct sales force and distributors
to market, sell and support our products.

Critical Accounting Policies, Estimates and Judgments

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. In doing
so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent assets and liabilities. In many cases, we could reasonably have used different
accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. We base our estimates on our past
experience and on other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our
financial condition or results of operations will be affected. Our significant accounting policies are fully described in Note 3 to our Financial Statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2008 filed
with the U.S. Securities and Exchange Commission. There have been no significant changes to those policies in the nine months ended September 30, 2008.

Financial Overview

Revenues

We made our first commercial shipments to Europe in the first quarter of 2007 and recognized our first revenues in the second quarter of 2007
for both European and U.S. customers. Revenues consist of sales of Sensei systems, Artisan catheters, other disposables and service revenue. We expect revenues for the remainder of 2008 to increase over 2007 levels but to be difficult to predict as
we are still in the early stage of commercializing our products and face both sales and manufacturing challenges. In any event, 2008 revenues will not significantly reduce our continued losses resulting from our selling, general and administrative
costs and our research and development and other activities.

Cost of Goods Sold

Cost of goods sold consists primarily of materials, direct labor, depreciation, overhead costs associated with manufacturing, training and
installation costs, royalties, provisions for inventory valuation and warranty expenses. We expect that cost of goods sold both as a percentage of revenue and on a dollar basis for the remainder of 2008 will continue to vary from quarter to quarter
due, among other things, to fluctuations in revenues, average selling prices, manufacturing levels and manufacturing yields.

Research and Development Expenses

Our research and development expenses primarily consist of
engineering, software development, product development, quality assurance and clinical and regulatory expenses, including costs to develop our Sensei system and disposable Artisan catheters. Research and development expenses include employee
compensation, including stock-based compensation expense, consulting services, outside services, materials, supplies, depreciation and travel. We expense research and development costs as they are incurred. Prior to the second quarter of 2007,
research and development expenses included manufacturing costs for commercial products, including start-up manufacturing costs. We expect our research and development expenses to increase moderately during the remainder of 2008 as we continue
development activities for the electrophysiology market and explore other future potential applications.



16



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Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of compensation for executive, finance, sales, legal and administrative
personnel, including sales commissions and stock-based compensation expense. Other significant expenses include costs associated with attending medical conferences, professional fees for legal services (including legal services associated with our
efforts to obtain and maintain broad protection for the intellectual property related to our products) and accounting services, administrative expenses associated with operating as a public company, consulting fees and travel expenses. We expect our
selling, general and administrative expenses to increase moderately during the remainder of 2008 as we continue to expand our sales and clinical support groups and as we prepare for a March 2009 trial in our litigation against Luna Innovations, Inc.

Results of Operations

Comparison of the three months ended September 30, 2008 to the three months ended September 30, 2007

Revenues



|                       |  |                                 |       |        |   |             |  |             |       |  |     |  
|---------------------- |  | ------------------------------- | ----- | ------ | - | ----------- |  | ----------- | ----- |  | --- | -
|                       |  | Three months endedSeptember 30, |       | Change |  
|(Dollars in thousands) |  | 2008                            |       | 2007   |   | $           |  | %           |      
|                       |  | As Restated                     |       |        |   | As Restated |  | As Restated |      
|Revenues               |  | $                               | 9,573 |        | $ | 3,455       |  | $           | 6,118 |  | 177 | %

Revenues for the third quarter of 2008 primarily related to the sale of three Sensei
systems in Europe and nine Sensei systems in the United States at an average selling price of approximately $728,000 per unit and the shipment of approximately 410 Artisan catheters at an average selling price of approximately $1,800 per unit.
Revenues for the third quarter of 2007 primarily related to the sale of one Sensei system in Europe and four Sensei systems in the United States at an average selling price of approximately $638,000 per unit and the shipment of approximately 140
Artisan catheters at an average selling price of approximately $2,000. Average selling prices of Sensei systems for the third quarter of 2008 were positively impacted by sales of Sensei systems with CoHesion modules and the sale of one system with
an additional robotic arm. We expect revenues for the remainder of 2008 to increase over 2007 levels but to be difficult to predict as we are still in the early stage of commercializing our products.

Cost of Goods Sold



|                            |  |                                 |       |   |        |   |       |             |  |             |       |  |    |  
|--------------------------- |  | ------------------------------- | ----- | - | ------ | - | ----- | ----------- |  | ----------- | ----- |  | -- | -
|                            |  | Three months endedSeptember 30, |       |   | Change |  
|(Dollars in thousands)      |  | 2008                            |       |   | 2007   |   |       | $           |  | %           |      
|                            |  | As Restated                     |       |   |        |   |       | As Restated |  | As Restated |      
|Cost of goods sold          |  | $                               | 6,222 |   |        | $ | 3,266 |             |  | $           | 2,956 |  | 91 | %
|As a percentage of revenues |  |                                 | 65.0  | % |        |   | 94.5  | %           |  |             |       |  |    |  

Cost of goods sold for both the third quarter of 2008 and the third quarter of 2007
included stock-based compensation expense of $0.2 million. During the third quarter of 2008, we experienced an increase in the overhead applied to our inventory, primarily due to the move to a new facility. This increase in inventory costs did not
impact cost of goods sold for the entire third quarter of 2008 due to the sale of preexisting inventory which had been manufactured with lower overhead costs. Essentially all existing



17



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finished goods inventory on hand as of September 30, 2008 was manufactured with the higher overhead costs. Had we experienced the higher inventory costs for the entire quarter, cost of goods
sold and gross profit for the third quarter of 2008 would have been negatively impacted by approximately $0.9 million. During 2007 we sold certain inventory which had previously been written down to zero as a result of the uncertainty of receiving
FDA clearance and CE Mark approval. As a result, cost of goods sold for the third quarter of 2007 did not include all of the cost for those sales, which resulted in a benefit of approximately $0.1 million. Cost of goods sold for the third quarter of
2007 also included a $0.4 million non-recurring milestone royalty charge. We expect that cost of goods sold, both as a percentage of revenue and on a dollar basis, will continue to vary from quarter to quarter due, among other things, to
fluctuations in revenues, average selling prices, manufacturing levels and manufacturing yields.

Operating Expenses

Research and Development



|                         |  |                                 |       |        |   |       |  |   |       |  |    |  
|------------------------ |  | ------------------------------- | ----- | ------ | - | ----- |  | - | ----- |  | -- | -
|                         |  | Three months endedSeptember 30, |       | Change |  
|(Dollars in thousands)   |  | 2008                            |       | 2007   |   | $     |  | % |      
|Research and development |  | $                               | 7,249 |        | $ | 4,463 |  | $ | 2,786 |  | 62 | %

The change in research and development expenses in the third quarter of 2008 compared
to the third quarter of 2007 was primarily due to the following:



| |  |  | An increase of $1.2 million in employee-related expenses, including travel expenses, related to an increase of 21 in research and development
headcount;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $1.5 million in outside services, materials and overhead expenses; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | An increase of $0.1 million in stock-based compensation expense due to our larger employee base, partially offset by the effects of our lower average
stock price.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total research and development expenses in the third quarter of 2008 included $0.7 million of
stock-based compensation expense compared to $0.6 million in 2007. We expect our research and development expenses to increase moderately during the remainder of 2008 as we continue development activities for the electrophysiology market and explore
other future potential applications.

Selling, General and Administrative



|                                    |  |                                 |       |        |   |       |  |   |       |  |    |  
|----------------------------------- |  | ------------------------------- | ----- | ------ | - | ----- |  | - | ----- |  | -- | -
|                                    |  | Three months endedSeptember 30, |       | Change |  
|(Dollars in thousands)              |  | 2008                            |       | 2007   |   | $     |  | % |      
|Selling, general and administrative |  | $                               | 8,931 |        | $ | 6,538 |  | $ | 2,393 |  | 37 | %

Selling, general and administrative expenses increased in the third quarter of 2008
compared to the third quarter of 2007 primarily due to the following:



| |  |  | An increase of $1.6 million in employee-related expenses, including sales commissions and travel expenses, associated with an increase in sales and
marketing headcount of 18 and an increase in general and administrative headcount of 7;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $0.5 million in supplies, equipment and overhead expenses;
| | - |  | -------------------------------------------------------------------------



| |  |  | An increase of $0.3 million in professional service fees, primarily consisting of legal fees necessary for the development of our intellectual property
portfolio, Luna litigation costs and other intellectual property related legal expenses;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | An increase of $0.1 million in stock-based compensation expense due to our larger employee base, partially offset by the effects of our lower average
stock price; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A decrease of $0.1 million in non-compensation marketing expenses.
| | - |  | ------------------------------------------------------------------

Selling, general and administrative expenses in the third quarter of 2008 included $1.9 million of stock-based compensation expense compared
to $1.8 million in the third quarter of 2007. We expect our selling, general and administrative expenses to increase moderately during the remainder of 2008 as we continue to expand our sales and clinical support groups and as we prepare for a March
2009 trial in our litigation against Luna Innovations, Inc.

Interest Income



|                       |  |                                 |     |        |   |     |  |   |      |   |  |     |   
|---------------------- |  | ------------------------------- | --- | ------ | - | --- |  | - | ---- | - |  | --- | --
|                       |  | Three months endedSeptember 30, |     | Change |  
|(Dollars in thousands) |  | 2008                            |     | 2007   |   | $   |  |   | %    |  
|Interest income        |  | $                               | 317 |        | $ | 916 |  | $ | (599 | ) |  | (65 | )%

Interest income decreased in the third quarter of 2008 compared to the third quarter
of 2007 primarily due to decreased average cash, cash equivalents and short-term investments balances in the third quarter of 2008 as compared to 2007, due primarily to the use of cash in operations and for the acquisition of AorTx, partially offset
by the cash received from our financing activities in 2008. We expect our quarterly interest income to decrease in the remainder of 2008 as we continue to utilize our cash to cover our operating expenses.

Interest and Other Expense, net



|                                |  |                                 |      |   |        |   |      |   |  |   |      |   |  |     |  
|------------------------------- |  | ------------------------------- | ---- | - | ------ | - | ---- | - |  | - | ---- | - |  | --- | -
|                                |  | Three months endedSeptember 30, |      |   | Change |  
|(Dollars in thousands)          |  | 2008                            |      |   | 2007   |   |      | $ |  |   | %    |  
|Interest and other expense, net |  | $                               | (345 | ) |        | $ | (115 | ) |  | $ | (230 | ) |  | 200 | %

Interest and other expense, net, consists mainly of interest expense, which increased
in the third quarter of 2008 as compared to 2007 primarily due to paying off our previous debt and the interest on our new term equipment line. We expect our interest expense to increase in the remainder of 2008 as we have a full quarter of interest
related to the term equipment line.

Comparison of the nine months ended September 30, 2008 to the nine months ended
September 30, 2007

Revenues



|                       |  |                                |        |        |   |             |  |             |        |  |     |  
|---------------------- |  | ------------------------------ | ------ | ------ | - | ----------- |  | ----------- | ------ |  | --- | -
|                       |  | Nine months endedSeptember 30, |        | Change |  
|(Dollars in thousands) |  | 2008                           |        | 2007   |   | $           |  | %           |       
|                       |  | As Restated                    |        |        |   | As Restated |  | As Restated |       
|Revenues               |  | $                              | 18,084 |        | $ | 5,889       |  | $           | 12,195 |  | 207 | %

Revenues for the first nine months of 2008 primarily related to the sale of five
Sensei systems in Europe and 18 Sensei systems in the United States at an average selling price of approximately $677,000 per unit and the shipment of approximately 1,100 Artisan catheters at an average selling price of approximately $1,800 per
unit. Revenues for the first nine months of 2007 primarily related to the sale of



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##### Table of Contents

four Sensei systems in Europe and five Sensei systems in the United States at an average selling price of $618,000 per unit and the shipment of approximately 170 Artisan catheters at an average
selling price of $1,900. Average selling prices of Sensei systems for the first nine months of 2008 were positively impacted by sales of Sensei systems with CoHesion modules and the sale of one system with an additional robotic arm.

Cost of Goods Sold



|                            |  |                                |        |   |        |   |       |             |  |             |        |  |     |  
|--------------------------- |  | ------------------------------ | ------ | - | ------ | - | ----- | ----------- |  | ----------- | ------ |  | --- | -
|                            |  | Nine months endedSeptember 30, |        |   | Change |  
|(Dollars in thousands)      |  | 2008                           |        |   | 2007   |   |       | $           |  | %           |       
|                            |  | As Restated                    |        |   |        |   |       | As Restated |  | As Restated |       
|Cost of goods sold          |  | $                              | 14,940 |   |        | $ | 4,919 |             |  | $           | 10,021 |  | 204 | %
|As a percentage of revenues |  |                                | 82.6   | % |        |   | 83.5  | %           |  |             |        |  |     |  

Cost of goods sold for the first nine months of 2008 included stock-based
compensation expense of $0.5 million as compared to $0.2 million for the first nine months of 2007. During the third quarter of 2008, we experienced an increase in the overhead applied to our inventory, primarily due to the move to a new facility.
Had we experienced the higher inventory costs for the entire third quarter of 2008, cost of goods sold and gross profit would have been negatively impacted by approximately $0.9 million. During 2007 we sold certain inventory which had previously
been written down to zero as a result of the uncertainty of receiving FDA clearance and CE Mark approval. As a result, cost of goods sold for the first nine months of 2007 did not include all of the cost for those sales, which resulted in a benefit
of approximately $0.6 million. Cost of goods sold for the first nine months of 2007 also included a $0.4 million non-recurring milestone royalty charge.

Operating Expenses

Research and Development



|                         |  |                                |        |        |   |        |  |   |       |  |    |  
|------------------------ |  | ------------------------------ | ------ | ------ | - | ------ |  | - | ----- |  | -- | -
|                         |  | Nine months endedSeptember 30, |        | Change |  
|(Dollars in thousands)   |  | 2008                           |        | 2007   |   | $      |  | % |      
|Research and development |  | $                              | 18,763 |        | $ | 13,886 |  | $ | 4,877 |  | 35 | %

In the first quarter of 2007, as a development-stage company, all manufacturing
expenses were included in research and development expenses. Beginning in the second quarter of 2007, as we received the necessary regulatory approvals, commenced our commercial operations and exited the development stage, manufacturing expenses
were included in cost of goods sold. Research and development expenses for the first nine months of 2007 included development-stage manufacturing expenses of $1.0 million. The remaining change in research and development expenses in the first nine
months of 2008 compared to the first nine months of 2007 of approximately $5.9 million was primarily due to the following:



| |  |  | An increase of $3.3 million in employee-related expenses, including travel expenses, related to an increase of 21 in research and development
headcount;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $2.5 million in outside services, materials and overhead expenses; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | An increase of $0.1 million in stock-based compensation expense due to our larger employee base, partially offset by the effects of our lower average
stock price.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



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##### Table of Contents

Total research and development expenses in the first nine months of 2008 included $2.0
million of stock-based compensation expense compared to $1.9 million in the first nine months of 2007.

Selling, General
and Administrative



|                                    |  |                                |        |        |   |        |  |   |        |  |    |  
|----------------------------------- |  | ------------------------------ | ------ | ------ | - | ------ |  | - | ------ |  | -- | -
|                                    |  | Nine months endedSeptember 30, |        | Change |  
|(Dollars in thousands)              |  | 2008                           |        | 2007   |   | $      |  | % |       
|Selling, general and administrative |  | $                              | 27,015 |        | $ | 16,241 |  | $ | 10,774 |  | 66 | %

Selling, general and administrative expenses increased in the first nine months of
2008 compared to the first nine months of 2007 primarily due to the following:



| |  |  | An increase of $5.5 million in employee-related expenses, including sales commissions and travel expenses, associated with an increase in sales and
marketing headcount of 18 and an increase in general and administrative headcount of 7;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $1.8 million in professional service fees, primarily consisting of legal fees necessary for the development of our intellectual property
portfolio, Luna litigation costs and other intellectual property related legal expenses;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $1.2 million in stock-based compensation expense due to our larger employee base;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | An increase of $1.2 million in lease costs for our new facility, all of which were being charged to selling, general and administrative expenses prior
to its occupancy in July 2008;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | An increase of $1.0 million in supplies, equipment and overhead expenses; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | An increase of $0.1 million in non-compensation marketing expenses.
| | - |  | -------------------------------------------------------------------

Selling, general and administrative expenses in the first nine months of 2008 included $5.1 million of stock-based compensation expense
compared to $3.9 million in the first nine months of 2007.

Interest Income



|                       |  |                                |       |        |   |       |  |   |        |   |  |     |   
|---------------------- |  | ------------------------------ | ----- | ------ | - | ----- |  | - | ------ | - |  | --- | --
|                       |  | Nine months endedSeptember 30, |       | Change |  
|(Dollars in thousands) |  | 2008                           |       | 2007   |   | $     |  |   | %      |  
|Interest income        |  | $                              | 1,155 |        | $ | 3,013 |  | $ | (1,858 | ) |  | (62 | )%

Interest income decreased in the first nine months of 2008 compared to the first nine
months of 2007 primarily due to decreased average cash, cash equivalents and short-term investments balances in the first nine months of 2008 as compared to 2007, due primarily to the use of cash in operations and for the acquisition of AorTx,
partially offset by the cash received from our equity offering in April 2008.

Interest and Other Expense, net



|                                |  |                                |      |   |        |   |      |   |  |   |      |   |  |    |  
|------------------------------- |  | ------------------------------ | ---- | - | ------ | - | ---- | - |  | - | ---- | - |  | -- | -
|                                |  | Nine months endedSeptember 30, |      |   | Change |  
|(Dollars in thousands)          |  | 2008                           |      |   | 2007   |   |      | $ |  |   | %    |  
|Interest and other expense, net |  | $                              | (508 | ) |        | $ | (377 | ) |  | $ | (131 | ) |  | 35 | %

Interest and other expense, net, consists mainly of interest expense, which increased
in the first nine months of 2008 as compared to the first nine months of 2007 primarily due to paying off our previous debt and the interest on our new term equipment line.



21



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##### Table of Contents

Liquidity and Capital Resources

We have incurred losses since our inception in September 2002 and, as of September 30, 2008 we had an accumulated deficit of $151.9
million. We have financed our operations to date principally through the sale of capital stock, debt financing and interest earned on investments. Prior to our initial public offering of stock in November 2006, we had received net proceeds of $61.3
million from the issuance of common and preferred stock and $7.0 million in debt financing. Through our initial public offering in 2006 we received net proceeds of $78.3 million. On April 7, 2008, we sold 3,000,000 shares of our common stock,
resulting in approximately $39.5 million of net proceeds. On August 25, 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a $15 million term equipment line and a one-year $10 million
revolving credit line. As of September 30, 2008, we had drawn down approximately $12.5 million against the equipment line under this agreement. Our cash and investment balances are held in a variety of interest bearing instruments, including
corporate bonds, commercial paper and money market funds. Cash in excess of immediate requirements is invested in accordance with our investment policy primarily with a view to liquidity and capital preservation.

Cash flow activity for the nine months ended September 30, 2008 and 2007 is summarized as follows:



|                                                |  |                                |         |   |      |   |         |  
|----------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                |  | Nine months endedSeptember 30, |        
|                                                |  | 2008                           |         |   | 2007 |  
|Cash used in operating activities               |  | $                              | (35,591 | ) |      | $ | (22,703 | )
|Cash used in investing activities               |  |                                | (18,781 | ) |      |   | (20,822 | )
|Cash provided by (used in) financing activities |  |                                | 49,853  |   |      |   | (707    | )
|                                                |  |                                |         |   |      |   |         |  
|Net decrease in cash and cash equivalents       |  | $                              | (4,519  | ) |      | $ | (44,232 | )
|                                                |  |                                |         |   |      |   |         |  

Net Cash Used in Operating Activities

Net cash used in operating activities primarily reflects the net loss for those periods, partially offset by non-cash charges such as
depreciation and amortization and stock-based compensation. Additionally, net cash used in operating activities was negatively impacted by the increase in accounts receivable and inventory balances necessitated by our growth in commercial sales of
our Sensei system and Artisan catheter, partially offset by increases in accounts payable and accrued liabilities.

Net
Cash Used in Investing Activities

Net cash used in investing activities primarily relates to the proceeds and
purchases of investments as we manage our investment portfolio to provide interest income and liquidity. Investing activities were also negatively impacted by the purchase of property and equipment as we invested in the infrastructure of our growing
company, especially in the first nine months of 2008 as we invested in the build-out of our new facility. We expect spending on the build-out of our new facility to continue into the fourth quarter of 2008, although not at the same level as in the
previous quarters.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities in the first nine months of 2008 was mainly due to the cash received from our equity offering in
April 2008 and the proceeds from our new term equipment line, in addition to receipts from our employee stock purchase plan and from the net exercises of stock options, partially offset by repayments of our long-term debt. Net cash used in financing
activities in the first nine months of 2007 was mainly attributable to repayments of long-term debt and the payments for remaining costs associated with our initial public offering in November 2006, partially offset by receipts from stock option
exercises and our employee stock purchase plan.

Operating Capital and Capital Expenditure Requirements

We are in the early stages of commercializing our Sensei system and Artisan catheter and we have not achieved
profitability. We anticipate that we will continue to incur substantial net losses for the next several years as we continue to commercialize our products, develop the corporate infrastructure required to manufacture and sell our products at
sufficient levels and operate as a publicly traded company as well as continue to develop new products and pursue additional applications for our technology platform.



22



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##### Table of Contents

We recognized our first revenues in 2007 and do not expect to generate net income in 2008.
We believe our existing cash, cash equivalents and investment balances and the interest income we earn on these balances, in addition to the amounts available under our term equipment line and revolving credit line, will be sufficient to meet our
anticipated cash requirements through at least the next 12 months based on current operating and spending assumptions. However, we may require additional capital sooner and beyond our currently forecasted amounts and we may seek to sell additional
equity or debt securities or enter into additional credit facilities at any time.

Because of the numerous risks and
uncertainties associated with the development and commercialization of medical devices, such as our Sensei system and disposable Artisan catheter, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to
continue the development of new products and the expanded commercialization of existing products. Our future capital requirements will depend on many factors, including but not limited to the following:



| |  |  | The revenue and margins generated by sales of our current and future products;
| | - |  | ------------------------------------------------------------------------------



| |  |  | The expenses we incur in manufacturing, selling and marketing our products, developing new products and operating our company;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to achieve manufacturing cost reductions as we scale the production of our products;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | The success of our research and development efforts;
| | - |  | ----------------------------------------------------



| |  |  | The rate of progress and cost of our clinical trials and other development activities;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | The costs and timing of future regulatory actions;
| | - |  | --------------------------------------------------



| |  |  | The costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property or other legal rights, or participating in
litigation-related activities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The emergence of competing or complementary technological developments;
| | - |  | -----------------------------------------------------------------------



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



| |  |  | The acquisition or disposition of businesses, products and technologies.
| | - |  | ------------------------------------------------------------------------

We cannot guarantee that future equity or debt financing or credit lines will be available in amounts or on terms acceptable to us, if at
all. This could leave us without adequate financial resources to fund our operations as presently conducted or as we plan to conduct them in the future.

Contractual Obligations

The following table summarizes our outstanding
contractual obligations as of September 30, 2008:



|                              |  |                                       |        |                 |   |           |  |           |        |                  |   |        |  |   |      
|----------------------------- |  | ------------------------------------- | ------ | --------------- | - | --------- |  | --------- | ------ | ---------------- | - | ------ |  | - | -----
|                              |  | Payments Due by Period (in thousands)
|Contractual Obligations       |  | Total                                 |        | Less than1 Year |   | 1-3 Years |  | 3-5 Years |        | More than5 Years
|Operating lease  real estate |  | $                                     | 11,296 |                 | $ | 444       |  | $         | 3,554  |                  | $ | 3,622  |  | $ | 3,676
|Debt                          |  |                                       | 14,275 |                 |   | 186       |  |           | 7,138  |                  |   | 6,951  |  |   |     
|                              |  |                                       |        |                 |   |           |  |           |        |                  |   |        |  |   |      
|Total                         |  | $                                     | 25,571 |                 | $ | 630       |  | $         | 10,692 |                  | $ | 10,573 |  | $ | 3,676
|                              |  |                                       |        |                 |   |           |  |           |        |                  |   |        |  |   |      

The table above reflects only payment obligations that are fixed and determinable.
Our commitments for operating leases relate principally to the lease for our corporate headquarters in Mountain View, California. Additionally, we have minimum royalty obligations of $100,000 per year under a license agreement with Mitsubishi
Electric which reduces to $55,000 per year if the license becomes



23



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##### Table of Contents

non-exclusive. The royalty obligation expires in 2018. We may also have minimum royalty obligations under the terms of our cross license agreement with Intuitive. Our agreement to acquire AorTx
includes possible future payments of up to $30.0 million payable upon achievement of regulatory clearances and revenue and partnering milestones. Such future payments are to be made 50% in cash and 50% in shares of our common stock. On
April 28, 2008, the Company entered into an agreement for the build-out of the Companys new 63,000 square foot office and laboratory facility in Mountain View, California. The remaining amount to be paid under this contract, which is
expected to be complete by the fourth quarter of 2008, is approximately $1,000,000.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS,
No. 157, Fair Value Measurements, or SFAS 157, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements
but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for us beginning in the first quarter of 2008. In February 2008, the FASB released a FASB Staff Position (FSP FAS
157-2Effective Date of FASB Statement No. 157) which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The adoption of SFAS 157 for financial assets and liabilities on January 1, 2008 did not have a material impact on our condensed
consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 will become effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. SFAS 159 is
effective for us beginning in the first quarter of fiscal year 2008. The adoption of SFAS 159 on January 1, 2008 did not have a material impact on our condensed consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations, or SFAS 141(R). SFAS 141(R) retains the
fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business
combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition
date. SFAS 141(R) also requires that acquisition-related costs be recognized separately from the acquisition. SFAS 141(R) will become effective for us on January 1, 2009. We are currently evaluating the impact that SFAS 141(R) will have on our
consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, or SFAS 160. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parents ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 will become effective for us beginning in the first quarter of 2009. We are currently
evaluating the impact that SFAS 160 will have on our consolidated financial statements.

In October 2008, the FASB issued FASB
Staff Position No. 157-3, Determining Fair Value of a Financial Asset in a Market That Is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 for financial assets in an inactive market. It demonstrates how
and when to use an entitys own assumptions, observable market inputs and market quotes in measuring the fair value of a financial asset when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including
prior periods for which financial statements had not been issued. The adoption of this standard did not have a material impact on our condensed consolidated financial position, results of operations or cash flows.



24



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##### Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Restated)

In the normal course of business, our financial position is subject to a variety of risks, including market
risk associated with interest rate movements. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these
areas.

The primary objective for our investment activities is to preserve principal while maximizing yields without
significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities. As of September 30, 2008, the fair value of our cash, cash equivalents and
short-term investments was approximately $45.6 million. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale securities. We have no investments
denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

ITEM 4. CONTROLS AND PROCEDURES (Restated)

Evaluation of Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule
13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the Exchange Act)) designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive officer or officers and principal financial
officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

In our Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, originally filed on November 5, 2008, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of September 30, 2008. In connection with our decision to restate our financial statements, as more fully described in Note 3 to the financial statements of this
Form 10-Q/A, our management, including our Chief Executive Officer and Chief Financial Officer, performed a reevaluation and concluded that our disclosure controls and procedures were not effective as of September 30, 2008 as a result of
the material weaknesses in our internal control over financial reporting as discussed below.

Material Weaknesses in Internal Control over
Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of the Companys annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with the restatement described in Note 3 to the financial statements, we reevaluated our internal control over financial
reporting and have identified the following material weaknesses:

1. Control Environment. We did not maintain an
effective control environment, which is the foundation upon which all other components of internal controls are based. Specifically:



| |  |  | Our commercial operations leadership did not consistently support the importance of strict adherence to our revenue recognition policy and to GAAP and
did not take sufficient steps to ensure good faith compliance with revenue recognition policies throughout our sales, clinical and field service departments. As a result, information related to certain revenue transactions was not communicated to
accounting personnel to appropriately consider the financial reporting implications of such transactions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We did not maintain sufficient safeguards to provide reasonable assurance that controls could not be circumvented or overridden by commercial
operations management or to prevent or detect possible misconduct by members of our commercial operations organization with respect to certain revenue transactions. Our commercial operations organization was structured such that the sales, clinical
and field service departments all reported to the executive in charge of our commercial operations, leading to a conflict of oversight and incentives, such as the desire to meet quarterly sales goals.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We did not maintain effective procedures for communicating to all relevant personnel our accounting policies, the importance of consistent application
of our accounting policies, and essential data required to properly apply GAAP to our transactions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Additionally, we did not effectively communicate the process of reporting unusual or uncertain circumstances. As a result, we did not detect
deficiencies in compliance with our accounting policies on a timely basis.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This material weakness led to errors and
irregularities that in turn resulted in errors in the preparation of our financial statements. This material weakness also contributed to the existence of the material weakness described in item 2 below.

2.Revenue recognitionprocess.We did not maintain effective controls related to the process for ensuring
completeness and accuracy of our accounting for revenue to provide reasonable assurance that all significant details of agreements with our distributors and customers were provided to those making revenue recognition decisions and that all
appropriate personnel received sufficient training on revenue recognition.



| |  |  | Certain employees were able to withhold information from accounting personnel or falsify documentation related to certain revenue transactions without
discovery, which resulted in improper recognition of revenue in the period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounting personnel were not provided the necessary information to determine the financial reporting consequences of certain revenue transactions.
Specifically, this led to incomplete information regarding temporary installations, unfulfilled training obligations, the inability of distributors to independently install systems and train end users, and undisclosed side arrangements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These material weaknesses resulted in material errors and the restatement of the our annual statements for
2007, annual and interim financial statements for 2008 and interim financial statements for the first and second quarters of 2009, impacting revenue, cost of goods sold, deferred cost of goods sold, and deferred revenue accounts. Additionally, these
material weaknesses could result in further misstatements of these accounts that would result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis.

Notwithstanding the material weaknesses described above, we concluded that the interim financial statements included in this
Form 10-Q/A fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with GAAP.

Changes in Internal Control Over Financial Reporting

As described under
the paragraph entitled Material Weaknesses in Internal Control over Financial Reporting, there were changes in internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

Managements Plan for Remediation

Beginning in October 2009, our management began to design and implement certain remediation measures to address the
above-described material weaknesses and enhance our system of internal control over financial reporting. Management believes the remediation measures described below will remediate the identified control deficiencies and strengthen our internal
control over financial reporting. As management continues to evaluate and work to enhance our internal control over financial reporting, it may be determined that additional measures must be taken to address control deficiencies or it may be
determined that we need to modify or otherwise adjust the remediation measures described below.

The remediation efforts
outlined below are intended both to address the identified material weaknesses and to enhance our overall financial control environment.

Control Environment and Organizational Structure.Our plan is to create and communicate aneffective culture and tone throughout the Companys commercial operations
organization in the following ways:



| |  |  | Certain employees have been terminated and other employees will be disciplined for actions relating to this restatement.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | We will improve the annual ethics training for all sales, clinical and field service employees to enhance their understanding of critical accounting
and ethics policies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will reorganize our sales, clinical and field service teams such that they will no longer report to the same vice president to ensure that each team
has the proper oversight and incentives.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue Recognition Process. We will
enhance our internal controls related to the revenue recognition process and training in the following ways:



| |  |  | We will increase management oversight by expanding our processes to include more rigorous representations made by sales, clinical and field service
personnel and more detailed documentation regarding elements required for revenue recognition and timely accountability for details underlying elements of revenue recognition.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will improve communications between accounting personnel responsible for revenue recognition and sales, clinical and field service personnel
responsible for the execution of the work on those transactions and will institute quarterly meetings involving accounting and sales, clinical and field service personnel involved in each system sale during the quarter.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will improve the annual ethics training for all sales, clinical and field service employees to enhance their understanding of critical accounting
and ethics policies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will expand our revenue recognition training to include clinical and field service employees to promote their understanding of and appreciation for
our revenue recognition policy and process.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We will improve our existing revenue recognition training to include a more detailed description of our revenue recognition process.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ITEM 4T. CONTROLS AND PROCEDURES

Not applicable.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On June 22, 2007, we filed suit in Santa Clara Superior Court against Luna Innovations, Inc., or Luna, alleging that Luna has, among
other things, breached a 2006-2007 development and intellectual property agreement with us that we believe establishes its ownership of all intellectual property in medical robotics developed by the parties during performance of the agreement,
misappropriated our trade secrets and has revealed our confidential information to other companies who might improperly benefit from it. Lunas Cross-Complaint against us asserts various claims including for misappropriation of trade secrets
and breach of the parties agreements and challenging the inventorship and our ownership of several patent applications which we filed during that same time period. The parties engaged in a nonbinding arbitration process earlier in 2008. The
arbitrators nonbinding decision, which we believe was very favorable, was due to be published almost in its entirety but has been temporarily sealed at Lunas request while Luna attempts on appeal to prevent the decision from becoming
public. Discovery in the case is in its later stages and trial has been set for late March 2009. We are vigorously prosecuting our own claims and defending against Lunas counterclaims.

ITEM 1A. RISK FACTORS

Risks Related to Our Business

We are a company with a limited
history of operations, which makes our future operating results difficult to predict.

We are a medical device company
with a limited operating history and first recognized revenues in the second quarter of 2007. Prior to the second quarter of 2007, we were a development stage company. We have been engaged in research and product development since our inception in
late 2002. Our Sensei



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##### Table of Contents

Robotic Catheter System, or Sensei system, and our corresponding disposable Artisan catheter received FDA
clearance in May 2007 for commercialization to facilitate manipulation, positioning and control of certain mapping catheters during electrophysiology procedures. We also received the CE Mark in Europe for our Sensei system in September 2006 and for
our Artisan catheter in May 2007. The future success of our business will depend on our ability to increase product sales, successfully introduce new products, grow our sales force and distribution network and manufacture and assemble our products
in sufficient quantities, in accordance with applicable regulatory requirements and at lower costs, all of which we may be unable to do. We have a limited history of operations upon which you can evaluate our business and our operating expenses have
increased significantly. Our lack of a significant operating history also limits your ability to make a comparative evaluation of us, our products and our prospects. If we are unable to successfully operate our business, our business and financial
condition will be harmed.

We have limited sales, marketing and distribution experience and capabilities, which could
impair our ability to achieve profitability.

In the second quarter of 2007, we received clearance to market, sell and
distribute our products in the United States and Europe. We have no prior experience as a company in undertaking these efforts. In the United States, we market our products through a direct sales force of regional sales employees, supported by
clinical account managers who provide training, clinical support and other services to our customers. Expanding our direct sales force will be expensive and time-consuming and could delay the success of the commercialization of our products.
Additionally, our direct sales force competes against the experienced and well-funded sales organizations of our competitors. Our revenues will depend on our ability to expand and retain an effective sales force. We face significant challenges and
risks in expanding and retaining our direct sales force and marketing our products, including, among others:



| |  |  | our ability to recruit, train and retain adequate numbers of qualified sales and marketing personnel;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the ability of sales personnel to obtain access to or persuade adequate numbers of hospitals to purchase our products or physicians to use our
products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs associated with hiring, maintaining and expanding an independent sales and marketing organization; and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | government scrutiny and labeling restrictions with respect to promotional activities in the healthcare industry.
| | - |  | ----------------------------------------------------------------------------------------------------------------

Outside the United States, primarily in the European Union, or EU, we are establishing a combination of a direct sales force and
distributors to market, sell and support our products. If we fail to select appropriate distributors or effectively use our distributors or sales personnel and coordinate our efforts for distribution of our products in the EU or if their and our
sales and marketing strategies are not effective in generating sales of our products, our revenues would be adversely affected and we may never become profitable.

Credit, financial market and general economic conditions could delay or prevent potential customers from purchasing our products, which would adversely affect our sales, financial condition and
results of operation.

The sale of a Sensei system often represents a significant capital purchase for our customers
and many customers finance their purchase of a Sensei system through a credit facility or other financing. If prospective customers that need to finance their capital purchases are not able to access the credit or capital markets on terms that they
consider acceptable, they may decide to postpone or cancel a potential purchase of a Sensei system. Also, even customers with sufficient financial resources to make such purchases without resorting to the credit and capital markets may be less
likely to make capital purchases during periods when they view the overall economic conditions unfavorably. In such conditions, those customers may decide to postpone or cancel the purchase of our products. If sufficient numbers of potential
customers decide to postpone or cancel purchase of a Sensei system, our sales, financial condition and results of operations could be significantly negatively impacted. Financial market conditions in the U.S and the EU for the third quarter of 2008,
including the credit and capital markets, have been very volatile and may continue to be volatile into the near future. We cannot predict what these conditions will be in the future, nor what their impact will be on any potential customers or their
decisions to purchase our products.



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We have limited experience in manufacturing and assembling our products and may
encounter problems at our manufacturing facilities or otherwise experience manufacturing delays that could result in lost revenue or diminishing margins.

We do not have significant experience in manufacturing, assembling or testing our products on a commercial scale. In addition, for our Sensei system, we subcontract the manufacturing of major components
and complete the final assembly and testing of those components in-house. In order to produce our Sensei system and disposable Artisan catheters in quantities sufficient to meet anticipated market demand and to efficiently utilize our new
manufacturing facility, we will need to increase our manufacturing capacity significantly over the current level. We face significant technical challenges to increasing manufacturing capacity, including equipment design and automation, material
procurement, low or variable production yields on Artisan catheters and quality control and assurance. Developing commercial scale manufacturing facilities has required and will continue to require the investment of substantial funds, the hiring and
retention of additional management and technical personnel who have the appropriate manufacturing and compliance experience. The costs resulting from this hiring and our relocation to a larger facility have had and will continue to have a
significant impact on our gross margins and may result in significant fluctuations of gross margins from quarter to quarter. We may not successfully complete required increases in manufacturing capacity or planned improvements in manufacturing
efficiency on a timely basis or at all. For example, as we were increasing our manufacturing capacity for Artisan catheters, we shipped a limited number in late 2007 and early 2008 that were later identified as having a potential leak. Although no
patient is known or suspected to have experienced any consequences associated with this possible leak nor has it significantly impacted our business, we may encounter other manufacturing issues that result in our being unable to meet the expected
demand for our Sensei system or Artisan catheters, maintain control over our expenses or otherwise successfully increase our manufacturing capabilities. If we are unable to satisfy demand for our Sensei system or Artisan catheters, our ability to
generate revenue could be impaired and hospitals may instead purchase, or physicians may use, our competitors products. Since our Sensei system requires the use of disposable Artisan catheters, our failure to meet demand for Artisan catheters
from hospitals that have purchased our Sensei system could adversely affect the market acceptance of our products and damage our commercial reputation.

In addition, all of our operations are conducted at our facilities leased in Mountain View, California. We could encounter problems at these facilities, which could delay or prevent us from manufacturing,
assembling or testing our products or maintaining our manufacturing capabilities or otherwise conducting operations.

Our reliance on third-party manufacturers and on suppliers, and in one case, a single-source supplier, could harm our ability to meet demand for our products in a timely manner or within budget, and could cause harm to our business
and financial condition.

We depend on third-party manufacturers to produce most of the components of our Sensei
system and other products, and have not entered into formal agreements with several of these third parties. We also depend on various third-party suppliers for various components we use in our Sensei systems and for our Artisan catheters and
sheaths. For example, we obtain the motors for our Sensei system from a single supplier, Maxon Motor AG, from whom we purchase on a purchase order basis, and we generally do not maintain large volumes of inventory. Force Dimension Sàrl, a
single-source supplier, manufactures customized motion controllers that are also part of our Sensei system. Additionally, in October 2007, we entered into a purchase agreement with Plexus Services Corp., or Plexus, under which Plexus will
manufacture certain components for us in quantities determined by a non-binding forecast and by purchase orders.



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Our reliance on third parties involves a number of risks, including, among other things, the
risk that:



| |  |  | suppliers may fail to comply with regulatory requirements or make errors in manufacturing components that could negatively affect the efficacy or
safety of our products or cause delays in or prevent shipments of our products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to respond to unanticipated changes and increases in customer orders;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | we may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems and other
products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our suppliers manufacture products for a range of customers, and fluctuations in demand for products these suppliers manufacture for others may affect
their ability to deliver components to us in a timely manner;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our suppliers may wish to discontinue supplying goods or services to us;
| | - |  | ------------------------------------------------------------------------



| |  |  | we may not be able to find new or alternative components for our use or reconfigure our system and manufacturing processes in a timely manner if the
components necessary for our system become unavailable; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and
meet our requirements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If any of these risks materialize, it could significantly increase our costs and
impact our ability to meet demand for our products.

In addition, if these manufacturers or suppliers stop providing us with
the components or services necessary for the operation of our business, we may not be able to identify alternative sources in a timely fashion. Any transition to alternative manufacturers or suppliers would likely result in operational problems and
increased expenses and could delay the shipment of, or limit our ability to provide, our products. We cannot assure you that we would be able to enter into agreements with new manufacturers or suppliers on commercially reasonable terms or at all.
Additionally, obtaining components from a new supplier may require qualification of a new supplier in the form of a new or supplemental filing with applicable regulatory authorities and clearance or approval of the filing before we could resume
product sales. Any disruptions in product supply may harm our ability to generate revenues, lead to customer dissatisfaction, damage our reputation and result in additional costs or cancellation of orders by our customers. We currently purchase a
number of the components for our Sensei system in foreign jurisdictions. Any event causing a disruption of imports, including the imposition of import restrictions, could adversely affect our business and our financial condition.

If we fail to maintain necessary FDA clearances and CE marks for our medical device products, or if future clearances are delayed, we
will be unable to commercially distribute and market our products.

The process of seeking regulatory clearance or
approval to market a medical device is expensive and time-consuming and clearance or approval is never guaranteed and, even if granted, clearance or approval may be suspended or revoked. In May 2007, we received FDA clearance in the United States to
commercialize our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control, for collecting electrophysiological data within the heart atria with electro-anatomic mapping and recording systems. Because the FDA has
determined that there is a reasonable likelihood that our products could be used by physicians for uses not encompassed by the scope of the present FDA clearance and that such uses may cause harm, we are required to label our products to state that
their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been established. There can be no assurance that we will be able to successfully market and sell
our products in the United States based on this label. We will be required to seek a separate 510(k) clearance or premarket approval, or PMA, to market our Sensei system for uses other than those currently cleared by the FDA. We cannot assure you
that the FDA would not impose a more burdensome level of premarket review on other intended uses or modifications to approved products. We may seek future



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clearances or approvals of our Sensei system for other indications, including atrial fibrillation or other
cardiac ablation procedures but there can be no assurance as to the timing or potential for success of those efforts if undertaken. We received the CE Mark in Europe for our Sensei system in September 2006 and for our Artisan catheters in May 2007.

Seeking to obtain future clearances or approvals from the FDA and other regulatory authorities could result in unexpected and
significant costs for us and consume managements time and other resources. The FDA or other regulatory authorities could ask us to supplement our submissions, collect non-clinical data, conduct clinical trials or engage in other time-consuming
or costly actions, or it could simply deny our applications. For example, in November 2007, we submitted a 510(k) premarket notification for our CoHesion 3D Visualization Module, or CoHesion Module. In response to our 510(k) submission, the FDA
requested additional information, which we then provided. The FDA approved the marketing of the CoHesion Module and completed its review of our IntelliSense technology at the end of the second quarter of 2008, but, in future instances, we may not be
able to satisfactorily address all of the FDAs future concerns or requests for additional information or testing, which may further delay the FDAs review of our premarket notifications or could result in the FDA denying our submissions.
In addition, clearance or approval could be revoked or other restrictions imposed if post-market data demonstrates safety issues or lack of effectiveness. We cannot predict with certainty how, or when, the FDA or other regulatory authorities will
act. If we are unable to maintain our regulatory clearances and obtain future clearance, our financial condition and cash flow may be adversely affected, and our ability to grow domestically and internationally may be limited.

If physicians and hospitals are not convinced that our products are a safe and effective alternative to existing technologies used in
atrial fibrillation and other cardiac ablation procedures, we may not be commercially successful.

We believe that
physicians will not use, and hospitals will not purchase, our products unless they determine that our Sensei system provides a safe and effective alternative to existing treatments. Since we have received FDA clearance to market our Sensei system
and disposable Artisan catheters only for guiding catheters to map the heart anatomy, we will not be able to label or promote these products, or train physicians, for use in guiding catheters for cardiac ablation procedures. Currently, there is only
limited clinical data on our Sensei system with which to assess its safety and efficacy in any procedure, including atrial fibrillation and other cardiac ablation procedures. If longer-term or more extensive clinical studies performed by us or
others or clinical experience indicate that procedures with our Sensei system or the type of procedures that can be performed with the Sensei system are less effective or less safe than our current data suggest, physicians may choose not to use our
Sensei system. Reluctance by physicians to use our Sensei system or to perform procedures enabled by the Sensei system would harm sales. Further, unsatisfactory patient outcomes or patient injury could cause negative publicity for our products,
particularly in the early phases of product introduction. In addition, physicians may be slow to adopt our products if they perceive liability risks arising from the use of these new products. It is also possible that as our products become more
widely used, latent or other defects could be identified, creating negative publicity and liability problems for us, thereby adversely affecting demand for our products. If physicians do not use our products in cardiac ablation procedures, we likely
will not become profitable and our business will be harmed.

In addition, our research and development efforts and our
marketing strategy depend heavily on obtaining support and collaboration from highly regarded physicians at leading hospitals. If we are unable to gain or maintain such support and collaboration, our ability to market our Sensei system and, as a
result, our business and results of operations, could be harmed.

We expect to derive substantially all of our revenues
from sales of our Sensei system and Artisan catheters. If hospitals do not purchase our system, we may not generate sufficient revenues to continue our operations.

Our initial commercial offering consists primarily of two products, our Sensei system and our corresponding disposable Artisan catheters.
The Sensei system has recently been supplemented by an optional CoHesion module. In order for us to achieve sales, hospitals must purchase our Sensei system and



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Artisan catheters. Our Sensei system is a novel device, and hospitals are traditionally slow to adopt new
products and treatment practices. In addition, our Sensei system is an expensive capital equipment purchase, representing a significant portion of an electrophysiology laboratorys annual budget. In addition, because it has only recently been
commercially introduced, our Sensei system has limited product and brand recognition. Furthermore, we do not believe hospitals will purchase our products unless the physicians at those hospitals express a strong desire to use our products and we
cannot predict whether or not they will do so. If hospitals do not widely adopt our Sensei system, or if they decide that it is too expensive, we may never achieve significant revenue or become profitable. Such a failure to adequately sell our
Sensei system would have a materially detrimental impact on our business, results of operations and financial condition.

We have incurred substantial losses since inception and anticipate that we will incur continued losses for the foreseeable future and we may not be able to raise additional financing to fund future losses.

We have experienced substantial net losses since our inception in late 2002. At September 30, 2008, we had an accumulated deficit of
$151.9 million. We have funded our operations to date principally from the sale of our securities and through issuance of indebtedness. For example, we sold 3,000,000 shares of our common stock in April 2008, raising approximately $39.5 million in
net proceeds to us, in order to fund expected future losses and, in August 2008, we entered into a $25 million loan and security agreement with Silicon Valley Bank, consisting of a one-year $10 million revolving line of credit and a $15 million term
equipment line, of which we had drawn down approximately $12.5 million as of September 30, 2008. While we have recently issued equity and incurred debt, we may at any time sell additional securities resulting in further dilution to existing
stockholders and we may at any time incur additional indebtedness. However, we cannot guarantee that future equity or debt financing will be available in amounts or on terms acceptable to us, if at all. The recent turmoil in the global financial and
credit markets may limit our ability to raise additional funds. We may face significant challenges if conditions in the financial markets do not improve or continue to worsen. In particular, our ability to access the capital markets and raise funds
required for our operations may be severely restricted at a time when we would like, or need, to do so, which could have an adverse effect on our ability to meet our current and future funding requirements and on our flexibility to react to changing
economic and business conditions. This could leave us without adequate financial resources to fund our operations as presently conducted or as we plan to conduct them in the future. We expect to incur substantial additional net losses for at least
the next several years as we generally scale up our manufacturing, marketing and sales operations to commercialize our products and seek additional regulatory clearances. We expect our general and administrative expenses to increase as we continue
to add the infrastructure necessary to support operating as a public company, develop our intellectual property portfolio and incur other intellectual property related legal expenses, including litigation expenses. Because we may not be successful
in significantly increasing sales of our products, the extent of our future losses and the timing of profitability are highly uncertain, and we may never achieve profitable operations. If we require more time than we expect to generate significant
revenue and achieve profitability, we may not be able to continue our operations. Even if we achieve significant revenues, we may never become profitable or we may choose to pursue a strategy of increasing market penetration and presence at the
expense of profitability.

We may incur significant liability if it is determined that we are promoting off-label use of
our products in violation of federal and state regulations in the United States or elsewhere.

We have received FDA
clearance of our Sensei system and Artisan catheters only to facilitate manipulation, positioning and control for collecting electrophysiological data within the heart atria with electro-anatomic mapping and recording systems, which is a critical
step in the identification of the heart tissue generating abnormal heart rhythms that may require ablation or other treatment. Because the FDA has determined that there is a reasonable likelihood that physicians may choose to use our products
off-label, and that harm may result, we are required to label our products to state that their safety and effectiveness for use with cardiac ablation catheters in the treatment of cardiac arrhythmias including atrial fibrillation have not been
established. We may subsequently seek regulatory clearance for use of our Sensei system for a variety of other interventional procedures in electrophysiology, including atrial fibrillation and



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other cardiovascular procedures. Our business and future growth will depend primarily on the use of our
Sensei system in the treatment of atrial fibrillation and other cardiovascular procedures, for which we do not yet, and may never, have FDA clearance or approval.

Unless and until we receive regulatory clearance or approval for use of our Sensei system in these procedures, uses in these procedures will be considered off-label uses of our Sensei system. Under the
Federal Food, Drug, and Cosmetic Act and other similar laws, we are prohibited from labeling or promoting our products, or training physicians, for such off-label uses. This prohibition means that the FDA could deem it unlawful for us to make claims
about the safety or effectiveness of our Sensei system in cardiac ablation procedures and that we may not proactively discuss or provide information or training on the use of our product in cardiac ablation procedures or use with unapproved
catheters, with very limited exceptions. We presently believe that to date, all of the procedures in which our products have been used in the U.S. have included off-label uses such as cardiac ablation, for which our Sensei system and Artisan
Catheters have not been cleared by the FDA.

The FDA and other regulatory agencies actively enforce regulations prohibiting
promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained. A company that is found to have improperly promoted off-label uses may be subject to significant liability, including civil and
administrative remedies under the Federal False Claims Act and various other federal and state laws, as well as criminal sanctions.

Due to these legal constraints, our sales and marketing efforts focus on the general technical attributes and benefits of our Sensei system and the use of this device to guide catheters for heart mapping. If we are perceived not to be in
compliance with all of the restrictions limiting the promotion of our products for off-label use, we could be subject to various enforcement measures, including investigations, administrative proceedings and federal and state court litigation, which
would likely be costly to defend and harmful to our business. If the FDA or another governmental authority ultimately concludes we are not in compliance with such restrictions, we could be subject to significant liability, including civil and
administrative remedies, injunctions against sales for off-label uses, significant monetary and punitive penalties and criminal sanctions, any or all of which would be harmful to our business and in certain instances may cause us to have to cease
operations.

The training required for physicians to use our Sensei system could reduce the market acceptance of our
system and reduce our revenue.

Physicians must be trained to use our Sensei system proficiently. It is critical to
the success of our sales efforts to ensure that there are a sufficient number of physicians familiar with, trained on and proficient in the use of our Sensei system. Convincing physicians to dedicate the time and energy necessary for adequate
training in the use of our system is challenging, and we cannot assure you that we will be successful in these efforts.

In
addition, we will only train physicians to insert, navigate and remove catheters using our Sensei system. The physicians must obtain training elsewhere to learn how to map or ablate cardiac tissue to treat atrial fibrillation. This training may be
provided by hospitals and universities and through independent peer-to-peer training among doctors. We cannot assure you, however, that a sufficient number of physicians will become aware of training programs or that physicians will dedicate the
time, funds and energy necessary for adequate training in the use of our system. Additionally, we will have no control over the quality of these training programs. If physicians are not properly trained, they may misuse or ineffectively use our
products. This may result in unsatisfactory outcomes, patient injury, negative publicity or lawsuits against us, any of which could negatively affect our reputation and sales of our products. Furthermore, our inability to educate and train
physicians to use our Sensei system for atrial fibrillation or other cardiac ablation procedures may lead to inadequate demand for our products and have a material adverse impact on our business, financial condition and results of operation.



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Because our markets are highly competitive, customers may choose to purchase our
competitors products, which would result in reduced revenue and harm our financial results.

Our Sensei system is a new technology and must compete with established manual interventional methods and methods of our competitors, such as Stereotaxis, Inc., in remote navigation. Conventional manual methods are widely accepted in the
medical community, have a long history of use and do not require the purchase of additional, expensive capital equipment. The Stereotaxis Niobe® system, which has been in the market since 2003, four years earlier than our Sensei system, has been adopted by a number of leading clinicians. In addition, many of
the medical conditions that can be treated using our products can also be treated with existing drugs or other medical devices and procedures. Many of these alternative treatments are widely accepted in the medical community and have a long history
of use.

We also face competition from companies that are developing drugs or other medical devices or procedures to treat the
conditions for which our products are intended. The medical device and pharmaceutical industries make significant investments in research and development and innovation is rapid and continuous. If new products or technologies emerge that provide the
same or superior benefits as our products at equal or lesser cost, they could render our products obsolete or unmarketable. We cannot be certain that physicians will use our products to replace or supplement established treatments or that our
products will be competitive with current or future products and technologies.

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



| |  |  | significantly greater name recognition;
| | - |  | ---------------------------------------



| |  |  | longer operating histories;
| | - |  | ---------------------------



| |  |  | established relations with healthcare professionals, customers and third-party payors;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | established distribution networks;
| | - |  | ----------------------------------



| |  |  | additional lines of products, and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive
advantage;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory clearance for products and marketing
approved products; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | greater financial and human resources for product development, sales and marketing, and patent litigation.
| | - |  | ----------------------------------------------------------------------------------------------------------

In addition, as the markets for medical devices develop, additional competitors could enter the market. As a result, we cannot assure you
that we will be able to compete successfully against existing or new competitors. Our revenues would be reduced or eliminated if our competitors develop and market products that are more effective and less expensive than our products.

We expect to continue to experience extended and variable sales cycles, which could cause significant variability in our results of
operations for any given quarter.

Our Sensei system will likely have a lengthy sales cycle because it involves a
relatively expensive capital equipment purchase, which will generally require the approval of senior management at hospitals, inclusion in the hospitals electrophysiology laboratory budget process for capital expenditures and, in some
instances, a certificate of need from the state or other regulatory clearance. We continue to estimate that this sales cycle may take between six and 18 months. These factors may contribute to substantial fluctuations in our quarterly operating
results, particularly in the near term and during any other periods in which our sales volume is relatively low. As a result, in future quarters our operating results could fall below the expectations of securities analysts or investors, in which
event our stock price would likely decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance. In addition, the introduction of new products
could adversely impact our sales cycle, as customers take additional time to assess the benefits and investments on capital products.



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The use of our products could result in product liability claims that could be
expensive, divert managements attention and harm our reputation and business.

Our business exposes us to
significant risks of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices. Moreover, the FDA has expressed concerns regarding the safety and efficacy of our Sensei system for ablation and other
therapeutic indications, including for the treatment of atrial fibrillation and has specifically instructed that our products be labeled to inform our customers that the safety and effectiveness of our technology for use with cardiac ablation
catheters in the treatment of cardiac arrhythmias, including for atrial fibrillation, have not been established. We presently believe that to date, all of the procedures in which our products have been used in the U.S. have included off-label uses
such as cardiac ablation, for which our Sensei system and Artisan catheters have not been cleared by the FDA and which therefore could increase the risk of product liability claims. The medical device industry has historically been subject to
extensive litigation over product liability claims. We may be subject to claims by consumers, healthcare providers, third-party payors or others selling our products if the use of our products were to cause, or merely appear to cause, injury or
death. Any weakness in training and services associated with our products may also result in product liability lawsuits. Although we maintain clinical trial liability and product liability insurance, the coverage is subject to deductibles and
limitations, and may not be adequate to cover future claims. Additionally, we may be unable to maintain our existing product liability insurance in the future at satisfactory rates or adequate amounts. A product liability claim, regardless of its
merit or eventual outcome could result in:



| |  |  | decreased demand for our products;
| | - |  | ----------------------------------



| |  |  | injury to our reputation;
| | - |  | -------------------------



| |  |  | diversion of managements attention;
| | - |  | ------------------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------



| |  |  | significant costs of related litigation;
| | - |  | ----------------------------------------



| |  |  | payment of substantial monetary awards to patients;
| | - |  | ---------------------------------------------------



| |  |  | product recalls or market withdrawals;
| | - |  | --------------------------------------



| |  |  | loss of revenue; and
| | - |  | --------------------



| |  |  | the inability to commercialize our products under development.
| | - |  | --------------------------------------------------------------

We may be unable to complete the development and commercialization of our existing and anticipated products without additional
funding.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend
substantial amounts on research and development. We expect to spend significant additional amounts on the continuing commercialization of our products, including expanding our direct sales force and expansion of manufacturing capacity. In 2007, our
net cash used in operating activities was $33.1 million and, for the first nine months of 2008, net cash used in operating activities was $35.6 million. We expect that our cash used by operations will be significant in each of the next several
years, and we may need additional funds to continue the development and commercialization of our Sensei system. Additional financing may not be available on a timely basis on terms acceptable to us, or at all. Any additional financing may be
dilutive to stockholders or may require us to grant a lender a security interest in our intellectual property assets. The amount of funding we will need will depend on many factors, including:



| |  |  | the success of our research and product development efforts;
| | - |  | ------------------------------------------------------------



| |  |  | the expenses we incur in selling and marketing our products;
| | - |  | ------------------------------------------------------------



| |  |  | the costs and timing of future regulatory clearances;
| | - |  | -----------------------------------------------------



| |  |  | the revenue generated by sales of our current and future products;
| | - |  | ------------------------------------------------------------------



| |  |  | the costs to scale-up manufacturing capacity;
| | - |  | ---------------------------------------------



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| |  |  | the costs to build out our new facility;
| | - |  | ----------------------------------------



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



| |  |  | the emergence of competing or complementary technological developments;
| | - |  | -----------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, or participating in
litigation-related activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the acquisition of businesses, products and technologies.
| | - |  | ---------------------------------------------------------

If adequate funds are not available, we may have to delay development or commercialization of our products or license to third parties the
rights to commercialize products or technologies that we would otherwise seek to commercialize. We also may have to reduce marketing, customer support or other resources devoted to our products. Any of these factors could harm our financial
condition.

Our products and related technologies can be applied in different applications, and we may fail to focus on
the most profitable areas.

Our Sensei system is designed to have the potential for applications beyond
electrophysiology, including in a variety of endoscopic procedures which require a control catheter to approach diseased tissue. We further believe that our Sensei system can provide multiple opportunities to improve the speed and capability of many
diagnostic and therapeutic procedures. We will be required to seek a separate 510(k) clearance or PMA from the FDA for these applications of our Sensei system. However, we have limited financial and managerial resources and therefore may be required
to focus on products in selected applications and to forego efforts with regard to other products and industries. Our decisions may not produce viable commercial products and may divert our resources from more profitable market opportunities.
Moreover, we may devote resources to developing products in these additional areas but may be unable to justify the value proposition or otherwise develop a commercial market for products we develop in these areas, if any. In that case, the return
on investment in these additional areas may be limited, which could negatively affect our results of operations.

If we
fail to obtain or acquire imaging and visualization technology, or successfully collaborate with a strategic partner to provide such technology on terms favorable to us, or at all, our Sensei system may not be able to gain market acceptance and our
business may be harmed.

Our success depends on our ability to continually enhance and broaden our product offerings
in response to changing technologies, customer demands and competitive pressures. We believe that integrating our Sensei system with key imaging and visualization technologies using an open architecture approach is a key element in establishing our
Sensei system as important for complex interventional procedures. Our Sensei system currently utilizes a variety of imaging means to visualize and assist in navigating our Artisan catheters. These imaging systems include fluoroscopy, intravascular
ultrasound and electro-anatomic mapping systems, as well as pre-operatively acquired three-dimensional computed tomography and magnetic resonance imaging. We believe that in the future, as imaging companies develop increasingly sophisticated
three-dimensional imaging systems, we will need to integrate advanced imaging into our Sensei system in order to compete effectively. There can be no assurance that we can timely and effectively integrate these systems or components into our Sensei
system in order to remain competitive. We expect to face competition from companies that are developing new approaches and products for use in interventional procedures and that have an established presence in the field of interventional cardiology,
including the major imaging, capital equipment and disposables companies that are currently selling products in the electrophysiology laboratory. We may not be able to acquire or develop three-dimensional imaging and visualization technology for use
with our Sensei system. In addition, developing or acquiring key imaging and visualization technologies could be expensive and time-consuming and may not integrate well with our Sensei system. If we are unable to timely acquire, develop or integrate
imaging and visualization technologies, or any other changing technologies, effectively, our revenue may decline and our business will suffer.



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In April 2007, we entered into agreements with St. Jude Medical, Inc., or St. Jude, to
integrate our Sensei system with St. Judes Ensite system and to co-market the integrated product. We are not obligated to undertake any other development projects except for the integration of the Sensei system with the EnSite system. We are
solely responsible for gaining regulatory approvals for, and all costs associated with, our portion of the integrated products developed under the arrangement. At the end of the second quarter of 2008, the FDA cleared for marketing in the U.S. our
CoHesion Module, which provides an interface between our Sensei system and the EnSite system; however, there can be no assurance that we will successfully maintain necessary regulatory clearances or compatibility of our products under the
collaboration or that the CoHesion Module will gain market acceptance.

In addition, under the terms of the co-marketing
agreement, we granted St. Jude the exclusive right to distribute products developed under the joint development agreement when ordered with St. Jude products worldwide, excluding certain specified countries, for the diagnosis and/or treatment of
certain cardiac conditions. There can be no assurance that we will successfully collaborate or that St. Jude will generate significant sales under this arrangement. If we are not able to successfully collaborate with St. Jude or are unable to
successfully integrate our systems, we may not be able to effectively compete with new technologies and our business may be harmed.

Our acquisition of AorTx, Inc. and future acquisitions are subject to a number of risks.

Our
acquisition of AorTx, Inc., or AorTx, in November 2007 and the proposed completion of any future acquisitions will be subject to a number of risks, including:



| |  |  | with respect to future acquisitions, the possibility that an announced acquisition does not close;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the diversion of managements time and resources;
| | - |  | -------------------------------------------------



| |  |  | the difficulty of assimilating the operations and personnel of the acquired companies;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the potential disruption of our ongoing business;
| | - |  | -------------------------------------------------



| |  |  | the difficulty of incorporating acquired technology and rights into our products and services;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | unanticipated expenses related to integration of the acquired companies;
| | - |  | ------------------------------------------------------------------------



| |  |  | difficulties in implementing and maintaining uniform standards, controls, procedures and policies; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | potential unknown liabilities associated with acquired businesses, including additional risks of third parties asserting claims that acquired
intellectual property infringes on the rights of such third parties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We consummated our acquisition of
AorTx with the expectation that the acquisition will result in various benefits including, among other things, leveraging our Sensei system into the developing market for percutaneous aortic heart valve replacement, which market we have decided to
pursue independently from the development of AorTxs technology. AorTx is a development stage company and its products have not received FDA clearance or CE mark approval. There can be no assurance that such clearances or approvals will be
obtained for the uses we propose, and we may not realize any of the benefits of the AorTx acquisition or may not realize them as rapidly, or to the extent anticipated by our management and certain financial or industry analysts. AorTxs
contribution to our financial results may not meet the current expectations of our management for a number of reasons, including integration risks, and could adversely affect our cash flows beyond the current expectations of our management.
Potential liabilities assumed in connection with our acquisition of AorTx and future payment obligations under the terms of the acquisition also could have an adverse effect on our business, financial condition and operating results. If these risks
materialize, our stock price could be materially adversely affected.

Software defects may be discovered in our
products.

Our Sensei system incorporates sophisticated computer software. Complex software frequently contains
errors, especially when first introduced. Because our products are designed to be used to perform



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complex interventional procedures, we expect that physicians and hospitals will have an increased sensitivity to the potential for software and other defects. We cannot assure you that our
software will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely also experience:



| |  |  | loss of revenue;
| | - |  | ----------------



| |  |  | delay in market acceptance of our products;
| | - |  | -------------------------------------------



| |  |  | damage to our reputation;
| | - |  | -------------------------



| |  |  | additional regulatory filings;
| | - |  | ------------------------------



| |  |  | product recalls;
| | - |  | ----------------



| |  |  | increased service or warranty costs; and/or
| | - |  | -------------------------------------------



| |  |  | product liability claims relating to the software defects.
| | - |  | ----------------------------------------------------------

Our costs could substantially increase if we receive a significant number of warranty claims.

We warrant each of our products against defects in materials and workmanship for a period of approximately 12 months from the acceptance of
our product by a customer. We accrue the estimated cost of warranties at the time revenue is recognized; however, we have a very limited history of commercial placements from which to judge our rate of warranty claims. Our warranty obligation may be
impacted by product failure rates, material usage and warranty service costs. We periodically evaluate and adjust the warranty reserve to the extent actual warranty expense differs from the original estimates, and, if warranty claims are significant
or differ significantly from estimates, we could incur additional expenditures for parts and service and our reputation and goodwill in the electrophysiology lab market could be damaged. Unforeseen warranty exposure in excess of our reserves could
negatively impact our business, financial condition and results of operations.

Hospitals or physicians may be unable to
obtain coverage or reimbursement from third-party payors for procedures using our Sensei system, which could affect the adoption or use of our Sensei system and may cause our revenues to decline.

We anticipate that third-party payors will continue to reimburse hospitals and physicians under existing billing codes for the vast majority
of the procedures involving our products. We expect that healthcare facilities and physicians in the United States will bill various third-party payors, such as Medicare, Medicaid, other governmental programs and private insurers, for services
performed using our products. We believe that procedures targeted for use with our products are generally already reimbursable under government programs and most private plans. Accordingly, we believe providers in the United States will generally
not be required to obtain new billing authorizations or codes in order to be compensated for performing medically necessary procedures using our products on insured patients.

There can be no assurance, however, that coverage, coding and reimbursement policies of third-party payors will not change in the future
with respect to some or all of the procedures that would use our Sensei system. Additionally, in the event that a physician uses our Sensei system for indications not approved by the FDA, there can be no assurance that the coverage or reimbursement
policies of third-party payors will be comparable to FDA-approved uses. Future legislation, regulation or coverage, coding and reimbursement policies of third-party payors may adversely affect the demand for our products currently under development
and limit our ability to profitably sell our products. For example, under recent regulatory changes to the methodology for calculating payments for current inpatient procedures in certain hospitals, Medicare payment rates for surgical and cardiac
procedures have been decreased, including those procedures for which our products are targeted. The reductions are to be transitioned over three years, beginning in fiscal year 2007. These changes took effect on October 1, 2007. The majority of
the procedures performed with our Sensei system and Artisan catheter are done on an in-patient basis and thus are paid under the diagnosis related group, or DRG system. Using the new Medicare Severity, or MS, based DRG system, we believe procedures
performed using our technology now fall under MS-DRG 251 which is slated to receive an average reimbursement of $9,260 for fiscal 2008. We are aware that there are very wide swings in profitability for atrial fibrillation ablation procedures for
hospitals using our technology which are largely based on geographical location.



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Our success in international markets also depends upon the eligibility of our products for
coverage and reimbursement by government-sponsored healthcare payment systems and third-party payors. In both the United States and foreign markets, healthcare cost-containment efforts are prevalent and are expected to continue. The failure of our
customers to obtain sufficient reimbursement could have a material adverse impact on our financial condition and harm our business.

We may lose our key personnel or fail to attract and retain additional personnel.

We are highly
dependent on the principal members of our management and scientific staff, in particular Frederic Moll, M.D., our Founder and Chief Executive Officer and one of our directors, and Gary Restani, our President and Chief Operating Officer and one of
our directors. Dr. Moll has extensive experience in the medical device industry, and we believe his expertise in the robotic device field may enable us to have proposals reviewed by key hospital decision-makers earlier in the sales process than
may otherwise be the case. Mr. Restani is important to our operational effectiveness and plays key roles within our organization. We do not carry key person insurance covering any members of our senior management. Each of our
officers and key employees may terminate his employment at any time without notice and without cause or good reason. The loss of any of these persons could prevent the implementation and completion of our objectives, including the development and
introduction of our products, and could require the remaining management members to direct immediate and substantial attention to seeking a replacement.

We expect to rapidly expand our operations and grow our research and development, sales and marketing and administrative operations. This expansion is expected to place a significant strain on our
management and will require hiring a significant number of qualified personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and
academic institutions for qualified personnel in the areas of our activities. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

If we do not effectively manage our growth, we may be unable to successfully develop, market and sell our products.

Our future revenue and operating results will depend on our ability to manage the anticipated growth of our business.
We have experienced significant growth in the scope of our operations and the number of our employees since our inception. This growth has placed significant demands on our management, as well as our financial and operations resources. In order to
achieve our business objectives, however, we will need to continue to grow, which presents numerous challenges, including:



| |  |  | implementing appropriate operational and financial systems and controls;
| | - |  | ------------------------------------------------------------------------



| |  |  | expanding manufacturing capacity, increasing production and improving margins;
| | - |  | ------------------------------------------------------------------------------



| |  |  | developing our sales and marketing infrastructure and capabilities;
| | - |  | -------------------------------------------------------------------



| |  |  | identifying, attracting and retaining qualified personnel in our areas of activity; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | training, managing and supervising our personnel worldwide.
| | - |  | -----------------------------------------------------------

Any failure to effectively manage our growth could impede our ability to successfully develop, market and sell our products and our business
will be harmed.



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We commenced sales of our Sensei system internationally and are subject to various
risks relating to such international activities which could adversely affect our international sales and operating performance.

A portion of our current and future revenues will come from international sales. To expand internationally, we will need to hire, train and retain additional qualified personnel. Engaging in international
business inherently involves a number of difficulties and risks, including:



| |  |  | required compliance with existing and changing foreign regulatory requirements and laws;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | export or import restrictions and controls relating to technology;
| | - |  | ------------------------------------------------------------------



| |  |  | pricing pressure;
| | - |  | -----------------



| |  |  | laws and business practices favoring local companies;
| | - |  | -----------------------------------------------------



| |  |  | longer payment cycles;
| | - |  | ----------------------



| |  |  | the effects of fluctuations in foreign currency exchange rates;
| | - |  | ---------------------------------------------------------------



| |  |  | shipping delays;
| | - |  | ----------------



| |  |  | difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | potentially adverse tax consequences, tariffs and other trade barriers;
| | - |  | -----------------------------------------------------------------------



| |  |  | international terrorism and anti-American sentiment;
| | - |  | ----------------------------------------------------



| |  |  | difficulties in penetrating markets in which our competitors products are more established;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | difficulties and costs of staffing and managing foreign operations; and
| | - |  | -----------------------------------------------------------------------



| |  |  | difficulties in enforcing intellectual property rights.
| | - |  | -------------------------------------------------------

If one or more of these risks are realized, it could require us to dedicate significant resources to remedy the situation, and if we are
unsuccessful at finding a solution, our revenue may decline.

Our business may be harmed by a natural disaster,
terrorist attacks or other unanticipated problems.

Our manufacturing and office facilities are located in Mountain
View, California. Despite precautions taken by us, a natural disaster such as fire or earthquake, a terrorist attack or other unanticipated problems at our facilities could interrupt our ability to manufacture our products or operate our business.
These disasters or problems may also destroy our product inventories. While we carry insurance for certain natural disasters and business interruption, any prolonged or repeated disruption or inability to manufacture our products or operate our
business could result in losses that exceed the amount of coverage provided by this insurance, and in such event could harm our business.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

Our research and development, manufacturing and clinical processes involve the handling of potentially harmful biological materials as well
as other hazardous materials. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and
regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial
condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing
risks and penalties associated with violations. We



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are subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes,
hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

Changes to existing accounting pronouncements or taxation rules or practices may affect how we conduct our business and
affect our reported results of operations.

A change in accounting pronouncements or taxation rules or practices can
have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. During the first quarter of fiscal 2006, we adopted the provisions of the Financial Accounting Standards
Boards Statement of Financial Accounting Standards No. 123revised 2004, or SFAS No. 123R, Share-Based Payment, which replaced Statement of Financial Accounting Standards No. 123, or SFAS 123, Accounting for
Stock-Based Compensation and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees. Adoption of this statement had a significant impact on our 2006 financial statements and is expected to have a significant impact
on our future financial statements, as we are now required to expense the fair value of our stock option grants and stock purchases under our employee stock purchase plan rather than disclose the impact on our net loss within our footnotes. Other
new accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. Changes to existing rules, future changes, if any, or the questioning of current
practices may adversely affect our reported financial results or the way we conduct our business.

Risks Related to Our Intellectual
Property

If we are unable to protect the intellectual property contained in our products from use by third parties,
our ability to compete in the market will be harmed.

Our commercial success will depend in part on obtaining patent
and other intellectual property protection for the technologies contained in our products, and on successfully defending our patents and other intellectual property against third party challenges. We expect to incur substantial costs in obtaining
patents and, if necessary, defending our proprietary rights. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. We do not know whether we will be
able to obtain the patent protection we seek, or whether the protection we do obtain will be found valid and enforceable if challenged. We also do not know whether we will be able to develop additional patentable proprietary technologies. If we fail
to obtain adequate protection of our intellectual property, or if any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. We may also determine that it
is in our best interests to voluntarily challenge a third partys products or patents in litigation or administrative proceedings, including patent interferences or reexaminations. In the event that we seek to enforce any of our owned or
exclusively licensed patents against an infringing party, it is likely that the party defending the claim will seek to invalidate the patents we assert, which, if successful could result in the loss of the entire patent or the relevant portion of
our patent, which would not be limited to any particular party. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and could divert the attention of our management and key personnel
from our business operations. Our competitors may independently develop similar or alternative technologies or products without infringing any of our patent or other intellectual property rights, or may design around our proprietary technologies.

We cannot assure you that we will obtain the patent protection we seek, that any protection we do obtain will be found valid
and enforceable if challenged or that it will confer any significant commercial advantage. U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to reexamination proceedings in the U.S.
Patent and Trademark Office, and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices, which proceedings could result in either loss of the patent or denial of the patent application, or
loss or



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reduction in the scope of one or more of the claims of, the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Some of our
technology was, and continues to be, developed in conjunction with third parties, and thus there is a risk that such third parties may claim rights in our intellectual property. Thus, any patents that we own or license from others may provide
limited or no protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary
protection or competitive advantages against competitors with similar technology.

Non-payment or delay in payment of patent
fees or annuities, whether intentional or unintentional, may result in loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may
be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, the patent owner may have limited
remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as do the laws of the United States, particularly in the field of
medical products and procedures.

Our trade secrets, nondisclosure agreements and other contractual provisions to protect
unpatented technology provide only limited and possibly inadequate protection of our rights. As a result, third parties may be able to use our unpatented technology, and our ability to compete in the market would be reduced. In addition, employees,
consultants and others who participate in developing our products or in commercial relationships with us may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach.

Third parties may assert that we are infringing their intellectual property rights which may result in litigation.

Successfully commercializing our Sensei system, and any other products we may develop, will depend in part on our not infringing patents
held by third parties. It is possible that one or more of our products, including those that we have developed in conjunction with third parties, infringes existing patents. From time to time, we have received, and likely will continue to receive,
communications from third parties inviting us to license their patents or accusing us of infringement. There can be no assurance that a third party will not take further action, such as filing a patent infringement lawsuit, including a request for
injunctive relief, to bar the manufacture and sale of our Sensei system in the United States or elsewhere. We may also choose to defend ourselves by initiating litigation or administrative proceedings to clarify or seek a declaration of our rights.
As competition in our market grows, the possibility of a patent infringement claim against us or litigation we will initiate increases.

There may be existing patents which may be broad enough to cover aspects of our future technology. In addition, because patent applications in many countries such as the United States are maintained under
conditions of confidentiality and can take many years to issue, there may be applications now pending of which we are unaware and which may later result in issued patents that our products infringe. We do not know whether any of these patents, if
challenged, would be upheld as valid, enforceable and infringed by our products or technology. From time to time, we receive, and likely will continue to receive, letters from third parties accusing us of infringing their patents or inviting us to
license their patents. We may be sued by, or become involved in an administrative proceeding with, one or more of these or other third parties. We cannot assure you that a court or administrative body would agree with any arguments or defenses we
may present concerning the invalidity, unenforceability or noninfringement of any third-party patent. In addition to the issued patents of which we are aware, other parties may have filed, and in the future are likely to file, patent applications
covering products that are similar or identical to ours. We cannot assure you that any patents issuing from applications will not cover our products or will not have priority over our own products and patent applications.



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We may not be able to maintain or obtain all the licenses from third parties necessary
or advisable for promoting, manufacturing and selling our Sensei system, which may cause harm to our business, operations and financial condition.

We rely on technology that we license from others, including technology that is integral to our Sensei system, such as patents and other intellectual property that we have co-exclusively licensed from
Intuitive. Under our agreement with Intuitive, we received the right to apply Intuitives patent portfolio in the field of intravascular approaches for the diagnosis or treatment of cardiovascular, neurovascular and peripheral vascular
diseases. To the extent that we develop or commercialize robotic capability outside the field of use covered by our license with Intuitive, which we may choose to do at some time in the future, we may not have the patent protection and the freedom
to operate outside the field which may be afforded by the license inside the field. Although we believe that there are opportunities for us to operate outside the licensed field of use without using Intuitives intellectual property, Intuitive
from time to time has told us that it believes certain of our past activities that have fallen outside the licensed field have infringed its intellectual property rights. Although we disagree with Intuitives position, we presently remain
focused within our licensed field and so have agreed to inform Intuitive before commencing any further outside clinical investigations for endoluminal applications or engaging in external technology exhibitions at non-intravascular conferences.
There can be no assurance that Intuitive will not challenge any activities we engage in outside the intravascular space, and we cannot assure you that in the event of such a challenge we would be able to reach agreement with Intuitive on whether
activities outside our licensed field may be conducted without the use of the Intuitives intellectual property. If Intuitive asserts that any of our activities outside the licensed field are infringing their patent or other intellectual
property rights or commences litigation against us, we will incur significant costs defending against such claims or seeking an additional license from Intuitive, and we may be required to limit use of our Sensei system or future products and
technologies within our licensed intravascular field if any of our activities outside the licensed field are judged to infringe Intuitives intellectual property, any of which could cause substantial harm our business, operations and financial
condition. Although Intuitive is restricted in how it can terminate our license, if Intuitive were ever to successfully do so, and if we are unable to obtain another license from Intuitive, we could be required to abandon use of our existing Sensei
technology completely and could have to undergo a substantial redesign and design-around effort, which we cannot assure you would be successful.

The medical device industry is characterized by patent litigation and we could become subject to litigation that could be costly, result in the diversion of managements attention, require us
to pay damages and discontinue selling our products.

The medical device industry is characterized by frequent and
extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often difficult to predict, and the
outcome may be uncertain until the court has entered final judgment and all appeals are exhausted. Our competitors may assert, and have asserted in the past, that our products or the use of our products are covered by United States or foreign
patents held by them. This risk is heightened due to the numerous issued and pending patents relating to the use of robotic and catheter-based procedures in the medical technology field.

If relevant patents are upheld as valid and enforceable and we are found to infringe, we could be prevented from selling our system unless
we can obtain a license to use technology or ideas covered by such patent or are able to redesign our Sensei system to avoid infringement. A license may not be available at all or on commercially reasonable terms, and we may not be able to redesign
our products to avoid infringement. Modification of our products or development of new products could require us to conduct additional clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time-consuming
and expensive. If we are not successful in obtaining a license or redesigning our products, we may be unable to sell our products and our business could suffer. In addition, our patents may be subject to various invalidity attacks, such as those
based upon earlier filed patent applications, patents, publications, products or processes, which might invalidate or limit the scope of the protection that our patents afford.



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Infringement actions, validity challenges and other intellectual property claims and
proceedings, whether with or without merit, may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. We have incurred, and
expect to continue to incur, substantial costs in obtaining patents and expect to incur substantial costs defending our proprietary rights. Incurring such costs could have a material adverse effect on our financial condition, results of operations
and cash flow.

We cannot be certain that we will successfully defend our patents from infringement or claims of invalidity or
unenforceability, or that we will successfully defend against allegations of infringement of third-party patents. In addition, any public announcements related to litigation or administrative proceedings initiated or threatened by us, or initiated
or threatened against us, could cause our stock price to decline.

If we are unsuccessful in our litigation with Luna
Innovations, Inc., our business may be materially harmed.

In June 2007, we filed suit against Luna Innovations, Inc.,
or Luna, alleging that Luna has, among other things, breached a 2006-2007 development and intellectual property agreement between us and Luna that we believe establishes our ownership of all intellectual property in medical robotics developed by the
parties during performance of the agreement, misappropriated our trade secrets and has revealed our confidential information to other companies who might improperly benefit from it. Lunas Cross-Complaint against us asserts various claims
including for misappropriation of trade secrets and breach of the parties agreements and challenging the inventorship and our ownership of several patent applications which we filed during that same time period. Discovery in the case is in its
later stages and trial has been set for late March 2009. We are vigorously prosecuting our own claims and defending against Lunas counterclaims. This litigation will require substantial resources, both financial and managerial and there can be
no assurance that we will be the prevailing party on all or any of the issues being litigated. If we do not succeed in prosecuting our rights against Luna or if Luna prevails on one or more of its counterclaims, other companies, including companies
who may attempt to compete with our flexible robotic technology, may benefit from work we performed with Luna without compensation to us. In addition, if Luna is successful, we may have to pay substantial damages and may lose rights to the patent
applications in question that pertain to certain aspects of flexible robotics that we do not presently use but which may limit certain development paths for our technology unless we can design around the intellectual property in question or obtain a
license which, if available at all, may require us to pay substantial royalties, any or all of which could materially harm our business.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at universities or other medical device companies, including our competitors or potential
competitors. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our products, if such technologies or features are found
to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect
on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize
certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management. Incurring such costs could have a
material adverse effect on our financial condition, results of operations and cash flow.



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Additional Risks Related to Regulatory Matters

If we fail to comply with the extensive government regulations relating to our business, we may be subject to fines, injunctions and
other penalties that could harm our business.

Our medical device products and operations are subject to extensive
regulation by the FDA and various other federal, state and foreign governmental authorities. Government regulations and foreign requirements specific to medical devices are wide ranging and govern, among other things:



| |  |  | design, development and manufacturing;
| | - |  | --------------------------------------



| |  |  | testing, labeling and storage;
| | - |  | ------------------------------



| |  |  | clinical trials;
| | - |  | ----------------



| |  |  | product safety;
| | - |  | ---------------



| |  |  | marketing, sales and distribution;
| | - |  | ----------------------------------



| |  |  | premarket clearance or approval;
| | - |  | --------------------------------



| |  |  | record keeping procedures;
| | - |  | --------------------------



| |  |  | advertising and promotions;
| | - |  | ---------------------------



| |  |  | post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or
serious injury; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | product export.
| | - |  | ---------------

The FDA, state, foreign and other governmental authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in governmental agencies or a court taking action, including any of the
following:



| |  |  | issuing public warning letters to us;
| | - |  | -------------------------------------



| |  |  | imposing fines and penalties on us;
| | - |  | -----------------------------------



| |  |  | issuing an injunction preventing us from manufacturing or selling our products;
| | - |  | -------------------------------------------------------------------------------



| |  |  | bringing civil or criminal charges against us;
| | - |  | ----------------------------------------------



| |  |  | delaying the introduction of our products into the market;
| | - |  | ----------------------------------------------------------



| |  |  | delaying pending requests for clearance or approval of new uses or modifications to existing products;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | recalling, detaining or seizing our products; or
| | - |  | ------------------------------------------------



| |  |  | withdrawing or denying approvals or clearances for our products.
| | - |  | ----------------------------------------------------------------

If we fail to obtain regulatory clearances in other countries for products under development, we will not be able to commercialize
these products in those countries.

In order to market our products outside of the United States, we must establish
and comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time
required to obtain approval in other countries might differ from that required to obtain FDA clearance. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA clearance in the United States.
Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. Failure to obtain regulatory approval
in other countries or any delay or setback in obtaining such approval could have the same adverse effects described above regarding FDA clearance in the United States.



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For example, the EU requires that medical products receive the right to affix the CE mark.
The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to obtain the right to affix the CE mark to our products, we will need to obtain
certification that our processes meet European quality standards. These standards include certification that our product design and manufacturing facility complies with ISO 13485 quality standards. We received CE mark approval for our Artisan
catheters in May 2007. However, future regulatory approvals may be needed. We cannot be certain that we will be successful in meeting European quality standards or other certification requirements.

We may fail to comply with continuing postmarket regulatory requirements of the FDA and other authorities and become subject to
substantial penalties, or marketing experience may show that our device is unsafe, forcing us to recall or withdraw it permanently from the market.

We must comply with continuing regulation by the FDA and other authorities, including the FDAs Quality System Regulation, or QSR, requirements, labeling and promotional requirements and medical
device adverse event and other reporting requirements. If the adverse event reports we file with the FDA regarding death, serious injuries or malfunctions indicate or suggest that the device presents an unacceptable risk to patients, including when
used off-label by physicians, we may be forced to recall the device and/or modify the device or its labeling, or withdraw it permanently from the market. The FDA has expressed concerns regarding the safety of the device when used with catheters and
in procedures not specified in the indication we are seeking, such as ablation catheters and ablation procedures, and we have already filed Medical Device Reports reporting adverse events during procedures utilizing our technology. Physicians are
using our device off-label with ablation catheters in ablation procedures, as well as in other electrophysiology procedures for which we have not collected safety data, and we therefore cannot assure you that clinical experience will demonstrate
that the device is safe for these uses.

Any failure to comply, or any perception that we are not complying, with continuing
regulation by the FDA or other authorities, including restrictions regarding off-label promotion, could result in enforcement action that may include suspension or withdrawal of regulatory clearances or approvals, recalling products, ceasing product
marketing, seizure and detention of products, paying significant fines and penalties, criminal prosecution and similar actions that could limit product sales, delay product shipment and harm our profitability.

In many foreign countries in which we market our products, we are subject to regulations affecting, among other things, product standards,
packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. Many of these regulations are similar to those of the FDA. In addition, in many countries the national health or social security
organizations require our products to be qualified before procedures performed using our products become eligible for coverage and reimbursement. Failure to receive, or delays in the receipt of, relevant foreign qualifications could have a material
adverse effect on our business, financial condition and results of operations. Due to the movement toward harmonization of standards in the EU, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country
regulatory system to an EU-wide single regulatory system. The timing of this harmonization and its effect on us cannot currently be predicted. Adapting our business to changing regulatory systems could have a material adverse effect on our business,
financial condition and results of operations. If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory clearances, product recalls, seizure of products, operating
restrictions and criminal prosecution.

An increased frequency of filing Medical Device Reports concerning adverse
events occurring during procedures performed with our technology could result in increased regulatory scrutiny of our products and could delay or prevent the adoption of our products.

We are continuously receiving new information regarding the performance of the Sensei system during procedures as the number of procedures
using the Sensei system increases. We have filed Medical Device Reports, or MDRs, reporting adverse events during procedures utilizing our technology and are continually evaluating events that may require adverse event reporting to the FDA and our
internal procedures and processes for the accurate and timely filing of MDRs. As the frequency of use of our



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technology in electrophysiology procedures increases, we are experiencing, and anticipate continuing to experience, it being necessary to file an increased number of MDRs. An increased frequency
of filing MDRs or a failure to timely file MDRs may result in FDA requests for further information, which could delay other matters that we may have pending before the FDA, or result in additional regulatory action. An increased frequency of MDRs
could also reduce confidence in the safety of our products and delay or prevent the acceptance of our products by physicians and hospitals, which would harm our business and cause our stock price to decline.

Our suppliers or we may fail to comply with the QSR and California Department of Health Services requirements, which could hurt our
ability to commercially distribute and sell our products and may subject us to fines, injunctions, and penalties.

Our
manufacturing processes must comply with the QSR, which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging and shipping of our products. The FDA enforces the QSR through
inspections. We cannot assure you that we would pass such an inspection. Failure to pass such an inspection could force a shut down of our manufacturing operations, a recall of our products or the imposition of other sanctions, including warning
letters, fines, injunction, and civil or criminal penalties, which would significantly harm our revenues and profitability. Further, we cannot assure you that our key component suppliers are or will continue to be in compliance with applicable
regulatory requirements and will not encounter any manufacturing difficulties. Any failure to comply with the QSR by us or our suppliers could significantly harm our available inventory and product sales and may subject us to fines, injunctions, and
penalties.

Our manufacturing facility is subject to the licensing requirements of the California Department of Health
Services, or CDHS. Our facility has been inspected and licensed by the CDHS and remains subject to re-inspection at any time. Failure to maintain a license from the CDHS or to meet the inspection criteria of the CDHS would disrupt our manufacturing
processes. If an inspection by the CDHS indicates that there are deficiencies in our manufacturing process, we could be required to take remedial actions at potentially significant expense, and our facility may be temporarily or permanently closed.

Modifications to our products may, and in some instances, will, require new regulatory clearances or approvals and may
require us to recall or cease marketing our products until clearances or approvals are obtained.

Modifications to our
products may require new regulatory approvals or clearances, including 510(k) clearances or premarket approvals, or PMAs, and may require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. The FDA
requires device manufacturers to initially make and document in a letter to file a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer of a 510(k) cleared product may determine
that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturers decision and may
disagree. The FDA may also on its own initiative determine that a new clearance or approval is required.

We have made
modifications to our products in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals because we believe they can be made on a letter-to-file approach. There can
be no assurance that the FDA will agree with our approach in such matters or that, if required, subsequent requests for 510(k) clearance will be received in a timely fashion, if at all. The FDA may require us to recall and to stop marketing our
products as modified or to disable features pending clearance which would significantly harm our ability to sell our products and cause harm to our existing customer relationships and business. Even if we are not required to take such action, delays
in obtaining clearances or approvals for features would adversely affect our ability to introduce enhanced products in a timely manner and would harm our revenue and operating results. The FDA could also take other enforcement action, including but
not limited to, issuing a warning letter relating to our decision to implement features and other product modifications via a letter to file rather than submission of a new 510(k) notice.



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If we fail to comply with healthcare laws and regulations, we could face substantial
penalties and our business, operations and financial condition could be adversely affected.

While we do not control
referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, due to the breadth of many healthcare laws and regulations, we cannot assure you that they will not apply to our business. We could be subject to
healthcare fraud and patient privacy regulation by both the federal government and the states in which we conduct our business. The regulations that may affect our ability to operate include:



| |  |  | the federal healthcare program Anti-Kickback Law, which prohibits, among other things, persons from soliciting, receiving or providing remuneration,
directly or indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid
programs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for
payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers or whose products are frequently used off-label;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit
program or making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal self-referral laws, such as STARK, which prohibit a physician from making a referral to a provider of certain health services with which the
physician or the physicians family member has a financial interest, and prohibits submission of a claim for reimbursement pursuant to a prohibited referral; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by
any third-party payor, including commercial insurers, and state laws governing the privacy of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus
complicating compliance efforts.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If our operations are found to be in violation of any of the laws
described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion of our products from reimbursement under Medicare and Medicaid programs and the
curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in
violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of
these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business. Moreover, to achieve compliance with applicable federal and
state privacy, security, and electronic transaction laws, we may be required to modify our operations with respect to the handling of patient information. Implementing these modifications may prove costly. At this time, we are not able to determine
the full consequences to us, including the total cost of compliance, of these various federal and state laws.

The
application of state certificate of need regulations and compliance with federal and state licensing requirements could substantially limit our ability to sell our products and grow our business.

Some states require healthcare providers to obtain a certificate of need or similar regulatory approval prior to the acquisition of
high-cost capital items such as our Sensei system. In many cases, a limited number of these certificates are available and, as a result, hospitals and other healthcare providers may be



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unable to obtain a certificate of need for the purchase of our Sensei system. Further, our sales cycle for our system is typically longer in certificate of need states due to the time it takes
our customers to obtain the required approvals. In addition, our customers must meet various federal and state regulatory and/or accreditation requirements in order to receive reimbursement from government-sponsored healthcare programs such as
Medicare and Medicaid and other third-party payors. Any lapse by our customers in maintaining appropriate licensure, certification or accreditation, or the failure of our customers to satisfy the other necessary requirements under
government-sponsored healthcare programs, could cause our sales to decline.

Risks Related to Ownership of Our Common Stock

The trading price of our common stock has been volatile and is likely to be volatile in the future.

The trading price of our common stock has been highly volatile. Further, our common stock has a limited trading history. Since our initial
public offering in November 2006 through October 31, 2008, our stock price has fluctuated from a low of $6.20 to a high of $39.32. The market price for our common stock may be affected by a number of factors, including:



| |  |  | the announcement of our operating results, including the number of our Sensei systems sold during a period and our resulting revenue for the period,
and the comparison of these results to the expectations of analysts and investors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the receipt, denial or timing of regulatory clearances, approvals or actions of our products or competing products;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | changes in policies affecting third-party coverage and reimbursement in the United States and other countries;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | ability of our products to achieve market success;
| | - |  | --------------------------------------------------



| |  |  | the performance of third-party contract manufacturers and component suppliers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | our ability to develop sales and marketing capabilities;
| | - |  | --------------------------------------------------------



| |  |  | our ability to manufacture our products to meet commercial and regulatory standards;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to manage costs and improve margins;
| | - |  | ------------------------------------------------



| |  |  | the success of any collaborations we may undertake with other companies;
| | - |  | ------------------------------------------------------------------------



| |  |  | our ability to develop, introduce and market new or enhanced versions of our products on a timely basis;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | actual or anticipated variations in our results of operations or those of our competitors;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | announcements of new products, technological innovations or product advancements by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | announcements of acquisitions or dispositions by us or our competitors;
| | - |  | -----------------------------------------------------------------------



| |  |  | developments with respect to patents and other intellectual property rights;
| | - |  | ----------------------------------------------------------------------------



| |  |  | sales of common stock or other securities by us or our stockholders in the future;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | additions or departures of key scientific or management personnel;
| | - |  | ------------------------------------------------------------------



| |  |  | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for
our technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | trading volume of our common stock;
| | - |  | -----------------------------------



| |  |  | our announcements of guidance regarding future operating or financial results which fails to meet investor or analyst expectations or which differs
from our previously-announced guidance;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | changes in earnings estimates or recommendations by securities analysts, failure to obtain analyst coverage of our common stock or our failure to
achieve analyst earnings estimates;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | public statements by analysts or clinicians regarding their perceptions of the effectiveness of our products;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | developments in our industry; and
| | - |  | ---------------------------------



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

The stock prices of many companies in the medical device industry have experienced wide fluctuations that
have often been unrelated to the operating performance of these companies. Following periods of volatility in the market price of a companys securities, stockholders have often instituted class action securities litigation against those
companies. Class action securities litigation, if instituted against us, could result in substantial costs and a diversion of our management resources, which could significantly harm our business.

Securities analysts may not continue, or additional securities analysts may not initiate, coverage for our common stock or may issue
negative reports, and this may have a negative impact on the market price of our common stock.

Currently, several
securities analysts provide research coverage of our common stock. Several analysts have already published statements that do not portray our technology, products or procedures using our products in a positive light and others may do so in the
future. If we are unable to educate those who publicize such reports about the benefits we believe our technology provides, or if one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly.
If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. The trading market for our common stock may be affected in part by the research and
reports that industry or financial analysts publish about us or our business. If sufficient securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. It may be
difficult for companies such as ours, with smaller market capitalizations, to attract and maintain sufficient independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.

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

Our executive officers, directors and
stockholders holding 5 percent or more of our outstanding common stock beneficially own or control approximately 36.0 percent of the outstanding shares of our common stock as of October 31, 2008. Accordingly, these executive officers, directors
and principal stockholders, acting as a group, have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our
assets or any other significant corporate transaction. These stockholders may also delay or prevent a change of control or otherwise discourage a potential acquirer from attempting to obtain control of us, even if such a change of control would
benefit our other stockholders. This significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors perception that conflicts of interest may exist or arise.

We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited
to the value of our common stock.

We have never paid dividends on our common stock and do not anticipate paying
dividends on our common stock in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may
consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. Pursuant to our agreement with Silicon Valley Bank, or SVB, we must obtain
SVBs prior written consent in order to pay any dividends on our common stock.



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Some provisions of our charter documents and Delaware law may have anti-takeover
effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would benefit our
stockholders. These provisions:



| |  |  | permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate,
including the right to approve an acquisition or other change in our control;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide that the authorized number of directors may be changed only by resolution of the board of directors;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a
majority of directors then in office, even if less than a quorum;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | divide our board of directors into three classes;
| | - |  | -------------------------------------------------



| |  |  | require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by
written consent;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a
meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholders notice;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | do not provide for cumulative voting rights, therefore allowing the holders of a majority of the shares of common stock entitled to vote in any
election of directors to elect all of the directors standing for election, if they should so choose;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer or by the board of
directors pursuant to a resolution adopted by a majority of the total number of authorized directors; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | provide that stockholders will be permitted to amend our amended and restated bylaws only upon receiving at least 662/3percent of the votes entitled to be cast by holders of all
outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any broad range of business combinations with any
stockholder who owns, or at any time in the last three years owned, 15 percent or more of our outstanding voting stock for a period of three years following the date on which the stockholder became an interested stockholder. This provision could
have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

Future sales of a substantial number of shares of our common stock in the public market, the announcement to undertake such sales, or the perception that they may occur, may depress the market price of our common stock.

Sales of substantial amounts of our common stock by us or by our stockholders, announcements of the proposed sales of
substantial amounts of our common stock or the perception that substantial sales may be made, could cause the market price of our common stock to decline. We may issue additional shares of our common stock in follow-on offerings to raise additional
capital or in connection with acquisitions or corporate alliances and we plan to issue additional shares to our employees, directors or consultants in



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connection with their services to us. All of the currently outstanding shares of our common stock are freely tradable under federal and state securities laws, except for shares held by our
directors, officers and certain greater than 5 percent stockholders, which may be subject to volume limitations. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. Such
sales could reduce the market price of our common stock.

We incur significant costs as a result of operating as a
public company, and our management is required to devote substantial time to new compliance initiatives.

We completed
our initial public offering in November 2006. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented
by the Securities and Exchange Commission and the NASDAQ Global Market, have imposed various new requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in
corporate governance practices. Our management and other personnel need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and make some
activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs
to maintain the same or similar coverage.

The Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, requires, among other
things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, commencing in fiscal 2007, we were required to perform a system and process evaluation and testing of our internal
controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
As a result of our compliance with Section 404, we have incurred and will continue to incur substantial accounting expense and expend significant management efforts and we may need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge to ensure continuing compliance.

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

(a) Sales
of Unregistered Securities

Not applicable.

(b) Uses of Proceeds from Sale of Registered Securities

Not applicable.

(c) Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.



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ITEM 6. EXHIBITS

Exhibits



|              |  |                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                     
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                            
|              | 
|3.2(2)        |  | Amended and Restated Bylaws of the Registrant.                                                                                  
|              | 
|4.1(3)        |  | Specimen Common Stock Certificate.                                                                                              
|              | 
|4.2(3)        |  | Amended and Restated Investor Rights Agreement, dated November 10, 2005, between the Registrant and certain of its stockholders.
|              | 
|10.29(4)      |  | Loan and Security Agreement by and among the Registrant and Silicon Valley Bank, dated August 25, 2008.                         
|              | 
|10.30         |  | Offer letter, by and between the Registrant and Christopher Sells, dated as of April 3, 2008.                                   
|              | 
|31.1          |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                         
|              | 
|31.2          |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                         
|              | 
|32.1*         |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         
|              | 
|32.2*         |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         



|(1) | Previously filed as an exhibit to Registrants Annual Report on Form 10-K, filed on March 28, 2007 and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(2) | Previously filed as an exhibit to Registrants Current Report on Form 8-K, filed on February 16, 2007 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Previously filed as an exhibit to Registrants Registration Statement on Form S-1, as amended, originally filed on August 16, 2006 and incorporated herein by
reference.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Previously filed as an exhibit to Registrants Current Report on Form 8-K, filed on August 27, 2008 and incorporated herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|* | The certifications attached here to as Exhibits 32.1 and 32.2 accompany this Quarterly Report on Form 10-Q/A are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of Hansen Medical, Inc. under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Form 10-Q/A), irrespective of any general
incorporation language contained in such filing.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES

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



|                         |  |  |  |     |  |                                             
|------------------------ |  |  |  | --- |  | --------------------------------------------
|Dated: November 16, 2009 |  |  |  | By: |  | /s/    FREDERIC H. MOLL,
M.D.               
|                         |  |  |  |     |  | Frederic H. Moll, M.D.                      
|                         |  |  |  |     |  | Chief Executive Officer                     
|                         |  |  |  |     |  | (Principal Executive Officer)               
|                         |  |  | 
|Dated: November 16, 2009 |  |  |  | By: |  | /s/    STEVEN M. VAN
DICK                   
|                         |  |  |  |     |  | Steven M. Van Dick                          
|                         |  |  |  |     |  | Chief Financial Officer                     
|                         |  |  |  |     |  | (Principal Financial and Accounting Officer)



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